Gran Jurado del Condado de Santa Clara

2018-2019

10 informes

From the annual report
The consolidated year-end volume. The individual investigations it contains are listed separately below.
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The full consolidated volume; individual reports are listed below.
Individual reports (10)
Hallazgos & Recomendaciones 5 hallazgos
F1: The VTA Board, currently made up exclusively of elected officials from the Santa Clara County, Board of Supervisors, the City of San José and the other smaller cities in the County, suffers from: A lack of experience, continuity and leadership; Inadequate time for the directors to devote to their duties to the VTA Board due to their primary focus on the demands of their elected positions; A lack of engagement on the part of some directors, fostered in part by the committee system, resulting in VTA functioning largely as a staff-driven organization; Domination, in terms of numbers, seniority and influence, by representatives of the Santa Clara County Board of Supervisors and the City of San José; and 3331 North First Street Administration 408-321-5555 San Jose, CA 95134-1927 Customer Service 408-321-2300 Solutions that move you Frequent tension between the director's fiduciary duties to VTA and its regional role, on the one hand, and the political demands of their local elected positions, on the other. Response VTA disagrees partially with the finding. As is true of boards of large organizations, there are different levels of tenure on the Board. The goal is to encourage a balance of new perspectives with institutional knowledge and continuity. It is important to point out there is significant longevity on the Board. The combined years of service for all existing Board members is 95 years. The average (mean) length of service is five (5) years, the median is four (4) years, and the mode (the years of service most common to all Board Members) is three (3) years. The longest tenure is 15 years. Additionally, staff provides significant resources to orient and assist Board members on a regular basis. The finding that the organization is staff driven and simultaneously dominated by the largest member agency is contradictory. Similar to other organizations, the Board sets the policy and provides direction to staff. Staff then implements the Board adopted policy and direction. Regarding the finding of the Board's fiduciary responsibilities and regional role, the Board's voting history shows there is generally consensus in approving projects with regional benefits.
Recomendaciones relacionadas (3)
R1A: VTA should commission a study of the governance structures of successful large city transportation agencies, focusing on such elements as: board size; term of service; method of selection (directly elected, appointed or a combination); director qualifications; inclusion of directors who are not elected officials; and methods of ensuring proportional demographic representation. This study should be commissioned prior to December 31, 2019. Response The recommendation has been implemented. The Board, through the Ad Hoc Board Enhancement Committee (Ad Hoc), directed staff to commission an independent study to evaluate how VTA's current governance structure and practices help support VTA's mission, goals and objectives. The governance study will identify leading practices and potential enhancements for consideration by the Board. The governance study is now underway.
R1F: Prior to December 31, 2019 and pending changes contemplated by Recommendation 1e, VTA should adopt a policy of routinely reappointing an incumbent Chairperson for a second one-year term at the end of his or her initial term, absent unusual circumstances. Response The recommendation requires further analysis. The idea of a two-year term for Chair and Vice Chair has been raised in the past as it may provide more time for the Chair to set direction and monitor policy. This proposal is contained within the scope of work of the aforementioned governance study. The Ad Hoc will consider this item in the future and a recommendation is anticipated.
R1G: In order to better connect the Chairperson with the budget process and accountability for operating and financial results, prior to December 31, 2019, VTA should amend Section 2-26 of the VTA Administrative Code to provide that the Chairperson and Vice Chairperson shall serve terms coinciding with VTA's fiscal year ending June 30, rather than the calendar year. Response The recommendation will not be implemented. While the intent of the finding is commendable, as a practical matter VTA's two-year budget process begins well prior to the start of the fiscal year, as is the case for most organizations. The timing does not align with current election cycles and in the event of a directly elected board would result in significant expense to hold a special election to match this cycle.
F2: The California Public Utilities Code, the VTA Administrative Code and the Guidelines for Member Agency Appointments to the VTA Board of Directors adopted by the Governance and Audit Committee of the Board (Guidelines) all contain provisions requiring that, to the extent possible, the appointing agencies shall appoint individuals to the VTA Board who have expertise, experience or knowledge relative to transportation issues. Nevertheless, appointees to the VTA Board often lack a basic understanding of VTA's operations and transportation issues, generally. Response VTA partially agrees with the finding. VTA does not have the authority to require compliance with the guidelines. VTA will take further steps to inform the appointing authorities of the advantage of appointing individuals with helpful experience or knowledge, to the extent possible, as well as communicate the time commitment required for Board Members.
Recomendaciones relacionadas (1)
R2: In order to help assure that individuals appointed to serve on the VTA Board have the appropriate qualifications, prior to December 31, 2019, VTA should take vigorous action to enforce compliance by appointing agencies with the qualification and suitability requirements of: (i) Section 100060(c) of the California Public Utilities Code; (ii) Section 2- 14 of the VTA Administrative Code; and (iii) the Guidelines. Response The recommendation will not be implemented. VTA has no ability to "enforce compliance." Appointing authorities are encouraged by VTA to appoint an individual based on the guidelines.
F3: The VTA Board lacks effective policies designed to assure productive participation by members of the VTA Board. Response VTA disagrees wholly with the finding. Board policies are designed to provide transportation and congestion management services and products to the public. As previously mentioned, VTA has no authority to initiate nor enforce a policy to address something as vague as "to assure productive participation." The study commissioned by the VTA may result in best practices that can assist in enhancing Board participation.
Recomendaciones relacionadas (2)
R3a: In order to help make directors become and remain productive members of the VTA Board, prior to December 31,2019, VTA should: (i) implement and enforce attendance at an intensive, multisession onboarding bootcamp for incoming directors that would provide detailed information regarding VTA's operations, financial affairs and currently pending large-scale projects as well as the organization and operations of the Board and directors' duties and obligations; (ii) prepare and provide to each director a detailed handbook of directors' duties, similar to the "Transit Board Member Handbook" published by the American Public Transportation Association; (iii) enforce attendance at Board and committee meetings by providing Board attendance records to appointing agencies and removing directors from committees for repeated non-attendance; and (iv) implement a robust director evaluation process, with the participation of an experienced board consultant, that would include mandatory completion by each director of an annual self- evaluation questionnaire and Board review of a composite report summarizing the questionnaire responses. Response The recommendation will not be implemented. While well intentioned, VTA has no ability to implement the recommendation. However, the Board will take steps to provide more workshops designed around the organization and its functions. Staff will continue to provide improved orientation material and information on general Board function and operation.
R3b: In order to further enhance the effectiveness of the directors, prior to December 31,2019, VTA should develop a program to encourage continuing education of the Board members by: (i) scheduling and enforcing attendance at more frequent and intensive Board workshops on important issues regarding transit policy, developments in transportation technology, major capital projects and VTA's financial management; and (ii) requiring directors to attend, at VTA's expense, third-party sponsored industry conferences and educational seminars. Response The recommendation will not be implemented. While well intentioned, VTA has no ability to enforce attendance at workshops or other educational opportunities. A continuing education program for Board members will be recommended by the Ad Hoc Board Enhancement Committee. VTA will continue providing opportunities for Board members to attend industry workshops and further education.
F4: The Grand Jury commends the Chairperson of the VTA Board for recognizing the need to improve Board engagement and effectiveness by convening the Ad Hoc Board Enhancement Committee to review the Board's governance structure and practices. Response VTA agrees.
F5: VTA continues to consider an extension of VTA's light rail system to the Eastridge Transit Center, at an additional capital cost of over $450 million, although VTA's light rail system is one of the most expensive, heavily subsidized and least used light rail systems in the country, many transit experts consider light rail obsolete, and VTA is suffering from chronic structural deficits that would be exacerbated by the continuation of the project as currently defined. Response VTA disagrees with the finding. The Eastridge to BART Regional Connector has been approved by the voters and the Board. See response for Recommendation 5a for more details.
Recomendaciones relacionadas (2)
R5a: VTA should consider following recommendations made by several directors that it undertake a thorough review of VTA's light rail system and its future role as a mode of transportation in Silicon Valley before proceeding with the Eastridge extension project. This review, as it pertains specifically to the analysis of the viability of the Eastridge extension, should be undertaken with the participation of an independent consultant and should consider such issues as projected ridership estimates, project cost estimates including future operating and capital costs, and the projected impact on traffic congestion on Capitol Expressway with the removal of two HOV lanes. Response The recommendation has been implemented. Prior to this recommendation, the Board initiated a review of light rail technology due to the anticipated cost of necessary upgrades and replacements for the existing system.
R5b: VTA should consider whether the recognized needs of the residents of East San José for modern, efficient public transportation can be better served by an alternative to the proposed light rail extension. Response The recommendation requires further analysis. The abovementioned study may provide an alternative technology to existing light rail. Nevertheless, the current Board approved project of a dedicated, grade separated right of way is progressing. Sincerely, Teresa Meill Teresa O'Neill Chairperson, VTA Board of Directors
Hallazgos & Recomendaciones 1 hallazgos
F1: "The VTA Board, currently made up exclusively of elected officials from the Santa Clara County Board of Supervisors, the City of San José and the other smaller cities in the County, suffers from: A lack of experience, continuity and leadership; Inadequate time for the directors to devote to their duties to the VTA Board due to their primary focus on the demands of their elected positions; A lack of engagement on the part of some directors, fostered in part by the committee system, resulting in VTA functioning largely as a staff-driven organization; Domination, in terms of numbers, seniority and influence, by representatives of the Santa Clara County Board of Supervisors and the City of San José; and Frequent tension between the director's fiduciary duties to VTA and its regional role, on the one hand, and the political demands of their local elected positions, on the other." Response to Finding 1: The County disagrees in part with Finding 1. Valley Transportation Authority (VTA) was established in its current governing structure in 1995 as an independent special district by the California legislature. While several Grand Jury reports have made recommendations to make alterations to the governing structure, no changes have been made. Board of Supervisors: Mike Wasserman, Cindy Chavez, Dave Cortese, Susan Ellenberg, S. Joseph Simitian County Executive: Jeffrey V. Smith 2.006 R Response to Santa Clara County Civil Grand Jury Final Report: Inquiry into the Governance of the Valley Transportation Authority August 5, 2019 Each of the members of the VTA governing board is elected to office in their respective jurisdictions and are then selected through a public process in each jurisdiction to sit on the VTA board. The Public Utilities Code (PUC) dictates that, to the extent possible, appointments to the VTA board be made of individuals who have expertise, experience or knowledge relative to transportation issues. Because the PUC code calls for members with useful background in transportation issues, the County would not benefit in supporting governance structures other than what the State Legislature has already put in place, since the composition of the VTA board is expected to include such qualifications. Beyond the composition of the VTA Board membership, the other areas of concern identified in the report could be addressed by the VTA itself, and do not require legislative action.
Recomendaciones relacionadas (3)
R1b: "As the appointing entity with an interest in the transit needs of all County residents, the County of Santa Clara should commission its own study of transportation agency governance structures, focusing on the elements listed in Recommendation 1a. This study should be commissioned prior to December 31, 2019."
R1d: "Within six months following the completion of the studies and reports specified in Recommendations 1a, 1b and 1c, the County of Santa Clara and/or one or more of VTA's other constituent agencies, should propose enabling legislation, including appropriate amendments to Sections 100060 through 100063 of the California Public Utilities Code, to improve the governance structure of VTA (which potentially could include an increase in the directors' term of service, the addition of term limitations and the inclusion of appointed directors who are not currently serving elected officials)."
R1e: "In order to provide more continuity in the leadership of the VTA Board, within six months following the completion of the studies and reports specified in Recommendations 1a, 1b and 1c, the County of Santa Clara and/or one or more of VTA's other constituent agencies, should propose enabling legislation amending Section 100061 of the California Public Utilities code to provide that the Chairperson of the VTA Board shall be elected for a term of two years rather than one." Response to Recommendations 1b, 1d, and 1e: The County does not plan to implement the recommendations as described. The County has examined the current report and does not believe the Grand Jury's recommendations to legislatively change the composition and structure of the VTA Board will address the problems articulated in the report. Issues with director engagement and other concerns can be addressed Response to Santa Clara County Civil Grand Jury Final Report: Inquiry into the Governance of the Valley Transportation Authority August 5, 2019
Hallazgos & Recomendaciones 7 hallazgos
F1a: "The Santa Clara County Fairgrounds is a financially unproductive asset for the County of Santa Clara which is accruing millions of dollars in deferred maintenance and has continually required the County's financial support to address deferred maintenance." Response to Finding 1a: The County agrees with Finding 1a.
F1b: "There is no realistic chance that Fairgrounds Management Corporation (FMC) will have sufficient financial ability to address the backlog of deferred maintenance." Response to Finding 1b: The County agrees with Finding 1b.
F2a: "Many of the current uses of Fairground property are inconsistent with FMC's purpose to provide '...county fair and similar educational, cultural, and community functions.' The County knows that these uses are inconsistent with FMC's purpose." Response to Finding 2a: The County agrees in part and disagrees in part with Finding 2a. Some of the current uses of Fairground property would appear to be inconsistent with FMC's purpose as stated in its Articles of Incorporation. However, the County disagrees with Finding 2a in so far as the parties who negotiated the Management Agreement intended to allow FMC to take on other ancillary or supporting activities in connection with the managing the Fairgrounds so long as such activities do "not interfere" with the use of the property for Fair purposes. The County acknowledges that the Articles of Incorporation are not entirely clear on this point and will require FMC to amend its Articles of Incorporation to provide clarity accordingly.
F2b: "FMC is not adhering to the Agreement. The County knows that FMC is not adhering to the Agreement." Response to Finding 2b: The County agrees in part and disagrees in part with Finding 2b. The Management Agreement dated April 18, 2000, as Amended, articulates multiple responsibilities for FMC and it establishes an inherent hierarchy of responsibilities. The Management Agreement states several responsibilities that are obligations, and it permissively allows FMC to enter into agreements for other certain uses that do not interfere with the conduct of the annual County Fair. The Management Agreement states as follows (emphasis added): FMC shall annually present an Annual Fair and it shall pay all expenses of the Fair (Section . 1.02.); FMC shall cover annual operating expenses and capital improvement expenses (Section 3.01.); and, FMC shall maintain and repair the existing improvements (Section 6.01.). Section 4.01 of the Agreement again restates that FMC "...shall permit the Residual Property to be used and occupied for purposes of conducting the annual County Fair on behalf of the County of Santa Clara. Section 4.01 goes on to permissively state that FMC "...may allow the property to be used for 0 promotion of any educational, charitable, informational, cultural, entertainment, or amusement purpose...and no events shall be permitted which shall interfere with the conduct of the annual County Fair." The County recognizes that the Management Agreement is silent on whether FMC may allow the property to be used for any use which is not an "educational, charitable, informational, cultural, entertainment, or amusement purpose." Many of the current uses of the Fairgrounds are temporary, short-term uses of otherwise empty land and do not "interfere with the conduct of the annual County Fair." FMC enters into such licenses to provide revenue in support of FMC's obligation to cover all operations costs, to cover the cost of maintenance and capital improvement, and to cover the cost of presenting an Annual County Fair, an event that for years has required financial subsidy. Furthermore, all revenue generated from such, temporary, short- term uses remain with FMC for operations of the Fairgrounds consistent with the terms of the Management Agreement. Numerous events conducted at the Fairgrounds are community-based and do not cover the full cost of the operations of the Fairgrounds. Those opportunities for non-profit and community events to take place would not be possible without the additional revenue provided by short-term uses that cover other operational and maintenance costs. However, in light of the Grand Jury's observations, the County will consider which allowable uses are consistent with the Agreement. The County agrees that the Management Agreement should be revised to provide guidance regarding short-term, revenue-producing uses until they can ultimately be replaced as opportunities arise with other educational, cultural and community activities that can be both financially viable and widely supported. See also Response to Finding 2c, and Response to Recommendation 2 below.
F2c: "The 25-year old Management Agreement is woefully outdated and in need of review and revision." Response to Finding 2c: The County agrees with Finding 2c but notes that the current Management Agreement is up-to-date and incorporates all relevant current County and Board policies. The County is currently negotiating an Amended and Restated Agreement to replace the current Management Agreement when it terminates on December 31, 2019.
F3: "Contractor storage yards, the RV park, RV(/Boat) storage and vehicle auctions are inconsistent with FMC's purpose to provide "...county fair and similar educational, cultural, and community functions." Response to Finding 3: The County agrees in part and disagrees in part with this finding. See Responses to Finding 2a and Finding 2b above, which reiterate the County's understanding that the parties who negotiated the original Management Agreement intended to allow FMC to take on such ancillary or supporting activities to produce revenue to support Fairgrounds operations, so long as such activities do "not interfere" with the use of the property for Fair purposes. Furthermore, the County understands that FMC terminated the RV/Boat Storage use as of June 30, 2019.
Recomendaciones relacionadas (2)
R3a: "By October 31, 2019, the County should evaluate and determine if each of the current uses and activities carried out by FMC at the Fairgrounds comport with FMC's purpose to provide '...county fair and similar educational, cultural, and community functions."" Response to Recommendation 3a: Recommendation 3a requires further analysis and will be implemented by December 31, 2019. As stated in the Response to Recommendation 2 above, the County is negotiating a revised Management Agreement with FMC that will explicitly address acceptable ancillary uses of the Fairgrounds property. The County will also require FMC to amend its Articles of Incorporation to clarify its purpose.
R3b: "If the report prepared in response to Recommendation 3a identifies uses and activities carried out by FMC at the Fairgrounds that are not consistent with FMC's purpose, the BOS should prohibit the inconsistent uses and activities by December 31, 2019." Response to Recommendation 3b: Recommendation 3b will be implemented within the December 31, 2019 time frame if such uses and activities are identified.
F4: "FMC's bingo games do not comply with many County bingo regulations." Response to Finding 4: The County agrees in part and disagrees in part with Finding 4 to the extent that it is conducting further analysis, including research into bingo operations at other venues, to determine the extent of compliance and/or non-compliance and to obtain FMC compliance.
Recomendaciones relacionadas (1)
R4a: "By October 31, 2019, the County should ensure that FMC's bingo games adhere to the County's bingo regulations." Response to Recommendation 4a: The Recommendation has been partially but not fully implemented; it will be implemented by October 31, 2019. The Office of Asset and Economic Development, County Counsel, Planning Department, and FMC have established a working group to implement
Hallazgos & Recomendaciones 2 hallazgos
F1: The County of Santa Clara and its Department of Tax and Collections are commended for revising the format of the 2018-19 tax bill to direct county property taxpayers to the distribution of the one-percent maximum tax levy by address or APN via tax bill web page links or QRC. Response: The Department of Tax and Collections agrees with Finding 1.
F2: Although the tax bill now provides links to find the distribution of the 1% Tax, the links are not entirely obvious. Response: The Department of Tax and Collections agrees with Finding 2.
Recomendaciones relacionadas (1)
R2: The County of Santa Clara could further improve the presentation of the tax bill by clarifying Board of Supervisors: Mike Wasserman, Cindy Chavez, Dave Cortese, Susan Ellenberg, S. Joseph Simitian County Executive: Jeffrey V. Smith how to locate the 1% Tax distribution data to facilitate a better user experience by inserting an explanation with the tax bill beginning with the 2019-20 tax year. Response: The Department of Tax and Collections agrees with Recommendation 2 and has initiated plans to incorporate the recommendation as stated below: The Department has begun the review and redesign of the Details of Taxes section of the tax bill in anticipation of the FY 2019 - FY 2020 tax assessment year. This section will be redesigned to inform and guide taxpayers about the distribution of the 1% Tax Levy. The font size of the current link on the tax bill will be increased to make it legible and displayed more prominently to include instructions for taxpayers. Secondly, the Department will insert a tax bill legend in the tax bills that will be mailed out in October 2019. Thirdly, a sample tax bill with explanations of the sections will be published online to make it easily accessible to members of the public. Finally, the Tax Distribution web page that displays the allocation of property taxes by the tax rate area will be revised to improve the user experience and knowledge. We have taken immediate steps to improve the 1% Tax Distribution Table by the parcel number online (Method 3), as described in the Grand Jury report's Show me the Money section. We are pleased to report that Method 3 now takes just one click to access the information on the Controller-Treasurer Department's Property Tax web page, instead of 4. The Finance Agency's commitment to taxpayers is to continue to develop effective and efficient ways to help taxpayers understand and connect with their property tax payments and to educate them on its distributions. We will accomplish this through the information we publish in print or online on our websites. •
Hallazgos & Recomendaciones 6 hallazgos
F1: Moving the City of San José mature pension plan to a more risk-averse investment portfolio has contributed, in part, to poor investment returns.
Recomendaciones relacionadas (1)
R1: The two Boards of Administration should conduct a comprehensive review of the investment portfolios that should be made public by June 30, 2020. The review should consider investment strategies used by other state and government pension organizations, particularly assessing portfolios of other pension plans with similar risk profiles that had higher returns.
F2: The City of San José pension plans are overburdened with a large number of investment managers and excessive investment management fees.
Recomendaciones relacionadas (1)
R2: The two Boards of Administration should study ways in which to reduce the number and the cost of investment managers and make their findings public by June 2020.
F3: The City of San José’s mandatory required contributions to pension plans are putting an ever- increasing burden on the City’s General Fund, which impedes the ability of the City to provide essential services to its residents.
Recomendaciones relacionadas (1)
R3: The City of San José should work collaboratively with the 11 bargaining units to find ways to reduce this burden and make the findings public no later than June 2020.
F4: Maintaining two separate pension Boards has resulted in inefficiencies including duplication of various tasks and responsibilities.
Recomendaciones relacionadas (2)
R4a: The City of San José should examine the current Board models, consider opportunities for streamlining, and identify areas of administrative cost reduction. This investigation should include evaluating one board for both plans but structured to prevent the proportional dilution of members' representation. This recommendation does not include the combining or commingling of plans funds. The results of these actions should be made public by June 30, 2020.
R4b: The Boards of Administration should implement employee reviews based on measurable goals and performance metrics for the CEO and CIO. The goals and performance metrics should be completed and made public by December 31, 2019.
F5: The expertise of the public members of the Boards of Administration is heavily weighted toward investment professionals. Other more successful pension funds, such as LACERS, have boards that have a much wider range of expertise.
Recomendaciones relacionadas (1)
R5: The City of San José should broaden the backgrounds of the public Board members beyond the present focus on investment strategy beginning with the next Board member appointment.
F6: 26 REQUIRED RESPONSES ........................................................................................................... APPENDIX A – Aggregate Annual Return Performance ............................................................ REFERENCES ............................................................................................................................. GLOSSARY AND ABBREVIATIONS Benchmark A set of data that is used as a measure of comparison against another set of data BPS Basis points - 100th of one percent (1/100 of 1%; 0.01%) CAFR Comprehensive Annual Financial Report CEO Chief Executive Office CIO Chief Investment Officer City City of San José City Council City of San José City Council COLA Cost of living adjustment COLI Cost of living index Discount Rate The assumed rate of return on pension plan assets that an actuary uses to determine employer and employee annual contribution to a plan in order to meet City’s future obligations to its pensioners. Federated San José Federated City Employees’ Retirement System General Fund The primary operating fund used to account for all the revenues and expenditures of the City that are not related to special or capital funds. Most day-to-day operations, including any shortfalls in the pension plans, are paid out of the General Fund. K Thousand (e.g., $5K is 5 thousand dollars) LAFPP Los Angeles Fire and Police Pensions LACERS Los Angeles City Employees’ Retirement System LACERA Los Angeles County Employees Retirement Association Mature A mature pension plan is one in which there are an equal number or more retiree beneficiaries than active employees paying into the plan. ORS San José Office of Retirement Services Pension plan/fund Pension plans/funds are an employment benefit designed to provide employees with a source of income during their retirement years. The terms fund and plan are used inter-changeably in this report. Percentile/Centile A number that represents a percentage position in a list of data. For example, if the performance of an entity is at the 43rd percentile, then it performs better than 42 percent of all entities within its group. Police and Fire San José Police and Fire Department Retirement Plan Plans Both the Federated and Police and Fire Plans, collectively Policy Benchmark A standard designed to gauge the performance of a pension plan, investment manager, asset or other financial entity. It is calculated as the weighted average of returns of multiple indices selected to represent the asset classes and allocation percentages of, in the case of this report, a pension fund. Quartile One of the three points that divide a range of data or population into four equal parts. The first quartile (also called the lower quartile) is the number below which lies 25% of the bottom data. The second quartile (the median) divides the range in the middle and has 50% of the data below it. The third quartile (also called the upper quartile) has 75% of the data below it and the top 25% of the data above it. Sharpe ratio This is a measure that provides the average return of an asset minus the risk-free return of that asset divided by the standard deviation of the return on that asset. In other words, the ratio indicates how much excess return received for the extra volatility you experience for holding an asset with relatively higher risk. SIEPR Stanford Institute for Economic Policy Research Standard Deviation A measure of the historical volatility of an asset. For example, the higher the standard deviation the more volatile the asset. Trailing returns Returns for past specific periods UAL Unfunded accrued/actuarial liabilities are the calculated cost of promised benefits that is greater than the current value of a fund’s assets. SUMMARY It has been recently reported that the City of San José’s share of pension costs in fiscal year 2019 spiraled to nearly 28% of the General Fund, at approximately $335 million, and are estimated to continue to climb. This $335 million from the General Fund, which is the primary operating fund used to account for all the revenues and expenditures of the City of San José (City) that are not related to special or capital funds, would otherwise have been available for essential City services such as police and fire, street repairs, parks and libraries. The City’s two pension plans will need to distribute $4.3 billion to retirees between 2020 and 2029 according to the San José Office of Retirement Services (ORS). As originally conceived, these pension plans were supposed to be self-sufficient, without requiring annual cash infusions from the City’s General Fund. The ORS estimates that the pension funds will pay out $1.3 billion between 2020 and 2029. This means that the City will have to provide at least $3 billion over the same timeframe. The reasons for the pension plans' shortfalls include: (1) insufficient employer/employee contributions; (2) investment earnings that have fallen short of expectations; (3) annual mandatory retiree COLAs; and (4) high overhead. Verus Investments, a consultant to ORS, has estimated that for FY2020, the portion of the General Fund used for pension costs will increase to approximately 31%. If changes are not made to the way in which the public pension plans are funded and managed, the City will likely be forced to continually increase its share of the required cash payouts and liabilities. The City, Federated and the Police and Fire pension plans and the bargaining units are urged to find common ground on which to create strategies that will enable the City to reduce its annual cash obligations to cover the underfunding for the pension plans so that the City may deliver necessary services to its residents. BACKGROUND A pension plan is a benefit funded by an employer on behalf of its employees. Pension plans are designed to provide employees with a source of income for the remainder of their lives once they retire and meet certain criteria, such as length of time with that employer. Employees typically contribute a percentage of their pay into the plan as well. The San José Police and Fire Retirement Plan (Police and Fire) and the Federated City Employees’ Retirement System (Federated) are examples of pension plans. These plans are “defined benefit plans” wherein the level of payments is set at the time of retirement and does not change based on the plan’s investment performance. Almost all San José City employees are covered by one of these plans. In this report, the terms plan and fund are used inter-changeably, as in pension fund or pension plan. As of June 30, 2018, among the 39 public pension plans in the state of California surveyed by Cheiron, the actuarial consultant contracted by each of the San José pension plans, Federated had the lowest funded status of all 39 plans. Its 50% unfunded actuarial liability (UAL) means it currently has half the assets necessary to meet the future obligations to its pensioners. Police and Fire, with stronger investment returns and higher City contributions, is better positioned for its future obligations, being funded at 74%. Table 1 below presents market value and actuarial liability for both Plans as of June 30, 2018. Table 1 - Pension Fund Assets FY18 Plan/Fund Market Value Actuarial Liability Federated Plan $2.1 billion $4.1 billion Police and Fire Plan $3.5 billion $4.7 billion Total $5.6 billion $8.8 billion For fiscal year (FY) 2019, retirement costs will require a $334.7 million contribution from the General Fund, an increase of $15.6 million from the FY2018 contribution of $319.1 million. The FY2019 costs represent 27.8% of the total General Fund base expenditure budget with committed additions and reflect the Federated Retirement System and Police and Fire Department Retirement Boards’ approved economic and demographic assumptions. The forecast for the City’s FY2020 retirement contribution is $352 million, representing a 5% increase over its FY2019 contribution. Many public and private organizations have changed from pension plans to 401(k) defined contribution plans. The primary reason for the change is that many of those pension plans have become increasingly burdensome to the organization due to underfunding. That is, the amount of funds paid into a plan and the amount of income generated by the assets are insufficient to cover the long-term costs. That shortfall necessitates the need for employers to cover those obligations through such mechanisms as borrowing, which also increases costs due to interest payments. In the case of San José, shortfalls are covered by using General Fund monies. Police and Fire and Federated plans are governed by two separate boards of administration as authorized by Chapter 3 of the Santa Clara County Ordinance Code1. These two Boards are comprised of current employee plan members, plan member retirees and appointed members of the public from the financial and investment industry. Police and Fire is a defined benefit retirement plan operating under the Municipal Code Chapter 3.32 and is managed and administered by the Police and Fire Board. The duties of the Board include administration and investment of funds, and retirement requests, membership and benefits. The Board has the authority to administer the Plans and to enter into agreements on behalf of the City for Plan administration. Board meetings are held monthly, except for July, at the San José City Hall. The Police and Fire Board consists of nine members who serve four-year terms. Board members include one employee each from the Fire Department and Police Department and one each from their respective retired members. The active and retiree members are elected by their membership. In addition, four members of the public are appointed by the City of San José City Council (City Council) and one public member is selected by the Board. Public members must live within 50 miles of the San José City Hall and have a degree in finance, actuarial science, law, economics, business or other related field from an accredited university. Public members must also have at least twelve years of relevant experience. Federated is a defined benefit retirement plan operating under the San José Municipal Code Chapter 3.28. Federated operates in much the same way as Police and Fire. The Federated Board consists of seven members, each of whom serves a four-year term. Board membership includes two employee members, who are members of two of the eleven labor unions, each of them from a different City department. One board member must be a retiree member of Federated. Three members are appointed from the general public by the City Council. One public member is selected by the Board. Measure G amended the City Charter in regards to governance of the retirement Boards. The measure allowed the City Council to establish one or more retirement Boards, specified the hiring authority of the retirement services chief executive, excluded certain future retirement services employees from the classified civil service and established the process for setting stipends paid to non-employee retirement board members.2 1 Chapter 3.28.100 - 1975 Federated Employees Retirement Plan 2 ("City of San Jose Retirement Board Governance, Measure G," 2014) The San José Office of Retirement Services (ORS) administers both the Police and Fire Plan (and fund) and the Federated Plan (and funds) on behalf of the two Boards. In November 2016, following the passage of Measure G, the Boards were given direct authority to hire and appoint a Chief Executive Officer (CEO) and a Chief Investment Officer (CIO) who report directly to the two Boards. There are approximately 13,400 active, vested-but-not-receiving-benefits, retired and survivor participants who are served by the ORS. The 2011–2012 Santa Clara County Civil Grand Jury likewise concluded that mounting retirement obligations were a direct cause of the need to scale back government services. In a 2012 report on the pension systems of the county and all the cities and towns therein, the Grand Jury asserted: "The [2011-2012] Grand Jury concludes that until significant modifications are enacted, there is no doubt that the escalating cost of providing Benefits at the current level is interfering with the delivery of essential City services and the ultimate cost to the taxpayers is an unbearable burden. These costs are already impacting delivery of essential services such as demonstrated by San José reducing police and fire department staffing levels, closing libraries or not opening those newly built, curtailing hours of community centers, and not repairing pot-holed city streets."3 The 2018-2019 Civil Grand Jury (Grand Jury) finds this situation continues today. 3 (2011-2012, 2012, p. 25) METHODOLOGY The Grand Jury began an investigation of the San José Police and Fire Retirement Plan and the Federated City Employees’ Retirement System on November 6, 2018. The investigation focused on the structure of the two Boards and the ORS. The Grand Jury considered the efficiency and effectiveness of their administrative duties, investment profile of the underfunded pensions, along with the challenges these issues bring to members and taxpayers. The Grand Jury also investigated public pension funding of other public entities’ plans. The Grand Jury conducted visits to San José City Hall, Stanford University Law School, Stanford University Institute for Economic Policy Research (SIEPR), the ORS, and San José Pension Fund workshops hosted by the City. Fifteen interviews were conducted with twelve individuals. Interviewees included members of the San José City Council, employees of the ORS, Board members of the two San José pension funds, and an out of state pension fund manager. Interviews also included attorneys who advise on public policy and/or represent pension fund trustees and investors of a few of the largest national pension funds. The Grand Jury attempted to obtain the perspective of the membership of the bargaining units and so invited representatives of the 11 unions whose members participate in the Plans to appear before the Grand Jury. The Grand Jury is disappointed that the bargaining units chose not to avail themselves of the opportunity. It was a missed opportunity for the membership of those units to provide valuable insight into how they view the serious issues confronting the pension funds and the City. Reports specific to San José pensions were reviewed including the 2011-2012 Grand Jury reports and responses. The San José Municipal Code, Chapter 2, Parts 10 and 12, Section 2.08.1200 and Section 2.08.1000 were studied. Measure G of the City of San José was reviewed. A study of the San José public pension plans that was conducted by the SIEPR was reviewed and is referenced in this report. Other resources are listed in the Reference section of this report. Other sources of data include a significant amount of City and ORS information that was obtained from their websites. The Grand Jury reviewed retirement plans and fund data for Los Angeles County, City of Los Angeles, Atlanta, Illinois Public Safety Officers, New York City, Palm Beach, Austin, Orange County Cities, New Jersey Public Safety Officers, the State of Nevada, among others, and a report from the California Policy Center by Robert Fellner of April 25, 2014.4 The Grand Jury looked in-depth at the board structures of both the City and County of Los Angeles. Information from the California Policy Center was reviewed. Pension plan specifics for San José, the City of Los Angeles5 and the County of Los Angeles6 have in some cases been taken directly from their websites. Fellner, R. (2014). Evaluating Public Safety Pensions in California. Retrieved from California Policy Center website: https://californiapolicycenter.org/evaluating-public-safety-pensions-in-california/ 5 (LACERS, 2019) 6 (LACERA, 2019) DISCUSSION San José ORS: Organization, Budget and Operations The ORS currently reports to the two separate pension fund Boards. The ORS CEO oversees the general activities of all the services that the ORS provides including its budget for services that ranges from $10 to $12 million per year (see Table 2 below comparing FY19 and FY20 costs). The CEO and CIO are City employees and report to both Boards. Table 2 - Office of Retirement Services Administrative Costs, 2018-2020 Expense Category 2018-2019 2018-2019 2019-2020 % Increase % Increase Adopted Forecast Proposed (Decrease) (Decrease) (A) (B) (C) (A to C) (B to C) Personnel Services $7,118,000 $6,201,733 $7,387,000 3.8% 19.1% Non-personnel / Equipment $2,624,000 $2,283,328 $2,816,000 7.3% 23.3% Professional Services $1,878,000 $1,413,270 $1,607,000 (14.4%) 13.7% Medical Services $438,000 $336,270 $355,000 (18.9%) 5.6% TOTAL $12,058,000 $10,234,601 $12,165,000 0.9% 18.9% The CIO receives direction from both the CEO of ORS and the Board. The CIO is responsible for recommending investment policies and strategies to the Boards for both Police and Fire and Federated. Both Plans earned negative returns in 2015 and 2016. Based in part on these poor returns, in March of 2017, the Mayor of San José requested and the City Council approved a review of the investment portfolios of the City’s retirement plans by the City Auditor.7 The City Auditor selected the SIEPR to conduct the analysis. On October 12, 2017, the City Auditor (Auditor) published a report on the ORS’ administrative and investment operations.8 The Auditor found that the costs for administering these plans, from an operations standpoint, ranked in the middle and not significantly higher or lower than the peer benchmark jurisdictions assessed. The SIEPR report9, published on November 20, 2017, noted that using 2016 data, the San José Plans underperformed peer plans in net returns, although in terms of risk-adjusted return (Sharpe 7 (Diamond, 2017) 8 (Erickson, 2017a) 9 (Nation, Tulloch, & Lipshitz, 2017) Ratio), Police and Fire was ranked 5 and Federated was 8 out of 10 peers. The ORS later responded that 1-year data was inadequate to draw meaningful conclusions. The SIEPR report also focused on the ineffectiveness of the prior investment management team, citing the investment funds selected and the generally high expenses associated with such management. Figures 13 and 14 on pages 22 and 23 of the report demonstrate that the total expenses of the San José Plans had increased from 2014 forward. The increased costs have placed San José among the costliest of managed plans among the peer group that SIEPR selected.10 The report also cited the high number of investment staff for the San José Plans compared to peers. The City of San José did not concur with those observations, arguing that circumstances warranted the costs. The City cited the pension portfolio’s diversity of complex investments and the administrative effort required to manage that portfolio. In addition, the ORS took the position that San José pension administration overhead included staffing costs that peer groups did not report. Board Structure and Expenses Measure G, approved by the voters in November 2016, authorizes the establishment of one or more retirement boards to administer the retirement plans. A subsequent analysis by the City Attorney found that the City Council has the authority to establish “one” or “more” retirement boards.11 The Grand Jury reviewed the administration of the ORS in its relationship to the Boards in order to determine if there were improvements and/or cost benefits that could be achieved. The Grand Jury also reviewed the profiles of members of the Boards, and compared the member qualifications and experiences to other boards overseeing public pension funds in other jurisdictions. In terms of administrative costs, Federated costs are the one of highest among all classes of public pension plans in California. California public pension plans, with net assets under $5 billion, had an average of $4.1 million in administrative costs. Both San José Plans have administrative costs in excess of this average.12 Refer to Table 1 for the net asset values for the Plans and to Figure 1 that presents the San José funds’ administrative costs in Basis Points (BPS) relative to other California public pension plans. Basis points (BPS) are used chiefly in expressing differences in interest rates and investment fees. 10 (Nation et al., 2017, p. 24) 11 (Erickson, 2017a) 12 (Peña, 2019) Figure 1 - Administrative Cost Comparison for Police and Fire, and Federated13 The Nevada Public Employees Retirement System presents an example of a pension fund that is managed cost efficiently with above-average returns. In an article in the Wall Street Journal titled, “What does Nevada’s $35 Billion Fund Manager Do All Day? - Nothing”, the author describes the Nevada pension fund as focused on minimizing investment fees and administrative overhead by investing pension assets into low cost passive index funds.14 As of March 2019, the Nevada Public Employees Retirement System had assets with a market value of over $45 billion with 85% invested in low cost index funds managed by only 10 investment managers. By contrast, the City of San José’s two pension plans with assets slightly above $6 billion utilize more than 70 investment managers and have less than 50% of assets in a passive index strategy. With investment fees about one-seventh the average public pension, the Nevada Public Employees Retirement System provides a compelling strategy of reducing investment costs to increase investment returns. 13 (Peña, 2019) 14 (Martin, 2016) Examples of Board Structures, Member Profiles and Experience In review of other board structures and profiles of board member experience, two relevant jurisdictions are discussed below. They were selected based on their complexity and diversified profiles. The Los Angeles County Employees’ Retirement Association (LACERA), for example, has safety and non-safety employees combined in one plan. The profile of the board is broad and diverse with the labor representatives including a public defender, retired sheriff, county assistant treasurer, deputy head of tax collection and assistant chief counsel. The public representatives include a real estate developer, two attorneys, an underwriter, the Chief Financial Officer of the Los Angeles County Department of Public Works Building and Safety, and a pension plan consultant. Safety and general employee members are represented together under one board of directors, however, there is a separate “Board of Retirement” and “Board of Investments” providing oversight for these plans.15 The LACERA “Board of Retirement” is responsible for the administration of the retirement system, the retiree healthcare program and review and processing of disability retirement applications. The board is composed of eleven members: six members are elected; two are active general members; two are retired members; and two are safety members. Four of its members are appointed by the Los Angeles County Board of Supervisors. The law requires the County Treasurer and Tax Collector to serve as ex-officio and alternate ex-officio members. The LACERA “Board of Investments” is responsible for establishing the investment policy and objectives, as well as exercising authority and control over the investment management of the Plan. The Board is composed of nine members. Four members are elected: two are elected by active general members; retired members elect one member; and safety members elect one member. Four of its members are appointed by the Los Angeles County Board of Supervisors. The same law applies regarding the Tax Collector and Treasurer of the County. There is some overlap of individuals who serve on both boards. The Los Angeles City Employees’ Retirement System, (LACERS) 16 is a department of the City of Los Angeles, established by City Charter in 1937, to provide retirement benefits to the civilian employees of the City of Los Angeles, representing three-fifths of the city’s workforce. The Los Angeles city profile is different than the county boards in that the City of Los Angeles has three separate groupings of labor members. In addition to the civilian employees noted above, the 15 LACERA Los Angeles County Website: https://www.lacera.com/home/index.html 16 LACERS website: https://lacers.org/aboutlacers/about-us.html remaining two-fifths of the city workforce has retirement benefits through the Department of Water and Power Employees Retirement System, or the Los Angeles Police and Fire System. Currently LACERS provides services to 24,000 active employees, and provides benefits to nearly 17,500 retirees and their beneficiaries. LACERS administers the benefits approved by the City of Los Angeles, the “plan sponsor”, and includes pension benefits, administration of retiree health care premiums, and management of the pension fund portfolio to offset payment of these obligations.17 The Board of Fire and Police Pension Commissioners administers the Los Angeles Fire and Police Pensions (LAFPP) System in accordance with the City Charter, the City Administrative Code and the State Constitution. The Board consists of nine commissioners – five appointed by the Mayor of Los Angeles and confirmed by the City Council, and four elected by members. The five appointed members include a doctor of medicine, attorney, philanthropist and two investment managers. The diversity of the Public Board members for Los Angeles’ three plans has a similar makeup to that of Los Angeles County, where it is not all comprised of investment financial professionals. In reviewing the composition of each of the San José Boards of Administration the expertise of the members is heavily weighted toward investment professionals. Other more successful pension funds, such as LACERS, have boards that have a much wider range of expertise. Oversight of the San José ORS’ CEO and CIO The Grand Jury discovered that the CEO and CIO of the ORS do not have an annual performance review that included predetermined measurable goals. The Grand Jury did not find evidence that the Boards evaluate performance based on metrics other than periodic evaluation of investment portfolios, although the Grand Jury learned that the need to determine metrics has been discussed. Because the CEO and CIO of ORS report to two different boards, their efficiency and measurement of effectiveness is difficult to assess without established and measurable goals. For example, the complexity of Police and Fire benefit requirements and the financial difficulties of Federated may cause ORS to focus on varied priorities simultaneously. The joint council personnel committee18 of the Boards conducts performance evaluations. The Grand Jury found that there is currently no measurement of work effectiveness or performance of ORS personnel. A robust measurement of ORS staff might expose the inefficiencies caused by 17 https://www.lacers.org/aboutlacers/about-us.html 18 A committee consisting of members from each Board. any duplication of efforts in serving two entities. Without such an analysis the City, Board and ORS are unable to address these management issues. Consideration for Improving Effectiveness of the Boards Both Boards appear to be strong and understand their fiduciary responsibilities. Members generally were found to be both engaged and comprehend the issues required to making informed decisions. The Grand Jury was advised that the Police and Fire Board tends to manage much more complex pension issues. As confirmation of this, on a statewide basis in California, Police and Fire employees make up 15% of California’s total state and local government workforce but represent 25% of pension costs with different benefit needs.19 The Grand Jury discovered that the ORS administration and investment team members are subjected to unnecessary duplication of efforts. This duplication increases the amount of time spent on administration of activities, board meeting preparation and attendance, workshops and related work effort. The Grand Jury found that members of ORS participate in nearly three times the number of meetings than peer jurisdictions of similar size. In some instances, there are conflicts of priority that go along with a duplication of efforts resulting in less time being spent on value- added duties. The Grand Jury learned that the City of San José has periodically considered the benefit of combining the two Boards partly for reasons described above, and there is currently a willingness from some interviewees to combine the Federated and Police and Fire Boards. The combining of the two boards would reduce redundancy and provide more time to focus on investment performance and serving the members. There are already certain committees that report to both Boards, whose recommendations and actions are for both member populations, therefore suggesting that one board could serve all members of both Plans. Any such change should ensure that member representation on the Board not be diluted nor that they lose visibility. Other pension plan boards have benefited from a broad range of backgrounds beyond an investment focus. San José should consider the benefits of this improvement in its public members. Fellner, R. (2014). Evaluating Public Safety Pensions in California. Retrieved from California Policy Center website: https://californiapolicycenter.org/evaluating-public-safety-pensions-in-california/(Fellner, 2014) Other Areas of Possible Cost Reductions Pension Plan Investment Management Fees For calendar year 2017, the combined investment fees paid by Federated and Police and Fire exceeded $70 million.20 Management fees are fees charged by fund managers to invest and manage assets. Incentive fees are performance-based fees. That is, fees are based on the ability of the fund manager to meet or exceed an agreed upon level of return and are only applicable to certain types of investments. Operating expenses include overhead related to managing a fund; these expenses are indirectly borne by investors, and include professional, administration, research, tax, legal, custodial and audit expenses for a fund. Trading expenses such as broker commissions are not included in this discussion of fees. Other expenses excluded are institutional services such as custodial services (State Street Bank) and the cost of plan consultants who include the general investment consultant (Meketa Investment Group), the risk consultant (Verus Investments) and the absolute return consultant (Albourne America). According to information received from ORS, for fiscal year 2017, the three plan consultants received total payments of approximately $1.5 million, broken down as follows: Meketa Investment Group Investment Group received $608K; Albourne America received $480K; and Verus Investments received $299K. The Mayor and City Council have become more keenly focused on the impact of investment fees on investment performance. In the Mayor’s budget message of March 9, 2019, he devoted a significant portion of his message to retirement contribution liabilities and the impact of underperforming assets in the pension funds.21 In this budget message, the Mayor stated, “Also troubling has been the tendency for the boards and Retirement Services staff to favor investment in high-fee, management-intensive alternative investments such as private equity, real assets, private debt, and hedge funds. Academics have long speculated about the likelihood of a widespread bias in the industry to prefer higher fee [these can include “carried interest” that is profit sharing between plans and managers] active investment approaches despite the evidence of inferior outcomes, perhaps because decision-makers tend to share the same education, career paths, and social circles as those directing actively managed funds. I've expressed concerns repeatedly in the past, however, that existing strategies maximize financial benefit to asset managers, at the cost to the City and our plan members.”21 20 (Peña, 2017) 21 (Liccardo, 2019) Per the Plan’s actuarial consultant, Cheiron, for every $1 million reduction in investment fees, the City contributions would decrease by approximately $20,000. The Federated and Police and Fire Plans’ overall expense ratio, sum of management, incentive and administrative fees, of 1.29% (129 basis points) is driven primarily by the higher fees associated with alternate investments. This fact is supported by the CEO’s preliminary report on investment fee analysis dated March 12, 201922, that reveals multiple hedge investments in its global equity, private equity, real estate and absolute return allocations with expense ratios ranging from 3.29% to 5.35% (329 to 535 basis points). The Impact of COLAs on Pension Liabilities The growth in the City’s unfunded liabilities has many causes, including the financial downturn after 2008. But the primary cause is a massive increase in retirement benefits. The 3% cost-of- living adjustments (COLA) awarded to all Tier 1 San José employees when they retire and all current Tier 1 retirees who retire after April 1, 2006 is one such generous benefit. Note that Tier 1 refers to retired and active plan members hired prior to the passage of Measure G. Tier 2 are all other employees.23 San José Tier 1 retiree plans include a mandated 3% COLA that compounds annually. Tier 2 employee plans support a COLA based on cost of living index values for the preceding year but cap at a maximum of 2%. Based on estimated pension payouts and the mandated annual COLA increases, San José retirement plans in the next 10 years will need to payout approximately $4.3 billion, of which $1.8 billion is needed for Police and Fire retirees and the remainder for Federated retirees. ORS has estimated that the City will cover $3.0 billion of this expense and the retirement plans must cover the rest ($1.3 billion). To-date, the City has transferred over $30 million per year to cover retiree COLA expenses and will need to continue to do so; retiree COLA payouts are estimated to increase through at least year 2034. The Grand Jury has evaluated and annualized current City contributions including COLA payments, and determined the estimate of the City’s contribution to be closer to $3.4 billion for the 10-year commitment. A basic shortfall results as the City continues to contribute additional funds to cover costs and amortization of the unfunded liabilities. These sums are large and, as noted above, take funding away from other essential and desired services the City otherwise could provide its citizens. 22 “March Budget Message for Fiscal Year 2019-2020” memorandum from Mayor Liccardo to City Council, March 8, 2019, 23 Per San José Municipal Code sections 3.44.160 and 3.28.1910 To put part of the shortfall in context, a retiree’s pension will double in 24 years when the guaranteed 3% COLA is applied (e.g., with an initial pension of $50K, payments in year 24 would equal $100K and in year 30, the same initial pension of $50K would payout $119.4K and so forth). See Table 2 below. These payout rates mean that the City and retirement plans must find increasing funds to cover the mandated pension obligations. Table 2 - Pension Growth Based on COLAs Pension at Retirement COLA Pension Pay Out at Year Notes 24 30 36 $50,000 3% $100,000 $119,400 $142,580 $85,000 3% $170,000 $202,990 $242,380 $100,000 3% $200,000 $238,810 $285,150 $100,000 2% - - $200,000 For comparison Since 2009, at least 29 states have attempted to pare pension costs by reducing, suspending or eliminating post-employment COLAs, and some have implemented various mechanisms to help reduce the unfunded liability risk. Many of the COLA changes have taken place in states that had guaranteed a fixed percentage pension COLA, regardless of inflation. The financial pressures of the Great Recession of 2008, combined with a relatively low-inflation environment, made reducing or eliminating these guaranteed rates, or shifting to a different type of formula, attractive to states such as Colorado, Hawaii, Florida, Kansas, Illinois, Minnesota, Montana, New Mexico, Ohio and South Dakota.24 During this same period some states, including Kentucky, Minnesota, Montana, New Jersey and Wyoming, tied their COLAs to pension plan funding levels, while others, such as Colorado, tied COLAs to investment performance. Other types of cuts have involved skipping or delaying COLAs so that they apply only after a worker has been retired for a certain length of time or reached a certain age. Some states, including Rhode Island and Louisiana, have developed complex COLA arrangements that combine several of these features. Many state and local government pension COLA approaches fluctuate with inflation, based on consumer price indices (CPIs) published by the U.S. Bureau of Labor Statistics. These approaches are worthy of consideration. See also National Association of State Retirement Administrators (NASRA) 2018 papers on this subject with each state’s current adjustments outlined in some detail.25 Illinois defined a 3-part pension solution of which an optional COLA buy-out was provided. In this program, Tier 1 members (that is, the older members who still have guaranteed 3% compounding cost-of-living adjustments) can accept a reduction in their COLA from 3% to 1.5% 24 (Petrini, 2015) 25 (NASRA, 2018) in exchange for a lump sum benefit of 70% of the present value of the amount of future COLA reduction. This is projected to save the state $381.9 million of their $203 billion unfunded liability. Other states have delayed COLA payments for a time after retirement or until a certain age is achieved. The Grand Jury acknowledges that reducing any part of an agreed upon pension benefit is complex, requires careful legal review and must thoroughly consider the impact on retirees, and active members who will retire in the future. However, there is room to develop creative and supportive solutions that address the ever-growing liability associated with pension costs. An Example of How One County is Solving its Pension Liability Problems Other public pension plans are continuing to address existing and growing unfunded liabilities. One example that bears consideration by San José is San Mateo County. San Mateo County pension plans support about 12,000 employees, retirees and vested-but-not-receiving-benefits members, which is comparable to San José’s 10,600 members. San Mateo County has actively reduced its discount rate as has San José; San Mateo reduced those rates from 8.0% in 2004 to 6.75% in fiscal year 2018. Finally, San Mateo is an independently managed pension plan as is San José; neither is part of CalPERS. Where San Mateo County and San José differ is in employee contribution rates and pension plan actual returns. San Mateo County employees contribute 13% (pro rata) to their pensions and the County’s pension plan actual returns averaged 9.2% over the last five years, significantly higher than San José’s. Although there are differences between San José and San Mateo County pension plan attributes, some of the County’s approaches are worthy of consideration. Among other solutions designed to address the growing UAL, San Mateo County in 2012-2013 decided to make payments over and above the annual required contribution, or supplemental payments, towards reducing the unfunded liability to zero within 10 years. They are on track to accomplish this goal. The benefits of these supplemental payments include: a. Reducing current interest payments on the unfunded liability balance - San Mateo County expects to save almost 40% of its UAL in reduced interest costs over the 10- year time period; and b. Reducing ongoing principal and interest costs in the years following when the UAL is fully paid off - San Mateo County estimates this to be about 14% of its costs. San Mateo County and the Grand Jury acknowledge that this program is not without risk. Economic factors can lead to reduced revenues and hence limit the ability to make supplemental payments. Rates of return and asset allocations need to be managed to ensure effective returns. However, an engaged and proactive administration and oversight team should be able to manage such challenges. Pension Plans’ Performance The Grand Jury examined the investment performance of the San José Plans. The SIEPR report showed that the San José Plans were mature -- with more retirees and beneficiaries than the active members. To be self-sustaining pension plans generally need a ratio of active members to retirees of 2.0 or greater. The Grand Jury noted that at the end of FY18, the ratio of retiree/beneficiaries to active members in Federated was 1.19, and 1.37 in Police and Fire. This is a similar ratio to the 2016 numbers published in the SIEPR report. The ORS explained that maturity was the main reason for the San José Plans to take more risk-averse investment strategies and thus accept lower returns. The Grand Jury used the annualized returns to examine the performance of the San José Plans. The data was obtained from the pension performance reports as of June 30, 2018.26 The average annualized returns of the trailing 1-, 3-, 5-, and 10-year periods are presented in Appendix A together with the returns of the InvestorForce27 Public defined benefit plan peers having assets of more than $1 billion. The data shows that over the last 10 years, the San José Plans’ returns were consistently lower than 99% of its peers. Police and Fire did slightly better in 2018, at 91% lower than its peers. Over the last 10 years, the investment policy benchmarks generally ranked in the lowest quartile, reflecting the risk-averse approach of plan investment. The data also show that the San José Plans consistently underperform their investment policy benchmarks. This indicates that the active management of funds did not serve its purpose of outperforming the market. The Grand Jury found that the concern about actively managed portfolios to be a common issue. For example, the State of Pennsylvania Public Pension Management and Asset Investment Review Commission conducted a review of its two largest public pension plans, for public school employees and state employees. In 2018, the Commission made its final report28, recommending “moving to fully index all public market investments in both equities and fixed income at both retirement systems”. It stated that the Commission heard compelling evidence demonstrating that active management of public securities underperforms, net of costs, in all sectors over the long term when compared to the appropriate risk adjusted index benchmark, and that there is no 26 Meketa. (2018). San José Federated City Employees’ Retirement System Quarterly Review June 30, 2018. Retrieved from https://www.sjretirement.com/Uploads/Fed/2Q18%20SJFED%20Review_Revised%2006.30.2018.pdf 27 InvestorForce is a company that does investment analytics and reporting solutions for the global investment industry. One data group is the public defined benefit plans, each of which has assets of more than $1B. 28 (Tobash, 2018) persistence of manager outperformance or reliable way to select outperforming managers in advance. Because of the City’s risk-averse approach, the Grand Jury also examined the investment performance using the risk-adjusted return (Sharpe Ratio) as a metric. The data are shown in Table 3 below. Using the Sharpe Ratio, Police and Fire performance ranking improved, especially in the last five years, moving out of the last quartile of the peers. Federated performance ranking stayed in the bottom 10%. Both plans still underperform their policy benchmark. The benchmark selection appeared to have improved in the last 3 years, with benchmark performance ranking in the second and third quartiles among peers. The effect of the lower than benchmark performance may be illustrated by looking at Federated’s 2018 returns. At the 5.9% net return rate, the investment income paid for 60% of the Federated retirees’ pension benefit. Had the investment return been at the policy benchmark level of 7.4%, it would have been able to pay for 75% of the retiree benefits. In addition, by following the public market index funds, the reduced investment manager fees further help the City reduce the unfunded liability, which Federated needs to be funded at 51% as of June 30, 2018. Table 3 - Risk-Adjusted Return (Sharpe Ratio) Performance Police and Fire Department Retirement Plan Federated City Employees Retirement System Sharpe Ratio Trailing Trailing Trailing Trailing Trailing Trailing Trailing Trailing 1 year 3-year 5-year 10-year 1 year 3-year 5-year 10-year Total Fund 1.4 1.0 1.1 0.5 1.2 0.8 1.0 0.4 % (63rd) (54th) (78th) (96th) (91st) (94th) (93rd) (99th) (percentile) Policy Benchmark 1.4 1.0 1.2 0.5 1.5 0.9 1.0 0.5 % (58th) (40th) (69th) (75th) (43rd) (73rd) (99th) (91th) (percentile) Top 5% 2.3 1.5 1.7 0.8 2.3 1.5 1.7 0.8 IFPDB Plans 25% IFPDB 1.7 1.1 1.4 0.7 1.7 1.1 1.4 0.7 Plans Median IFPDB 1.5 1.0 1.2 0.6 1.5 1.0 1.2 0.6 Plans 75% IFPDB 1.3 0.9 1.1 0.5 1.3 0.9 1.1 0.5 Plans 95% IFPDB 1.1 0.8 1.0 0.5 1.1 0.8 1.0 0.5 Plans The demographic maturity of the San José pension plans prompted the investment staff to take a more risk-averse approach to portfolio allocation and expected lower returns as a result. However, the lower investment return also requires the City and employees to contribute more to maintain unfunded liability. The Grand Jury appreciates the difficult situation the City is facing and wants to find ways to support the City. The following are observations from the Grand Jury’s investigation that will hopefully trigger innovative ideas: ● CalPERS removed hedge funds from its portfolio in 2015 for its high fees and not having a significant material impact.29 ● Over the last 10 years, Federated investment returns have always been lower than peer portfolios having similar or less standard deviation, as shown on pp. 48-49 of the pension performance report as of June 30, 2018 and reproduced in Table 3 of this report. Other 29 Farmer, L. (2015). As Retirees Outnumber Employees, Pensions Seek Saviors. Retrieved from https://www.governing.com/topics/finance/gov-pension-hedge-funds-investments.html city, county and state plans have achieved higher returns with lower risks; this should be investigated.30 ● According to the Center for State and Local Government Excellence, most public pension plans have outperformed their blended portfolio benchmark over the long term.31 ● Public pension plans that underperform their benchmarks more often pay higher fees across all major asset classes, particularly for such alternatives as private equity and hedge funds, as mentioned in reports from the Center for State and Local Government Excellence and the Boston College Center for Retirement Research.32 The Grand Jury suggests that the allocations to alternative asset classes should be reviewed to ensure that this is being done in the most optimal way.33 30 (Meketa, 2018) 31 (Aubry & Crawford, 2018) 32 (Cypen, 2018) 33 (Erickson, 2017b) CONCLUSIONS The ORS estimates that, over the period of 2020 through 2029, the City of San José will need to pay between $3 billion and $3.3 billion dollars from the General Fund to cover pension obligations. For 2020, the estimated cost amount is 31% of the City budget, monies that would otherwise be available for essential City services. Some of the factors contributing to the underfunding of the pension plans are:  Unrealistic projections of investment earnings (the funds have continually earned less than projected and have earned far less than comparable pension funds);  Insufficient contributions by both the employer (the City) and the employee members of the 11 bargaining units (two for Police and Fire and nine for Federated). The insufficient contributions were largely based on unrealistically high earnings projections;  The mandatory 3% annual COLA for Tier 1 retirees that doubles retiree pensions in 24 years as compared to the CalPERS COLA of the actual cost of living index with a 2% cap; and  Two independent Boards of Administration (one board for Police and Fire and a second for Federated) result in duplication of management structures, redundant outside contractors and consultants fees and costs. Among public pension plan peers, Federated has consistently been ranked at the bottom, while Police and Fire falls in the last 10th percentile. The demographic maturity of the plans appears to have been the primary reason why portfolio allocations changed to more risk-averse investment options. In recent years, even controlling for risk adjustment, Federated’s return (Sharpe Ratio) still ranks in the lowest 10%, while Police and Fire ranks in the 50-75 percentile. The Grand Jury recommends that the City, the 11 bargaining units, the two Boards of Administration and the ORS work collaboratively to address these issues. FINDINGS AND RECOMMENDATIONS
Recomendaciones relacionadas (1)
R6: The City of San José should examine ways in which the 3% COLA liability can be reduced fairly as many other public entities have done by considering options such as reducing COLAs in exchange for lump sum buyouts, etc. This examination should be completed and made public by June 2020.
Hallazgos & Recomendaciones 10 hallazgos
F1a: The Santa Clara County Fairgrounds is a financially unproductive asset for the County of Santa Clara which is accruing millions of dollars in deferred maintenance and has continually required the County’s financial support to address deferred maintenance.
F1b: There is no realistic chance that FMC will have sufficient financial ability to address the backlog of deferred maintenance.
F2a: Many of the current uses of Fairgrounds property are inconsistent with FMC’s purpose to provide “…county fair and similar educational, cultural, and community functions.” The County knows that these uses are inconsistent with FMC’s purpose.
F2b: FMC is not adhering to the Agreement. The County knows that FMC is not adhering to the Agreement.
F2c: The 25-year old Management Agreement is woefully outdated and in need of review and revision.
F3: Contractor storage yards, the RV park, RV storage and vehicle auctions are inconsistent with FMC’s purpose to provide “…county fair and similar educational, cultural, and community functions.”
F4: FMC’s bingo games do not comply with many County bingo regulations.
F5: The FMC Board exerts inadequate fiscal oversight of FMC’s financial reporting of its operations and has failed to address the numerous inconsistencies in its financial reports.
F6: FMC’s bookkeeping lacks transparency regarding the actual revenue received from different activities and events, specifically the profitability of bingo and the County Fair.
F7: The FMC appears to be using the closed session personnel discussion exception to discuss other business which is not permitted by the Ralph M. Brown Act.
Recomendaciones adicionales 12

No vinculadas a hallazgos específicos.

R1: The County should develop a realistic financial plan to address the deferred maintenance of the County’s property and buildings by June 30, 2020.
R2: By December 31, 2019, the County should either enforce proper use of the FMC property consistent with FMC’s purpose and the Agreement or revise the governing documents to accurately reflect the use of the Fairgrounds.
R3a: By October 31, 2019, the County should evaluate and determine if each of the current uses and activities carried out by FMC at the Fairgrounds comport with FMC’s purpose to provide “…county fair and similar educational, cultural, and community functions.”
R3b: If the report prepared in response to Recommendation 3a identifies uses and activities carried out by FMC at the Fairgrounds that are not consistent with FMC’s purpose, the BOS should prohibit the inconsistent uses and activities by December 31, 2019.
R4a: By October 31, 2019, the County should ensure that FMC’s bingo games adhere to the County’s bingo regulations.
R4b: By October 31, 2019, FMC should ensure that the bingo games are in compliance with County’s bingo regulations.
R5a: FMC should direct its auditor to address and comment by December 31, 2019, on the appropriateness of FMC’s reporting of building improvements and landscaping as capital assets, and the depreciation of those assets.
R5b: FMC should take steps to have FMC’s financial reporting revised to be more transparent and consistent across all its reports by December 31, 2019.
R6a: FMC should immediately establish a separate account for bingo income consistent with the County Ordinance Code in order to enhance clarity around the financials of bingo.
R6b: By October 31, 2019, FMC should ensure that FMC’s public financial reports accurately reflect the revenue earned by FMC’s bingo operations and the County Fair.
R6c: FMC should seek financial advice on the proper reporting of income from pull tabs which appear to constitute unrelated business income; reporting of building improvements as capital assets and depreciation taken against such assets; and file all necessary tax forms.
R7: The FMC BOD and FMC key staff should undergo training to comply with the Ralph M. Brown Act by October 31, 2019.
Hallazgos & Recomendaciones 4 hallazgos
F1: The City does not properly respond to CPRA requests because it: (a) does not indicate if it will respond; (b) does not respond within 10 days; (c) overutilizes the 14-day extension; (d) invokes the need for a 14-day extension for reasons beyond those permitted in the statute; and (e) fails to provide all documentation responsive to the request.
Recomendaciones relacionadas (1)
R1: The City should train staff responsible for responding to CPRA requests to timely indicate if the City will respond to the request and, further, only invoke the 14-day extension where permissible.
F2: The City lacks a written policy to guide staff in responding to CPRA requests in a manner that complies with the law.
Recomendaciones relacionadas (1)
R2: The City should create and implement a written policy, by October 31, 2019, to guide City staff in complying with the CPRA.
F3: The City’s disorganized recordkeeping and lack of a functional records management system hinders its ability to timely and accurately comply with CPRA requests. Although the City purchased records and CPRA management systems 18 months ago, it has yet to implement those systems.
Recomendaciones relacionadas (2)
R3a: The City of Santa Clara should implement its records management and CPRA management systems by December 31, 2019.
R3b: In the absence of an operational CPRA and records management system, the City of Santa Clara should create and immediately implement interim procedures to comply with the CPRA.
F4: 12 REQUIRED RESPONSES ......................................................................................................... REFERENCES ............................................................................................................................ APPENDIX 1: Second CPRA Request, 2/6/2019 ................................................................ APPENDIX 2: Third CPRA Request, 4/3/2019 .................................................................. GLOSSARY AND ABBREVIATIONS Bid A written offer/proposal made in response to an RFP or RFQ. City City of Santa Clara. CPRA California Public Records Act. General Services Contract for any work performed or services rendered by an independent contractor, with or without the furnishing of materials. RFP Request for Proposal: A solicitation seeking consultants/contractors to provide services or public works. RFQ Request for Qualifications: A solicitation seeking the qualifications of a consultant/contractor to carry out a service or project. The Santa Clara Stadium Authority is Stadium Authority a public body, separate and distinct from the City, established to provide for the development and operation of Levi's Stadium. SUMMARY The California Public Records Act (CPRA)1, which provides the public with the right of access to public records, has been in effect for 50-plus years. The City of Santa Clara (City) is in the midst of Silicon Valley with all of the area’s technical acumen and resources available. However, the 2018-19 Santa Clara County Civil Grand Jury (Grand Jury) found the City’s recordkeeping to be disorganized and its staffing levels inadequate to process CPRA requests in compliance with the requirements of the law. Through the CPRA, accessing public records from government agencies to monitor “the people’s business” should be simple, responsive and without significant delays. However, the Grand Jury found that obtaining public records from the City is a time-consuming and difficult chore. The Grand Jury encountered non-compliance by the City in response to its CPRA requests. Noncompliance with the CPRA included non-responsive replies to the requests, invalid excuses for extensions of time, and incomplete document production. The City acknowledged its recordkeeping system was disorganized and in need of improvement, but the City did not have an interim solution. However, the City’s progress towards implementation of an existing recordkeeping software has been without a sense of urgency. The Grand Jury finds the City’s non- compliance with CPRA unacceptable and recommends the City implement measures immediately that will ensure compliance with CPRA requests. BACKGROUND The Grand Jury initiated an investigation to review the contracting procedures of the City and the Santa Clara Stadium Authority (Stadium Authority). In furtherance of that investigation, specific contracts and supporting documentation were requested from the City under the CPRA. After encountering numerous obstacles, including inadequate responses from the City to its document requests and a lack of cooperation in scheduling Grand Jury interviews, the Grand Jury turned the focus of its investigation to the City’s handling of requests under the CPRA. THE CALIFORNIA PUBLIC RECORDS ACT Access to Public Records The CPRA is a state law enacted in 1968 giving individuals the right to inspect and obtain copies of records kept by state and local agencies. The law expressly provides that “access to information 1 California Government Code § 6250, et seq. concerning the conduct of the people’s business is a fundamental and necessary right of every person in this state.” 2 This fundamental precept ensures the public access to information enabling them to monitor the operations of their government. Californians felt so strongly about the public having the right of access to information concerning the conduct of the people’s business that in November 2004, the voters approved Proposition 59 (Sunshine Amendment), which amended the California Constitution to include the public’s right to access public records.3 The CPRA in section 6253(e) defines “public records” as “any writing, containing information relating to the conduct of the public’s business prepared, owned, used or retained by any state or local agency regardless of physical form or characteristics.” When a person requests access to public records under the CPRA, access must be provided, unless a specific exemption is available to the responding agency. Exemptions fall into two main categories: protection of individual privacy interests (e.g. personnel or medical records); and support of effective governmental operation (e.g. pending real estate negotiations or litigation). The CPRA provides for two different rights of access. First is the right to inspect public records: “Public records are open to inspection at all times during the office hours of the state or local agency and every person has a right to inspect any public record, except as hereafter provided.”4 A person need not give notice to inspect public records at an agency’s offices during normal working hours. Second, the CPRA provides the right to obtain copies of public records and requires the public entity to “make the records promptly available to any person upon payment of fees covering direct costs of duplication, or a statutory fee if applicable.”5 Local Agency’s Duty to Respond The fundamental purpose of the CPRA is to provide access to information about the conduct of the people’s business.6 This right of access to public information imposes a duty on local agencies to respond to CPRA requests and does not “permit an agency to delay or obstruct the inspection or copying of public records.”7 Time is critical in responding to public records requests. A local agency must respond promptly, but no later than 10 calendar days from receipt of a request for copies of public records, to notify the requesting person whether records will be produced.8 The 10-day time limit may be extended 2 Gov. Code § 6250 3 Cal. Const., Article 1, § 3(b)(1) 4 Gov. Code § 6253(a) 5 Gov. Code § 6253(b) 6 Gov. Code § 6250 7 Gov. Code § 6253(d) 8 Gov. Code § 6253(c) for an additional 14 calendar days by written notice to the requesting person in one of four special circumstances, in which the agency is required:  to search for and collect the requested records from field facilities or other establishments separate from the office processing the request;  to search for, collect, and appropriately examine a voluminous amount of separate and distinct records demanded in a single request;  to consult with another agency having substantial interest in the request (such as a state agency), or among two or more components of the local agency (such as two city departments) with substantial interest in the request; or  in the case of electronic records, to compile data, write programming language or a computer program, or to construct a computer report to extract data.9 No other reasons justify an extension of time to respond to a request for copies of public records. The response to a request for copies of public records must either produce all of the records sought, seek a refinement of the request or suggest an agreeable timeframe for production. The agency may only charge the requesting person for the direct cost of duplicating the records or a statutory fee, if applicable. METHODOLOGY The Grand Jury reviewed public records obtained from the City and the Stadium Authority, received both in person and by email. Several visits to the City took place to inspect and obtain public records. The Grand Jury also interviewed previous and current City employees. Gov. Code §6253(c) DISCUSSION First CPRA Request The Grand Jury began an investigation of the City’s contracting procedures by reviewing the City and Stadium Authority10 purchasing policies and by submitting a CPRA request on December 3, 2018, to view the following public records:  All “General Services” Bids, RFPs, RFQs for the City of Santa Clara and Santa Clara Stadium Authority within the last five years in the amount of $40,000.00 or more.  All “General Services” contracts (excluding utility contracts) for the City of Santa Clara and Santa Clara Stadium Authority awarded within the last five years.  All invoices for “General Services” contracts (excluding utility contract invoices) awarded in 2017 and 2018 for the City of Santa Clara and Santa Clara Stadium Authority. The City responded in writing to the request on December 13, 2018. The response failed to state whether the records would be produced and invoked a 14-day extension to December 28, 2018, without citing a permissible reason as required by the CPRA. The response explained that City Hall would be closed for the holidays from December 25, 2018 to January 1, 2019, that City staff was working diligently on the request, and that it hoped to have documents available for review by December 21, 2018, or sooner. Closure of city offices other than for recognized holidays does not extend or excuse compliance with the time for response under the CPRA. The Grand Jury received a second response on December 17, 2018, containing a list of 377 documents that appeared to be all of the City’s RFPs, RFQs, and bid postings for the last five years. In that response, the City asked the Grand Jury to narrow its request to a specific project, stating that each appropriate City department would need to retrieve the documents sought. The City explained that it had a decentralized recordkeeping system, which made the Grand Jury’s request challenging, requiring many hours of staff time to fulfill. No actual documents were produced at this time nor did the City state whether any of the documents would be produced as required by the CPRA. Working with the City Clerk’s Office, the Grand Jury agreed to revise its original request and seek only General Services contracts entered into during the past 12 months. An appointment was made 10 City officials staff the Stadium Authority. The custodian of public records for the City is the custodian for the Stadium Authority. for members of the Grand Jury to visit City Hall before it closed for the holidays to view the documents. Prior to its visit, the Grand Jury received an email from City staff with an attachment entitled “City Clerk Contracts” listing 66 contracts. Again, the list did not identify documents that were responsive to the Grand Jury’s initial CPRA request. The list of 66 contracts referenced only five that were entered into within the revised time frame the Grand Jury had specified, at the request of the City. Upon arrival at City Hall on December 24, 2019, the Grand Jury was shown numerous boxes containing all types of contracts and invited to sort through the boxes and view the documents. The Grand Jury observed that the City employees appeared to be eager to assist; however, they indicated they were recent hires and were unfamiliar with where documents were stored. The City further stated that they lacked a record management system to identify and locate City documents. After searching through the boxes for two hours, the Grand Jury was unable to find the documents it was seeking. This was surprising since the Grand Jury had previously obtained copies of several of the requested documents from other sources. It was observed that the contracts had attached blue routing sheets that are used within the City to help ensure that all necessary City Departments, such as the Finance Department or the City Attorney, review and sign off on pending contracts. Unable to obtain the information sought by the CPRA request, the Grand Jury scheduled interviews with current and former City employees and a City contractor. The contractor had recently obtained a general service contract via the City and Stadium Authority bid processes and would have knowledge of the steps leading up to securing the contract. The contractor had agreed to the interview but subsequently cancelled, refusing to reschedule. City staff was unresponsive to multiple requests to meet, forcing the Grand Jury to seek legal assistance to facilitate the interviews. The Grand Jury learned that the City had recently hired several new staff members who had limited knowledge of purchasing policies and practices. Second CPRA Request On February 6, 2019, the Grand Jury made a second CPRA request focusing on three specific General Services contracts and the purchasing process used in entering into these contracts. These contracts were not obscure agreements but involved contractual dealings between the City and the Stadium Authority. The documents requested were:11 11 See Appendix 1 for the text of the second CPRA request  Three specific contracts and their blue routing sheets;  Invoices and payments associated with the three contracts;  RFQs and RFPs associated with the procurement of the three specified contracts; and  City and Stadium Authority purchasing policies and directives. The timeline below outlines the dates and responses to the Grand Jury’s second request:  On February 11, 2019, the City responded stating, “The City will provide a further response to your request on or before February 16, 2019.”  On February 19, 2019 (two days beyond the 10-day CPRA response period), the City responded with an update stating the City was “…in the process of compiling responsive records to several items of your request and will be providing, at a minimum a partial response to 50% of your request by end of day tomorrow (February 20, 2019).”  On February 21, 2019, the City provided some documents and stated that, pursuant to Government Code Section 6253(c), the City would respond further by March 1, 2019. The City also provided an email with a link to an electronic copy of some of the requested documents. The link did not work.  On February 27, 2019, the City provided a working link to the electronic documents.  On March 1, 2019, the Grand Jury received the additional documents. The City did not produce the blue routing sheets even though the Grand Jury specifically referenced these documents in the second CPRA request. The City also did not provide some of the payment documents associated with two of three contracts. After almost three months of seeking purchasing and procurement records, the Grand Jury still could not get a complete set of documents that should have been easily retrievable and disclosed. Grand Jury Changes Focus to CPRA Due to the City’s non-responsiveness to its CPRA requests after three months, the Grand Jury concluded that its investigation into the City’s procurement process had become futile. Accordingly, the Grand Jury changed the focus of its investigation to the City’s compliance with the CPRA. The Grand Jury interviewed City staff to understand the City’s current method of responding to CPRA requests. After more than a year of discussing the need to (a) centralize and streamline the public records process; (b) achieve higher quality and due diligence on records; and (c) modernize administrative procedures, the City Manager reported at the January 31, 2019 Council Goal and Priority Setting Session that the City had hired a Public Records Manager. The Grand Jury learned that the City had been trying for over 18 months to implement a records management system and had procured two software systems: Lazerfiche®, a records management system to track records; and NextRequest, a software system used to trace record requests. To date, these systems are not operational and the City could not estimate when they would be. The Grand Jury also learned that the recently hired Public Records Manager is responding to approximately 40 to 50 pending CPRA requests using the 14-day extension as a triage. At the same time, the Public Records Manager is also tasked with implementing the new records management software. The City Manager reported to the City Council, that the City still did not have adequate staff to properly process CPRA requests nor to implement the software systems. The City Council recently authorized the hiring of a part-time employee to assist the Public Records Manager, but that position remains unfilled. The Grand Jury learned that the City currently has no city-wide process or written procedures in place for complying with CPRA requests and that the Public Records Manager is the only CPRA- trained City employee. The Grand Jury learned that the City’s current method of responding to in-person and written CPRA requests is to first notify the Public Records Manager for manual tracking of requests on a spreadsheet. Requests are then forwarded to the appropriate City departments, which are responsible for gathering and producing the requested information within the CPRA timelines. If the responsible department does not respond within the 10-day time period, its staff communicates with the Public Records Manager on how to resolve the request and assert a 14-day extension. Third CPRA Request The Grand Jury decided to test the City’s CPRA compliance with a third request on April 3, 2019. This request sought three items: the missing payment documents and routing sheets that had not been provided in response to the second request, and copies of the City’s CPRA tracking logs for the past year.12 On April 10, 2019, the City responded to the third CPRA request, stating it had records responsive to the request and again invoked a 14-day extension contending the request was “voluminous” and citing the need to search for and collect the requested records from field facilities. The Grand Jury had obtained two of the three requested items five days earlier on April 5, 2019, during a visit to City Hall. At that visit it turned out the missing payment documents and routing sheets were stored at the City Clerk’s Office and Finance Department, not at field facilities. These two items were 12 See Appendix 2 for the text of the third CPRA request produced within minutes. Moreover, the entire request consisted of only three items totaling seven pages plus five logs. The Grand Jury’s third request was not “voluminous.” On April 19, 2019, 16 days after its third request, the Grand Jury received the City’s written response. It included five CPRA logs, three blue routing sheets and four invoices. The payment documents requested were not included in its written response, as they had already been produced by the Finance Department at the April 5, 2019 visit. However, at that visit, the Finance Department had produced additional payment documents that the Grand Jury had not previously been provided through the City’s CPRA responses. This alerted the Grand Jury to seek the missing invoices that coincided with the payment documents. These invoices were included in the April 19, 2019 response. After a review of the documents produced in response to the April 3, 2019, records request, the Grand Jury determined that the City had finally produced all the requested documents. Although the City stated all CPRA requests now go through the Public Records Manager to be logged, the Grand Jury found this not to be the case. The Public Records Manager was apparently unaware that the routing slips in the Grand Jury’s request had been previously provided by the City Clerk’s Office and duplicated work by producing them again. The 14-day extension provision provided by Government Code Section 6253 was intended to be the exception not the rule. When invoking the 14-day extension, the City is required to state the reason for the extension. The City’s responses to the initial CPRA requests did not state whether the records would be provided or cite a reason for invoking the 14-day extension. City staff gave the Grand Jury repeated excuses for the City’s failure to produce requested documents in a timely manner. Documents were provided as they were found, not all at once. For example, a staff member stated that the requested routing sheets did not exist, even though the Grand Jury had two of them in its possession. During the April 5, 2019, visit to City Hall, the City staff was able, within minutes, to provide the routing sheets that had not previously been produced. At the same visit, the Finance Department produced the missing payment documents and missing invoices from the previous response, also within minutes. The Grand Jury’s experience in obtaining requested documents seems to be consistent with the City’s general CPRA practices, as verified by the CPRA logs kept by the City. For the year 2018, the average response time for all CPRA requests was 10.6 days. For the first quarter of 2019, the average ballooned to 23.8 days. The Grand Jury was told that this increase in response time had been due to an increase in the number and type of document requests as well as to the fact that the City had not kept accurate records. However, the CPRA requires the City to timely respond to document requests regardless of the number received or the state of the City’s record management system and does not permit extensions based merely on a spike in the number of requests. CONCLUSIONS The City’s disorganized recordkeeping is hindering its ability to do the people’s business in a transparent fashion. The City knew that the requester was the Grand Jury. Given the Grand Jury’s statutory ability to investigate and report on the City, it can be assumed that the City gave the Grand Jury heightened attention. The Grand Jury is concerned because it has greater access to public records than a private citizen does, yet it had significant trouble obtaining documents despite multiple requests. The City has acknowledged its shortcomings in complying with CPRA requests, and that its efforts during the past 18 months to address CPRA management have been unsuccessful. Not having a functional records management system in place to locate public records is an unacceptable excuse for noncompliance with the CPRA. The CPRA does not provide for exceptions for compliance due to seasonal City Hall closures, employee turnover, lack of training, organizational structure, understaffing or lack of adequate records and CPRA management systems. The City is in the process of installing a new records management system which, when fully implemented, presumably will improve its ability to comply with the CPRA on a consistent basis. However, until such time as a records management system is implemented, the City must employ an interim method to comply with the CPRA. FINDINGS AND RECOMMENDATIONS
Recomendaciones relacionadas (1)
R4: The City should identify and train necessary staff on compliance with the CPRA by October 31, 2019.
Hallazgos & Recomendaciones 4 hallazgos
F1: Utilizing chronically understaffed highly-trained emergency personnel to answer non-emergency and TRAC calls is inefficient.
Recomendaciones relacionadas (1)
R1: The City should remove non-emergency call-taking and TRAC responsibilities from SJPD Communications, while maintaining the current authorized headcount by December 2020.
F2: SJPD Communications is chronically understaffed due to: ineffective recruiting practices; lengthy hiring timelines; staffing vacancies; and salaries that are lower than other local PSAPs.
Recomendaciones relacionadas (4)
R2a: To improve recruiting practices, the City recruiting staff should develop a recruitment plan for SJPD Communications positions dedicated to outreach and recruitment and complete a written plan by January 2020. The plan should review the salaries of local PSAPs for competitiveness and focus on creative solutions already in place at other PSAPs, to include part-time and per diem employees.
R2b: To reduce the loss of applicants during the hiring process, the City should examine the delays associated with the current hiring process and develop a strategy to reduce the timeframe from application to hire date and complete a written plan by January 2020.
R2c: To better address staffing vacancies, the City should develop a strategy to over hire to address the historic vacancy and high attrition rates, and in anticipation of retirements and other known future vacancies.
R2d: To increase the recruiting pool of potential new hires, the City should recognize external POST- certified training programs.
F3: SJPD Communications personnel are civilian employees and often perceive their positions as less valued than sworn positions within the Department, thus adversely affecting their morale.
Recomendaciones relacionadas (1)
R3: The City should conduct an employee survey of SJPD Communications staff with a commitment to discuss the results directly with employees. Additionally, the City should develop a plan to address issues that create poor morale.
F4: Most other PSAPs in Santa Clara County use the South Bay Regional Public Safety Consortium for initial training. SJPD Communications conducts all its training in-house to the exclusion of other available training resources, adversely impacting its ability to timely fill positions.
Recomendaciones relacionadas (1)
R4: The City should develop alternative training strategies to include use of other available training resources in addition to the in-house SJPD training by January 2020.
Hallazgos & Recomendaciones 5 hallazgos
F1: The VTA Board, currently made up exclusively of elected officials from the Santa Clara County, Board of Supervisors, the City of San José and the other smaller cities in the County, suffers from:  A lack of experience, continuity and leadership;  Inadequate time for the directors to devote to their duties to the VTA Board due to their primary focus on the demands of their elected positions;  A lack of engagement on the part of some directors, fostered in part by the committee system, resulting in VTA functioning largely as a staff-driven organization;  Domination, in terms of numbers, seniority and influence, by representatives of the Santa Clara County Board of Supervisors and the City of San José; and  Frequent tension between the director’s fiduciary duties to VTA and its regional role, on the one hand, and the political demands of their local elected positions, on the other.
Recomendaciones relacionadas (8)
R1: From VTA report "Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2018" listed in References, item number 15, and State Department of Finance http://www.dof.ca.gov/Forecasting/Demographics/Estimates/E-2/documents/PressReleaseJul2018.pdf
R1a: VTA should commission a study of the governance structures of successful large city transportation agencies, focusing on such elements as: board size; term of service; method of selection (directly elected, appointed or a combination); director qualifications; inclusion of directors who are not elected officials; and methods of ensuring proportional demographic representation. This study should be commissioned prior to December 31, 2019.
R1b: As the appointing entity with an interest in the transit needs of all County residents, the County of Santa Clara should commission its own study of transportation agency governance structures, focusing on the elements listed in Recommendation 1a. This study should be commissioned prior to December 31, 2019.
R1c: As constituent agencies of VTA, each of the cities in the County should prepare and deliver to VTA and the County Board of Supervisors a written report setting forth its views regarding VTA governance, with specific reference to the elements listed in Recommendation 1a. These reports should be completed and delivered prior to December 31, 2019.
R1d: Within six months following the completion of the studies and reports specified in Recommendations 1a, 1b and 1c, the County of Santa Clara and/or one or more of VTA’s other constituent agencies, should propose enabling legislation, including appropriate amendments to Sections 100060 through 100063 of the California Public Utilities Code, to improve the governance structure of VTA (which potentially could include an increase in the directors’ term of service, the addition of term limitations and the inclusion of appointed directors who are not currently serving elected officials).
R1e: In order to provide more continuity in the leadership of the VTA Board, within six months following the completion of the studies and reports specified in Recommendations 1a, 1b and 1c, the County of Santa Clara and/or one or more of VTA’s other constituent agencies, should propose enabling legislation amending Section 100061 of the California Public Utilities code to provide that the Chairperson of the VTA Board shall be elected for a term of two years rather than one.
R1f: Prior to December 31, 2019 and pending changes contemplated by Recommendation 1e, VTA should adopt a policy of routinely reappointing an incumbent Chairperson for a second one-year term at the end of his or her initial term, absent unusual circumstances.
R1g: In order to better connect the Chairperson with the budget process and accountability for operating and financial results, prior to December 31, 2019, VTA should amend Section 2-26 of the VTA Administrative Code to provide that the Chairperson and Vice Chairperson shall serve terms coinciding with VTA’s fiscal year ending June 30, rather than the calendar year.
F2: The California Public Utilities Code, the VTA Administrative Code and the Guidelines for Member Agency Appointments to the VTA Board of Directors adopted by the Governance and Audit Committee of the Board (Guidelines) all contain provisions requiring that, to the extent possible, the appointing agencies shall appoint individuals to the VTA Board who have expertise, experience or knowledge relative to transportation issues. Nevertheless, appointees to the VTA Board often lack a basic understanding of VTA’s operations and transportation issues, generally.
Recomendaciones relacionadas (1)
R2: In order to help assure that individuals appointed to serve on the VTA Board have the appropriate qualifications, prior to December 31, 2019, VTA should take vigorous action to enforce compliance by appointing agencies with the qualification and suitability requirements of: (i) Section 100060(c) of the California Public Utilities Code; (ii) Section 2-14 of the VTA Administrative Code; and (iii) the Guidelines.
F3: The VTA Board lacks effective policies designed to assure productive participation by members of the VTA Board.
Recomendaciones relacionadas (3)
R3: Vehicle Revenue Hours (VHR) and Unlinked Passenger Trips (UPT) data from FTA NTD https://www.transit.dot.gov/ntd/data-product/ts22-service-data-and-operating-expenses-time-series-system-0
R3a: In order to help make directors become and remain productive members of the VTA Board, prior to December 31,2019, VTA should: (i) implement and enforce attendance at an intensive, multi- session onboarding bootcamp for incoming directors that would provide detailed information regarding VTA’s operations, financial affairs and currently pending large-scale projects as well as the organization and operations of the Board and directors’ duties and obligations; (ii) prepare and provide to each director a detailed handbook of directors’ duties, similar to the “Transit Board Member Handbook” published by the American Public Transportation Association; (iii) enforce attendance at Board and committee meetings by providing Board attendance records to appointing agencies and removing directors from committees for repeated non-attendance; and (iv) implement a robust director evaluation process, with the participation of an experienced board consultant, that would include mandatory completion by each director of an annual self- evaluation questionnaire and Board review of a composite report summarizing the questionnaire responses.
R3b: In order to further enhance the effectiveness of the directors, prior to December 31,2019, VTA should develop a program to encourage continuing education of the Board members by: (i) scheduling and enforcing attendance at more frequent and intensive Board workshops on important issues regarding transit policy, developments in transportation technology, major capital projects and VTA’s financial management; and (ii) requiring directors to attend, at VTA’s expense, third- party sponsored industry conferences and educational seminars.
F4: The Grand Jury commends the Chairperson of the VTA Board for recognizing the need to improve Board engagement and effectiveness by convening the Ad Hoc Board Enhancement Committee to review the Board’s governance structure and practices.
Recomendaciones relacionadas (1)
R4: Operating expense, UPTs and VHRs include only directly operated bus and light rail vehicles For the charts below, the Grand Jury used data from the 'National Transit Summaries & Trends 2017”20, “Santa Clara Valley Transit Authority Annual Agency Profile 2017”21, and “Service Data and Operating Expenses Time-Series by System”22 to examine VTA’s operations and performance in the national arena. 10 9 8 7 6 5 4 3 2 1 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 20 2017 National Transit Summaries and Trends https://www.transit.dot.gov/sites/fta.dot.gov/files/docs/ntd/130636/2017-national-transit-summaries-and-trends.pdf 21 Santa Clara Valley Transit Authority Annual Agency Profile 2017 https://www.transit.dot.gov/ntd/transit-agency-profiles/santa-clara-valley-transportation-authority 22 Service Data and Operating Expenses Time-Series by System https://www.transit.dot.gov/ntd/data-product/ts22-service-data-and-operating-expenses-time-series-system-0 )$( tsoC gnitarepO 2017 Operating Cost ($) per Passenger Trip Percentile 2017 Operating Cost per Passenger Trip Data National Distribution ($) 2017 Operating Cost per Passenger Trip Data VTA ($) 300 250 200 150 100 50 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% )$( tsoC gnitarepO 2017 Operating Cost ($) per Revenue Hour Percentile 2017 Operating Cost per Revenue Hour Data National Distribution ($) 2017 Operating Cost per Revenue Hour Data VTA ($) 50 45 40 35 30 25 20 15 10 5 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % oitaR yrevoceR eraF 2017 Fare Recovery Ratio Percentile 2017 Fare Recovery Ratio National Data (%) 2017 Fare Recovery Ratio VTA (%)
F5: 46 REQUIRED RESPONSES ........................................................................................................... APPENDIX A – The Guidelines for Member Agency Appointments to the VTA Board of Directors ........................................................................................................................................ APPENDIX B – VTA Operating Statistics and 2017 National Trends ........................................ APPENDIX C – Peer Agency Comparisons ................................................................................ REFERENCES ............................................................................................................................. GLOSSARY AND ABBREVIATIONS AC Transit Alameda County Transit. A peer transit agency to VTA. APTA American Public Transit Association. A national association of which VTA is a member. BART Bay Area Rapid Transit. A peer transit agency. County County of Santa Clara CPC Capital Program Committee. A standing committee of the VTA Board of Directors. DOT US Department of Transportation. A national transportation agency. EBRC Eastridge-BART Regional Connector. Current nomenclature for the Eastridge light rail extension (Phase 2). Farebox Fares collected from passengers divided by operating expenses. recovery ratio FTA Federal Transit Administration. A federal agency providing transit data (see NTD) and services. HMTA Houston Metro Transit Agency HOV High Occupancy Vehicle LRT Light rail transit [system] MTC Metropolitan Transportation Commission. A Bay Area regional transportation coordination and planning agency. Next Network VTA's Next Network is a redesign of the transit network and is one component of an agency-wide effort to make public transit faster, more frequent and more useful for Santa Clara County travelers. NTD National Transportation Database. Database of statistics and metrics maintained by FTA. PUC California Public Utilities Code SCCTD Santa Clara County Transit District SCVWD Santa Clara Valley Water District VTA Santa Clara Valley Transportation Authority VRH Vehicle Revenue Hours SUMMARY The Santa Clara Valley Transportation Authority (VTA) is an independent special district created by the California legislature in 1972. Initially, the Santa Clara County (County) Board of Supervisors provided direct oversight of VTA and acted as its Board of Directors. Effective January 1, 1995, pursuant to further legislation, VTA began operating under a separate Board of Directors (VTA Board) composed of elected officials from throughout the County appointed to serve by the County Board of Supervisors and the governing authorities of VTA’s constituent municipalities, with the allocation of VTA Board representation generally based on population. For many years, VTA has been plagued by declining operating performance and recurring budget gaps between projected revenues and expenses (referred to as structural financial deficits) – notwithstanding significant population growth and, in recent years, increased employment levels throughout much of Silicon Valley. The 2003-2004 Santa Clara County Civil Grand Jury conducted an “Inquiry into the Board Structure and Financial Management of the Valley Transportation Authority”1 which found, among other things, that:  The operating performance of VTA compared unfavorably to its peer organizations;  The VTA Board had not effectively managed the finances of VTA, resulting in a substantial structural financial deficit that was projected to increase in the following year; and  A root cause of VTA’s poor performance was the governance structure of the VTA Board, which was “too large, too political, too dependent on staff, too inexperienced in some cases, and too removed from the financial and operational performance of VTA.” To address these issues and attempt to make the VTA Board more responsive, the 2003-2004 Grand Jury proposed various changes to the Board’s structure. Although responses filed by seven of VTA’s constituent municipalities were supportive of some or all the recommended changes, VTA’s response defended the status quo, and most of the other municipalities adopted VTA’s position. Accordingly, the recommended changes were not made. The 2008-2009 Grand Jury again examined the governance of VTA and reiterated some of the same concerns noted in the earlier report, although the focus of the 2008-2009 report was primarily on the role and functioning of the VTA Board’s appointed advisory committees. 1 http://www.scscourt.org/court_divisions/civil/cgj/2004/BoardStructureFinancialMgmtVTA.pdf The 2018-2019 Civil Grand Jury (Grand Jury) revisited the subject of VTA’s governance and the work of the earlier grand juries and found that:  VTA’s operating performance has continued to deteriorate over the last 10 years, relative to both its own historical performance and the performance of its peers, across a wide variety of metrics;  The VTA Board has consistently failed to adequately monitor VTA’s financial performance and has taken action, albeit less than fully effective action, only in the face of imminent financial crises; and  Despite the serious ongoing structural financial deficit, the VTA Board has been unwilling to review and reconsider decisions made years or even decades ago regarding large capital projects (and their attendant operating costs) that are no longer technologically sound or financially viable, based on their costs and projected ridership. The Grand Jury concluded that today, more so than in 2004 or 2009, the VTA Board is in need of structural change to enable it to better protect the interests of the County’s taxpayers and address the many complex challenges presented by emerging trends in transportation, rapidly evolving technology and the changing needs of Silicon Valley residents. The Grand Jury recommends several changes to the governance structure and operations of the VTA Board which will improve the Board’s ability to effectively perform its important oversight and strategic decision-making functions. The Grand Jury further recommends that the VTA Board consider deferral of Phase 2 of the Eastridge light rail extension project pending a full review of the future role of light rail in VTA’s transit system. Such a review should study alternative ways to meet the needs of the residents of East San Jose for modern, efficient public transportation without extending a costly and outdated light rail system and worsening VTA’s already precarious financial condition. In January 2019, the incoming Chairperson of the VTA Board issued a summary of her “2019 Perspectives and Priorities”2 for VTA (see Board of Director’s Meeting, January 7, 2019, section 8.2). Among the goals articulated by the Chairperson was improved board governance. The Chairperson announced that she would “convene a board working group to look at a range of board governance practices,” with a view to improving “board engagement and effectiveness.” The Grand Jury commends the Chairperson for focusing on the important subject of governance. This report may aid the Chairperson and the rest of the Board in that endeavor. 2 http://santaclaravta.iqm2.com/Citizens/FileOpen.aspx?Type=12&ID=2133&Inline=True METHODOLOGY The 2018-2019 Civil Grand Jury began this investigation of VTA on August 15, 2018 and concluded its work on May 29, 2019. The investigation primarily followed from issues highlighted in the report of the 2003-2004 Grand Jury and focused on the structure of the VTA Board of Directors, the effectiveness of its oversight of VTA’s operating and financial performance, its handling of the agency’s persistent structural financial deficit and its ability to address the many complex challenges facing VTA as it confronts the future of transportation in Silicon Valley. The Grand Jury employed a broad range of data gathering and investigative methods, including:  Site visits were made to VTA headquarters, one of the VTA bus yards, VTA’s downtown customer service center, and bus and light rail stops and stations.  The transit system was used, including the purchase of Clipper Cards, riding buses and light rail trains during peak and off-peak hours, stops at and transit through Diridon Station, Eastridge, downtown and North County rail and bus facilities, and assessing access to transit stops by walking to stations and stops and using VTA parking sites.  Interviews were conducted with 37 individuals (some more than once) over more than 50 hours. Interviewees included a substantial number of individuals who served as members of the VTA Board and its committees during 2018 and 2019, senior and mid-level VTA staff personnel, city and county government officials, and representatives of various community stakeholder groups.  Governing documents were reviewed, including: (i) provisions of the California Public Utilities Code (PUC), which established VTA, particularly PUC Sections 100060 through 100063, which set forth the governance structure of the VTA Board; (ii) provisions of the VTA Administrative Code, adopted by the VTA Board to supplement the provisions of the PUC; and (iii) agreements among members of city groups who share representation on the VTA Board regarding the process for rotating their representation on the Board and collectively choosing their appointees. In addition, data regarding attendance records for VTA Board and committee meetings, directors’ terms in office and voting records were examined.  Reports specific to VTA were reviewed, including: (i) the 2003-2004 and 2008-2009 Civil Grand Jury reports and the responses thereto; (ii) a 2007 report entitled “Santa Clara Valley Transportation Authority Organizational and Financial Assessment,” by the Hay Group (Hay Report); (iii) a 2008 report on VTA by the California State Auditor; (iv) a 2010 thesis entitled “Assessing Transit Performance: Recommended Performance Standards for the Santa Clara Valley Transit Authority,” authored by a San Jose State University master degree candidate; (v) a 2016 report entitled “Transit Choices Report,” prepared for VTA by the consulting firm Jarrett Walker +Associates; and (vi) numerous public documents published by VTA and/or available on its website. These and other documents referred to in this report are listed in the Reference Section.  Comparisons were made of VTA’s performance in various operating and financial categories to the performance of other transit organizations utilizing data compiled by the American Public Transportation Association (APTA), the United States Department of Transportation (DOT), The Business Insider, the Federal Transit Administration (FTA) published in the National Transit Database (NTD), the Public Transit Factbook and other federal and industry indices and metrics. Industry and “think tank” reports and articles discussing and comparing transit agency performance, including, among others, the Cato Institute, the Heritage Foundation and the Hudson Institute, were also reviewed. For purposes of comparison, operating data from peer agencies serving the metropolitan areas of Portland, Minneapolis, Houston, Dallas, Salt Lake City, Denver, San Francisco, Sacramento and San Diego were reviewed. In connection with a comparison of governance structures, other agencies, including those serving Los Angeles, Seattle, Vancouver B.C., Austin, Chicago, New York, the District of Columbia and Phoenix, were considered.  Attendance at regularly scheduled meetings of the VTA Board and its committees, including the Administration and Finance Committee, Capital Program Committee (CPC), Governance and Audit Committee, and Ad Hoc Financial Stability Committee between October 2018 and May 2019, as well as Board workshops on the Future of Transportation in Silicon Valley and the proposed biennial budget for fiscal years 2020 and 2021. Audio and video recordings of some of the meetings noted above, as well as other meetings of the VTA Board and certain committees conducted from January 2018 forward were reviewed. DISCUSSION A Brief History of the VTA Santa Clara County Transit District (SCCTD) was created by the County’s voters in June 1972 and took over operations of three financially strapped private bus companies. SCCTD was initially managed by the County’s Department of Public Works, but in 1974 became a separate agency governed directly by the County Board of Supervisors. SCCTD initially focused on upgrading and replacing its inherited fleet of buses. Assisted by federal funding and a voter approved half-cent sales tax in 1976, SCCTD began to acquire diesel buses and build repair facilities. In the 1980s, SCCTD embarked upon the construction of its light rail transit system, utilizing funding received from the federal government and the proceeds of additional voter-approved sales taxes. The first segment of the light rail system opened for service in late 1987, and the entire initial 21-mile system was completed in 1991. Four extensions of the system were completed by 2005, and additional extensions are currently in the planning stages. SCCTD completed a two-part reorganization, in early 1995. SCCTD was designated the Congestion Management Agency for the County under a joint powers agreement among the County and its 15 cities. At the same time, legislation reconstituting the Board of Directors from five directors, all of whom were County Supervisors, to 12 consisting of two County Supervisors, five San José City Council members and five city council members representing the remaining 14 cities, selected on a rotating basis by the governing authorities of those cities. The name of the agency was changed to the Santa Clara Valley Transportation Authority in 1996, from which the acronym VTA was adopted. Today, VTA is a complex, multi-billion-dollar enterprise that provides bus, light rail and paratransit services within Santa Clara County. In addition, VTA participates in funding other agencies that provide regional rail service, including Caltrain, the commuter rail line serving the San Francisco Peninsula, the Capitol Corridor operating between Silicon Valley and the Sacramento area, and the Altamont Corridor Express, connecting Stockton and San José. VTA also is responsible for county-wide transportation planning, including congestion management, the design and construction of highway, pedestrian and bicycle improvement projects, and the promotion of transit-oriented development. Structure of the VTA Board The present structure of the VTA Board was authorized by legislation effective January 1, 1995. In the legislation proposed by the County Board of Supervisors, the VTA Board was to have been composed of five directly elected members (corresponding to the five county supervisorial districts) and 11 appointed members of various elected bodies in the county. As ultimately adopted, the enabling legislation eliminated the directly elected directors. Instead, PUC Section 100060 provided for a Board consisting of 12 voting members and alternates, all of whom are elected public officials, with the allocation of Board representation generally based on population. Under the formula outlined in PUC Section 100060, and further spelled out in Section 2-13 of the VTA Administrative Code, the VTA Board is composed of:  Two voting members and one alternate who are members of the Santa Clara County Board of Supervisors;  Five voting members and one alternate representing the City of San José;  One voting member and one alternate representing the cities of Los Altos, Los Altos Hills, Mountain View and Palo Alto;  One voting member and one alternate representing the cities of Campbell, Cupertino, Los Gatos, Monte Sereno and Saratoga;  One voting member and one alternate representing the cities of Gilroy and Morgan Hill; and  Two voting members and one alternate representing the cities of Milpitas, Santa Clara and Sunnyvale. All the voting members and alternates, other than the County supervisors, must be currently serving as mayors or city council members of the city they represent. Each of the four groups of smaller cities may collectively determine their representative, and each group has adopted an agreement specifying, in varying degrees of detail, the manner in which the group’s appointed representatives will rotate among the member cities and how individual representatives are to be selected. PUC Section 100060(c) provides, importantly, that “[t]o the extent possible, the appointing powers shall appoint individuals to the VTA Board who have expertise, experience, or knowledge relative to transportation issues.” The VTA Administrative Code and the inter-city agreements contain similar directives. In 2015, the Governance and Audit Committee of the VTA Board adopted a set of Guidelines for Member Agency Appointments to the VTA Board of Directors (Guidelines). The Guidelines contain several recommendations emphasizing, among other things, the value of a candidate’s expertise and prior experience on the VTA Board or its Policy Advisory Committee. The Guidelines also express the expectation that VTA Board members “[h]ave a fiduciary responsibility to vote for the best interests of the region, not those of their city/county group or appointing jurisdiction,” and “should be able to attend Board and standing committee meetings regularly.” A full copy of the Guidelines is attached as Appendix A. In addition to the voting members and alternates, the VTA Administrative Code provides that members of the Metropolitan Transportation Commission (MTC) who reside in Santa Clara County, and who are not voting members or alternates, shall be invited to serve as ex-officio, non- voting members of the Board3. The VTA Board currently has one such ex-officio member. VTA Board members serve for a term of two years4. The VTA Administrative Code “strongly encourages” appointing authorities to reappoint representatives to successive terms, and some members do serve multiple terms5. One director who recently left the VTA Board had served as a director or alternate representing San José and the County for a total of 13 years, but missed eight Board meetings in his last two years of service. The two voting directors currently representing the County have served as directors or alternates for a total of 14.5 and 12.5 years. The current Mayor of San José has served as a director for 11.5 years. However, many directors who serve on a rotating basis as representatives of the smaller city groups do not serve successive terms, and directors’ two-year terms are frequently cut short when they are not re-elected, term out or otherwise cease to serve in their elected position. PUC Section 100061 requires the VTA Board to elect its Chairperson and Vice Chairperson annually. Both officers serve for terms of one calendar year, straddling two fiscal years of the VTA (July 1 to June 30). By informal convention, the Vice Chairperson one year becomes Chairperson the following year. VTA Administrative Code Section 2-15 4 PUC Section 100060.2 5 VTA Administrative Code Section 2-14 The VTA Board in Action As noted above, the VTA Board consists of a rotating group of elected public officials appointed by the County Board of Supervisors, the City of San José and the four groups of smaller cities. Although the PUC, the VTA Administrative Code and the Guidelines all admonish the appointing authorities to appoint VTA Board members who have appropriate expertise, experience and knowledge, as a practical matter, appointments are often made based more on political considerations than on the candidate’s qualifications. From the candidate’s point of view, appointment to the VTA Board, one of the largest agencies in the County, is generally considered a plus for his or her political advancement. Candidates often express an interest in serving on the VTA Board largely because they see service on the Board as a “resume builder.” As a result, appointees to the VTA Board often have no previous experience with transportation, finance or leadership of a commercial enterprise, let alone one with annual revenues of over a half billion dollars and assets of $5 billion. New directors often know little about VTA’s operations or finances, or the organization and functioning of the Board. In our interviews, the Grand Jury learned that one director was unclear about how directors were chosen or even how many directors there are. Another, representing one of the smaller city groups, was unfamiliar with the provisions of the inter-city agreement governing appointments to the Board and considers appointments as simply the political prerogative of the mayor of the city whose turn it is to make the appointment. Because new directors often have little or no experience with transportation agency operations or transit policy, they face a steep learning curve to even begin to become effective Board members. There is no “boot camp” for new directors. The orientation program provided by the VTA staff is brief and presents only a high-level overview of VTA and basic information regarding Board procedures. When speaking with the Grand Jury, some directors couldn’t recall going through any orientation at all. Workshops are conducted by the VTA staff, generally about twice a year, to provide background information to the directors, often focusing on a specific issue. These workshops are relatively short, sometimes poorly attended and often cancelled. For example, both director workshops scheduled to be held in 2018 were cancelled. A workshop held on February 22, 2019, ambitiously addressed the important and complex topic of “The Future of Transportation in Silicon Valley.” The workshop was attended by eight of the 12 voting members of the VTA Board, three of the six alternates and the ex officio member and lasted a little over three hours. Needless to say, the workshop merely scratched the surface of the topic. A few Board members have attended transportation-related, third party-sponsored programs and seminars on their own initiative to enhance their knowledge on issues of transportation management and policy. There is no formal policy requiring or encouraging attendance at external training programs or conferences or other forms of continuing education. Influence on the VTA Board The City of San José dominates the VTA Board with the ability to appoint five of the 12 directors, which should not be unexpected given San José’s share of the County’s population. Although the San José directors technically are appointed by the San José City Council, the Mayor recommends those appointments. Thus, the Mayor effectively controls the initial selection of the San José directors as well as their tenure on the Board and, therefore, has the ability to exercise considerable influence over a substantial portion of the VTA Board. Since some members of the County Board of Supervisors who have served on the VTA Board previously served on the San José City Council or represented supervisorial districts within San José, these relationships may further enhance San José’s dominance on the VTA Board. Given that representatives of the City of San José and the County Board of Supervisors are often able to serve multiple terms on the VTA Board, they gain experience and the ability to add value. However, representatives of the smaller city groups are subject to the rotational provisions of their inter-city agreements, limiting their ability to serve consecutive terms. Accordingly, the San José and County representatives often dominate the Board in terms of experience and influence as well as numbers. Current voting members of the VTA Board representing San José and the County have served an average of 4.3 years and 10.5 years, respectively, including non-concurrent terms but excluding service by some of them as alternates. However, the current voting members representing the smaller cities have served an average of only 1.9 years. Board Member Preparation All of the members of the VTA Board are primarily focused on their other duties as local elected officials; their position on the VTA Board is clearly of secondary importance to most, if not all, directors and, as noted above, viewed by some principally as a “resume builder” and a one day a month job. Directors confront their other duties as elected officials and, in the case of smaller city directors, private employment or business interests, which themselves may be demanding and time-consuming. Directors often find it difficult to digest the massive amounts of information provided to them by the VTA staff to help them fulfill their responsibilities and prepare for meaningful participation in Board meetings. For example, meeting materials for VTA Board meetings typically run more than 300 pages, and committee meeting packages can be as voluminous. Here too the representatives of the smaller city groups are at a disadvantage. While members of the County Board of Supervisors and the San José City Council have dedicated staffs that can help them review and distill VTA-supplied materials and analyze issues, the representatives of the smaller city groups have little or no staff support. Although members of the VTA staff make themselves available to meet with directors to discuss VTA business, particularly in advance of monthly meetings, the Grand Jury learned that some directors take little or no advantage of these opportunities. VTA Committees Like many complex organizations — both governmental and private — the VTA Board maintains a system of standing committees. These include the Administration and Finance Committee, the CPC, and the Governance and Audit Committee, among others. The Board also has a number of advisory committees and occasionally appoints ad hoc committees to deal with specific matters. For example, the Ad Hoc Financial Stability Committee (which will be discussed further in this report) was formed in January 2018 and was active throughout 2018. The Board’s committee structure is both a benefit and a detriment. Because Board members have other public and private commitments, it is challenging to deal with all the complex issues affecting VTA; thus, delegation of certain responsibilities is necessary. On the other hand, the committee structure tends to create a certain level of disengagement. Board members are assigned by the Chairperson to serve on standing committees. Several interviewees expressed the opinion that committee assignments are often made with little or no input from the affected Board members, and some committee members only learn of their appointment when they see their name on a list. Because of their various time commitments, Board members often are unfamiliar with or just defer to and trust the staff and their fellow directors regarding issues passed upon initially by committees of which they are not members. When those issues come before the full Board, often by way of its consent calendar, there is little or no discussion or debate. In some cases, matters of some significance are also placed on the consent calendar at the committee level, with the result that only the staff conducts any significant review of the matter. This system works well for some topics, like the approval of construction contracts, but can leave many directors uninformed about important topics to which the full Board should be attentive. Topics like monitoring VTA’s financial affairs and structural financial deficit (which is principally left to the Administration and Finance Committee) and major ongoing capital programs, which are monitored by the CPC demand full engagement by all directors. At the October 2018 Board meeting, in reference to a report on the consent calendar, one of the directors stated, “Instead of going to committee, this type of report should go to the full Board…We should have [Board] workshops on several of these reports.” Alternate VTA Board Members Like the use of committees, the system of alternate Board members has both advantages and disadvantages. Alternate members cannot vote at meetings except when they are attending in place of a voting member. Accordingly, alternate members often do not attend Board or committee meetings. If they attend meetings at all, they typically sit in the audience and do not participate. The existence of alternate Board members is useful in securing a quorum at Board and committee meetings when a voting member is absent. However, the availability of an alternate can serve as justification for voting members to make meetings a lower priority. Additionally, because alternate members frequently are called upon at the last minute, they may be even less prepared than voting members with the agenda and meeting materials. The alternate faces the decision to vote on matters in accordance with his or her own beliefs and opinions, or to vote the way he or she believes the voting member being replaced would have voted. This type of voting “by proxy” is inconsistent with good governance practices and would not be permitted by members of a corporate board of directors. VTA Board Meetings The VTA Board meets once a month in the evening. Board committees meet between three and 11 times a year. Attendance at Board and committee meetings varies greatly. Data compiled by the Grand Jury show that during 2017, 2018 and the first four months of 2019, attendance by voting members at Board meetings and workshops averaged approximately 87%. Individual attendance ranged from 61 to 92%. During the same period, attendance by voting members at committee meetings averaged approximately 86%. Often, directors arrive at meetings late, step away from the meeting, or leave early, but their partial participation is not always reflected in the attendance records. The conduct of Board meetings observed by the Grand Jury is characterized by limited debate and discussion, typically with active participation by only a few directors and some directors not participating at all. The Board does very little on an ongoing basis to monitor and assess directors’ performance. The Grand Jury learned from our interviews that guidelines were developed to aid the Board in measuring its effectiveness, but no action has been taken to implement these guidelines. Board members receive a self-assessment questionnaire at the end of the year, but, according to several interviewees, many are not completed or returned, and no action is taken to follow up or seek feedback. VTA Board Effectiveness In short, the VTA Board suffers from:  a lack of experience and continuity by many directors;  dominance, in terms of numbers, seniority and influence, by representatives of San José and the County;  inadequate time for the directors to devote to the Board’s oversight and policy-making functions;  a lack of engagement by some of the directors, fostered in part by the committee system, resulting in VTA functioning largely as a staff-driven organization; and  conflicts of interest, which are often irresolvable, between the directors’ fiduciary duty to VTA and its regional role, on the one hand, and the political demands of their local elected positions, on the other. In assessing the effectiveness of VTA, several preliminary observations are in order. First, nothing in this report is meant to suggest that the members of the VTA Board are not honorable and hard-working public servants who are doing their best to perform the duties of a very difficult position under extremely difficult circumstances. Similarly, the Grand Jury has found that the VTA senior management staff is a competent team of professionals doing their best to run a very complex organization within the policy guidance provided by the VTA Board. As one member of the Board stated at the February directors’ workshop, “the staff is like a racehorse that we are keeping in the starting gate.” For their part, members of the senior staff are sometimes reluctant to draw the Board’s attention to matters of concern where they realize there is political resistance on the part of some directors and feel that raising an issue would be a waste of time. Some senior staff members are frustrated by what they perceive as an unwillingness of the Board to support needed action or make important changes at the policy level. Several staff members pointed to other transit districts, such as those in Portland, Austin and San Diego, as agencies whose policymakers are prepared to make tough decisions and take risks to improve public transit. According to some staff members and directors, this frustration, in part, has resulted in a general decline in morale at the senior staff level. The process used in the recent reorganization of senior staff responsibilities has contributed to additional morale problems. Some key members of senior management have recently announced that they will be leaving VTA. The Grand Jury also recognizes that many of the problems facing VTA are not unique to it as a transit organization or to the specific geographic or demographic characteristics of the Silicon Valley. Like many other transit organizations, VTA must deal with nationwide transportation trends, including increasing congestion and competition from ride-hailing companies and corporate-run employee bus services, as well as looming challenges posed by autonomous, driverless vehicles. Moreover, operating a transit system in a largely suburban region presents greater challenges than are typically faced in more densely populated urban areas, having concentrated downtown business centers. It is because of the complex and evolving nature of the problems facing VTA that active and enlightened Board oversight and strategic vision are more essential than ever to the organization’s future success. Having those observations in mind, the Grand Jury has noted that VTA and the VTA Board have been subject to criticism over the years from various quarters. As described above, the 2003-2004 and 2008-2009 Grand Juries were critical of the Board and its governance structure. However, criticism of the management and Board of VTA has not been limited to the Civil Grand Jury. A number of investigations, studies and articles, including the Hay Report which was commissioned by VTA itself, have criticized VTA’s operational and financial performance and the effectiveness of VTA governance. In 2007, one writer referred to VTA as possibly “the nation’s worst managed transit agency, at least among those serving big cities.”6 Even members of the VTA Board have questioned the Board’s effectiveness. For example, at a meeting of the VTA Board in October 2018, one director made the comment, “we have to break the mold of ‘same ole, same ole’…Board, we have to step up and change things.” Upon assuming her position in January 2019, the current Chairperson of the VTA Board announced that she would “convene a board working group [later designated the Ad Hoc Board Enhancement Committee] to look at a range of board governance practices” with a view to improving “board engagement and effectiveness.”7 At the Board workshop in February 2019, the participating directors, by a unanimous show of hands, agreed that VTA needs to make “radical changes” to address its many challenges. As one director put it, “We just had a workshop where we had a long conversation and we pretty much had a consensus where we have to do things differently and think outside the box.” The Ad Hoc Board Enhancement Committee held its first meeting on May 29, 2019. A complete review and assessment of the operations and management of VTA is far beyond the means of the Grand Jury or the scope of this report. Accordingly, the Grand Jury has chosen to focus its attention on the consideration of the effectiveness of the VTA Board’s oversight and policymaking, as exemplified by three areas of concern:  VTA’s poor and continually deteriorating operating performance; 6 “The Nation's Worst Transit Agency", The Antiplanner, March 26, 2007 7 http://santaclaravta.iqm2.com/Citizens/FileOpen.aspx?Type=12&ID=2133&Inline=True . See section 8.2 of Minutes for the January 9, 2019 Board of Directors meeting.  the VTA Board’s inadequate oversight of the agency’s financial performance and its structural financial deficit; and  the VTA Board’s unwillingness, to date, to reconsider the merits of significant pending capital projects that may be indicative of its general ability to guide the organization strategically. VTA’s Operating Performance VTA Operating Trends The 2003-2004 Grand Jury reviewed VTA’s operations and found that its operating performance compared unfavorably to its own benchmarks as well as the performance of peer agencies. Among other things, its report noted that:  VTA’s operating costs had risen substantially faster than the rate of inflation; and  Fares collected from VTA’s passengers divided by VTA’s operating expenses (referred to as the farebox recovery ratio) for the previous two years had been 11.6% and 12%, compared to the national average of more than 20%, meaning that the taxpayers of Santa Clara County were providing a much greater than average subsidy of transit operations. The 2018-2019 Grand Jury again examined VTA’s operating statistics and found that VTA’s performance has continued to deteriorate over the past 10 years, relative to both its historical performance and the performance of its peers, across a wide variety of metrics, including continuing increases in operating costs and further reductions in farebox recovery. Since the 2008-2009 recession, the population of Santa Clara County has increased by approximately 10.6%. During that 10-year period, bus and light rail vehicle revenue hours (VRH) ,which measures the amount of service VTA offers, increased by 6.4% while operations employee headcount (i.e., operators and maintenance personnel) grew by 8.9%. Total operations expense rose by 63.2% between 2009 and 2018, including a one-year increase of 17.1% between 2017 and 2018 alone. As operations expense increased, overall farebox recovery declined from 13.5% in 2009 to 9.3% in 2017 – substantially worse than the ratios that the 2003-2004 Grand Jury cited as unacceptably low back in 2004. Meanwhile, despite increases in employment and income levels in Silicon Valley, the public’s actual use of VTA’s services (as measured by passenger trips on buses and light rail) dropped by 19.2% between 2009 and 2018 and by 14.8% in the last two years alone. According to U.S. Census Bureau data, in 2017 (the last year for which such data is available), public transit was used as a means of transportation to work by only 4.8% of Santa Clara County’s commuters, little more than the combined percentage of those who walked or biked to work and fewer than the 5.3% who worked at home. Despite the declining use of transit during the last ten years, VTA continued to increase its employee headcount (both operations employees and administrative staff) and add to its fleet of buses and train cars, further increasing operating expense. As a result of the dramatic increases in operations expense and the concurrent decline in ridership, VTA’s cost per passenger trip for buses and light rail combined increased from $5.61 in 2009 to $9.30 in 2017, 90.5% of which was covered by taxpayer subsidies. Detailed data regarding VTA’s operations are shown in Appendix B, and the trends discussed above are depicted in Figure 1 below. 75 50 25 0 -25 1 2 3 4 5 6 7 8 9 10 Figure 1 - VTA Operations Trends since 2009 Peer Agency Comparison The FTA issues an annual NTD report summarizing nationwide data and trends for transit agencies throughout the United States. In its most recent survey, for 2017, the FTA reported that for transit agencies serving populations of more than one million people:  Operating cost per passenger trip for buses and light rail ranged from a low of $3.27 to a high of $9.31 with VTA’s cost per trip of $9.28 nearly the highest in the nation;  Operating expense per revenue hour ranged from a low of $84.82 to a median of $123.20 and a high of $249.83 with VTA’s operating expense per revenue hour of $199.79 at about the top 10th percentile in the nation; and )%( 9002 ecnis egnahC Chart Title County Population Full-time Ops Employees Vehicle Revenue Hours (VRH) Passenger (Bus+LR) Trips Ops Expense 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year  Farebox recovery for light rail systems (combined bus and light rail data was not available) ranged from 7.6% to 47.2% with VTA’s light rail system farebox recovery of 7.6%, the lowest in the nation, requiring taxpayers to subsidize 92.4% of the cost of light rail service. Since the FTA surveys contain data for more than 800 transit agencies, including many with operating environments that differ significantly from VTA’s, the Grand Jury selected a cohort of ten peer agencies for further review using the following guidelines:  Only agencies operating both buses and light rail systems were included;  Only agencies serving urbanized communities with population and service areas generally comparable to VTA’s were included; and  Agencies identified as VTA’s peers by interviewees or transit experts were also considered for inclusion. Based on these guidelines, public transit agencies serving the metropolitan areas of Portland, Minneapolis, Houston, Dallas, Salt Lake City, Denver, San Francisco (SF), Sacramento and San Diego were chosen for comparison. Comparisons of FTA operating data for the 10 peer agencies from 2009 through 2017 are shown in Appendix C. In summary, comparative data for three key metrics show the following:  Operating Cost per Trip: VTA’s operating cost per trip was the highest of all 10 peer agencies in each of the nine years. In addition, VTA’s cost per trip increased by 65% over the period, second only to Sacramento’s increase of 86%.  Passenger Trips per Revenue Hour: The effectiveness of VTA’s service, as measured by the number of passenger trips per revenue hour, was consistently among the lowest of the peer group, and second lowest in 2017 and 2018. San Diego, with a lower population density than VTA’s, achieved almost twice the ridership per hour as VTA in the last five years. Not surprisingly, San Francisco, with its significantly greater population density, consistently recorded the highest number of trips per hour.  Farebox Recovery: VTA had the lowest farebox recovery in the peer group for its total operations since 2012. 2012. Table 1 below summarizes VTA’s operating performance in 2017 relative to the peer group. Table 1 - VTA Operating Performance Versus Peer Group in 2017 10-Peer VTA Performance Measure Average Best Worst Rating Passenger Trips Service per Revenue 34.0 63.8 23.4 24.3 Effectiveness Hour (SF Muni) (Dallas) (2nd to last) Operating Cost per Passenger $5.30 $3.00 $9.30 $9.30 Service Trip (San Diego) (VTA) (Last) Efficiency Farebox 21.5% 34.7% 9.3% 9.3% Recovery Ratio (San Diego) (VTA) (Last) In short, while all VTA’s peer agencies suffered declines in ridership over the last decade, all but one of the other agencies were more successful than VTA at controlling increases in costs. It is important to note that, despite the continuing decline in key operating metrics, between 2016 and 2019, VTA’s operations management has successfully improved performance in a number of significant areas, including: a 20% improvement in miles between major mechanical schedule loss; a 24% reduction in passenger concerns (complaints); a 3% improvement in light rail miles between chargeable accidents; and a 7% improvement in light rail on-time performance. In addition, the Grand Jury had direct experience utilizing VTA transportation services during our investigation and observed vehicles that were clean, performance that was generally on-time, and operators who were friendly and resourceful. VTA’s Financial Management VTA is highly dependent on sales tax for its operating revenue. Currently, sales tax receipts provide approximately 80% of VTA’s revenue, while farebox revenue provides about 7%. Remarkably, in an environment of robust population and economic growth, VTA’s farebox receipts have decreased from $36.2 million in 2009 to $34.5 million in 2018, a decline of 5%. Over that same period, operating expenses have increased by a staggering 51%. Adding further pressure to VTA’s revenue stream is the steadily decreasing contribution of federal operating grants, which peaked at $59 million in 2010 and fell to $3.8 million in 2018. To address its revenue shortfall, VTA has begun to tap Measure A and Measure B sales tax receipts, originally earmarked for capital improvements, to help fund transit operations. For 2018 and 2019, the VTA Board approved the transfer of $44 million and $14 million, respectively, of these funds to supplement VTA’s operating revenue. To further address the shortfall, VTA has drawn down its reserves to help fund operating deficits. Given its history of low fare collections, declining ridership and uncertain governmental assistance, the answer would seem to be increased attention to cost management, with an emphasis on labor costs, by far the largest component of VTA’s operating expense. However, VTA’s combined operations and administrative headcount continues to rise each year despite the decline in ridership. The Grand Jury found the VTA Board has not vigorously addressed these issues through its budget process by embracing the type of comprehensive cost management strategy that is called for by the environment of limited resources in which VTA is currently operating. The 2018-2019 Budget Process VTA operates on a biennial budget cycle with a budget for the following two fiscal years adopted in June of each odd-numbered year. The proposed budget is reviewed by the Administration and Finance Committee and forwarded to the full VTA Board with the Committee’s recommendation. The proposed 2018-2019 budget, as recommended by a three-to-one vote of the Administration and Finance Committee in May 2017, showed projected operating deficits of $20 million and $26 million for fiscal years 2018 and 2019, respectively, and similar deficits for subsequent years. Taking into account the annual need for local funds on the order of $30 million to support VTA’s capital programs, the total gap between projected revenues and expenses (referred to as a structural financial deficit) contemplated by the budget was between $50 and $60 million. Compounding the widening budget gap was the fact that, over the preceding six years, operating expenses had grown twice as fast as revenues, and VTA had consistently failed to meet its ridership and farebox recovery projections. For example, in fiscal years 2016 and 2017, VTA’s farebox recovery had fallen short of budget projections by 7.3% and 18.9%, respectively. Nevertheless, rather than undertaking a thorough review of the proposed budget and making hard decisions regarding meaningful reductions in operating and capital expenses, or even sending the budget back to the Committee for further study, the VTA Board adopted the budget on June 1, 2017, by a vote of eleven to one, thereby assuring operating deficits for the following two years. To no one’s surprise, the projected operating deficits materialized and were largely funded by drawing down VTA’s reserves. Capital reserves, which had stood at $49.5 million at June 30, 2017, had been depleted to $5 million by the middle of the following year. Ad Hoc Financial Stability Committee In January 2018, the incoming Chairperson of the VTA Board recognized that some action had to be taken to address the structural deficit problem, which had become critical. Rather than engaging the full Board, for example by convening an all-day workshop, to address the problem that the Board and the Administration and Finance Committee should have been actively monitoring all along, the Chairperson chose to create an Ad Hoc Financial Stability Committee. The Committee was chaired by an ex officio member of the Board and included only two actual voting directors. The Committee then invited a group of approximately 12 “stakeholders” to participate. Stakeholders included employees, representatives of organized labor and several individuals from community organizations – each with their own agenda, but none with the fiduciary duty to make tough policy decisions solely in the best interests of VTA and County taxpayers. As the 2003-2004 Grand Jury report noted, “[i]t is the fiduciary responsibility of the Board, not a committee, a business lobbying group, or business community leaders, to provide oversight and direction” regarding VTA’s operations and financial management. The use of an ad hoc committee was hardly a new concept for the VTA Board. The Board had historically followed a pattern of waiting for a financial crisis to arise and then appointing an ad hoc committee. That committee would attempt to deal with the crisis and come up with a fix. In most cases, the fix would last a few years, relying primarily on new sources of revenue that would hopefully emerge. However, in any event, the composition of the Board — and responsibility for dealing with the problem — would have changed. The Board would then realize that another financial crisis was taking place, and the process would be repeated. Most recently, Ad Hoc Financial Stability Committees had been formed to deal with financial crises in 2001 and 2010. The Ad Hoc Financial Stability Committee met sporadically between March and December 2018 to discuss the structural deficit, its implications and potential cost-saving measures. Three of the nine scheduled meetings were cancelled. At a meeting of the Committee in August 2018, in response to a question, VTA’s Chief Financial Officer underscored the urgency of VTA’s financial situation by stating that VTA could continue its operations for no more than 18 to 24 months before going “off a cliff.” On June 20, 2018, the Committee held a three-hour workshop to discuss strategies and solutions to address the budget and structural deficit. During the workshop, the stakeholders broke out into working groups to consider possible solutions. Although no consensus was reached, a wide variety of suggestions were made, which were reviewed by the VTA staff and discussed at subsequent meetings. These recommendations included, among other things, substantial fare increases, implementation of wage cuts, a hiring freeze, a reduction of fleet size, and a delay of further capital expenditures on light rail expansion. At its final meeting in December 2018, the Ad Hoc Financial Stability Committee concluded that the defeat in November of a ballot measure to repeal fuel taxes and vehicle fees (California Proposition 6) and the collection of sales tax on out-of-state sales beginning at some unspecified point in the future (later determined to be April 2019) would infuse additional revenues into the budget. The fuel and vehicle monies would result in an additional $23 to $27 million per year in annual revenues. The sales tax would, when implemented, increase revenues by $5.5 million per year. After these painless fixes, the Committee then addressed the annual structural deficit of approximately $25 million that still remained by proposing three initiatives:  reducing the proposed increase in bus and rail service hours – not from their actual fiscal 2018 levels, but from the even higher levels originally budgeted for fiscal year 2019 as a part of VTA’s Next Network program – saving approximately $15 million annually;  a fare increase indexed to inflation, saving approximately $2 million annually (which was subsequently deferred until 2021); and  a voluntary early-retirement program projected to save another $1 million annually. After six meetings over a nine-month period (including the three-hour workshop) involving three directors and a dozen stakeholders, as well as untold hours of VTA staff support time, the Ad Hoc Financial Stability Committee recommended a total of only $18 million in projected cost savings to address the remaining $25 million deficit target, leaving a $7 million gap unaddressed. Several serious cost-cutting measures brought forward at the workshop were not actively considered. At its meeting, on December 6, 2018, the VTA Board unanimously accepted the recommendations of the Committee, and the Committee stood down. By any measure, the VTA Board’s oversight of the agency’s financial affairs, as exemplified by its adoption of the 2018-2019 budget and the handling of the built-in structural financial deficit, has been weak and ineffective. The inability of the VTA Board to meaningfully address the deficit can be attributed, in part, to the lack of financial expertise on the Board, a lack of preparation and engagement on the part of some directors — exacerbated by the delegation of the problem to the Ad Hoc Financial Stability Committee — and the VTA Board’s inability or unwillingness to deal with controversial and politically-charged topics such as labor costs and expensive capital programs. The 2020-2021 Budget Process The VTA Board will consider VTA’s proposed biennial budget for fiscal years 2020 and 2021 at its meeting on June 6, 2019. The proposed budget shows net surpluses of approximately $2 million in 2020 and $4 million in 2021. However, the proposed budget does not take into account the outcome of pending labor negotiations with the Amalgamated Transit Union (ATU) that have been ongoing since August 2018. VTA has reported that its current proposal to the ATU, if accepted, would result in a total additional cost of $30.9 million over the next three years. Since the VTA's proposal is the best possible outcome of the negotiations, the budget understates expenses and virtually assures continuing deficits. Other risks acknowledged in the budget could further increase these deficits. The Extension of Light Rail Service to Eastridge Light Rail in the United States Light rail transports people using electric motive power and light-weight rails (hence the name). Light rail transit (LRT) systems, originally called trams or trolleys, evolved in the early 1900s to move employees to businesses and industries located in downtown or central business districts. They were less expensive to build than traditional heavy railway systems, and the cars were likewise less expensive to build and operate. In the late 1960s, private transportation companies, including those that operated LRT systems, began to struggle financially and subsequently were transitioned to public ownership with the expectation that better public transport could be achieved using a mix of city, state and federal funding. LRT systems in the United States have not met the original expectations of transit planners or the public. Coupled with the downward trend of public transit ridership and expanding infrastructure regulations, LRT systems have experienced ever-increasing installation and operations costs. Due in part to its high costs and fixed routes, light rail is now viewed by many industry experts as a technology whose time has passed. In October 2017, Randal O’Toole, a senior fellow with the Cato Institute and a recognized expert in light rail policy analysis, recommended the following: 8 “First, transit agencies should stop building rail transit. Buses made most rail transit obsolete nearly 90 years ago. Buses can move more people faster, more safely, and for far less money than light rail, meaning light rail was obsolete even before San Diego built the nation’s first modern light-rail line in 1981.” … “Second, as existing rail lines wear out, transit agencies should replace them with buses. The costs of rehabilitating lines that have suffered from years of deferred maintenance is nearly as great as (if not greater than) the cost of building them in the first place.” Cities whose densities and post-automobile development sprawl aren’t particularly suitable for efficient light rail service have begun to reexamine the viability of constructing, operating and maintaining expensive light rail systems. For example, in March of this year, the Phoenix City Council voted to delay and likely kill an ambitious expansion of its existing light rail system. Calling it a “train to nowhere,” city leaders determined that the reallocation of capital funds from light rail to an expansion of a flexible bus system and the repair of a deteriorating road system would be a better use of the taxpayers’ money and have a more positive impact on transit 8 “The Coming Transit Apocalypse”, Randal O’Toole, Cato Institute, October 2017 effectiveness.9 A Phoenix Arizona initiative measure that will be on the ballot in August 2019 proposes to halt six additional light rail extension projects that were previously approved by the Phoenix voters in 2015 and forbid the city from funding any other future light rail extensions.10 VTA’s Light Rail System Santa Clara County’s LRT system, first proposed in the early 1980s, was conceived as a loop connecting to a future integration of Bay Area Rapid Transit (BART) and the San José Airport with transfer points throughout the County with feeder lines to support access to and from the loop to business and residential areas. The intent was to transport large numbers of residents quickly — at upwards of 55 mph — and cost-efficiently to and from jobs, entertainment and shopping, and to link San José and Santa Clara County with the entire BART system. As funding issues arose and interest group views emerged, the loop concept was abandoned in favor of direct spoke- like connections between downtown centers (e.g., San José) and various residential and business areas. VTA’s LRT began service in December 1987 with a 6.8-mile corridor between Santa Clara and downtown San José. An additional 14.3 miles were added by 1991 in 5 separate extensions (under the auspices of the SCCTD). VTA then followed with 4 more extensions: into Mountain View (1999), Milpitas (2001), East San José (2004) and the last corridor, Diridon to Winchester, completed in October 2005. The ultimate construction cost of this system was almost $2 billion. Today, VTA operates a 3-line LRT system consisting of 42 route miles, 61 stations and 21 park- n-ride lots. Due to unprecedented declines in revenues beginning in 2008, the implementation plan for further light rail expansion was modified to provide for construction of additional extensions in phases. Two significant extensions, to Eastridge and Vasona Junction, remain under consideration by VTA. Overly optimistic ridership projections justified the construction of the $2 billion light rail system in an environment that did not have the trip densities necessary to support this mode of transit. The federal government had its own doubts and initially did not approve funding, thereby creating the necessity of funding the project, in part, with local tax measures. As suggested above, the design and layout of the VTA LRT system deviated from the initial concepts, largely driven by political and financial considerations rather than strategic decisions. Despite the high capital costs of the system, the airport remains inaccessible directly via light rail, there is uneven access to jobs, entertainment and shopping, and operating speeds are far below 9 “Phoenix Votes to Delay, Likely Kill, West Phoenix Light-Rail Line", Jessica Boehm, Arizona Republic, March 21, 2019 10 “Phoenix Voters Could Kill Light Rail to These 6 Neighborhoods”, Jessica Boehm, Arizona Republic, April 15, 2019 those expected or technically feasible. VTA LRT has been in operation for over 30 years but continues to underperform in effectiveness and ridership. VTA LRT Operational and Financial Challenges Since its inception, VTA’s light rail system has struggled with operational and financial inefficiencies caused by low ridership and high operating costs. Despite a vibrant local economy with burgeoning job growth and population expansion, the public’s interest in and utilization of light rail has deteriorated. Over the past ten years, light rail ridership has declined by 21% and, currently, fewer than 1% of Santa Clara County residents regularly utilize light rail. During the same period, the farebox recovery ratio for light rail has declined 36%. In just the past five years, light rail ridership has declined 15% while operating expenses have increased 54%. Meanwhile, VTA has continued to increase capacity without a corresponding demand for its product, resulting in higher operating costs of which less than 8% is covered by fare revenue. Put more bluntly, the taxpayers pay for more than 92% of the LRT system’s operating costs. VTA has failed to accurately estimate the ongoing operating and capital costs of maintaining the light rail system, a fact that has led, in part, to its recurring financial deficits. Table 2 below outlines metrics comparing operations of VTA’s light rail system versus its peers (using 2017 NTD data) that reveal its poor performance, including:  Cost per Passenger: Highest among peers ($11.61)  Subsidy per Passenger Trip: Highest among peers ($10.73)  Operating Cost per Hour: Highest among peers ($487.58)  Farebox Recovery Ratio: Lowest among peers (7.6%)  Passenger Trips: Lowest among peers (9.1 million miles)  Passengers Boarded per Hour: Second lowest among peers (42) Table 2 - VTA Light Rail Peer Statistics (2017) Fare Total Service Revenue Operating Farebox Operating Passenger Revenue Subsidy Peer Agency Area Route Earned Costs Recovery Cost per Boardings Trips Cost per per per Name Population Miles ($Ms) ($Ms) Ratio Hour per Hour (Ms) Passenger Passenger Passenger Santa Clara VTA 1,664,496 42.2 $8.06 $106.0 7.6% $487.58 42 9.1 $11.61 $0.88 $10.73 Sacramento Regional Transit District 1,723,634 42.9 $14.80 $67.8 21.8% $272.55 46 11.4 $5.93 $1.29 $3.64 Dallas Area Rapid Transit 5,121,892 93 $27.71 $175.2 15.8% $356.20 61 29.9 $5.84 $0.92 $4.92 Denver Regional Transportation District 2,374,203 58.5 $38.16 $115.2 33.1% $145.09 31 24.6 $4.67 $1.55 $3.12 San Francisco Municipal Railway 3,281,212 36.8 $39.22 $213.8 18.4% $368.95 88 50.9 $4.19 $0.77 $3.42 Houston Metropolitan Transit Authority 4,944,332 22.7 $5.97 $65.2 9.2% $227.04 63 18.3 $3.56 $0.33 $3.23 Portland Tri- County Metropolitan Transportation District 1,849,898 60 $49.38 $138.8 35.6% $222.51 63 39.7 $3.49 $1.24 $2.25 Salt Lake City Utah Transit $2.49 Authority 1,021,243 44.8 $17.97 $64.7 27.8% $180.35 52 18.8 $3.44 $0.95 Minneapolis Metro Transit 2,650,890 23 $24.14 $70.9 34.0% $166.23 55 23.8 $2.98 $1.01 $1.97 San Diego Metropolitan Transit System 2,956,746 53.5 $38.97 $82.5 47.3% $168.24 76 37.6 $2.19 $1.04 $1.15 Legend: Ms = value in millions Worst in peer group 2nd worst in peer group In light of the VTA LRT system’s intrinsic design issues, unacceptably slow speeds in portions of its routes, extremely high operating costs and the lack of ridership and revenue to support those costs, a case can be made for dismantling or phasing out the light rail system altogether. At a meeting of the CPC on March 28, 2019, a member of the VTA staff responded to a question from a Board member by confirming that operating costs could be cut in half and farebox recovery doubled if a bus-only system were deployed. In fact, light rail operating expenses are closer to three times the cost of bus operations, but the point remains that a large reduction in the taxpayer subsidy of VTA operations could be achieved by focusing future investment in transit solutions other than light rail, as Phoenix has decided to do. One director noted at the March 28, 2019 CPC meeting, “We have to really broaden our thought process with regard to light rail. The worst position that VTA can get into is being the last transit agency to be deploying an old technology.” The Eastridge LRT Extension Although operating statistics demonstrate the high cost and inefficiency of light rail as a mode of transportation, the VTA Board has continued to consider construction of two additional light rail extensions that would require additional capital outlays in the hundreds of millions of dollars. These two extension projects, to Vasona Junction and the Eastridge Transit Center, have been in the planning stage for years, have been the subject of countless VTA staff studies and reports and have been considered by the Board and its committees, particularly the CPC, at numerous meetings. Finally, at its meeting on March 28, 2019, the CPC approved placing the Vasona project on an indefinite hold, based on its capital costs, high operating costs and projected ridership that failed to meet VTA’s minimum criteria for a new project. However, the Eastridge project remains alive. The proposed Eastridge light rail extension is part of a two-phase project. Phase 1 of the project, which included conceptual design, pedestrian and bus improvements, and improvements of the Eastridge Transit Center, has been completed. Phase 2, which is now referred to as the Eastridge- BART Regional Connection, or EBRC, would add a 2.4-mile rail line and related infrastructure connecting the Alum Rock Station and the Eastridge Transit Center. In the original design, most of the rail extension was to have been constructed at street level on Capitol Expressway. The design was subsequently changed to an elevated track above the roadway for the entire 2.4 miles at an estimated additional cost of $75 million, which would enable the trains to run at higher speeds. The total cost of the project, which was originally estimated at $377 million, is now projected to be $599 million, of which $146 million has been spent on Phase 1, and $453 million would be spent on Phase 2 ($13 million has been spent to date on design and other preparatory work). If Phase 2 is continued, work is currently estimated to be completed in 2025. Table 3 below outlines the cost and status of the Eastridge project*: Table 3 - Eastridge (EBRC) Phases, Costs and Status Project Cost Sub-total Status Notes Cost Concept $11M Completed Original Construction $56M Completed Phase 1 – pedestrian improvements $19M Completed Phase 1 – bus improvements $60M Completed Eastridge Transit Center Phase 1 sub-total - $146M Phase 2 – EBRC various $13M Initial design studies/design work completed Phase 2 – EBRC completion $440M Under Does not meet minimum (2023-25) review operations criteria until well after 2025 Phase 2 sub-total - $453M Plus $2-3M per year in new operational costs Project total - $599M Costs almost $250 million/mile *Data from VTA CPC Agenda Packet item #7, pages 36 and 37, dated March 28, 2019 and updates presented in the Board of Directors meeting on April 4, 2019. The VTA Board has considered various aspects of the Eastridge project more than 20 times since 2000. Each time, the Board has made a decision that allowed work on the project to continue, often kicking the ultimate decision on the fate of the project down the road by noting that its current decision was not the final word on the project and that there would be opportunity for further consideration of the project and final approval at a future date. For example, at its meeting on May 3, 2018, the Board considered the viability of the light rail extension to Eastridge. After a lengthy discussion, the Board approved a funding strategy for proceeding with the project, but the Chairperson noted that there would be still more decision points at which the project could again be considered by both the CPC and the full Board. At the same time, the Board approved a resolution authorizing a staff study of alternatives to light rail for the Eastridge extension. VTA staff has confirmed that, a year later, this study still has not been completed. At the March 28, 2019 meeting of the CPC (at which the Committee agreed that the Vasona Junction extension should be put on hold), Phase 2 of the Eastridge project was again considered. At the meeting, the Mayor of San José, serving as Chairperson of the Committee, asked the following question, “Is the current light rail system one we want to continue to invest in? Our ridership is challenged. Our cost-effectiveness system-wide is 10% on farebox return [it is actually less than 10%]. That 10% is already among the very lowest in the nation in terms of farebox return, and light rail actually hurts us. The question is: what does the process look like for us to be re-evaluating the entire system to see if we want to start thinking differently about the entire light rail system? I hate to think we are doubling down on a failed system.” Another committee member echoed that sentiment, noting, “We have to choose our transportation modes in a cost- effective and efficient manner. I support to do additional evaluation of what is needed for that corridor. The train has not left the station on Eastridge.” Yet, after a lengthy discussion about an overall re-evaluation of light rail before proceeding with the Eastridge extension, no concrete action was taken in that direction, and both of these directors joined with a third to support a motion to move forward with the project and kick the ultimate decision down the road yet again. The vote was three to two in favor of the motion, but it failed for lack of the required four aye votes needed to pass. The fate of the Eastridge extension project is now once again in the hands of the VTA Board, and its final resolution will be a test of the Board’s leadership. The issue will be considered by the Board again at its meeting on June 6, 2019. Although the subject of the extension was not on the agenda at the Board’s May meeting, the Mayor of San José signaled his intentions. Despite the comments he made at the March CPC meeting, the Mayor stated, “I will vote to proceed immediately with the construction of the Eastridge transit project when it comes before the VTA Board in June. I expect we will move forward without delay.” The investigation of the Grand Jury report was completed on May 29, 2019, and this report does not reflect any actions taken at the June 6, 2019 meeting. As pointed out above, the remaining capital cost to complete the 2.4-mile extension is currently estimated at $453 million, or almost $189 million per mile. According to most recent staff projections included in the May 2019 EBRC Supplemental Environmental Impact Report (SEIR), the new light rail extension would attract approximately 61111 new riders (net of a reduction in bus ridership on the existing bus lines that run parallel to the proposed rail extension) by 2025. Therefore, the additional capital cost would be equal to approximately $720,000 for each new rider in the first year of service. Once completed, the Eastridge extension would become part of an outmoded light rail system that is one of the most expensive and heavily subsidized LRT systems in the country, with declining ridership and operating costs more than double the cost of bus operations. The extension, upon completion, is projected to have a miniscule impact on transit usage in the East San José/Milpitas corridor over the next 24 years (i.e., an increase of only 0.07% by 2043 and just over half that when service begins).12 Moreover, the current design permanently removes two existing high occupancy vehicle (HOV) lanes from the Capitol Expressway, without any foreseeable commensurate reduction in automobile traffic, a fact that may not be widely 11 EBRC SEIR, May 2019, , Table 5.1-11. http://vtaorgcontent.s3-us-west- 1.amazonaws.com/Site_Content/EBRC_Vol1_FSEIR-2%20(1).pdf 12 EBRC SEIR, May 2019, understood in the East San José community. As noted in the SEIR, “[t]he proposed removal of the HOV lanes would result in higher average automobile delays and higher automobile travel times on Capitol Expressway.”13 Further, despite claims that the Eastridge Transit Center is among the busiest in the VTA system, there is an average of only seven riders per bus trip into and out of that center. Based on our interviews, the Grand Jury has found virtually no support for the project among the VTA staff, although they continue to move the project forward in compliance with incremental policy decisions made by the VTA Board. The argument supporting the Eastridge extension is essentially political. The extension was one of 13 transportation improvement projects envisioned by Measure A and passed by the voters in 2000. For various reasons, most related to budget challenges brought about by the dot com “bubble” in the early 2000s and the later economic recession, the implementation of the Eastridge project has been delayed, along with some of the other Measure A projects. In the interim, the once-promising LRT system has become technically outmoded and increasingly expensive. Yet, proponents of the extension, including powerful political forces, contend that the periodic, incremental approvals of the project by the VTA Board that have kept the project alive over the years have reinforced a “promise” to complete it, even though the VTA Board has both the right and the duty to re-evaluate capital projects when they are no longer viable. Proponents also contend that completion of the project is a matter of “economic equity,” balancing the needs of a relatively low-income, transit-dependent area of Santa Clara County with the type of transit services provided elsewhere in the County (although, as noted above, the Vasona Junction project that was to have served the Los Gatos area was recently put on hold). The challenge to the VTA Board, in the exercise of its fiduciary duties to the taxpayers and transit users of the County, is to address such questions as:  Can any further investment in VTA’s present LRT system be justified, much less one that will cost $720,000 for each prospective new rider?  Does the proposed Eastridge extension meet VTA’s standards for new transit projects, including minimum projected ridership criteria?  Before proceeding with the project, should the Board undertake a thorough review of the light rail system and its future as a mode of transportation in Silicon Valley, as suggested by members of the CPC? 13 Ibid,  Can the recognized needs of the residents of East San José for modern, efficient public transportation be better served by an alternative to the proposed Eastridge light rail extension? VTA should aspire to take an industry-leading role in the future of public transportation, commensurate with the role of Silicon Valley as a worldwide leader in technology and innovation. Whether the VTA Board is able to put aside local political considerations and answer these questions based on the interests of all the taxpayers and residents of Silicon Valley will say much about its effectiveness as a policy-making body and whether VTA will be able to achieve such leadership aspirations. Designing a More Effective Structure for the VTA There are countless variations in models for governing a regional transit agency, and there is no perfect structure that fits all situations. Even when transit agencies set out to reorganize their own governance structure in response to acknowledged defects, they realize they must choose among alternative structures having both advantages and disadvantages. Virtually all the individuals interviewed by the Grand Jury, including directors and senior staff, agreed that VTA could benefit from a more knowledgeable and engaged Board of Directors that is more sharply focused on VTA’s role as a regional transit agency and less on local political interests. However, there is less consensus on how best to achieve that goal. Nevertheless, it is useful to examine some of the variable features of alternative governance structures, how they have been implemented by other transit agencies and how changes to the structure of VTA’s governance might result in a more effective Board. Number of Directors The VTA Board has 12 voting members. As pointed out in the 2003-2004 Grand Jury’s report, the VTA Board is larger than the boards of many regional transit agencies. Alameda County Transit (AC Transit) and BART, for example, have boards of seven and nine members, respectively, while two other transit agencies in California have five-person boards. However, transit agency boards across the country range widely in size, from as few as five to more than 20. The agency serving Dallas/Fort Worth, for example, has a 15-person board, while the Phoenix and Salt Lake City transit agencies each has a 16-member board. The 2003-2004 Grand Jury Report concluded that a smaller Board, of five to seven members, “would be more involved in and accountable for the financial and operational management of VTA.” Some current members of the VTA Board agree that a smaller Board would be preferable, although others disagree. While the current Grand Jury agrees that reducing the size of the Board might result in more focused decision-making, a reduction in Board size, in and of itself, would not address fundamental issues of lack of experience, inadequate continuity, competing time commitments and conflicts of interest between VTA and local priorities. Accordingly, a reduction in the size of the VTA Board should only be considered in conjunction with other structural changes that directly address these key issues. Term of Service VTA directors serve for terms of two years. Although some directors serve more than one term (often consecutive), directors whose positions rotate among groups of smaller cities generally do not serve consecutive terms. Furthermore, a director’s term can be cut short if the director ceases to serve in his or her elected position. The term of service for directors of regional transit agencies in California and other larger metropolitan areas generally ranges between two and four years, with three and four-year terms being common. In California, for example, directors of BART, AC Transit and transit agencies serving Santa Barbara, Stockton and Bakersfield serve four-year terms. Directors of agencies serving Austin and Vancouver, B.C. serve for three years. In an independent review of the agency serving Vancouver, a Governance Review Panel concluded that “longer-term decision-making requires a minimum of three-year terms,” although the panel also recommended that members not be allowed to serve more than six consecutive years in order to vary the “mix of management, finance, legal and other skills to match [the agency’s] changing needs over time.”14 Among the individuals interviewed, there was substantial support for longer terms to provide additional time for directors to become knowledgeable about VTA’s operations and transit issues, to participate in more than one budget cycle and to participate more effectively in the Board’s long-term planning function. In addition, lengthening the term of service would mitigate the advantage currently enjoyed by representatives of San José and Santa Clara County, who typically serve substantially longer terms than the representatives of the smaller city groups and dominate the Board, in part, as a result of their greater experience. Not all interviewees agreed, however. One made the point that, if a director is unqualified in the first place, a four-year term would just mean that the Board would be burdened with an unqualified member for twice as long. Additionally, since under the current structure a director’s term ends when he or she leaves elected office, a four-year term is more likely than a two-year term to be cut short, lessening to some degree the impact of a change to a longer term. Nevertheless, extending the term of VTA directors to four years would increase the average term of Board service and, accordingly, would provide some valuable experience and continuity to the Board and enhance the influence of the smaller cities. Likewise, establishing term limits or limits on total years of service would mitigate the dominance of San José and the County and allow the Board to evolve over time to meet its changing needs. As described above, the PUC specifies the annual election of the Board’s Chairperson and Vice Chairperson. The VTA Administrative Code provides that the election of the two officers shall be conducted at the last meeting of the calendar year, when practical, and that they shall serve for the ensuing calendar year.15 The Administrative Code also specifies that the two positions shall be rotated annually, according to a fixed schedule, among representatives of San José, Santa Clara County and the smaller city groups16. There was considerable support among the persons interviewed for extending the Chairperson’s term from one to two years. As pointed out above, because VTA operates on a June 30 fiscal year, 14 “TransLink Governance Review", TransLinK Governance Review Panel, January 26, 2007, 15 VTA Administrative Code Section 2-26 16 Ibid the Chairperson’s calendar year term of service straddles two fiscal years, disconnecting the Chairperson from the budget process and accountability for operating and financial results. He or she inherits one annual budget in mid-stream and serves only halfway through another. Lengthening the Chairperson’s term would help address this problem by allowing the Chairperson to oversee VTA’s financial performance for at least one full fiscal year. Coordinating the term of the Chairperson with the agency’s June 30 fiscal year would further connect the Chairperson with VTA’s budget process and the oversight of its financial performance. Similarly, reviewing the VTA General Manager’s performance on a fiscal year rather than a calendar year basis would also improve direct accountability for the organization’s performance to budget. Direct Election of Directors Under the current governance structure, members of the VTA Board are appointed to serve by the jurisdictions they represent, either through direct appointment by a mayor or city council or, in the case of the groups of smaller cities, by arrangement among the cities. As pointed out above, as originally proposed by the County Board of Supervisors, the VTA Board would have been composed of a combination of five directly elected members and 11 appointed members. Although the direct election of directors of transit agencies is not common in California, there are exceptions, including BART and AC Transit, both of which have directly elected directors serving four-year terms. Other regional public bodies use a direct election model for some or all their directors. The Santa Clara Valley Water District (SCVWD), for example, has a board of seven directors, directly elected by supervisorial district. Benefits of an elected board include direct accountability to the public and the directors’ increased focus on the affairs of the agency as their primary, rather than secondary, public service responsibility. Direct election would also eliminate the possibility of directors’ terms being shortened when they cease to serve in their elected position. In theory at least, candidates who serve on an elected board also would be more likely to have an interest in and commitment to public transportation issues than would appointed directors. On the other hand, directly elected VTA Board members, like other elected officials, may tend to have a parochial view if they are elected to represent specific districts or municipalities, so the goal of encouraging a regional view of strategic planning responsibilities might not be fully realized. Some interviewees supported changing to a direct election model for the VTA Board, based on the potential benefits noted above. Others, however, did not favor such a change. Several pointed out what they perceived to be a lack of effectiveness of the BART Board of Directors as evidence that the change would not be worthwhile. Others noted that moving to a direct election model would be complicated, politically difficult and costly – again, not justifying the change. One interviewee observed that, at the end of the day, voters pay very little attention to the direct election of directors of governmental agencies, noting that many voters do not even know that an agency like SCVWD, for example, even exists, much less who its directors are. Appointed Directors Who Are Not Elected Officials Like VTA, many regional transit districts have boards consisting exclusively of elected officials representing the constituent communities making up the district. In at least three California transit agencies (those serving Santa Barbara, San Francisco and Stockton), the appointed boards of directors include interested citizens who are not currently serving as elected officials, and the enabling legislation of another transit district, serving the Bakersfield area, specifically provides that elected officials are not eligible for appointment as members of the Board. Transit agencies whose directors are not current elected officials are not uncommon in other parts of the country. Examples of transit agencies with appointed boards that do not include elected public officials are those serving Houston, Austin, Vancouver, B.C. and Toronto. The flexibility to appoint non-politicians to serve on the board of a transit agency allows the appointing authority to select directors having a wide range of business, financial and transportation-related experience with a mandate to serve non-politically and make evidence- driven policy decisions based on demonstrated need and financial feasibility. The Houston Metropolitan Transit Authority (HMTA), for example, has a board of nine members, five of whom are appointed by the Mayor of Houston, two by the Harris County Commissioners Court and two by the mayors of other cities in its service area. The Board of the HMTA currently includes a retired lawyer, a certified public accountant, a banker, executives of large companies and experts on infrastructure, construction and budget management. Partially offsetting the benefits of removing elected public officials from a transit agency’s governance structure are concerns of accountability. The level of commitment of non-elected directors to their local communities’ views on transit policy and priorities, including land use and development, is uncertain. However, some senior VTA staff and directors feel that the staff gets little support from VTA Board members in connection with VTA’s dealings with city governments on these issues. Some transit districts have chosen to balance the benefits of a predominantly non-political governing board with some participation by elected officials. For example, the board structure of the transit agency serving the Austin area was revised in 2011 from 100% elected officials to a mix of two elected officials and five non-politicians, with the City of Austin, the largest participant and underwriter of the system, having a predominant say in the appointments. The enabling legislation went a step further and specified that one appointed member of the board must have at least 10 years of experience as a financial or accounting professional and another must have at least 10 years of experience in an executive-level position in a public or private organization.17 As one commentator noted at the time the legislation was proposed, “What the board would lose in elected officials, it would presumably gain in knowledge.”18 In 2011, the Legislative Auditor of the State of Minnesota issued an evaluation report that analyzed various governance structures for the agency principally responsible for the Twin Cities’ transit system, as potential alternatives to the existing structure under which all members of the governing council are appointed by the governor. After analyzing and comparing various structures, including the existing appointment system and the direct election of council members, the Auditor concluded that the optimal model would be a combination of appointed and elected officials that “would provide the Council with an effective mix of regional and local perspectives.”19 Silicon Valley offers an unparalleled pool of talented individuals, including entrepreneurs who have introduced cutting-edge technologies, products and services, as well as countless experts with leadership experience in finance and executive management of large organizations. Current and retired leaders of Silicon Valley companies and organizations have made numerous contributions in support of a wide range of community activities, including the arts, healthcare, education and other civic and charitable endeavors. Surely, appointing authorities could identify qualified public sector leaders who would be willing to serve on the VTA Board, and VTA would benefit from their knowledge and experience. Texas Transportation Code Section 451.5021(b) 18 "What's Wrong With Cap Metro...and What's Right", Lee Nichols, Austin Chronicle, April 24, 2009 19 "Governance of Transit in the Twin Cities Region", Office of the Legislative Auditor, January 2011, CONCLUSIONS VTA is a complex, multi-billion-dollar enterprise. In addition to operating a large transit system, VTA has responsibility for county-wide transportation planning, including congestion management, the design and development of highway, pedestrian and bicycle improvement projects and the promotion of transit-oriented development. VTA is governed by a part-time Board of Directors composed solely of elected public officials, each of whom is burdened by the obligations of his or her office and subject to local political interests. A few of the directors have served for many years, but others have served for less than two. Appointees to the VTA Board often have little or no previous experience with transportation, finance or leadership of a large organization, let alone one the size of VTA. Today, VTA faces a series of challenges which, taken together, can be fairly characterized as a crisis. The following challenges, among others, must be addressed by the VTA Board:  Year after year, VTA operates one of the most expensive and least efficient transit systems in the country. Empty or near-empty buses and light rail trains clog the County’s streets but are used regularly by fewer than 5% of the County’s commuters. Operating costs increase continuously, and taxpayers subsidize 90% of these costs, to the tune of about $5.50 per rider for each bus trip and $10.75 per rider for each light rail trip.  VTA veers from one financial crisis to another. In June 2017, the VTA Board adopted the 2018-2019 biennial budget and consciously approved a built-in structural financial deficit of $50 to $60 million per year. In January 2018, an ad hoc committee of the VTA Board was formed to deal with the crisis caused by the budget deficit. In August 2018, VTA’s Chief Financial Officer advised the committee that the agency was 18 to 24 months away from going “off a cliff.” At the end of 2018, the ad hoc committee made weak and only partially effective recommendations to address VTA’s structural financial deficit and didn’t seriously consider such important but politically sensitive topics as reductions in employee headcount or the scrapping or deferral of large capital projects.  Light rail ridership is declining steadily throughout the country. Experts have pronounced the early twentieth century concept of light rail transit obsolete, and other regional transit agencies are contemplating abandoning light rail system extensions. VTA, however, continues to move forward with an extension of its light rail system — one that currently has among the highest operating costs and lowest ridership in the country. The remaining capital cost of the proposed 2.4-mile Eastridge extension project is currently estimated at $440 million, representing approximately $720,000 for each new rider that the staff estimates will actually use the extension during the first year of its operation. The project makes no financial sense and survives only because powerful political forces continue to support it. VTA needs to carefully consider whether the recognized needs of the residents of East San José for modern, efficient public transportation can be met without “doubling down on a failed system,” as one director put it, and worsening VTA’s precarious financial condition.  Although a detailed review of the long-pending BART to Silicon Valley project was beyond the scope of the Grand Jury’s inquiry, a number of our interviewees, including senior VTA staff and members of the VTA Board, noted its importance to the future of VTA. VTA’s proposed fiscal years 2020-2021 capital budget calls for a staggering $713.5 million in Measure A and Measure B tax funds for the BART Phase 2 project. The operating agreement between VTA and BART remains in negotiation, and several of our interviewees expressed concern that important issues regarding the sharing of system-wide capital and operating costs remain unresolved and that such costs could fall disproportionately on VTA. One director expressed the opinion that BART-related cost control issues are more significant for VTA than those related to the Eastridge light rail extension. A senior staff member stated unequivocally that “BART is going to bankrupt VTA.” An interested stakeholder similarly predicted that BART “will be the demise of VTA.” Whether or not these assessments are accurate, it is clear that the financial health of VTA is dependent on the success of BART in the South Bay Area. That success is dependent, in turn, on VTA effectively implementing BART Phase 2 and meeting its ridership and revenue goals. VTA’s operating territory is the Silicon Valley – the world’s leading center of innovation and cutting-edge technology. Several of VTA’s key staff members have noted that they had joined VTA in the hope that VTA would take an industry-leading role in the future of transportation, commensurate with the role that companies and other institutions in the Silicon Valley have taken in the introduction of all manner of new products, technologies and services. Yet, little such innovation has been evident at VTA in recent years. In fact, as noted above, VTA seems to be “doubling down” on old technology. At the Board’s recent workshop on “The Future of Transportation in Silicon Valley,” the directors present (two-thirds of the voting members and half of the alternates) seemed to recognize this problem and unanimously agreed that VTA needs to make “radical changes” in the way it provides its services. If VTA is going to meet the many challenges it faces, the VTA Board will have to make good on its commitment to radical change. So, the question becomes, is the Board capable of making the policy decisions and providing the strategic oversight necessary to accomplish such change? The Grand Jury has concluded that, as presently structured and operated, that level of capability does not appear to be present. Accordingly, the Grand Jury recommends a number of changes in the structure of the VTA Board and in the way directors are selected, trained and evaluated that it believes will assist VTA in addressing its many challenges and achieving its aspiration of becoming a leader in the transportation industry. FINDINGS AND RECOMMENDATIONS
Recomendaciones relacionadas (2)
R5a: VTA should consider following recommendations made by several directors that it undertake a thorough review of VTA’s light rail system and its future role as a mode of transportation in Silicon Valley before proceeding with the Eastridge extension project. This review, as it pertains specifically to the analysis of the viability of the Eastridge extension, should be undertaken with the participation of an independent consultant and should consider such issues as projected ridership estimates, project cost estimates including future operating and capital costs, and the projected impact on traffic congestion on Capitol Expressway with the removal of two HOV lanes.
R5b: VTA should consider whether the recognized needs of the residents of East San José for modern, efficient public transportation can be better served by an alternative to the proposed light rail extension.
Hallazgos & Recomendaciones 2 hallazgos
F1: The County of Santa Clara and its Department of Tax and Collections are commended for revising the format of the 2018-19 tax bill to direct county property taxpayers to the distribution of the one-percent maximum tax levy by address or APN via tax bill web page links or QRC.
F2: 12 REQUIRED RESPONSES ............................................................................................................................... REFERENCES ..................................................................................................................................................... GLOSSARY AND ABBREVIATIONS ad valorem In proportion to the assessed value. APN Assessor’s Parcel Number. The unique number assigned to each legal parcel of real property in a given county. Debt Payments Payments of debt service, such as bonds issued by local governments and agencies, typically issued for a specific purpose. DTAC Santa Clara County Department of Tax and Collections. One-Percent Maximum Property taxes, excluding parcel taxes, Property Tax Levy (1% assessments and debt payments, may not exceed Tax) 1% of the assessed value of the real property. This one-percent maximum levy is shared by taxing entities through a formula set by the California State Legislature. QRC Quick Response Code. A readable square box similar to a bar code that can be read by devices equipped with a camera such as cell phones. Parcel Tax A tax that is the same for every parcel, regardless of the size or valuation of the parcel. Property Tax An ad valorem tax paid by the owner of the real and personal property. The tax is a percentage of the value of the property, including land, improvements and certain personal property. The total property tax bill also adds parcel taxes, assessments and debt payments. SUMMARY Do you know which governmental entities share the one-percent maximum property tax levy (1% Tax) you pay every year? This is the single largest component of your property tax. Property taxpayers in Santa Clara County (SCC) prior to 2018 could not easily obtain information for their property as to how the 1% Tax was distributed amongst the various governmental entities. Beginning with the 2018-19 tax year, property tax bills provide web page links that enable a search by address or Assessor’s Parcel Number (APN) for the specific distribution of the 1% Tax. Detailed steps a taxpayer can take to access this information are provided in this report. The Grand Jury commends the County of Santa Clara for joining a small group of other counties in making this information easily available to its taxpayers. BACKGROUND Property taxes in California are the sum of the ad valorem 1% Tax, parcel taxes, assessments and debt payments. An ad valorem tax for any given parcel is the product of the tax rate and the property’s assessed valuation. The passage of Proposition 13 in 1978 established the maximum ad valorem property tax rate at one-percent (1%) for all real property in California. This is the one-percent maximum levy. In Santa Clara County, most of the money goes to school districts and community colleges. The legislature determines the formula by which the 1% Tax is distributed amongst the governmental entities who levy property taxes. The distribution formula has been revised several times by the legislature; the specifics are beyond the scope of this report. The 2017-18 Grand Jury began an investigation into the detail of the 1% Tax distribution. In discussions with the Santa Clara County Department of Tax and Collections (DTAC), the 2017-18 Grand Jury learned the distribution detail was being considered for implementation. Further investigation by the 2018-19 Grand Jury revealed DTAC had completed the 1% Tax detail project in October 2018. METHODOLOGY The Grand Jury interviewed employees of DTAC, inspected SCC web pages related to property tax collections and distributions prior to the current 2018-19 tax year, and inspected property tax web pages from a select number of other California counties. DISCUSSION A property owner’s tax bill includes the 1% Tax in addition to levies for voter- approved bonded indebtedness, parcel taxes and special assessments by percentages and/or dollar amounts. Each county in California is divided into Tax Rate Areas (TRA). A TRA consists of those parcels of real property, generally contiguous, that share the identical set of taxing entities, such as city, school district, special districts, bonded indebtedness, etc. There are numerous TRAs in any given county. Santa Clara County fully complies with the California Tax Code that defines the minimum content of county property tax bills1. The tax bill must show each parcel tax, assessment and debt payment that applies to a given TRA. However, the state tax code does not require that the components of the 1% Tax be included on the tax bill or published elsewhere. Prior to 2018, Santa Clara County only provided each governmental entity’s share of the total county-wide taxes collected in the form of a pie chart. At the time the 2017-18 Grand Jury began its investigation, a few counties offered greater detail in the form of the parcel-specific distributions of the 1% Tax. For instance, see El Dorado2, Riverside3 and Contra Costa4 counties’ web sites for examples of the detailed breakdown of the 1% Tax. Contra Costa goes a step further 1 California Revenue and Taxation Code Section 2611.6 2 https://www.edcgov.us/Government/Auditor- Controller/PropTax/Pages/distribution_of_proposition_13_s_1__general_property_tax.aspx 3 http://www.auditorcontroller.org/Portals/0/Documents/Proptax/16-17%20P- tax%20apportionments/AUCR300.TXT?ver=2017-10-06-120357-740 4 http://www.co.contra-costa.ca.us/6581/Where-Your-Taxes-Go with its tax bills by providing both the percentage and the actual dollar value distributed to each entity.5 The Grand Jury found that the format of property tax bills for 2018-19 has been revised to contain web links that allow a search by property address or APN. The search will display the percentage each county governmental entity shares in the 1% Tax for that parcel. Each tax bill also provides a Quick Response Code (QRC) that will take the taxpayer directly to their specific parcel information and, with one further step, give the detailed percentages as shown in Figure 1. Figure 1: Sample 1% Tax Distribution for a Fictitious Parcel or APN Note: To obtain the dollar amount for any given component of the 1% Tax, the taxpayer must multiply the relevant percentage above by the total 1% Tax amount for the parcel in question. Each Santa Clara County property owner receives a property tax bill as shown below in Figures 2 and 3. 5 http://www.co.contra-costa.ca.us/DocumentCenter/View/45682/CCC_SecBill_How-To- Read_Apr-2017 Figure 2: Front of a Fictitious Tax Bill Figure 3: Back of a Fictitious Tax Bill Steps to locate the 1% Tax Distributions by parcel The tax bills reviewed by the Grand Jury did not include instructions to find the specific parcel 1% Tax distribution. However, the Grand Jury found several methods to locate the 1% Tax distribution. The Grand Jury details three of these methods below. To assist in describing these methods, three black numbered circles have been included on the property tax bill images above in Figures 2 and 3. Method 1 (black circle 1): On the front of the tax bill in the “Pay Your Taxes Online” box is a website address listed as http://www.WhereDoTaxesGo.org. When the address is inserted into a web browser, it takes the user to Santa Clara County’s Countywide Property Tax 1% Allocation website in Figure 4. Figure 4: County Property 1% Tax Allocation Search Site There, the user can enter the parcel address in the text box displayed above (circled in red). After selecting the Submit button, the data will be displayed as shown in Figure 1 above. Method 2 (black circle 2): On the front of the tax bill in the “Pay Your Taxes Online” box is a QRC. When a user scans that QRC with a QR reader such as a smart phone, it returns an alert to the reader’s device inviting the user to launch a web browser to the website http://payments.sccgov.org/propertytax/secured/parcel. That website provides the tax currently owed and a link to the “Where do my 1%- tax dollars go” website, as shown in Figure 5. Figure 5: Sample Parcel Tax Summary from the QRC Select the “Where do my 1%-tax dollars go?” link (circled in red) in a web browser to view the parcel’s 1% Tax distribution as shown in Figure 1. Method 3 (black circle 3): This is a 4-step process. In the center of the back page of the property tax bill, as shown in Figure 3 (Tax Details), there is a notation that reads: “Visit http://www.sccgov.org/tra for Tax Rate information”. This link provides a variety of tax detail including access to the 1% Tax distribution. Step 1: When a user types that web address into a web browser, the County of Santa Clara Finance Agency website is displayed as shown in Figure 6. Figure 6: Tax Rate Info Web Site Step 2: From the Tax Rate Info site (Figure 6), there is a reference link near the top entitled “Property Tax” (circled in red) which directs the user to Santa Clara County’s tax related information on the web (Figure 7). Click on this link. Figure 7: Santa Clara County Finance Agency Tax Information Step 3: From the Santa Clara County Tax site (Image 7), select the reference link entitled “Where My Taxes Go” (circled in red) which directs the user to Santa Clara County’s property tax-related information on the web. This is the same web site as shown earlier for Method 1 in Figure 4. Step 4: The user would enter either a property address or APN number to display the 1% Tax breakdown. CONCLUSIONS Understanding where our tax monies are distributed, and thus ultimately spent, is important to a well-informed taxpayer. The California 1% Tax is divided amongst many governmental entitles depending on the location of a given parcel. When the Grand Jury began this investigation, Santa Clara County did not provide a detailed distribution of the 1% Tax. During the course of the investigation, the Grand Jury was pleased to learn that DTAC, starting with the 2018-19 tax bill, includes links to a searchable webpage where this level of detail may be found for each property. The Grand Jury suggests that Method 1 or 2 is the easiest way to locate this detail but recommends that additional instructions be provided to tax payers. FINDINGS AND RECOMMENDATIONS
Recomendaciones relacionadas (1)
R2: The County of Santa Clara could further improve the presentation of the tax bill by clarifying how to locate the 1% Tax distribution data to facilitate a better user experience by inserting an explanation with the tax bill beginning with the 2019-20 tax year.

* This report's PDF did not contain easily extractable text and required Optical Character Recognition (OCR) for analysis. There may be minor errors in the extracted findings and recommendations due to OCR limitations with scanned documents.