Report 2003-119 Summary - July 2004

Los Angeles County Metropolitan Transportation Authority

:

It Could Use Certain Recommended Management Tools to Improve Its Oversight of Legal Contracts, and Its Efforts Resulted in the Award of a Large Construction Contract Within Budget

HIGHLIGHTS

Our review of the Los Angeles County Metropolitan Transportation Authority's (MTA) oversight of outside counsel found that:

The MTA took actions to award a construction contract for its Metro Gold Line Eastside Extension Project within budget by revising the project scope and reducing other project costs.

RESULTS IN BRIEF

The Los Angeles County Metropolitan Transportation Authority (MTA) serves as the planner, coordinator, and operator of the public transportation system for Los Angeles County. This report focuses on its oversight of legal costs and its procurement of a contract for a major construction project.

The MTA could improve the oversight of its legal costs by requiring the county of Los Angeles, Office of the County Counsel (County Counsel), to fully implement recommended management tools included in its contracts with outside counsel. County Counsel represents the MTA in transactional matters such as drafting and reviewing contracts, and provides advice on all legal issues and developments in outstanding legal cases. It also monitors outside counsel—contract lawyers who represent the MTA in a variety of litigation and transactional matters.

Three units account for the vast majority of the MTA's legal costs: County Counsel, Public Liability/Property Damage, and Workers' Compensation. County Counsel legal costs represented 65 percent of all MTA legal costs between July 1995 and December 2003. These costs include those for legal matters other than public liability/property damage and workers' compensation (other legal matters), such as construction litigation. After increasing from $9.9 million in fiscal year 1995-96 to a high of $31 million in fiscal year 2001-02, County Counsel legal costs declined to $14.6 million in fiscal year 2002-03 as several major cases related to subway construction either closed or completed their trial phases. Seven major cases accounted for the majority of County Counsel's recent legal costs. The MTA expects legal costs to continue at a lower level in the near term and has budgeted $12 million for County Counsel legal costs in fiscal year 2004-05.

The MTA could benefit from the use of case plans and budgets, which provide a blueprint for the conduct of cases and allow an evaluation of the reasonableness of billed legal costs by providing cost estimates with which they may be compared. However, most case files related to other legal matters that we tested held no evidence of case plans or budgets covering each phase of the case, and most public liability/property damage cases we tested contained no budget revisions as is required for cases that exceed their budget. Further, outside counsel for workers' compensation cases are not required to submit budgets. County Counsel believes that case plans and budgets are not effective tools for managing complex and unpredictable cases. However, plans and budgets should be evolving documents subject to change and are useful for both simple and complex cases.

Although legal costs are detailed for legal services and related to the appropriate cases, a task-based billing format for invoices—which uses standardized billing codes for legal tasks—would aid in the analysis of legal fees. This would allow for a quick determination of how much outside counsel spent on particular tasks such as briefs or depositions. A task-based format can provide for a more meaningful review of legal fees and can also lead to better-informed discussions with outside counsel, potentially allowing improved quality of services. Although we saw no evidence of such a task analysis, both the MTA and County Counsel appeared to thoroughly review the expense portion of invoices and to enforce most billing rates. Errors related to billing rates or to a lack of documentary support amounted to only 1 percent of the legal fees and expenses we tested. The MTA and County Counsel, however, often could not show that outside counsel received prior approval for the cost and use of consultants and expert witnesses, as required in contracts with outside counsel.

Through a process that spanned 18 months, the MTA procured a construction contract within budget for its Metro Gold Line Eastside Extension Project (project), a six-mile light-rail line. The MTA received two bids in response to its initial invitation for bid, and the low bid, under the type of insurance program that the MTA ultimately used, was $54.9 million above the estimate. A large portion of the difference was attributable to the general requirements and mobilization components of the project. The project's size appears to be one reason why the MTA did not receive more bids. Certain contractors that were interested in the project and had the capability to bid on it did not do so, citing difficulties in forming joint ventures with other firms to handle the size of the project. Some contractors also had the perception that they would have difficulty working for the MTA.

After the MTA rejected the initial bids, it significantly revised and revamped the scope and other requirements of the project. It provided an opportunity for bidders to compete for three separate contracts, adopted a simpler procurement process, and revised other technical aspects of the project. This time it received five bids, but the low bid was still higher than expected—15 percent above the estimate. Based on discussions with the low bidder, the MTA further modified elements of the project's scope of work, and reassessed and reduced other costs. Based on the modified scope, the low bidder made a final offer of $610 million,1 $59.8 million lower than its previous offer. The federal government recently approved a grant agreement with the MTA for $490.7 million that will help pay for the project, and the MTA sent a notice of contract award to the low bidder. As of early June 2004, the MTA expected to authorize the contractor to begin work by the end of the month.

RECOMMENDATIONS

To more effectively monitor outside counsel, the MTA, in conjunction with County Counsel, should take the following actions:

The MTA, in conjunction with County Counsel, should ensure outside counsel adhere to all billing requirements detailed in contract provisions and billing guidelines, including requiring that outside counsel receive written prior approval to use consultants and expert witnesses within an established budget.

AGENCY COMMENTS

The MTA believes that its internal control practices sufficiently safeguard taxpayer resources. It does not indicate whether it will implement any of the report's recommendations. In addition, the MTA contends that the report does not conform to generally accepted government auditing standards. We disagree. Our comments follow the MTA's response.

1 The $610 million offer included $9.6 million for overhead compensation should delays occur and for construction options that may be exercised at a later date. The remaining $600.4 million is the amount of the contract award.