    Corps Of Engineers: Improved Analysis of Costs and Benefits
    Needed for Sacramento Flood Protection Project (27-OCT-03,
    GAO-04-30).

    In 1996 and 1999, Congress authorized the U.S. Army Corps of
    Engineers (the Corps) to strengthen sections of the American
    River and Natomas Basin levees that provide flood protection for
    Sacramento, California. In 2002, the Corps reported that the cost
    of this work, known as the Common Features Project, had increased
    significantly. GAO was asked to determine why costs increased,
    the extent to which the Corps analyzed and reported the potential
    cost increases to Congress in a timely manner, and whether the
    Corps correctly estimated economic benefits.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-04-30
        ACCNO:   A08762
      TITLE:     Corps Of Engineers: Improved Analysis of Costs and
    Benefits Needed for Sacramento Flood Protection Project
         DATE:   10/27/2003
      SUBJECT:   Cost analysis
    	     Flood control
    	     Flood control management
    	     Construction costs
    	     Cost control
    	     Cost effectiveness analysis
    	     Reporting requirements
    	     Sacramento (CA)
    	     Sacramento River (CA)
    	     American River (CA)
    	     Natomas Basin (CA)
    	     Army Corps of Engineers Common Features
    	     Project

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    GAO-04-30

    United States General Accounting Office

    GAO

                           Report to Congressional Requesters

    October 2003

    CORPS OF ENGINEERS

     Improved Analysis of Costs and Benefits Needed for Sacramento Flood Protection
                                        Project

                                           a

    GAO-04-30

    Highlights of GAO-04-30, a report to congressional requesters

    In 1996 and 1999, Congress authorized the U.S. Army Corps of Engineers
    (the Corps) to strengthen sections of the American River and Natomas Basin
    levees that provide flood protection for Sacramento, California. In 2002,
    the Corps reported that the cost of this work, known as the Common
    Features Project, had increased significantly. GAO was asked to determine
    why costs increased, the extent to which the Corps analyzed and reported
    the potential cost increases to Congress in a timely manner, and whether
    the Corps correctly estimated economic benefits.

    To better inform Congress about the costs and benefits of flood protection
    for Sacramento, GAO recommends, among other things, that the Secretary of
    the Army

    o  	improve the accuracy of the cost-benefit analysis for the not yet
    constructed American River levee improvements;

    o  	improve the reporting of costs and benefits and analyze alternative
    flood protection measures for the Natomas Basin improvements; and

    o  	arrange for a credible, independent review of the completeness and
    accuracy of the revised analyses.

    The Army concurred with GAO's recommendations but took issue with the
    presentation of some information.

    www.gao.gov/cgi-bin/getrpt?GAO-04-30.

    To view the full product, including the scope and methodology, click on
    the link above. For more information, contact Anu Mittal at (202) 512-3841
    or mittala@gao.gov.

    October 2003

    CORPS OF ENGINEERS

    Improved Analysis of Costs and Benefits Needed for Sacramento Flood Protection
    Project

    Estimated costs for the Common Features Project rose from $57 million in
    1996 to between $270 million and $370 million in 2002-primarily because of
    design changes. For the American River, costs more than tripled from $44
    million to $158 million in 2002, primarily due to changes such as
    deepening the walls built in the levees (cut-off walls) to prevent seepage
    and closing gaps in the walls at bridge crossings. Cost estimates for the
    Natomas Basin- still in planning-increased from $13 million in 1996 to
    between $112 million and $212 million in 2002. The Corps has yet to
    analyze alternative flood protection approaches for the Natomas Basin that
    might be more costeffective. Furthermore, it has not analyzed its exposure
    to potentially significant cost increases for the Natomas Basin work.

    The Corps did not fully analyze, or report to Congress in a timely manner,
    the potential for significant cost increases for the American River levee
    improvements authorized in 1996. Specifically, a severe storm in the
    Sacramento area in January 1997 indicated some cut-off walls would need to
    be much deeper and therefore would be more costly. Corps guidance
    generally directs the Corps to seek new spending authority from Congress
    if it determines, before issuing the first contract, that it cannot
    complete the project without exceeding its spending limit. However, the
    Corps began construction in 1998 without analyzing or reporting potential
    cost increases. By 2003, it had committed most of the funding authorized
    for the entire Common Features Project to the 1996 American River work,
    leaving the additional 1999 work and the Natomas Basin improvements
    without funding.

    In 1996, the Corps incorrectly estimated the economic benefits for the
    American River levee improvements by overcounting the residential
    properties to be protected. In 2002, it incorrectly estimated benefits for
    the 1999 improvements by, among other things, miscalculating the size of
    the area that the improvements would protect. The Corps' quality control
    process was ineffective in identifying and correcting these mistakes.

    Contents

      Letter

    Results in Brief
    Background
    Design Modifications Have Greatly Raised Costs for the Common

    Features Project

    The Corps Did Not Adequately Analyze Likely Cost Increases for the Common
    Features Project or Communicate Them to Congress in a Timely Manner

    Corps' Benefit Estimates for the American River Levee

    Improvements Are Incorrect Conclusions Recommendations for Executive
    Action Agency Comments and Our Evaluation

    1 4 6

    9

    15

    19 25 26 26

    Appendixes

                                           Appendix I: Appendix II: Appendix III:

    Appendix IV:

    Scope and Methodology
    Conversion of Costs to Constant Dollars
    Comments from the Department of the Army

    GAO Comments

    GAO Contact and Staff Acknowledgments

    GAO Contact
    Staff Acknowledgments

                                           29

                                           31

                                         32 38

    42 42 42

    Tables    Table 1: The Corps' Original 1996 Cost Estimate and Estimated
                         Cost Increases for the American River Levee
                               Improvements Authorized in 1996                 10
                 Table 2: The Corps' Original 1996 Cost Estimate and Potential
                                                                          Cost
                          Increases for the Natomas Basin Component            12
                 Table 3: Common Features Project's Cost Estimates in Original
                          1996 Dollars and in Adjusted 2002 Dollars            31
    Figures     Figure 1: Location of the Common Features Project Figure 2:  3
                        Seepage under and through Levees and a Cut-off Wall to
                                       Prevent Seepage                          8
                 Figure 3: Location of the Fremont Weir and the Yolo Bypass    14

    Contents

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    A

    United States General Accounting Office Washington, D.C. 20548

    October 27, 2003

    The Honorable Don Young Chairman, Committee on Transportation and
    Infrastructure House of Representatives

    The Honorable John T. Doolittle House of Representatives

    The Honorable Richard Pombo House of Representatives

    The city of Sacramento, California, located where the American and
    Sacramento Rivers meet, has faced significant risks of major flooding
    since its founding in the 1840s. A major flood in the Sacramento area
    could cause loss of lives; toxic and hazardous waste contamination;
    disruptions to the city's downtown business and government areas,
    including the state capitol; and billions of dollars in property damage.
    To help protect against these risks, in 1991 and again in 1996, the U.S.
    Army Corps of Engineers (the Corps) identified several alternatives for
    long-term flood protection. On both occasions, the Corps recommended
    building a new dam on the American River near Auburn, California. Concerns
    were raised about the proposed dam's high cost and environmental impacts,
    and Congress did not authorize its construction.

    In light of the decision not to proceed with the new dam, the Corps
    recommended improving the existing levees on the American and Sacramento
    Rivers to increase the level of flood protection for the greater
    Sacramento area. Levees provide flood protection by raising the height of
    river banks, which helps prevent rivers from overflowing during storms.
    The Corps primarily proposed constructing "cut-off" walls in the center of
    the existing levees. These walls, composed primarily of soil, cement, and
    clay, become impermeable when they harden and prevent water from passing
    through the levees. These levee improvements were common to all of the
    alternatives that the Corps had considered for Sacramento flood protection
    in 1996 and became known as the Common Features Project.

    The Water Resources Development Act (WRDA) of 1996 authorized $57 million
    for the project.1

    The Common Features Project consists of two related but separate
    components-the American River levee improvements and the Natomas Basin
    levee improvements. The levees on the American River protect downtown
    Sacramento, while the levees on the Sacramento River protect the Natomas
    Basin, a largely agricultural area just north of downtown Sacramento where
    new development is occurring at a rapid rate. Figure 1 shows the greater
    Sacramento area and the location of the Common Features Project.

    1In this report, costs and benefits are presented in the dollar values for
    the years in which they were estimated, not in constant dollars, except
    for the work authorized in 1999, which is presented in 2002 dollars. We
    did not adjust cost and benefit figures to constant dollars to account for
    inflation in order to maintain consistency with the figures in published
    Corps reports on the Common Features Project. However, when discussing
    changes in project cost, we do report cost increases due to inflation. In
    addition, appendix II shows 1996 project costs converted to 2002 dollars.

    Figure 1: Location of the Common Features Project

    The WRDA of 1999 authorized additional work for the Common Features
    Project, directing the Corps to raise or strengthen some American River
    levee sections and raise some levees in the Natomas Basin; it also
    increased project authorization to $92 million. Several years after this
    authorization, however, the Corps stated that project costs would go
    significantly higher.

    In the context of these issues, in response to your request, this report
    addresses (1) why the costs have increased for the Common Features
    Project, (2) the extent to which the Corps analyzed the likelihood of
    significant cost increases for the project and reported this information
    to Congress in a timely manner, and (3) whether the Corps correctly
    estimated the economic benefits of the American River levee improvements.
    Our scope and methodology in addressing these questions can be found in
    appendix I.

    Results in Brief	The estimated costs for all components of the Common
    Features Project have risen from $57 million in 1996 to between $270
    million and $370 million in 2002, primarily because of design
    modifications. With respect to the American River component, estimated
    costs for the levee improvements authorized in 1996 have more than
    tripled, from $44 million in 1996 to $143 million in 2002. This increase
    occurred primarily because the Corps modified the original design of the
    cut-off walls to close gaps at bridge crossings and other areas and to
    greatly increase the depth of the walls to prevent water from seeping
    under the levees. In addition to the cost increases related to the 1996
    authorized work, new flood protection measures authorized in 1999 added
    about $15 million in costs to the American River component of the project.
    For the Natomas Basin component-which is still in the early planning
    stage-the Corps' cost estimates increased from $13 million in 1996 to
    between $112 million and $212 million in 2002. These projected cost
    increases are largely due to design changes in the planned improvements to
    the Sacramento River levees and additional work that the Corps has
    proposed for this part of the project.

    The Corps did not fully analyze likely cost increases for the Common
    Features Project or report them to Congress in a timely manner. Corps
    guidance generally directs the Corps to seek new spending authority from
    Congress if it determines, before issuing the first construction contract,
    that it cannot complete the project without exceeding its spending limit.
    A severe storm in January 1997 demonstrated vulnerabilities in the
    American River levees and alerted the Corps of the need to do additional
    work to close the gaps in the cut-off walls at bridges and other areas and
    extend the depth of some cut-off walls from about 20 feet to about 60
    feet. Although these design changes were likely to increase project costs
    significantly, the Corps did not use cost risk analysis, or any other
    analysis, to determine the potential extent of the increases. The Corps
    then began constructing the redesigned American River levee improvements
    without communicating to

    Congress the project's potential exposure to substantial cost overruns. In
    2002, when the Corps finally updated project costs, it had already
    completed or contracted at a much higher cost for most of the American
    River levee improvements that were authorized in 1996. Because of the
    reporting delay, Congress did not have the opportunity to determine
    whether, at these higher costs, building these levee improvements was an
    efficient and effective use of public funds. By 2003, the Corps had
    committed most of the funding authorized for the entire Common Features
    Project to the 1996 American River work, thereby leaving the 1999 work and
    the Natomas Basin improvements without funding.

    The Corps made several mistakes in estimating the economic benefits for
    the American River levee improvements. First, in 1996, the Corps
    incorrectly calculated the economic benefits by overcounting the
    residential properties that the levees would protect. The actual number of
    protected residential properties was about 20 percent less than the number
    that the Corps estimated. Although the Corps updated its benefit estimate
    in 2002, it again made mistakes in estimating benefits because it
    incorrectly determined that the levee improvements authorized in 1999
    would protect a larger area from flooding than they will and used an
    inappropriate methodology to determine the amount of flood damages the
    levee improvements would prevent. However, it is also important to
    recognize that the levee improvements may reduce the loss of human lives
    in the event of a flood, which is a benefit that is not included in the
    Corps' analysis. Second, although the Corps' policy calls for reporting a
    range of benefits from the levee improvements and the likelihood of
    realizing them, in 2002 the Corps reported only a single estimate of
    benefits. The Corps did not provide a range of benefits to Congress
    because it did not use the most current version available of its computer
    software, which could have performed the analysis. Finally, although the
    Corps has a three-tiered quality control process to ensure that it
    prepares economic analyses accurately and appropriately, this process did
    not identify the mistakes we found, which raises questions about the
    effectiveness of the Corps' quality control process.

    In light of the concerns we identified with the Common Features Project
    and to better inform Congress about its costs and benefits, we are making
    several recommendations to the Secretary of the Army regarding the need
    for the Corps to (1) improve the accuracy of its cost-benefit analysis of
    the American River levee improvements that it has not yet constructed and
    (2) improve its reporting of the costs and benefits of the planned work as
    well as analyze alternative flood protection measures for the Natomas
    Basin. In

    commenting on a draft of this report, the Department of the Army concurred
    with our recommendations, but took issue with our presentation of some
    information. Specifically, the Army believes that this report does not
    recognize the significant role Congress played in 1999 when it added
    additional work to the project and authorized funds for construction
    before the Corps had developed reliable cost estimates. In addition, the
    Army states that the consistent provision of funds to the Corps by
    Congress, at or exceeding the Corps' budget request, created the situation
    of which our report is critical. We have considered the Army's comments;
    however, we believe that our report is factually accurate and that our
    findings are presented in their proper context.

    Background	Sacramento, California, was established at the confluence of
    the American and Sacramento Rivers shortly after gold was discovered
    upstream at Sutter's Mill in 1848. Frequent flooding has been a problem in
    Sacramento since its founding. To help reduce flooding, over time a
    complex system of levees, dams, and other related facilities were built.
    Levees line both sides of the American River from where it meets the
    Sacramento River upstream for a distance of about 17 miles, and the
    Natomas Basin is completely surrounded by levees. In addition, the Folsom
    Dam, completed in 1956 and located upstream from Sacramento on the
    American River, uses a portion of its storage capacity for flood
    protection.

    The Sacramento area flood protection system was designed on the basis of
    records of rainfall during the first half of the 20th century. However,
    since 1950, the American River watershed has experienced five floods that
    were larger than any recorded in the pre-1950 period, although downtown
    Sacramento was not flooded during any of these events. Nonetheless, the
    Sacramento area has less protection than the designers of the original
    flood protection system realized. In fact, much of urbanized Sacramento is
    located in areas where a flood has a 1 percent chance of occurring every
    year-known as the 100-year floodplain. Because of this limited level of
    protection, the Corps estimates that a very large flood-one with a 0.25
    percent chance of occurring every year-would flood the 400-year
    floodplain, resulting in residential, commercial, industrial, and public
    property damage of about $15.5 billion as well as loss of lives. According
    to the Corps, about 305,000 people live in more than 100,000 residential
    properties located within the American River floodplain. A major flood
    also would cause toxic and hazardous waste contamination; disrupt the
    city's downtown business and government areas, including the state

    capitol; and interfere with the transportation system, including two
    interstate highways.

    A major flood in 1986, the largest one ever recorded on the American and
    Sacramento Rivers, severely strained the levee system protecting
    Sacramento. Although the levees held and downtown Sacramento was not
    flooded, the event spurred efforts by federal, state, and local entities
    to identify measures to increase Sacramento's level of flood protection.
    In 1987, the Corps began work on a comprehensive study of flood protection
    alternatives for Sacramento. In its 1991 report,2 the Corps' Sacramento
    district office considered six flood protection options and recommended
    building a new dam on the American River at Auburn, California, but
    Congress did not approve the dam's construction.3 Subsequently, in
    response to the Department of Defense Appropriations Act of 1993, the
    Corps reevaluated three alternatives for increasing flood protection. In
    its 1996 report,4 the Corps examined (1) building a new dam near Auburn,
    California; (2) modifying the existing Folsom Dam; and (3) increasing the
    amount of water released from Folsom Dam during a flood, coupled with
    other flood protection measures. The Corps again recommended building a
    dam at Auburn, but, again, Congress did not approve its construction.

    Recognizing the magnitude of the opposition to the proposed Auburn Dam, in
    June 1996, the Corps recommended the Common Features Project, which
    included improving sections of the American and Sacramento Rivers' levees,
    primarily by constructing cut-off walls, to provide smallscale
    improvements to flood protection for the Sacramento area while the options
    for more extensive improvements continued to be considered. The WRDA of
    1996 authorized $57 million for the Common Features Project, which
    included 24 miles of levee improvements on the American River and 12 miles
    on the Sacramento River along the western border of the Natomas

    2See U.S. Army Corps of Engineers and the State of California Reclamation
    Board, Feasibility Report, American River Watershed Investigation,
    California (Sacramento, Calif.: December 1991).

    3Constructing a dam near Auburn is not a new idea. In 1965, the U.S.
    Bureau of Reclamation was authorized to construct a dam near Auburn for
    increasing water supply, providing hydropower, controlling floods, and
    other purposes. Construction at the site was halted in 1975 because of
    concerns over the proposed dam's ability to withstand earthquakes, and was
    never resumed.

    4See U.S. Army Corps of Engineers, State of California Reclamation Board,
    and the Sacramento Area Flood Control Agency, Supplemental Information
    Report, American River Watershed Project, California (Sacramento, Calif.:
    March 1996).

    Basin. Subsequently, the Corps concluded that it could provide the same
    level of flood protection on the American River by modifying only about 21
    miles of levees. Figure 2 shows how a cut-off wall, which is composed
    primarily of a soil, cement, and clay mixture that forms an impermeable
    barrier when it hardens, can prevent water from seeping under or through a
    levee.

    Figure 2: Seepage under and through Levees and a Cut-off Wall to Prevent
    Seepage

    In January 1997, numerous rivers in northern California flooded causing
    extensive damages, although not in the Natomas Basin or downtown
    Sacramento. This flood, which was nearly as large as the 1986 flood,
    highlighted the continuing vulnerabilities of the existing flood
    protection system. In response, the WRDA of 1999 (1) modified the Common
    Features Project by adding about 3.8 miles of additional levee
    modifications along the American River and 10 miles on the Natomas Cross
    Canal, located on the northern border of the Natomas Basin, and (2)
    increased the project's authorization from $57 million to $92 million.

    When Congress approves a flood protection project, it authorizes a
    specific amount of money for the project, which provides the basis for the
    maximum project cost. According to section 902 of the Water Resources
    Development Act of 1986, as amended, the maximum project cost is the sum
    of (1) the original authorized amount, with the costs of unconstructed
    project features adjusted for inflation; (2) the costs of modifications
    that do

    not materially alter the scope of the project, up to 20 percent of the
    original authorized amount (without adjustment for inflation); and (3) the
    cost of additional studies, modifications, and actions authorized by the
    1986 Act or any later law. As a result of these provisions, the $92
    million that Congress authorized for the Common Features Project in 1999
    translates to an allowable maximum project cost of about $120 million in
    2003.

    When Congress authorized the Common Features Project in 1996, federal law
    required that nonfederal partners pay 25 percent of the cost of flood
    protection projects.5 For the Common Features Project, these partners are
    the State of California Reclamation Board and the Sacramento Area Flood
    Control Agency. In this report, when we refer to project costs, including
    the maximum allowable project cost, we are referring to the combined
    federal and nonfederal expenditures.

    Design Modifications Have Greatly Raised Costs for the Common Features
    Project

    Estimated costs for the Common Features Project grew from $57 million in
    1996, when the project was first authorized, to between $270 million and
    $370 million in 2002, primarily because the Corps changed the design of
    the levee improvements.6 For the American River levee improvements
    authorized in 1996, estimated costs more than tripled, due largely to
    changes in the design of the cut-off walls. New work authorized in 1999
    added another $15 million to the cost increase. The Corps has completed
    much of the American River work authorized in 1996, but it has not begun
    construction on the work authorized in 1999. Regarding the Natomas Basin
    component, estimated costs increased from $13 million to between $112
    million and $212 million. Costs rose primarily because the Corps changed
    the design of the levee improvements and proposed adding other
    improvements to this component. The Natomas Basin work is in the early
    planning stages, and the Corps has not begun construction. As of July
    2003, the Corps had spent or made plans to spend nearly all of the money
    authorized for the Common Features Project. It therefore will not be able
    to finish constructing the American River work authorized in 1996, begin
    constructing the American River work authorized in 1999, or complete

    5Current law requires the nonfederal partner to pay a minimum of 35
    percent of the costs of flood protection projects. This increased cost
    share requirement only applies to projects authorized after the WRDA of
    1996 and therefore does not apply to the Common Features Project.

    6About 3 percent ($9 million) of this increase is the result of price
    inflation between 1996 and 2002.

    planning for the Natomas Basin work unless Congress increases the
    project's authorized funding.

    Estimated Costs for the American River Levee Improvements Authorized in
    1996 Have More Than Tripled Because of Design Changes

    The Corps' cost estimate for the American River levee improvements
    authorized in 1996 has more than tripled, from $44 million in 1996 to
    about $143 million in July 2002, as shown in table 1.

    Table 1: The Corps' Original 1996 Cost Estimate and Estimated Cost
    Increases for the American River Levee Improvements Authorized in 1996

                                  Dollars in millions

                                                        Estimated Total estimated
                                          Original 1996      cost     costs as of
                          Project element cost estimate increasea       July 2002
                            Cut-off walls           $30       $76           $105b
                 Response to construction
                                accidents           N/A        11
              Planning, design, and other
                                    costs            14         6
                 Inflation related to the
                                 original
                       1996 cost estimate           N/A         7
                                    Total           $44      $100           $143b

    Source: GAO analysis of U.S. Army Corps of Engineers data.

    aIn 2002 dollars.
    bDoes not sum to the total due to rounding.

    As table 1 shows, costs rose primarily because of the increased costs of
    the cut-off walls. The Corps' original design called for building cut-off
    walls to a depth of between 20 and 30 feet to prevent water from seeping
    through the levees and for allowing gaps in the cut-off walls at bridge
    and utility crossings. However, after the 1997 flood, the Corps realized
    it also needed to address the problem of water seeping under levees. It
    therefore increased the depth of the cut-off walls to between 60 and 80
    feet and closed the gaps in the cut-off walls at bridge and utility
    crossings. For some sections of the levees, the Corps could not close the
    gaps using its standard approach for cut-off walls because of problems
    accessing the sites. As a result, the Corps employed a new and more
    expensive approach-known as jet grouting-to build cut-off walls by
    drilling and injecting concrete material into areas that were difficult to
    access. Closing the gaps in the cutoff walls by jet grouting raised
    estimated costs by $52 million and

    increasing their depth raised costs by $24 million, according to the
    Corps' July 2002 cost estimate. However, in September 2002, the Corps
    determined that fewer gaps needed to be closed using jet grouting, which
    should reduce costs to some extent. As of June 2003, however, the Corps
    had not incorporated these potential cost reductions into an official
    project cost update.

    As table 1 also shows, the Corps' response to accidents that occurred
    during construction of the 1996 authorized work added $11 million to
    project costs. On three occasions, liquid material from the cut-off walls
    accidentally leaked into either the American River or the backyards of
    homes that are built against the levees. As a result, the Corps incurred
    costs cleaning up these spills and responding to new work requirements
    mandated by the Environmental Protection Agency to help prevent future
    leaks.

    Lastly, in addition to the cost increases related to the 1996 authorized
    work, new flood protection measures authorized in 1999 added about $15
    million in costs to the American River component of the project.7 These
    measures include raising levee banks at two locations, installing gates
    and pumps at an existing drain, and installing cut-off walls in two
    additional levee segments.

    Of the American River work authorized in 1996, the Corps has completed
    about 90 percent and must still close gaps in the cut-off walls at some
    remaining bridge and utility crossings to complete this work. For the
    levee improvements authorized in 1999, the Corps has done some planning
    but has not begun any construction. However, as of July 2003, the Corps
    had spent or had plans to spend $116 million of the $120 million
    authorized for the entire Common Features Project. The Corps could not
    give an exact accounting of how much of the $116 million it had spent on
    the 1996 American River work. However, on the basis of the information
    that the Corps provided, we estimate the Corps has spent, or made plans to
    spend, at least $103 million for planning and constructing the 1996
    American River work. Because the Corps has spent or made plans to spend
    most of the project's authorized funds, it will not be able to complete
    the 1996 and 1999 work on the American River unless Congress increases the
    project's authorized funding.

    7These costs are in 2002 dollars.

    Natomas Basin Costs Are Expected to Increase Significantly, and Lack of
    Funds Has Halted Planning and Cost Estimating Efforts

    The Corps' preliminary cost estimates for the Natomas Basin component of
    the project increased from $13 million in 1996 to between $112 million and
    $212 million in 2002, as shown in table 2.

    Table 2: The Corps' Original 1996 Cost Estimate and Potential Cost
    Increases for the Natomas Basin Component

                                  Dollars in millions

    Original 1996 cost estimate

    Potential cost increasea

    Total potential costs estimated in 2002

                                    Project element

                              Original levee
                  improvements authorized in
                                        1996   $13   $47 to $88       $60 to $101
                          New work the Corps
                            proposed in 2002   N/A    37 to 84           37 to 84
                      Work authorized in the
                                WRDA of 1999   N/A    14 to 26           14 to 26
               Inflation related to the 1996
                               cost estimate   N/A              2
                                       Total   $13  $99 to $199b    $112 to $212b

    Source: GAO analysis of U.S. Army Corps of Engineers data.

    aIn 2002 dollars.
    bDoes not sum to the total due to rounding.

    As table 2 shows, the Corps estimates that the costs for the original
    levee improvements will increase by between $47 million and $88 million
    due to design changes to add cut-off walls or provide other methods of
    flood protection to control seepage under levees. The Corps proposed new
    work in 2002 that will increase costs by between $37 million and $84
    million. This work is located in an area of the levee where the Corps
    previously had constructed a cut-off wall to stop water from seeping
    through the levee. However, the Corps later determined that the cut-off
    wall was not deep enough to prevent water from seeping under the levee,
    and the proposed new work will address this problem. Finally, the Corps
    estimates that the additional work authorized in 1999 to modify levees
    along the Natomas Cross Canal, which empties into the Sacramento River at
    the north end of the Natomas Basin, will add between $14 million and $26
    million to the cost of this component of the project.

    The Natomas Basin work-authorized in 1996 and 1999 and the additional work
    the Corps identified-is in the planning stages and no construction has yet
    begun. The Corps has been updating information on the extent of the levee
    problems and the costs of the improvements identified in the original plan
    and intends to submit a more precise cost estimate to Congress when it
    completes its planning. However, the Corps halted its Natomas Basin
    planning work in June 2003 because it had spent or made plans to spend
    nearly all of the money authorized for the entire Common Features Project.

    Given that the Natomas Basin levee improvements will cost significantly
    more than originally estimated and no construction has yet begun,
    identifying and evaluating alternative flood protection measures could
    result in cost savings. For example, one possible alternative method for
    flood protection identified by the Sacramento Area Flood Control Agency,8
    as well as the Corps, involves lowering the water level in the Sacramento
    River during floods by diverting water through the Fremont Weir and into
    the Yolo Bypass, which is located at a point just before where the
    Sacramento River flows past the Natomas Basin.9 The Fremont Weir is a low
    dam that controls the movement of large volumes of floodwater from the
    Sacramento River by diverting it into the Yolo Bypass. The Yolo Bypass is
    a continuous, 40-mile open space corridor that is protected from urban
    development pressure by flood easements. (See fig. 3.)

    8The California state legislature established the Sacramento Area Flood
    Control Agency to coordinate flood protection efforts for the Sacramento
    area on a regional basis.

    9See U.S. Army Corps of Engineers and the State of California Reclamation
    Board, Sacramento and San Joaquin River Basins, California, Comprehensive
    Study, Interim Report (Sacramento, Ca.: Dec. 20, 2002).

    Figure 3: Location of the Fremont Weir and the Yolo Bypass

    Lowering the water level in the Sacramento River as it passes the Natomas
    Basin could, among other things, improve the reliability of the Natomas
    Basin levees and may provide more cost-effective flood protection than the
    current Natomas Basin levee improvement plan. However, as of June 2003,
    the Corps had not yet analyzed the costs and benefits of modifying the
    weir and the bypass or any other alternative method for Natomas Basin
    flood protection.

    The Corps Did Not Adequately Analyze Likely Cost Increases for the Common
    Features Project or Communicate Them to Congress in a Timely Manner

    After the 1997 storm demonstrated vulnerabilities in the American River
    levees, the Corps significantly changed the design of the levee
    improvements but did not analyze the likelihood of cost increases for the
    Common Features Project. The Corps then began constructing the American
    River levee improvements without informing Congress that the changes could
    greatly increase the overall costs of the project. By the time that the
    Corps reported the significant cost increases in 2002, it had already
    spent or made plans to spend more than double its original estimate for
    the American River levee improvements authorized in 1996. Furthermore, as
    previously discussed, the Corps estimates that it will spend more than
    three times its original estimate by the time it completes this work. The
    Corps has been able to pay for these levee improvements by spending funds
    originally planned for the Natomas Basin and the additional American River
    improvements authorized in 1999.

    The Corps Did Not Adequately Analyze Likely Cost Increases for the
    American River Levee Improvements

    The Corps did not analyze the risk of cost increases after changing the
    design of the American River levee improvements in 1997 and, therefore,
    did not provide Congress with information on the project's exposure to
    significant cost increases. A storm in January 1997 demonstrated that the
    American River levees were vulnerable to floodwaters seeping under them,
    which could cause them to fail. On the basis of this information, the
    Corps significantly changed the design of the levee improvements but did
    not conduct a cost risk analysis, or any other type of analysis, to
    determine the extent to which these changes would increase the costs for
    the Common Features Project.

    According to the Corps' policy, project management teams should consider
    conducting a cost risk analysis when developing cost estimates for
    projects with considerable uncertainties.10 A cost risk analysis
    identifies the areas of a project that are subject to significant
    uncertainty about costs and provides decision makers with a range of
    potential costs for a project and the probability that these costs will be
    exceeded. For example, a cost risk analysis might determine that there is
    a 50 percent chance that costs for a particular project will exceed $5
    million but only a 20 percent chance that costs will exceed $8 million.
    According to a report from the Corps' Institute for Water Resources, this
    type of estimate is more accurate than a single point cost estimate and
    provides decision makers with better and more complete information.11

    However, the Corps did not analyze the risk of cost increases after
    changing the design of the American River levee improvements even though
    it had identified several factors that could lead to significant cost
    increases. For example, by July 1997 the Corps recognized that it had to
    close the gaps in the cut-off walls at bridges and other areas and extend
    the depth of some walls from about 20 to about 60 feet, although the Corps
    had not developed a final design for these improvements. By identifying a
    project element with significant cost uncertainty-the design and depth of
    the cut-off walls-the Corps essentially performed the first step of cost
    risk analysis. However, the Corps did not follow through by quantifying
    this uncertainty and determining a range of potential costs for the
    cut-off walls or the likelihood that the potential costs within that range
    would be exceeded-the second and third steps of the cost risk analysis.
    Given that the Corps' original cost estimate for the American River work
    was nearly equal to its estimates of the benefits, if the Corps had
    conducted a cost risk analysis, it would have shown whether there was a
    significant likelihood that project costs would be greater than the
    economic benefits.

    Furthermore, despite experiencing significant cost increases for the 1996
    work, the Corps did not conduct a cost risk analysis to determine its
    exposure to potentially significant cost increases for the 1999 work. In
    addition, the Corps is not planning to conduct a cost risk analysis for
    the Natomas Basin improvements. According to Sacramento district
    officials,

    10See U.S. Army Corps of Engineers, Engineer Regulation 1110-2-1302.

    11Charles Yoe, Risk Analysis Framework for Cost Estimation, a report
    prepared for the U.S. Army Corps of Engineers, Institute for Water
    Resources, December 2000.

    the Corps did not conduct a cost risk analysis because it did not believe
    such an analysis was necessary to account for uncertainties in the
    project.

    The Corps Did Not Provide Congress with Timely Information about
    Significant Potential Cost Increases for the American River Levee
    Improvements

    The Corps' planning guidance generally directs the Corps to seek new
    spending authority from Congress if it determines that a project's
    estimated costs exceed the maximum project cost before it has awarded a
    project's initial contract.12 However, after making significant changes to
    the project's design in 1997, the Corps did not reevaluate its cost
    estimate to determine if it could still implement the project without
    exceeding the maximum project cost. For example, the Corps did not
    estimate the potential for cost increases due to tripling the depth of
    some cut-off walls, which eventually added $24 million in estimated costs
    to the project. In addition, the Corps did not estimate the potential for
    cost increases due to closing the gaps in the cut-off walls at bridges and
    other areas. This expense was not considered in the Corps' original 1996
    cost estimate and potentially involved the use of jet grouting-a
    technology the Corps had not previously used to construct cut-off walls.
    Closing the gaps in the cut-off walls eventually added $52 million in
    estimated costs to the project.

    In spite of significantly changing the project's design, the Corps awarded
    the project's first contract without updating its cost estimate to
    determine whether it would need additional spending authority to complete
    the project. In June 1998, the Corps issued the first Common Features
    Project solicitation for bids to construct about 1.6 miles of the
    redesigned cut-off wall on the north bank of the American River. These
    levee improvements represented only about 8 percent of the total miles of
    planned American River levee improvements, but the bid that the Corps
    selected amounted to 24 percent of the estimated cost for all of the
    American River levee work. We believe that this difference should have (1)
    alerted the Corps to the possibility that costs were likely to be much
    higher than it had originally estimated and (2) warranted an update of the
    Corps' cost estimate before it awarded the initial contract.

    According to a headquarters official, the Corps issued the first contract
    without updating its total project cost estimate because it would have
    been impractical to delay the project while the agency revisited cost
    estimates. Furthermore, according to the Corps, the first contract was
    expected to be

    12See U.S. Army Corps of Engineers, Engineer Regulation 1105-2-100.

    more costly than future contracts because, among other reasons, it
    involved work on only a small stretch of the levee, which limited possible
    cost efficiencies. However, because the Corps did not analyze the
    potential for cost increases for the remainder of the American River levee
    improvements, it did not determine the likelihood that it would need
    additional spending authority to complete the project before it awarded
    the first contract.

    The Corps has paid for the significantly increased costs of the American
    River levee improvements by using funds planned for the Natomas Basin and
    for the additional American River work authorized in 1999. Although the
    Common Features Project has two separate components, and Congress approved
    parts of the project in 2 different years, the project is subject to a
    single maximum project cost. The Corps has the flexibility to spend Common
    Features Project funds as it sees fit and is not required to allocate
    funds in proportion to its original cost estimates for each component.

    Following project authorization in 1996, the Corps began to construct the
    American River levee improvements before the Natomas Basin improvements.
    Although the Corps exhausted the funds it had originally estimated that it
    would need to construct the American River levee improvements, it was able
    to continue implementing the American River work by spending funds it had
    originally planned to use for the Natomas Basin work. With the
    authorization of additional work in 1999, effectively raising the
    project's maximum cost to about $120 million, the Corps also was able to
    use funds planned for this work to pay for the increased costs of the
    American River work authorized in 1996.

    After it awarded the first Common Features Project contract, the Corps was
    not required to inform Congress of project cost increases until it could
    not contract for additional work without exceeding the maximum project
    cost. According to the Corps, in March 2001 it briefed a number of Members
    of Congress on its intention to prepare a report that would evaluate the
    potential for the cost of the Common Features Project to exceed the
    project's maximum cost. However, it was not until February 2002, more than
    4 years after it significantly modified the design of the American River
    levee improvements, that the Corps reported to Congress for the first time
    that due to significant cost increases, it could not complete the project
    without exceeding the maximum project cost. By this time, the Corps had
    spent or awarded contracts for more than twice the amount it originally
    planned to spend on the American River levee improvements authorized in
    1996 and had completed about 90 percent of

    the work. Furthermore, the Corps estimates that it will spend more than
    three times its original estimate by the time it completes this work.
    Because the Corps did not update its cost estimate or report the
    significant cost increases to Congress until most of the 1996 American
    River work was complete, Congress did not have the opportunity to
    determine whether the significantly more expensive levee improvements were
    still the most appropriate means of providing flood protection for
    Sacramento.

    Corps' Benefit Estimates for the American River Levee Improvements Are
    Incorrect

    The Corps made mistakes in estimating the benefits for the American River
    levee improvements because it incorrectly counted and valued the
    properties that the levee improvements would protect and used an
    inappropriate methodology to determine the amount of flood damages they
    would prevent. Seven years after Congress authorized the project, the
    Corps has not yet prepared an accurate assessment of the benefits of the
    American River levee improvements. In addition, contrary to its guidance,
    the benefit estimate the Corps prepared in 2002 did not describe the range
    of possible benefits and the likelihood that the values in this range
    would be realized. This additional information, describing the uncertainty
    of the benefit estimate, would have provided decision makers with
    information on the likelihood that the project's benefits would be greater
    than its costs. Furthermore, the Corps' three-tiered quality control
    process did not identify the mistakes that we found during the course of
    our review.

    The Corps Made Mistakes in Counting and Valuing Properties and Determining
    Flood Damages When Estimating Project Benefits

    In its original 1996 analysis of the benefits and costs of the American
    River levee improvements, the Corps incorrectly counted the residential
    properties that the proposed levee improvements would protect. As a
    result, the Corps incorrectly calculated the benefits that these
    improvements would provide. According to the Corps, the methodology it
    used to count the number of residential properties in 1996 was "accepted
    practice and consistent with Corps guidance and technology applicable at
    the time." In 2002, the Corps used a different methodology that
    incorporated new technologies and provided a more precise estimate of the
    number of properties protected. Using this new approach, the Corps
    determined that the actual number of residential properties protected by
    the levee improvements is about 20 percent less than its original
    estimate. The Corps did not calculate the amount that benefits would
    decrease due to this change. However, given the small difference between
    the original estimated annual benefits ($5.6 million) and the annual costs
    ($5.5 million) of the American River levee improvements, if the Corps had
    incorporated a

    more accurate estimate of the property inventory in its 1996 analysis, the
    benefits of these improvements may have been less than the costs.

    For flood protection projects, such as the Common Features Project, the
    Corps calculates benefits as the dollar value of the physical damages to
    residential, commercial, industrial, and public properties and
    infrastructure that the levee improvements prevent. To calculate the
    reduction in flood damage to properties, the Corps counts the number of
    properties located in the potential flood area-known as the floodplain-
    and then assesses the monetary value of the structures and their contents.
    The Corps uses this information to determine the property damage that
    would result from floods of various depths and to estimate the impact that
    the levee improvements would have in preventing this damage.

    It is important to remember that, in addition to the economic benefits
    from preventing property damage, levee improvements may reduce the risk of
    loss of human lives, which is a benefit that is not included in the Corps'
    calculations.13 According to the Corps, about 305,000 people live within
    the American River floodplain and the number of lives lost because of
    levee failure would depend on a variety of factors, such as the size of
    the flood, warning time, time of day, and availability of evacuation
    routes. Because of the many factors involved and the lack of historical
    data, the Corps was not able to estimate the number of lives that would be
    lost as a result of levee failure and flooding in the Sacramento area.

    Although the Corps updated its benefit estimate in 2002 to incorporate the
    benefits from the new levee improvements authorized in 1999, a Sacramento
    district official acknowledged that the Corps again made mistakes in
    estimating the number of properties the levee improvements would protect.
    For the American River levee improvements authorized in 1999, the Corps
    identified an area that was larger than the area the levee improvements
    would actually protect. As a result, the Corps overestimated the number of
    properties protected and the benefits provided by the work authorized in
    1999. According to a Sacramento district official, the Corps currently
    does not have the information it needs to determine the correct

    13The Corps' guidance (Engineer Regulation 1105-2-100) directs the Corps
    to address the issue of prevention of loss of life when evaluating
    alternative plans-which the Corps did. However, the Corps is not required
    to formally estimate the number of lives saved or lost as a potential
    effect of a project. In situations where historical data exist, the Corps
    has the option to estimate the number of persons potentially affected by a
    project, and include this number as an additional factor for the
    consideration of decision makers.

    area the levee improvements would protect and therefore is unable, at this
    time, to provide a reliable estimate of the benefits from the 1999 work.

    In addition, the Corps made mistakes in its 2002 analysis in estimating
    the value of the residential properties the American River levee
    improvements would protect. The Corps' policy calls for calculating a
    property's value as the cost of replacing the structure less any
    depreciation, which accounts for a reduction in a structure's value due to
    deterioration prior to flooding.14 Because the Corps had more than 100,000
    residential properties to assess and a limited amount of time and
    resources, it determined depreciated replacement values for a small sample
    of 365 properties and then used the results to estimate the depreciated
    replacement values for all properties. However, the Corps did not
    correctly select the sample of properties. According to members of both
    the Appraisal Institute and The Appraisal Foundation, to accurately
    appraise a large number of properties by sampling requires a separate
    sample for each residential property type, such as single-family homes,
    condominiums, and apartment buildings.15 Instead of conducting a separate
    sample for each type of property, the Corps sampled all property types
    together and calculated an average depreciated replacement value for all
    property types. As a result, it is unclear whether the Corps accurately
    calculated depreciation, which in turn raises questions about its
    estimates of the value of the residential properties the American River
    levee improvements would protect.

    Moreover, the Corps did not use a consistent, objective appraisal
    methodology to calculate depreciation for the properties in the sample.
    Instead, the Corps subjectively determined depreciation. For example, if
    the Corps determined a structure was in "very good" condition it was
    assigned a zero percent, 5 percent, or 10 percent level of depreciation.
    However, the Corps could not provide us with its criteria for assigning
    the level of depreciation. Furthermore, the Corps' economists who made
    these subjective decisions did not consult with the professional
    appraisers in the Corps' Sacramento district office to identify
    alternative appraisal methodologies that may have been more appropriate.
    According to the

    14See U.S. Army Corps of Engineers, Engineer Regulation 1105-2-100.

    15The Appraisal Institute is an international membership association of
    professional real estate appraisers whose mission is, in part, to uphold
    professional credentials and standards of professional practice and ethics
    consistent with the public good. The Appraisal Foundation is a nonprofit
    education organization that, among other things, develops and promulgates
    professional appraisal standards and appraiser qualifications.

    Corps, the methods it used to determine depreciation are "standard
    practice at the Corps and are consistent with prior and existing
    guidance." Nonetheless, we believe that the shortcomings identified above
    raise questions about the accuracy of the Corps' property value estimates
    and, in turn, the project benefit estimates that are, in part, based on
    them. The Corps said it recognizes the need to strengthen its
    methodologies and is currently developing a new tool to estimate property
    values.

    Finally, the Corps' 2002 analysis did not use the methodology described in
    Corps guidance to determine the number of properties that are located in
    the 100-year floodplain and the damages they would sustain in a 100-year
    flood.16 The 100-year floodplain is the land area that may be affected
    during a flood that has a 1 percent chance of occurring every year.
    Instead of following Corps guidance by directly counting the properties
    located in the 100-year floodplain and calculating the damages they would
    sustain in a 100-year flood, the Corps estimated the damages using a
    methodology that relied on the results from its incorrect 1996 count of
    properties. The Corps' use of this alternative methodology further calls
    into question the accuracy of its benefit estimate for the American River
    levee improvements authorized in both 1996 and 1999, which is based in
    part on this flood damage assessment. The Corps told us that it could have
    directly counted the properties in the 100-year floodplain but the
    necessary information was not available in a "user friendly" format, and
    that the additional effort needed to collect more accurate information was
    not expected to change the results. As a result, the Corps did not believe
    this was an effective use of resources. However, the Corps did not provide
    us with any evidence to support the validity of calculating the 100-year
    flood damages as it did or to validate its contention that the results
    would not change if it had used the methodology prescribed in its
    guidance.

    16See U.S. Army Corps of Engineers, Engineer Manual 1110-2-1619.

    The Corps Has Not Provided Congress with Information on the Range of
    Possible Benefits from the Levee Improvement Work or the Likelihood They
    Will Be Realized

    The Corps has not followed its policy to provide Congress with an estimate
    of the range of possible benefits from the American River and Natomas
    Basin levee improvements and the likelihood that these benefits will
    actually be realized. In 1996, the Corps established a policy calling for
    benefit estimates and benefit-cost comparisons for flood protection
    projects to be reported with their associated probabilities.17 For
    example, rather than reporting that the benefits for a particular project
    are exactly $1.5 million, the Corps could report that it is 80 percent
    confident that project benefits will be at least $1 million but it is only
    30 percent confident that benefits will reach $2 million. The Corps
    recognizes that this information can assist Congress in understanding the
    uncertainty involved in achieving various levels of benefits and in
    determining whether those risks justify funding the project. According to
    the Corps, it did not estimate a range of benefits for the Common Features
    Project in 1996 because the computer software used to assess the project's
    benefits and costs was developed prior to the 1996 guidance and did not
    have the capability to calculate a range of values.

    However, in its 2002 reanalysis of project benefits, when a new version of
    the software capable of calculating benefit ranges and probabilities was
    available and costs for the American River work had significantly
    increased, the Corps chose not to calculate a range of benefits and
    instead continued to report a single estimate. Because the Corps' 2002
    estimates of benefits and costs for the American River work were so close
    in value (1.1 to 1), an analysis of the potential range of benefits would
    have revealed whether there was a significant probability that project
    benefits could be lower than the single estimate the Corps reported and
    perhaps lower than project costs.18 According to a Sacramento district
    official, the Corps did not use the new version of its software that could
    have calculated the range of benefits to maintain consistency with
    information on flood protection it had previously released to the public.
    For example, the Corps has reported to the public that the American River
    levees have about a 1 percent chance of being breached by floodwaters in
    any given year. This estimate of flood protection could be different if
    calculated using the newer version of the software. The Corps was
    concerned that using the newer software would require it to report a
    different, and perhaps slightly lower, level of flood

    17See U.S. Army Corps of Engineers, Engineer Regulation 1105-2-101.

    18The Corps' 2002 estimate includes the benefits of both the expanded 1996
    work and the additional 1999 levee improvement work.

    protection, which would confuse the public. However, by taking this
    approach, the Corps did not provide Congress with important information
    about the uncertainty surrounding the amount of benefits the project would
    provide.

    The Corps' Quality Control Process Did Not Identify Flaws in Its Benefit
    Analyses

    Three organizational levels within the Corps-district, division, and
    headquarters-reviewed and approved the 1996 and 2002 benefit analyses for
    the American River component of the Common Features Project, but these
    reviews did not identify the mistakes that we found. This issue raises
    questions about the adequacy and effectiveness of the Corps' review
    process. We raised similar concerns about the Corps' review process in our
    report on the Delaware River Deepening Project, which found significant
    miscalculations and invalid assumptions in the project's economic analysis
    that the Corps did not find during its reviews.19

    For the Common Features Project, the Corps' Sacramento district office
    conducted the 1996 study that analyzed the technical and economic aspects
    of the proposed project and the 2002 report updating that information. The
    Corps' Los Angeles district office reviewed the 2002 economic analysis for
    technical accuracy. Next, the Corps' South Pacific division reviewed the
    analysis; although, following the Corps' policy, it did not review the
    district's work for technical accuracy or verify the underlying analysis.
    Rather, the division checked that the district's reports had undergone a
    technical review, and that the district had issued a quality control
    certification report with the necessary district office-level approvals.
    The division then forwarded the project to headquarters. Corps
    headquarters also did not conduct a technical review of the analysis.
    Rather, headquarters checked that the district's report adhered to Corps
    policies for conducting a benefit-cost analysis and addressed any concerns
    headquarters had raised.

    These review processes, however, were ineffective in detecting and
    correcting the mistakes in the benefit analyses we identified. For
    example, for the 2002 study, we found no indication that the mistakes made
    in calculating the number and the value of residential properties or the
    mistake made in calculating flood damages were detected during the Corps'
    review process. For the 2002 analysis of the American River levee

    19See U.S. General Accounting Office, Delaware River Deepening Project:
    Comprehensive Reanalysis Needed, GAO-02-604 (Washington, D.C.: June 7,
    2002).

    improvements, a Corps economist from another district independently
    reviewed the benefits analysis. However, the review was not comprehensive
    enough to sufficiently identify methodological problems. The review
    primarily focused on process-oriented issues, such as assessing whether
    the Sacramento district conducted certain analyses, rather than examining
    the technical aspects of how the analyses should have been and were
    conducted.

    Conclusions	It is critical that decision making and priority setting be
    informed by accurate information and credible analysis. Reliable
    information from the Corps about the costs and benefits for the American
    River component of the Common Features Project has not been present to
    this point. The analysis on which Congress has relied contained
    significant mistakes. And of most relevance today, the analyses for the
    remaining work do not provide a reliable economic basis upon which to make
    decisions concerning the American River levee improvements authorized in
    the WRDA of 1999. To provide a reliable economic basis for determining
    whether these improvements are a sound investment, the Corps' analysis
    needs to adequately account for the risk that project costs could increase
    substantially, correctly count and value the properties the project would
    protect, and include information on the range of potential project costs
    and benefits.

    Moreover, because the Corps has not made some critical decisions regarding
    the Natomas Basin work, it is not yet known whether the Corps will be able
    to identify cost-effective flood protection options for this area.
    Specifically, the Corps has not determined whether it will (1) conduct a
    cost risk analysis of its current plan to identify its exposure to
    potentially significant cost increases or (2) evaluate the costs and
    benefits of alternatives to the current levee improvement plan to identify
    the most cost-effective flood protection option. In addition, identifying
    cost-effective flood protection involves reporting the range of potential
    project benefits and the probability of achieving them, which the Corps
    has not done for the Natomas Basin work. If the Corps begins implementing
    the authorized Natomas Basin work before it completes a comprehensive,
    accurate costbenefit analysis, significant unanticipated cost increases
    could materialize, as they did with the American River work. Finally, for
    Congress to have confidence that the Corps' economic analyses have been
    prepared accurately, the Corps' quality control process would need to be
    sufficiently independent and detailed to identify the types of mistakes
    that our review revealed.

    Recommendations for Executive Action

    For the American River levee improvements authorized in 1999 and for the
    planned Natomas Basin work, we recommend that the Secretary of the Army
    direct the Corps of Engineers to

    o 	determine whether it is appropriate to conduct risk analyses of project
    costs and document the basis for that decision in its project files;

    o 	report information to Congress on the range of potential project
    benefits and the probability of achieving those benefits, as called for in
    the Corps' guidance, in future benefit-cost analyses; and

    o 	arrange for a credible, independent review of the completeness and
    accuracy of the revised benefit-cost analyses.

    For the American River project component, we also recommend that the
    Secretary of the Army direct the Corps of Engineers to reanalyze the
    benefits of the improvements authorized in the WRDA of 1999, correcting
    for the mistakes made in counting and valuing properties and the
    inappropriate methodology used to calculate flood damages.

    Additionally, for the Natomas Basin project component, we recommend that
    the Secretary of the Army direct the Corps of Engineers to

    o 	analyze the costs and benefits of alternatives to the current levee
    improvement plan and identify the flood protection plan that provides the
    greatest net benefits and

    o 	submit a report to Congress that includes a cost estimate for all of
    the planned Natomas Basin work, and wait until Congress authorizes funding
    that is based on the report before beginning construction of any Natomas
    Basin levee improvements.

    Agency Comments and Our Evaluation

    We provided a draft of this report to the Secretary of the Army for review
    and comment. In commenting on the draft report, the Army concurred with
    all of our recommendations. Perhaps most significantly, the Army
    acknowledged that on the basis of the Corps' experience in constructing
    the American River levee improvements, there is a potential for
    substantial cost increases for the Natomas Basin levee improvements, and
    therefore the Corps needs to investigate a wider array of alternatives for
    providing flood protection for the Natomas Basin. In addition, although
    the Army

    concurred with our recommendation to reanalyze the benefits of the
    improvements added to the American River component of the project in 1999,
    it contended that the Corps has already completed the reanalysis. We
    disagree. In 2002, the Corps prepared an analysis of the economic benefits
    for the work added to the project in 1999. However, our review found
    several mistakes in this analysis, including mistakes in counting and
    valuing properties and using an inappropriate methodology to calculate
    flood damages. We continue to believe that before the Corps begins
    construction of the work added to the American River project component in
    1999, it should reanalyze this work to ensure it is cost beneficial.

    The Army stated that the report does not recognize the significant role
    Congress played in 1999 by adding additional work to the project and
    providing funds for construction before the Corps had developed reliable
    cost estimates, which created the situation of which our report is
    critical. By focusing its comment on the relatively small amount of work
    added in 1999, the Army avoided the main issues regarding the American
    River levee improvements discussed in our report. Specifically, that (1)
    the costs for the American River component of the project approved in 1996
    are more than triple the original estimate; (2) the Corps had information,
    before construction began, that should have alerted it that costs would
    likely increase greatly; and (3) the Corps should have communicated this
    information to Congress at that time, but it did not. Furthermore, the
    additional funding provided by Congress for the work authorized in 1999
    has not been used for that purpose, but rather has been used to fund the
    cost overruns for the work authorized in 1996. The full text of the Army's
    comments, and our responses to them, are presented in appendix III.

    As agreed with your offices, unless you publicly announce the contents of
    this report earlier, we plan no further distribution until 30 days from
    the date of this letter. At that time, we will send copies of this report
    to the appropriate congressional committees, other interested Members of
    Congress, and the Secretary of the Army. We also will make copies
    available to others upon request. In addition, the report will be
    available at no charge on the GAO Web site at http://www.gao.gov.

    If you, or your staff, have any questions about this report, please
    contact me at (202) 512-3841. Key contributors to this report are listed
    in appendix

    IV.

    Anu Mittal Director, Natural Resources and Environment

    Appendix I

    Scope and Methodology

    To determine the reasons for the cost increases for the Common Features
    Project, we obtained the key cost estimation documents prepared by the
    U.S. Army Corps of Engineers' (the Corps) Sacramento district office.
    Specifically, we obtained the Corps' 1996 Supplemental Information Report,
    American River Watershed Project; the 1997 Addendum to the Supplemental
    Information Report; the 2002 Second Addendum to the Supplemental
    Information Report; and other related documents. We reviewed the
    Supplemental Information Report, which examined a number of different
    flood protection alternatives, because it provided the foundation,
    including cost estimates, for the project elements that the Corps later
    grouped together as the Common Features Project. The Addendum to this
    report documented the Corps' first cost estimate that specifically and
    exclusively addressed the Common Features Project and included separate
    costs for both the American River component and the Natomas Basin
    component of the project. We reviewed the Second Addendum, the Corps' most
    current official cost estimate, to establish the amount of and the reasons
    for the increased costs. We also analyzed construction contracts to
    determine the cost of responding to accidents constructing the levee
    improvements authorized in 1996. We calculated the extent of inflation for
    both components of the project, using the Corps' Civil Works Construction
    Cost Index System and a cost index from the Office of Management and
    Budget. Finally, we discussed the reasons for the cost increases with
    economists, cost estimators, project managers, engineers, and other staff
    from the engineering, constructions operations, and planning divisions of
    the Corps' Sacramento district office.

    To determine whether the Corps analyzed the likelihood of significant cost
    increases for the project and reported them to Congress in a timely
    manner, we reviewed the Corps' (1) policy regarding the use of cost risk
    analysis in estimating costs for civil works projects (Engineer Regulation
    1110-2-1302) and (2) requirements for updating project cost estimates and
    informing Congress of cost increases (Engineer Regulation 1105-2-100). We
    also reviewed a document from the Corps' Institute for Water Resources on
    incorporating risk and uncertainty into cost estimation. We examined the
    American River levee improvement construction contracts to determine when
    the Corps became aware of cost increases for this component of the
    project. In addition, we reviewed the Corps' annual budget documents
    related to the Common Features Project, which contained information on the
    project's status and any changes or cost increases. We examined the Corps'
    cost estimates from 1996, 1997, and 2002 for compliance with relevant
    Corps cost estimating guidance and to determine if the Corps provided
    Congress with accurate information about significant expected

    Appendix I
    Scope and Methodology

    cost increases. Finally, we discussed the Corps' cost estimating
    procedures and awareness of likely cost increases with cost estimators,
    project managers, and other staff from Corps headquarters and the
    Sacramento district office.

    To determine whether the Corps correctly estimated the economic benefits
    of the American River levee improvements, we reviewed the extent to which
    the Corps followed accepted economics practices and whether the major
    assumptions used in the analysis were reasonable and well supported. We
    obtained the Corps' 1996, 1997, and 2002 economic analyses for the Common
    Features Project and discussed the sources of these data and conduct of
    the analyses with the Corps economists responsible for preparing them. We
    also discussed the basis for the hydrologic and engineering assumptions
    used in the economic analysis with the Corps specialists who provided this
    information. In addition, we obtained the Corps' guidance (Engineer
    Regulations 1105-2-100 and 1105-2-101 and Engineer Manual 1110-2-1619) on
    the accepted economic and engineering methodologies for incorporating risk
    and uncertainty into benefit estimation. To verify and supplement the
    information we received from officials in the Corps' Sacramento district
    office, we spoke with, among others, Corps officials at the Hydrologic
    Engineering Center and the Institute for Water Resources and experts in
    real estate appraisal from the Appraisal Foundation and the The Appraisal
    Institute. Where we identified problems that affected the accuracy of the
    benefit analysis, we discussed them with the responsible Corps staff and
    considered any new data or revisions that they provided. Finally, we
    identified the roles and responsibilities of the Sacramento district
    office, South Pacific division, and headquarters in the Corps' internal
    quality control process for the Common Features Project. We also obtained
    copies of the quality control reviews and the reviewers' comments on the
    economic analysis and discussed the comments and their resolution with
    Corps officials.

    We conducted our review from September 2002 through September 2003 in
    accordance with generally accepted government auditing standards.

    Appendix II

                        Conversion of Costs to Constant Dollars

    In this report, unless otherwise noted, we present costs in the dollar
    values for the years in which they were estimated, not in constant
    dollars. For example, the Corps estimated the original cost of the project
    as $57 million in 1996, and that is how we present it in this report. We
    did not adjust the costs to constant dollars to account for inflation to
    maintain consistency with the figures in published Corps reports on the
    Common Features Project. However, table 3 shows the Corps' 1996 cost
    estimates for key components of the Common Features Project and also shows
    the same estimates adjusted to 2002 constant dollars to account for
    inflation.

    Table 3: Common Features Project's Cost Estimates in Original 1996 Dollars
    and in Adjusted 2002 Dollars

                                  Dollars in millions

                                Common Features Project

                                         Amount authorized in 1996 (1996 dollars)

                                   Amount authorized

    in 1996

    plus inflation

    (2002 dollars)

                                American River component

                                     Levee improvements     $30               $33
                      Planning, design, and other costs      14
                                               Subtotal     $44               $51
                                Natomas Basin component      13
                                                  Total     $57               $66

               Source: GAO analysis of U.S. Army Corps of Engineers data.

                                      Appendix III

                        Comments from the Department of the Army

    Note: GAO comments supplementing those in the report text appear at the
    end of this appendix.

    Now GAO-04-30.

    Appendix III
    Comments from the Department of the Army

                                     Now GAO-04-30.

                                     See comment 1.

                                     See comment 2.

                                     See comment 3.

                                     See comment 4.

    Appendix III
    Comments from the Department of the Army

                                     See comment 5.

                                     See comment 6.

    Appendix III
    Comments from the Department of the Army

                                     See comment 7.

    Appendix III
    Comments from the Department of the Army

                             See comment 8. See comment 9.

    Appendix III
    Comments from the Department of the Army

                                    See comment 10.

                            See comment 11. See comment 12.

                                      Appendix III
                        Comments from the Department of the Army

    GAO Comments 	The following are GAO's comments on the Department of the
    Army's letter dated September 22, 2003.

    1.

    2.

    3.

    4.

      Although the Army asserted that we made some factual errors, its subsequent
                comments failed to identify any specific factual errors.

    The Army believes that the report does not recognize the significant role
    Congress played in 1999 when it added additional work to the project and
    authorized funds for construction before the Corps had developed reliable
    cost estimates. While the Congress did add work to the Common Features
    Project in the Water Resources Development Act (WRDA) of 1999 without a
    Corps report, the cost of this work is relatively small in comparison to
    the work authorized in 1996. We believe the Army's comment is not relevant
    to the main focus of our report, which is the significant cost increases
    for the work the Corps recommended and the Congress authorized in 1996.
    For example, the costs for the work the Corps recommended on the American
    River more than tripled from $44 million in 1996 to $143 million in 2002.
    In contrast, the estimated cost for the work on the American River levees
    the Congress added in 1999 is about $15 million. We believe our report
    accurately reflects the limited impact the addition of work in 1999 had on
    the American River component of the project's overall cost. Furthermore,
    the additional funding provided by Congress for the work authorized in
    1999 has not been used for that purpose, but rather has been used to fund
    the cost overruns for the work authorized in 1996.

    The Army stated that the consistent provision of funds to the Corps by
    Congress, at or exceeding the Corps' budget request, created the situation
    of which our report is critical. We do not agree. Two of the main issues
    in our report are that the costs of the American River component of the
    project nearly tripled due to design changes, and that the Corps began
    construction of the American River levee improvements without analyzing
    the likelihood of these cost increases or reporting the potential cost
    increases to Congress. The fact that Congress provided funding for the
    project does not absolve the Corps of its responsibility to communicate
    project cost increases in a timely manner.

    The Army implied that Congress was informed of potential cost increases
    for the Common Features Project during the yearly appropriations process.
    This is not the case on the basis of our review

    Appendix III
    Comments from the Department of the Army

    of all of the Corps' submissions for the annual appropriations process
    from 1997 through 2001. As our report states, it was not until February
    2002, more than 4 years after it had significantly modified the design of
    the American River levee improvements, that the Corps informed Congress
    for the first time of the significant cost increases for the American
    River component of the project.

    5.	The Army stated that the levee improvements were not originally
    designed to withstand the destructive effect of seepage and that this
    design was not an error. Rather, an unknown condition (i.e., the potential
    for destructive seepage under the levees) resulted in design changes and
    increased costs. Our report does not criticize the Corps for not
    anticipating the need for a levee improvement design that would stop
    seepage under the levees. We acknowledge that the flood of January 1997
    caused the Corps to change the design of its levee improvements. However,
    as our report notes, the Corps did not develop new cost estimates after
    making these design changes and did not communicate the resulting
    significant cost increases to Congress in a timely manner.

    6.	We do not consider the separable elements of the Common Features
    Project as separate projects. This report makes clear that there is one
    Common Features Project comprised of an American River component and a
    Natomas Basin component.

    7. We agree with the Army that, in 1996, the Corps was not aware of any
    significant areas of cost uncertainty for the proposed American River
    levee improvements. However, as the Army recognizes, the flood of January
    1997 showed that the Corps' design for the levee improvements should be
    significantly modified. After making these design changes, though, the
    Corps did not estimate the potential for cost increases due to tripling
    the depth of some cut-off walls or closing the gaps in cut-off walls at
    bridges and other areas. These design changes eventually added $76 million
    to the cost of the project.

    8. The Army stated that the Corps believes that its review process results
    in decision documents that form the basis for sound recommendations.
    However, in two recent cases, we found that the process did not serve its
    intended purpose. As this report documents, the Corps' review process was
    ineffective in detecting and correcting the mistakes in the benefit
    analyses we identified. We raised similar concerns about the

    Appendix III
    Comments from the Department of the Army

    review process in our June 2002 report on the Delaware River Deepening
    Project.

    9.	We did not recommend that the Corps reanalyze the costs and benefits of
    the work authorized in 1996. We agree that a reanalysis of this work,
    which is nearly complete, would be of little value. However, we continue
    to believe that a reanalysis of the economic benefits from the work
    authorized in 1999 is necessary because the Corps' initial analysis
    contained significant mistakes and construction of the work has not yet
    begun. Before beginning construction of this work, the Corps should verify
    that the work is in fact cost beneficial. In addition, the Corps should
    arrange for a credible, independent review of the completeness and
    accuracy of its reanalysis.

    10. The Army contends that the Corps has already completed the reanalysis
    we recommended of the work added to the American River component of the
    project in 1999. We disagree. The Corps analyzed the economic benefits for
    the 1999 work added to the project for the first and only time in 2002.
    Our review found several problems with the Corps' 2002 analysis of the
    benefits from this work. For example, we found that the Corps had made
    mistakes in how it counted and valued properties and had used an
    inappropriate methodology to calculate flood damages. As a result, the
    Corps has not yet prepared an accurate assessment of the benefits
    resulting from the 1999 work. The Corps has not begun any construction for
    the work authorized in 1999, and it is not currently known if the benefits
    provided by this work are greater than the costs. Consequently, we
    recommend a reanalysis of these benefits in order to correct the mistakes
    that we identified.

    11. The Army stated that the Corps does not conduct individual real estate
    appraisals to determine the value of each property that could be damaged
    in a flood. Our report does not suggest that the Corps should conduct such
    appraisals. Rather, we identified weaknesses in the sample the Corps used
    to estimate property values and its methodology for calculating
    depreciation for the properties in the sample. For example, to accurately
    appraise a large number of properties by sampling requires a separate
    sample for each residential property type, such as single-family homes and
    apartment buildings. However, the Corps sampled all property types
    together. In addition, the Corps did not use a consistent objective
    appraisal methodology to calculate depreciation for the properties in the
    sample. These weaknesses raise

    Appendix III
    Comments from the Department of the Army

    questions about the accuracy of the Corps' property value estimates and
    the project benefit estimates that are, in part, based on them.

    12. The Army claims that there are approximately 163,000 residential
    structures in the 400-year floodplain. This is not correct on the basis of
    the Corps' most current analysis. The estimate of 163,000 residential
    structures comes from the Corps' 1996 economic analysis. However, in 2002,
    the Corps updated its analysis and found that it had overestimated the
    number of residential structures in 1996. The Corps' 2002 analysis
    estimated that there were 115,347 residential structures in the 400-year
    floodplain.

    Appendix IV

                         GAO Contact and Staff Acknowledgments

                         GAO Contact Anu Mittal, (202) 512-3841

    Staff 	In addition to the individual above, Jeff Arkin, Chuck Barchok,
    Judy Hoovler, Richard Johnson, Mark Metcalfe, Ryan Petitte, and Stephen

    Acknowledgments Secrist made key contributions to this report.

    (360273) Page 42

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