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						 
                                                                 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
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 [email protected].

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

GAO's Mission	The General Accounting Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

Obtaining Copies of GAO Reports and Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost
is through the Internet. GAO's Web site (www.gao.gov) contains abstracts
and fulltext files of current reports and testimony and an expanding
archive of older products. The Web site features a search engine to help
you locate documents using key words and phrases. You can print these
documents in their entirety, including charts and other graphics.

Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document files.
To have GAO e-mail this list to you every afternoon, go to www.gao.gov and
select "Subscribe to e-mail alerts" under the "Order GAO Products"
heading.

Order by Mail or Phone	The first copy of each printed report is free.
Additional copies are $2 each. A check or money order should be made out
to the Superintendent of Documents. GAO also accepts VISA and Mastercard.
Orders for 100 or more copies mailed to a single address are discounted 25
percent. Orders should be sent to:

U.S. General Accounting Office 441 G Street NW, Room LM Washington, D.C.
20548

To order by Phone: 	Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

To Report Fraud, 	Contact: Web site: www.gao.gov/fraudnet/fraudnet.htm

Waste, and Abuse in E-mail: [email protected]

Federal Programs Automated answering system: (800) 424-5454 or (202)
512-7470

Public Affairs	Jeff Nelligan, Managing Director, [email protected] (202)
512-4800 U.S. General Accounting Office, 441 G Street NW, Room 7149
Washington, D.C. 20548

                               Presorted Standard
                              Postage & Fees Paid
                                      GAO
                                Permit No. GI00

United States
General Accounting Office
Washington, D.C. 20548-0001

Official Business
Penalty for Private Use $300

Address Service Requested
*** End of document. ***