[Audit Report on the Guam Mass Transit Authority, Government of Guam]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 97-I-241

Title: Audit Report on the Guam Mass Transit Authority, Government
       of Guam

Date: March 31, 1997



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Acquisition and Management Operations at (202) 208-4599.
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United States Department of the Interior
OFFICE OF INSPECTOR GENERAL
Washington, D.C. 20240

MEMORANDUM

TO:

FROM:

SUBJECT SUMMARY:  Final Audit Report for Your Information - "Guam
Mass Transit Authority, Government of Guam" (No. 97-I-241 )

Attached for your information is a copy of the subject final audit
report. The objective of the audit was to determine whether the
Guam Mass Transit Authority acquired, protected, and used resources
economically and efficiently and conducted its operations in
accordance with applicable laws and regulations.

We found that the Authority had taken action to improve financial
controls, reduce operating
costs, and increase revenues. However, we also found that the
Authority: (1) issued contracts
in which contractors were compensated on a cost plus a percentage
of cost basis; (2) incurred
and paid costs before contracts were approved; (3) issued purchase
orders on a
noncompetitive basis; (4) issued contracts to companies that
employed immediate family
members of Authority procurement officials; and (5) did not comply
with the staffing level
authorized by the Legislature. In addition, the Authority had not
ensured that: (1)
contractors' invoices included only supported costs that were in
compliance with contract
terms; (2) contractors' costs were within their approved budgets;
and (3) the maintenance and
repair contractor maintained an adequate number of buses to meet
the Authority's service
needs. These conditions occurred because the Authority had not
developed and implemented
procurement and contract oversight procedures. In addition, the
former Board of Directors
had not provided adequate oversight and control over Authority
management. As a result,
during fiscal years 1993, 1994, and 1995, the Authority incurred
questioned costs of about
$5 million.

Based on the Authority's response and documents subsequently
provided, we considered all
of the report's recommendations resolved and implemented.

If you have any questions concerning this matter, please contact
Mr. Robert J. Williams,
Assistant Inspector General for Audits, at (202) 208-5745.

Attachment





N-IN-GUA-005-95
United States Department of the Interior
    OFFICE OF INSPECTOR GENERAL
         Washington, D.C. 20240

Mr. Gerald Taitano
President, Board of Directors
Guam Mass Transit Authority
236 East O'Brien Drive
Agana, Guam 96910

Subject: Audit Report on the Guam Mass Transit Authority,
Government of Guam (No. 97-I-241)

Dear Mr. Taitano:

This report presents the results of our review of the Guam Mass
Transit Authority. The
objective of the review was to determine whether the Authority: (1)
acquired, protected, and
used resources economically and efficiently and (2) conducted its
operations in accordance
with applicable laws and regulations. Our review covered the
activities of the Authority that
occurred during fiscal years 1993, 1994, and 1995.

We found that, during fiscal year 1995, the Authority had taken
action to improve financial
controls, reduce operating costs, and increase revenues. As a
result of these actions, the
Authority: (1) reduced its annual operating losses by $0.4 million
from fiscal years 1994 to
1995, primarily by reducing expenditures; (2) issued a contract to
generate revenue by selling
advertising space on Authority property; and (3) improved transit
services by improving
vehicle maintenance. These actions are detailed in the Background
section of this report.

However, we also found that the Authority: (1) issued contracts in
which contractors were
compensated on a cost plus a percentage of cost basis; (2) incurred
and paid costs before
contracts were approved; (3) issued purchase orders on a
noncompetitive basis; (4) issued
contracts to companies that employed immediate family members of
Authority procurement
officials; and (5) did not comply with the staffing level
authorized by the Legislature. In
addition, the Authority had not ensured that: (1) contractors'
invoices included only
supported costs that were in compliance with contract terms; (2)
contractors' costs were
within their approved budgets; and (3) the maintenance and repair
contractor maintained an
adequate number of buses to meet the Authority's service needs.

These conditions occurred because the Authority had not developed
and implemented
procedures to ensure: (1) its compliance with Federal and Guam
procurement laws and
regulations and (2) contractor compliance with contract terms. In
addition, the former Board
of Directors had not provided adequate oversight and control over
Authority management.
As a result, during fiscal years 1993, 1994, and 1995, the
Authority did not obtain surcharge
revenues of about $6.8 million; lost advertising revenues estimated
at $73 5,000; and incurred
questioned costs of about $5 million.

 
Wilma A. Lewis
Inspector General

cc: General Manager, Guam Mass Transit Authority

 
INTRODUCTION

BACKGROUND

The Guam Mass Transit Authority was established on July 1, 1977, by
Title 12,
Chapter 6, of the Guam Code Annotated and was granted the exclusive
franchise to
establish, develop, promote, and/or operate public transportation
systems in order to
provide adequate public transportation for persons residing or
working on Guam. The
Authority is governed by a five-member Board of Directors appointed
by the Governor
and confirmed by the Legislature. The Authority issues and monitors
contracts for
operations of the Guam Public Transit system, which provides both
regularly scheduled
and on-request transit services to the public, and the Guam
Para-Transit system, which
provides transit services to individuals with disabilities.

The Authority's activities are accounted for as an enterprise fund,
and it has maintained
its own accounting functions since August 3, 1990. The Authority's
financial statements
reported that, despite subsidies from the Government of Guam's
General Fund totaling
$6 million and Federal grant contributions totaling $1.1 million
for fiscal years 1993
through 1995, the Authority had a cumulative net loss of $1.5
million as follows:

*U. S. Department of Transportation and U.S. Department of Energy
grants.

**Total revenues do not agree with those shown in the single audit
reports for fiscal years 1993 and 1994 because we had access to
and included information in the Guam Energy Office's records that
was unavailable to the independent public accountant.

The single audit report for fiscal year 1994 stated that the
Authority's assets included cash
and accounts receivable of $92,232 and property, plant, and
equipment (primarily
vehicles) of $1,996,370. At September 30, 1995, the Authority had
9 employees, and
Authority contractors had 58 employees.

1

 
Title 49, Part 18, of the Code of Federal Regulations (known as the
"Common Rule")
contains the requirements for administering the Federal grants. In
addition, other
requirements applicable to the Authority's operations are contained
in Federal grant
agreements; Title 5, Chapter 5, of the Guam Code Annotated;
procurement regulations
issued by Guam's General Services Administration; and the terms and
conditions of the
Authority's various service contracts.

Beginning in January 1995, when a new Board of Directors was
appointed, the Guam
Mass Transit Authority began improving its financial management and
the economy and
efficiency of its operations. As a result, the Authority: (1)
reduced its annual net loss by
67 percent (from $561,987 to $183,937) from fiscal years 1994 to
1995; (2) reduced its
fiscal year 1995 operating expenditures (as compared to those of
fiscal year 1994) by
$470, 101; (3) improved transit operations by increasing the number
of available operating
buses; and (4) should begin receiving thousands of dollars of
advertising revenues and
millions of dollars of Mass Transit Automotive Surcharge revenues.
The new Board has
taken the following actions:

  - Although the Authority's prior Board of Directors had not
adopted complete
budgets for fiscal years 1993, 1994, and 1995, the new Board
adopted, in July 1995, a
fiscal year 1995 budget and then, before the start of fiscal year
1996, adopted the
Authority's fiscal year 1996 budget. In addition, the Authority:
(1) developed and began
to implement controls over the Authority's personal property; (2)
enforced contract
provisions requiring support for all contractor invoices submitted
for payment; and (3)
contracted with an independent public accounting firm to analyze a
contractor's invoices,
including outstanding billings of $71,684, before authorizing
payment.

  - The Authority terminated an expensive and ineffective
maintenance and repair
contract, obtained a Mechanic Supervisor from the Department of
Public Works and
several mechanics in training from the Guam Community College to
provide vehicle repair
and maintenance services, and renegotiated an expensive transit
service contract.
Although we did not determine all of the reasons for the $470,101
reduction in operating
expenditures from fiscal years 1994 to 1995, we did estimate that
the Authority saved
$142,566 with more efficient and effective vehicle maintenance and
repair and $88,200
by renegotiating the transit service contract. Also, between
January and December 1995,
the Authority increased the average number of transit vehicles
available for operations by
over 100 percent, from 10 vehicles to 23 vehicles, which resulted
in improved public
transit services.

  - On December 27, 1995, the Governor signed a contract,
negotiated by the
Authority, to sell advertising space on Authority property.
However, the Authority had
delayed issuing a contract for more than 2 years since the
September 29,1993, effective
date of the authorizing law. This delay cost the Authority an
estimated $745,935, the total
of the estimated advertising revenues included in the proposed
budgets for fiscal years
1994 and 1995. As a result of the new contract, the Authority
anticipates collecting
additional revenues of $75,000 in fiscal year 1996.

2

 
  - Based on a March 26, 1996, memorandum from Guam's Attorney
General
responding to the Authority's questions on legal issues relating to
the Mass Transit

Transit Automotive Surcharge revenues collected by the Department
of Administration
during fiscal years 1993, 1994, and 1995 but not released to the
Authority. The primary
issue under dispute was whether Title 5, Section 1504(d), of the
Guam Code Annotated
pledged the transit surcharge revenues for the repayment of any
Guam bond. The
Authority and the Department of Administration disagreed on this
issue; however, based
on the memorandum, Authority officials said that they hope to gain
access to the funds for
use in transit operations.

OBJECTIVE AND SCOPE

The objective of our review was to determine whether the Authority:
(1) acquired,
protected, and used its resources economically and efficiently and
(2) conducted its
operations in accordance with applicable laws and regulations. The
scope of the audit
initially included fiscal years 1994 through 1995; however, we
expanded the scope to
include fiscal year 1993 in order to evaluate management actions
taken during that fiscal
year which significantly affected Authority operations that
occurred during fiscal years
1994 and 1995.

Our audit was conducted at the Authority's offices from June 1995
to February 1996. To
conduct our audit, we obtained information from Government of Guam
officials of the
Departments of Administration, Revenue and Taxation, and Law; the
Bureau of Budget
and Management Research; the Guam Energy Office; the Guam Public
Auditor; and the
Guam Legislature. We also contacted officials of the U.S.
Department of Transportation
and the Authority's independent public accountants. To accomplish
our objective, we
reviewed, for the period of October 1, 1992, to September 30, 1995,
the following items
maintained by the Authority and its contractors: personnel,
procurement, and contract
records; Board minutes; correspondence; and accounting records. We
also reviewed
applicable laws, regulations, and operating procedures related to
contracting for and
administering public transit services. However, our audit scope was
limited because the
Authority's and the contractor's accounting records were
incomplete.

The audit was conducted, as applicable, in accordance with the
"Government Auditing
Standards, " issued by the Comptroller General of the United
States. Accordingly, we
included such tests of records and other auditing procedures that
were considered
necessary under the circumstances.

As part of the audit, we evaluated the system of internal controls
in the areas of revenue
collection, procurement, contract monitoring, and property
management to the extent that
we considered necessary to accomplish the audit objective.
Significant internal control
weaknesses were identified in all areas except revenue collection
(excluding bus fare
collections discussed in the Prior Audit Coverage section of this
report) and property
management, for which the Authority had taken effective remedial
action.  These

3

 
weaknesses are discussed in the Findings and Recommendations
section of this report.
Our recommendations, if implemented, should improve the internal
controls in these areas.

PRIOR AUDIT COVERAGE

During the past 5 years, neither the U.S. General Accounting Office
nor the Office of
Inspector General has issued any audit reports concerning the
Authority. However, an
independent public accounting firm issued single audit reports on
the Authority's
operations for fiscal years 1990 through 1994. The audits stated
the following: (1) bus
fare collection controls were inadequate; (2) the fixed asset
register had not been updated
since September 30, 1991; (3) a physical inventory of fixed assets
(except for vehicles) had
not been taken for fiscal years 1993 and 1994; (4) insurance
services were procured
improperly; (5) contractor invoices did not have adequate
supporting documentation; (6)
annual leave taken was inappropriately included as a contract
expense; and (7) financial
status reports were not prepared and submitted in a timely manner.
In addition, the fiscal
year 1990 single audit report noted that the Authority had not
implemented a general
ledger accounting system and did not have an accounting system
capable of producing an
annual financial statement.

Based on our review, we determined that, as of January 31, 1996,
satisfactory corrective
action was taken on or was in progress on the reported findings
except for the areas of fare
collections and the accounting system. Specifically, the Authority
did not have: (1) an
effective method to ensure that the public transit contractor
collected and transferred all
fares to the Authority and (2) a budgetary and accrual accounting
system capable of
generating timely and accurate financial statements. Regarding the
accounting system
deficiencies, the Authority, during fiscal years 1993 and 1994,
acquired and initiated the
installation of an automated accounting system software package.
However, in fiscal year
1995, the Authority's General Manager determined that the
accounting software package
was inadequate and stopped the installation effort pending
selection of another accounting
software package.

4

 
FINDINGS AND RECOMMENDATIONS

A. PROCUREMENT

The Guam Mass Transit Authority did not conduct its procurements
effectively and in
accordance with Guam law and Federal regulations. Specifically, the
Authority: (1) issued
contracts in which contractors were compensated on a cost plus a
percentage of cost basis;
(2) incurred and paid costs before contracts were approved; (3)
issued purchase orders on
a noncompetitive basis; (4) issued contracts to companies that
employed immediate family
members of Authority procurement officials; and (5) did not comply
with the staffing level
authorized by the Legislature. The Guam Code Annotated and Federal
regulations specifiy
procedures to be followed when issuing procurement contracts.
However, the Authority
had not ensured compliance with these procedures, and the
Authority's Board of Directors
had not provided adequate oversight and control over management. As
a result, we
questioned costs of approximately $5 million that the Authority
incurred for contracts
issued during fiscal years 1993, 1994, and 1995.

Contracts

During fiscal years 1993, 1994, and 1995, the Authority issued
and/or amended eight
service contracts, totaling $7,605,794. We reviewed the procurement
actions for four of
these contracts, totaling $7,441,659, and found that the Authority
had not issued and/or
administered three of the four contracts in accordance with
applicable laws and
regulations. Specifically, the Authority issued three contracts
that: (1) stated that the three
contractors would be paid on a cost plus basis1and (2) authorized
the contractors to begin
work about 5 months before either the contract was signed or
contract amendments that
established payment terms were approved. In addition, during
calendar year 1995, one
of the three contracts was amended three times, but the cost plus
provisions were not
revised. The Code of Federal Regulations (49 CFR 18.36(f)(4)) and
Title 5, Section 5235,
of the Guam Code Annotated prohibit the use of cost plus a
percentage of cost contracts.
In addition, Title 5, Section 22601, of the Guam Code Annotated
prohibits contract costs
from being incurred before a contract is approved. According to
Authority officials and
Board minutes, the cost plus contracts were issued in an attempt to
reduce operating costs.
Authority officials also stated that management was not aware that
cost plus contracts were
prohibited and that they relied on the Bureau of Budget and
Management Research and the
Attorney General's Office to review the contracts for
improprieties.

On June 22, 1994, the General Manager notified the Board that the
cost plus contracts
were improper and stated that this issue would be addressed when
new contracts or
amendments were negotiated. During January 1993 through October
1995, the Authority

1The contracts provided that each contractor would be reimbursed
for actual salaries and wages of personnel
listed in an approved staffing pattern plus 10 percent of such
salaries and wages.

5

 
incurred questioned costs of $4,908,164 with the cost plus
contracts, including $722,899
that was paid to the contractors before the three contracts were
approved by the Governor.
For example, on February 22, 1993, at the General Manager's
direction, a contractor
began to perform maintenance and repair on Authority vehicles.
However, the contractor
and the Authority's General Manager did not sign the contract until
April 20, 1993, and
the Governor did not sign the contract until July 13, 1993. In
addition, the maintenance
and repair contract provided not only for reimbursement of salaries
and wages plus
10 percent but also for reimbursement to the contractor for all
expenditures necessary to
service the Authority's vehicles. Between March 5, 1993, and
January 27, 1995, the
Authority paid the contractor $1,330,143.

The Authority terminated the cost plus contract for vehicle
maintenance and repair on
February 28, 1995, and then entered into a memorandum of
understanding with Guam's
Department of Public Works to maintain the Authority's vehicles,
Regarding the other
two cost plus contracts, the Authority issued new (non-cost plus)
contracts: the first on
December 30, 1994, and the second on December 19, 1995.

Purchase Orders

During fiscal years 1993, 1994, and 1995, the Authority issued 363
purchase orders,
totaling $643,002. We reviewed the procurements for 37 of the
purchase orders, totaling
$172,133, and found that the Authority had not issued 12 of the
purchase orders, totaling
$54,724, in accordance with applicable laws and regulations.
Specifically, the Authority
did not comply with the competitive bidding requirements of Guam
law, in that it issued
multiple purchase orders for $5,000 and below that amount to the
same vendor. Title 5,
Section 5213, of the Guam Code Annotated states that "procurement
requirements shall
not be artificially divided so as to constitute a small purchase,
" which, according to
Guam's General Service Administration Procurement Regulations
3-204.01, are
"established for procurements of less than $5,000 for supplies and
services. " As a result,
the Authority could not ensure that full value was received for
$54,724 expended for
services during fiscal years 1993, 1994, and 1995.

For example, during fiscal years 1993, 1994, and 1995, the
Authority issued, without
competition, 12 purchase orders for amounts of $5,000 or less to
one nonprofit
organization for bus washing and cleaning services. The Authority's
Administrative
Officer said that competition was not required because the purchase
orders were issued to
a nonprofit organization. Title 5, Chapter 5, Section 5001(d), of
the Guam Code
Annotated states, "If any entity of the government of Guam . . .
intends to procure any
supply or service which is offered by a nonprofit corporation . .
. or a government of
Guam entity employing sheltered or handicapped workers then that
entity shall procure
such supply or service from that nonprofit corporation or
government entity. " However,
Section 5001(d) does not waive the requirements for competitive
procurement among
qualifying nonprofit corporations and governmental entities, and we
found no indication
that the Authority had sought bids from other Guam nonprofit
organizations. Based on
the Guam Code Annotated, we believe that the Authority should have
used competitive

6

 
procurements for the following 12 purchase orders: 3 purchase
orders, totaling $12,624,
issued in fiscal year 1993; 5 purchase orders, totaling $22,500,
issued in fiscal year 1994;
and 4 purchase orders, totaling $19,600, issued in fiscal year
1995.

Possible Conflicts of Interest

During fiscal years 1993 and 1994, Authority contractors employed
immediate relatives
of two Authority employees who had procurement responsibilities.
Title 5, Section
5628(a), of the Guam Code Annotated states, "It shall be a breach
of ethical standards for
any employee to participate directly or indirectly in a procurement
when the employee
knows that: (1) the employee or any member of the employee's
immediate family has a
financial interest pertaining to the procurement; . . . or (3) any
other person, business or
organization with whom the employee or any member of the employee's
immediate family
is negotiating or has an arrangement concerning prospective
employment is involved in the
procurement. " In addition, Part II, Sections 103a(l)(b) and (d),
of the U.S. Department
of Transportation's Federal Transit Administration Agreement with
the Authority requires
the Authority to prohibit any "employee, officer, board member, or
agent of the [grant]
Recipient [to] . . . participate in the selection, award, or
administration of a contract
supported by Federal funds if a real or apparent conflict of
interest would be involved.
Such a conflict would arise when any of the parties set forth below
has a financial or other
interest in the firm selected for award: . . . [the "parties"
include] . . . (b) Any member
of his or her immediate family; . . . or (d) An organization that
employs, or is about to
employ, any of the above, " Further, Title 5, Section 5650(c), of
the Guam Code
Annotated states, "The value of anything received by an employee in
breach of the ethical
standards of this Chapter or regulations promulgated hereunder
shall be recoverable by the
Territory as provided in 5652 of this Chapter. " Title 5, Section
5652(a), states, "The
value of anything transferred or received in breach of the ethical
standards of this Chapter
or regulations promulgated hereunder by an employee or non-employee
may be recovered
from both the employee and non-employee. " Based on these
guidelines, we questioned
$98,117 (consisting of $14,599 for fiscal year 1992 and $83,5182
for fiscal years 1993 and
1994) that the Authority paid the contractor for the relatives of
the Authority employees.

Between October 1, 1991, and May 14, 1994, the public transit
contractor and then the
maintenance and repair contractor employed an immediate family
member of a member
of the Authority's staff. In addition, between April 4, 1993, and
May 28, 1994, the
maintenance and repair contractor employed an immediate family
member of another
member of the Authority's staff. Although we were unable to talk to
one of the two
Authority employees because the individual was no longer employed
by the government,
we were able to talk with the other employee, who stated that she
did not believe there was
a conflict because the immediate family members were not directly
supervised by
Authority personnel. The former Board President stated that the
Board was not aware of
this conflict until May 1994 and that both contractor employees
were subsequently

2This amount is included in the total questioned costs of the cost
plus contracts.
              7

 
terminated. The President of the public transit contractor said
that an Authority employee,
in 1991, requested that the President hire an individual whom he
subsequently found to
be the employee's immediate relative and that he could not fire the
relative because he
"feared retribution. " From October 1991 to May 1994, the Authority
indirectly (through
the contractors) paid the two immediate family members a total of
$90,847 and paid the
maintenance and repair contractor an additional $7,270 in
accordance with the 10 percent
cost plus provision of the contract.

Staffing

During fiscal years 1993 and 1994, the Authority directed one of
its contractors to hire
three persons to perform services for the Authority, not for the
contractor. Title 5,
Sections 22401(a)(l) and (4), of the Guam Code Annotated prohibits
governmental
officials from authorizing expenditures and employing personnel
except as authorized by
law. The minutes of the April 20, 1994, Board of Director's meeting
state, "[The
Authority's General Manager] stated that this [compensating the
three individuals] is
because he needs them internally because BBMR [the Bureau of Budget
and Management
Research] will not give him the positions that he needs. " The
Bureau of Budget and
Management Research would not authorize the Authority to hire
additional staff,
apparently because the positions were not in the staffing pattern
approved by the
Legislature. As a result, we questioned costs of $89,1273 that the
Authority incurred for
the three employees.

Conclusion

In our opinion, the Board could have corrected the procurement
deficiencies pertaining to
the cost plus contracts at least 6 months earlier than they were
corrected. The former
President of the Board of Directors stated that he agreed, in
retrospect, that the Board
should have acted to correct the serious procurement problems when
it became aware of
them in 1994 (see Appendix 2). However, he said that the Board, at
the time, was not
clear as to its authority and ability to correct the problems when
the General Manager did
not act to correct them. In addition, both the former and the
current Board Presidents
stated that the Boards had not obtained or developed meaningful
guidance for Board
members on the Boards' responsibilities and authority.

Recommendations

We recommend that the Guam Mass Transit Authority Board of
Directors instruct the
General Manager to:

3This amount is included within the total questioned costs of the
cost plus contracts.
               8

 
  1. Advise the U.S. Department of Transportation, Region IX, and
the U.S.
Department of Energy, Region IX, of the questioned costs charged to
the Federal grants
and either resolve the questioned costs or arrange for repayment.

  2. Ensure that procurement actions are conducted in accordance
with Title 49,
Part 18, of the Code of Federal Regulations; the Federal Transit
Administration
Agreement; and Title 5 of the Guam Code Annotated.

  3. Request the Attorney General of Guam to determine whether
members of the
Authority's former management violated the conflict-of-interest
provisions of Title 5,
Section 5628(a), of the Guam Code Annotated. If the law was
violated, a determination
should be made as to whether the Authority has a legal basis to
seek the recovery of the
funds paid to relatives of Authority management officials in
accordance with Title 5,
Sections 5650(c) and 5652(a), of the Guam Code Annotated.

We recommend that the Guam Mass Transit Authority Board of
Directors:

  4. Obtain or have developed a handbook with guidelines on the
duties and
responsibilities of members of the Board of Directors and provide
a copy to each Board
member.

Guam Mass Transit Authority Response and Office of Inspector
General
Reply

The September 25, 1996, response (Appendix 4) from the General
Manager, Guam Mass
Transit Authority, concurred with all of the recommendations and
included a copy of
Resolution 96-01, approved on September 10, 1996, which stated that
all of the
recommendations had been adopted by the Authority's Board of
Directors. Based on the
response, we consider all of the recommendations resolved and
implemented (see
Appendix 5).

9

 
B. CONTRACT ADMINISTRATION

The Guam Mass Transit Authority did not administer its transit
service contracts
effectively. Specifically, the Authority did not ensure that: (1)
contractors' invoices
included only supported costs that were in compliance with contract
terms; (2) contractors
stayed within their approved budgets; and (3) the maintenance and
repair contractor
maintained an adequate number of buses to meet the Authority's
service needs. The Guam
Code Annotated and a Federal Agreement establish the general need
for, and the contracts
provide for, administrative oversight and monitoring of contractor
performance.
However, the Authority had not established specific internal
procedures to ensure that the
contractors complied with contract terms. In addition, from May
through December 1994,
despite documented instances of excess contractor costs,
overbilling, and inadequate
contractor performance, the Authority's Board of Directors did not
require Authority
management to correct the problems (Appendix 2). As a result, from
April 1993 through
February 1995, the Authority incurred questioned costs totaling
$604,853, consisting of
unsupported and unallowable costs of $267,300 and contract
expenditures in excess of
approved budgets of $337,553. Also, during the same period, the
Authority did not
ensure that its contractor provided the minimum number of operating
buses required for
the publicly announced level of transit service.

Title 5, Section 7101, of the Guam Code Annotated states, "It is
the intent of the
Legislature that the government of Guam practice fiscal
responsibility, and that the persons
who spend the taxpayer's money follow the mandates of law in
expending government
funds. " In addition, Title 12, Section 6301, of the Guam Code
Annotated states, "The
government of the Authority shall be vested in a Board of
Directors. " Further, the U.S.
Department of Transportation's Federal Transit Administration
Agreement, Part II,
Section 105 .c., states, "All costs charged to the Project . . .
shall be supported by properly
executed payrolls, time records, invoices, contracts, or vouchers
describing in detail the
nature and propriety of the charges. " Finally, each of the
Authority's three transit service
contracts included provisions that the Authority would be
responsible for monitoring
contractors' compliance and that the contractors would provide the
Authority with
operating reports and documents to justify amounts billed.

Between February 1993 and February 1995, the maintenance and repair
contractor billed
for reimbursement of overtime, materials, and subcontracted repairs
in excess of costs
incurred and for subcontracted work that, according to the
contract, should have been
performed by the contractor. Further, contrary to contract terms,
the Authority did not
require the contractor to provide supporting documentation for
amounts billed or to
maintain a record of vehicle maintenance and repairs. On April 1,
1995, the Authority
contracted with an independent public accounting firm for an
analysis of the contractor's
billings for the period of February 1993 through January 1995. In
its September 19, 1995,

10

 
report,4 the independent accounting firm identified more than 200
instances of incorrect
billings. For example:

  - The contractor added excess charges of up to 1,130 percent to
the contractor's
costs on the amounts billed to the Authority for parts purchased to
repair Authority
vehicles. The identified overcharges totaled $68,896 and included
items such as vehicle
batteries purchased by the contractor at an average cost of $68.45
each and billed to the
Authority at an average cost of $139.51 each.

  - The contractor billed the Authority $154,554 for vehicle parts
but had no
documents to show that the parts were actually purchased. In
addition, the contractor's
records included receipts for parts costing $10,798 that seemingly
were not billed to the
Authority. Therefore, we reduced the amount of unsupported costs by
the amount of costs
apparently not billed and questioned the net amount of $143,756 as
unsupported.

Finally, of the three transit service contracts, the maintenance
and repair contract had the
greatest impact on transit operations. Since the Authority's
contract with the maintenance
and repair contractor did not set specific performance standards
but rather general goals
and objectives, the Authority should have closely monitored the
contractor's performance
to ensure that the Authority's needs were met. The goals and
objectives listed in the
contract were to: "(l) Ensure uninterrupted, safe, reliable, and
consistent public transit
services; (2) Reduce vehicle maintenance and repair costs; (3)
Reduce vehicle downtime;
[and] (4) Ensure all vehicles meet minimum safety standards for
public transportation. "

The contractor did not meet these goals and objectives. According
to the Authority's
Assistant General Manager and the public transit operations
manager, the public transit
contractor, in order for the Authority to meet its published
schedule, needed at least 15
operative buses daily. Despite a public transit fleet that averaged
27 vehicles during April
1993 through February 1995,5 the maintenance and repair contractor
was unable to meet
the 15 vehicle minimum. The average number of operative vehicles
available daily to the
public transit contractor was 13.2 during April through September
1993; 11.2 during fiscal
year 1994; and 10 during October 1994 through February 1995.

Recommendation

We recommend that the Guam Mass Transit Authority Board of
Directors instruct the
General Manager to develop and implement written procedures for
monitoring contractors
to ensure that contractors comply with contract terms and
conditions and that the results
of such monitoring are reported to management and the Board of
Directors.

4Based on our review of both the methodology used by the accounting
firm and selected working papers
supporting its analysis, we believe the report's results to be
reasonable and adequately supported.

5Records were not available for February and March 1993.

11

 
Guam Mass Transit Authority Response and Office of Inspector
General
Reply

The September 25, 1996, response (Appendix 4) from the General
Manager, Guam Mass
Transit Authority, concurred with the recommendation and included
a copy of Resolution
96-01, approved on September 10, 1996, which stated that the
recommendation had been
adopted by the Authority's Board of Directors. Based on the
response, we consider the
recommendation resolved and implemented (see Appendix 5).

12

 


APPENDIX 1

CLASSIFICATION OF MONETARY AMOUNTS

Procurement
Contracts                   $4,908,164
Purchase Orders                  54,724
Conflicts of Interest                 14,599*

Contract Administration                   **

Total                     $4.977.487***

*Fiscal year 1992 amount not included in Appendix 3.

***Amount consists of $4,290,472 of local funds and $687,015 of
Federal funds.

13

 
APPENDIX 2

CHRONOLOGY OF SELECTED TRANSIT AUTHORITY ACTIONS
RELATING TO THE 1993 REPAIR AND MAINTENANCE CONTRACT

DATE               ACTION

02/24/93 Board approved the "cost plus" contract (immediate family
members of two Authority
   managers were listed as employees of the contractor).

10/27/93 General Manager reported that contract costs exceeded the
approved budget of

   increase of the contractor's budget, which the Board granted.

04/20/94 Board discussed excess costs of parts and the fact that
the contractor improperly adding
   cost plus percentage to parts. Contractor requested budget
increase, in part, to pay for
   three employees working for the Authority.

05/04/94 Board questioned General Manager regarding payments to
contractor for apparently
   excess overtime and unauthorized subcontracted work when only 32
percent of
   Authority buses were operative.

05/25/94 Board heard report by contractor's system manager that
maintenance records and
   contract monitoring were inadequate. General Manager provided
Board with a May
   17, 1994, staff memorandum that discussed inappropriate actions,
including: (1) using
   a "cost plus" contract; (2) overbilling the Authority by the
contractor (adding a profit)
   to parts and subcontract costs; and (3) hiring personnel by
contractor for use by the
   Authority. One Board member recommended that the contract be
canceled.

06/22/94 Assistant General Manager (the contract administrator)
recommended that the Board
   terminate the contract because it was "too costly" and the
contractor "failed" to comply
   with contract terms and conditions.

07/13/94 Board approved continuation of the contract through
September 30, 1994.

09/28/94 General Manager reported to the Board that contract costs
totaled $733,000 in fiscal
   year 1994 and recommended a $700,000 budget for fiscal year
1995. One Board
   member resigned in protest over the General Manager's efforts to
force the Board's
   approval of his fiscal year 1995 budget.

01/26/95 New Authority Board (replaced after election of a new
Governor) authorized a 30-day
   notice to terminate contract.

14

 


                             APPENDIX 3

SUMMARY SCHEDULE OF EXPENDITURES AND QUESTIONED COSTS

FOR FISCAL YEARS 1993, 1994, AND 1995

Total
Expenditures



$317,958
79.637
$397,595
2.889.307

$3.286.902




$332,127
26.857
$358,984
2.918.570

$3.277.554





$336,720
2.470.733

$2.807.453

$9.371.909

Total
Audited



$245,399
61.496
$306,895
1.645.361

$1.952.256




$252,779
20.462
$273,241

1.793.637

$2.066.878





$197,940

1.344.847

$1.542.787

$5.561.921

Questioned Costs
(Unallowable)

$184,481
46.230
$230,711

1.236.916

$1.467.627

$246,550
19.958
$266,508

1.749.438

$2.015.946

$189,796

1.289.519

$1.479.315

$4.962.888

15

 
September 25, 1996

Dear Ms. Lewis:

SUBJECT :  Draft Audit Report on the Guam Mass Authority,
     Government of Guam (Assignment No. N-IN-GUA-005-95)

   Hafa Adai and greetings from the beautiful island of Guam.
As a result of Resolution No. 96-01 which was adopted by the Guam
Mass Transit Board of Directors on September 10, 1996, directing
the General Manager to implement the findings and recommendations
of the aforementioned subject matter,  the management staff of
GMTA  have  initiated  and  completed  the  findings  and
recommendations of  the aforementioned  subject matter.  Listed
below are the results of Resolution No. 96-01:

  1.  That the General Manager advise the Board of Directors,
the U.S.              of the questioned costs charged
to the Federal Grants and either resolve the questioned costs or
arrange for repayment.        Letters dated September 26,
1996, were transmitted to the aforementioned agencies.

  2.  That the General Manager ensure that procurement actions
are conducted in accordance with Title 49, Part 18, of the Code
of  Federal  Regulations;  the  Federal  Transit  Administration
Agreement; and Title 5 of the Guam Code Annotated.  ( COMPLETED) .
Procurement Procedures and Guidelines have been developed and
will be implemented. Procurement Officer will be in compliance in
monitoring all procurement actions.

16

 
APPENDIX 4
Page 2 of 3

The findings indicated in the Draft Audit Report will not occur
during this administration.

local laws.
   Thank you
Report and look

for allowing GMTA to respond to the Draft Audit
forward to the Final Audit Report.

Sincerely,

cc :  Inspector General, North Pacific Region, Guam
  Mr. Gerald Taitano, Board Chairman

17

 


APPENDIX 4

Page 3 of 3

Guam Mass Transit Authority

Resolution No. 96-01

the Interior. in 1996, conducted a
1995; and
recommendations in its report no.

   THEREFORE, BE IT RESOLVED,   that the Board of Directors herein
adopts the recommendations of the
Office of Inspector General, U.S. Department of the Interior, and
hereby directs as follows:

   1.   That the General Manager advise the Board of Directors, the
U.S. Department of Transportation, Region
IX, and the U.S. Department of Energy, Region IX, of the questioned
costs charged to the Federal grants and either
resolve the questioned costs or arrange for repayment
   2.   That the General Manager ensure that procurement actions
are conducted in accordance with Title 49,
Part 18, of the Code of Federal Regulations: the Federal Transit
Administration Agreement; and Title 5 of the Guam
Code Annotated;
   3.   That the General Manager request the Attorney General of
Guam to determine whether members of the
Authority's former management violated the conflict-of-interest
provisions of Title 5. SectIon 5628(a), of the Guam Code
Annotated. If the law was violated, a determination should be made
as to whether the Authority has a legal basis to seek
the recovery of the funds paid to relatives of Authority management
officials in accordance with Title 5, Sections 5650(c)
and 5652(a), of the Guam Code Annotated;

   4.   That the General Manager obtain or have developed a
handbook with guidelines on the duties and
responsibilities of members of the Board of Directors and provide
a copy to each Board Member and
   5.   That that General Manager develop and Implement written
procedures for monitoring contractors to
ensure that contractors comply with contract terms and conditions
and the results of such monitoring are reported 10 the
Board of Directors.
The above action items shall be completed and submitted to the
Board of Directors no later than September 25, 1996,
and that those items due to the Inspector General shall be
forwarded for his receipt no later than September 27, 1996.

18

 
APPENDIX 5

STATUS OF AUDIT REPORT RECOMMENDATIONS

Finding/Recommendation
  Reference      Status       Action Required
A.1-A.4 and B.1    Implemented.  No further action is required.

19

 
ILLEGAL OR WASTEFUL ACTIVITIES
   SHOULD BE REPORTED TO
THE OFFICE OF INSPECTOR GENERAL BY:

Sending written documents to:            Calling:

Within the Continental United States

U.S. Department of the Interior         Our 24-hour
Office of Inspector General          Telephone HOTLINE
1849 C Street, N.W.             1-800-424-5081 or
Mail Stop 5341               (202) 208-5300
Washington, D.C. 20240

TDD for hearing impaired
(202) 208-2420 or
1-800-354-0996

Outside the Continental United States

Caribbean Region

U.S. Department of the Interior         (703) 235-9221
Office of Inspector General
Eastern Division - Investigations
1550 Wilson Boulevard
Suite 410
Arlington, Virginia 22209

North Pacific Region

U.S. Department of the Interior         (700) 550-7428 or
Office of Inspector General          COMM 9-011-671-472-7279
North Pacific Region
238 Archbishop F.C. Flores Street
Suite 807, PDN Building
Agana, Guam 96910

 
Toll Free Numbers:
1-800-424-5081
TDD 1-800-354-0996

(202) 208-5300
TDD (202) 208-2420

HOTLINE

1849 C Street N.W.
Mail Stop 5341
Washington, D.C. 20240