Financial Management Oversight (FMO) Progress Report

Finance & Administration Committee Information Item IV-A October 8, 2015 Financial Management Oversight (FMO) Progress Report Page 52 of 97

Washington Metropolitan Area Transit Authority Board Action/Information Summary Action Information MEAD Number: 201662 Resolution: Yes No TITLE: FMO Progress Report PRESENTATION SUMMARY: An update on WMATA's financial status and progress toward completion of the Corrective Action Plans (CAPs) addressing the findings in the Federal Transit Administration's (FTA) Financial Management Oversight (FMO) Report. Staff will also provide a summary of FMOrelated compliance review activities and progress on GAO recomendations for financial management. PURPOSE: Provide an update to the Board's Finance & Administration Committee on WMATA's financial status as it relates to WMATA's Corrective Action Plans (CAPs) pertaining to the Federal Transit Administration's (FTA) Financial Management Oversight (FMO) report. Provide a summary on the newly developed Financial Management Risk and Control Policy as recommended by the GAO. DESCRIPTION: Key Highlights: Since September's report, notable actions affecting WMATA's financial condition include: September's FTA reimbursements totaled $80.7 million Through September 25, first quarter FY2016 grants reimbursements totaled $97.5 million All four WMATA FTA grant applications for FFY2015 totaling $420.5 million were awarded in September Total outstanding short-term debt has been reduced by 56 percent since May 1 (repaid $284 million of total $503 million) One of two LOCs with Wells Fargo Bank ($63.75 million) was re-extended for thirty days to October 23, 2015 pending negotiation and approval of full year renewal On September 30, FTA issued WMATA a letter outlining the three-part FMO Report Testing and Validation Plan for items and activities required prior to removing WMATA's ECHO restriction and for closing out the FMO findings Background and History: Page 53 of 97

Financial Management Oversight The FTA's June 10, 2014 FMO report identified nine total findings, of which three were material weaknesses and six were significant deficiencies. An additional five advisory comments were also identified. A total of 45 recommendations from FTA for addressing the findings and comments were included in the FMO report. WMATA submitted a total of 65 Corrective Action Plans (CAPs) in response to the 45 Recommendations. The WMATA Office of Internal Compliance was established to conduct objective reviews to monitor WMATA s progress toward implementing all FMO CAPs as well as adherence to financial management controls and related policies and procedures. Internal Control and Compliance The Office of Internal Control and Compliance (OICC) is responsible for conducting objective reviews and assessments to monitor WMATA s adherence to financial management controls and related policies and procedures. The staff of the Compliance Office do not participate in financial management processes nor do they perform financial management controls, and are thus able to provide an objective assessments of their effectiveness. Discussion: Financial Update WMATA has reduced its outstanding short-term debt by 56 percent since May 1, from $503 million to $219 million. All $200 million of the Series 2014 Grant Anticipation Notes have been repaid. Of the total $302.5 million in the four Lines of Credit (LOCs) with three banks, $219 million remains drawn ($84 million had been repaid in June 2015). WMATA's existing $64 million LOC with Wells Fargo Bank (one of two LOCs with Wells Fargo) has been re-extended for an additional thirty days, to October 23, to provide time for renegotiating a full 12-month renewal agreement. WMATA has received a total of $81 million in FTA grant reimbursements in the month of September for a total of $98 million in grant draws for the first quarter of FY2016. The September monthly amount of draws was the third highest amount drawn in any single month since the ECHO restriction was imposed in late March 2014 (behind $90 million drawn in June 2015 and $83 million in May 2015). Through September, the total amount of reimbursement drawdowns since March 2014 is $473 million. In the month of September, all four of WMATA's FFY2015 federal grants, totaling $420.5 million were approved and offically awarded by FTA. These grants include Metro's PRIIA Appropriation ($133m) and three FTA grants (formula - $146.5m; State of Good Repair - $131.3m; and Bus/Bus Facilities - $9.7m). Due to federal fiscal year-end financial closing activities, the FTA's ECHO payment system will not be available from September 26 through mid-october. FMO Follow-up Activity On September 30, 2015, WMATA received a letter from the Federal Transit Administration s Region III Administrator regarding FTA s testing plan to validate Metro s implementation of the necessary corrective actions to address the material weakness Page 54 of 97

and significant deficiency findings that were identified in FTA s June 2014 Financial Management Oversight Report. This plan and the dates identified in it were jointly developed between FTA Region III and WMATA OCFO staffs. The plan identifies testing and validation action items in three categories as follows: 1) Requirements for removal of WMATA s ECHO restriction for all grants awarded after July 1, 2015; 2) requirements for removal of ECHO restriction for grants awarded prior to July 1, 2015; and, 3) additional items that need to be addressed as part of the FMO closeout but are not conditions related to the lifting of ECHO restrictions. FTA notes that the elements of the plan such as due dates, testing completion goals and the testing process itself are subject to change if additional issues or concerns arise. OCFO staff will address this FMO Testing and Validation Plan and update the Board on progress during the FMO Update information sessions in the Board Finance & Administration Committee meetings beginning with the October 8 session. Compliance Reviews Activity as of 9/30 Through the end of September 30 the Office of Internal Control and Compliance (OICC) has been working on the eighteen (18) reviews scheduled for FY2015 that primarily focused on FMO CAP follow up items. As of September 30, thirteen (13) of the scheduled reviews were completed, two (2) reviews are in progress, and three (3) were deferred until FY2016 to accommodate special purpose reviews related to direct labor draws. FMO Follow Up Reviews FMO CAPs for the Budget Controls, Cash and Grant Management, Federal Financial Reporting, and Procurement & Job Order Contracts (JOC) areas were evaluated through the control certification or self-assessment review method. This type of review allows management with financial management control responsibilities across WMATA to have an active role in the review process. The process is designed to allow accountability and an opportunity to proactively self-identify and report instances of control failure. Management can also proactively develop and implement corrective actions. As part of the control certification review process, the Office of Internal Compliance facilitated the identification of control activities resulting from WMATA's CAP responses to the FTA. These control activities were documented along with the related risk, regulatory expectation, expected control, and control objective as part of a risk and control matrix. Control owners reviewed and certified to the operating effectiveness of assigned controls. The Compliance Office then examined supporting documentation to independently confirm compliance. As of September 30, the OICC also initiated FMO follow-up reviews for the Asset Management (FTA Funded Assets) and HR/Payroll controls areas. Other Activities and Reviews Direct Labor Draw Reviews: OICC completed two (2) special purpose reviews to provide reasonable assurance that the cost associated with recent FTA labor draw requests was supportable by WMATA s records and to validate that that all cost were charged to the same activity for which Page 55 of 97

work was performed. The review also supported certification statements made by WMATA s Chief Executive Officer and Chief Financial Officer in connection with the draw requests. Both reviews found no material cost differences in the amounts presented by WMATA and reimbursed by the FTA. One of the labor reviews completed involved reviewing 2000 timesheets while another involved 780 timesheets. Targeted FMO Reviews & Consultation: While WMATA has responded to all FTA recommendations as of June 30, according to the FTA, the FMO Report's Finding's Recommendations remain open until FTA performs various follow-up reviews to formally close the items. OICC is conducting targeted review procedures to gauge WMATA s readiness in the event of an FTA follow-up review. Initial focus has been in the following areas: Disposal of FTA Funded Assets & Biennial Inventory Procurement Contract Files Financial Management System Access Controls Grant Reporting (Federal Financial Reports & Milestone Progress Reports) GAO Recommendations - Financial Management: WMATA recently went through a GAO review with an objective partly focused on examining WMATA s progress in addressing FTA s recommendations and identifying opportunities for improvement. The report issued by the GAO details the progress WMATA has made in addressing financial management issues and made two recommendations related to financial management. GAO recommended that WMATA s Board of Directors, working with the General Manager/Chief Executive Officer of WMATA, direct the appropriate WMATA officials to take the following two actions: Develop and implement a policy and related procedures for assessing WMATA s financial management-related risks, and Develop and implement a policy and related written procedures for the Office of Internal Compliance to monitor the design and operating effectiveness of the five components of internal control related to financial management. WMATA formally responded to the GAO s recommendations and has planned the following activities: Create new Financial Risk and Control Policy October 2015 Develop formal procedures for addressing WMATA s financial management related risks and controls in alignment with the new policy June 2016 Undertake a comprehensive assessment of financial management related risks - June 2016 Adopt the Committee of Sponsoring Organizations of the Treadway Commission s (COSO) internal control framework for financial management controls June 2016 As of September 30, 2015, a financial management risk and control policy was developed and approved by the General Manager and CEO. FUNDING IMPACT: Information Item only. No requests with impact on Funding Page 56 of 97

Project Manager: J. Blair Fishburn Project CFO Department/Office: TIMELINE: Previous Actions Anticipated actions after presentation Monthly presentations to the F&A Committee on execution of all corrective action plans committed to FTA. FTA's assessment of WMATA's progress in adequately fulfilling the 38 recommendations across the nine control findings described in the June 2014 FMO Report (FTA does not respond to CAPs submitted for Advisory Comments). All WMATA CAP deadlines (including FTA-approved extended deadlines) were met on-time, in accordance with FTA requested due dates. October 2015 and forward - Follow-ups with FTA on CAP submission adequacy, on-going internal compliance monitoring, and preparation for FTA on-side validation of FMO CAPs implementation. RECOMMENDATION: No action required; information item only. Page 57 of 97

Washington Metropolitan Area Transit Authority Financial Management Oversight (FMO) Progress Report Finance & Administration Committee October 8, 2015 Page 58 of 97

Purpose Provide update on WMATA financial status Provide monthly progress report on FMO Corrective Action Plans (CAPs), FTA feedback and follow-ups Page 59 of 97

Financial Update $81 million of FTA grant draws in September 2015 Total FTA grant draws of $473 million since ECHO restriction FTA approved all four FFY2015 grant applications totaling $421 million Outstanding short-term debt reduced by 56% since May 1 Short-term debt balances: $0m GANs; $219m LOCs Line of Credit Status: Wells Fargo 1 (of 2) $64 million reextended additional 30-days Debt Issuance in 2H FY2016 (pending completion & release of FY2015 audited financial statements) Page 60 of 97

FMO Dashboard Reimbursement Request Success Rates Page 61 of 97

FMO Dashboard Completion of Recommendations FTA Confirmed FMO Report FMO Finding Description Submission Recommend. ("Adequate") Mat. Weak. II.1 Budget Controls 3 1 2 Outstanding FTA Recommend. Mat. Weak. II.2 Federal Expend. Report. Controls 2 2 0 Mat. Weak. II.3 Procurement Controls 5 5 0 Sig. Defic. III.1 Audit Committee Oversight 2 2 0 Sig. Defic. III.2 Cash & Grants Mgmt Controls 4 3.5 0.5 Sig. Defic. III.3 FTA Funded Assets 8 8 0 Sig. Defic. III.4 Financial Mgmt System Access 6 6 0 Sig. Defic. III.5 Controls over JOC 4 4 0 Sig. Defic. III.6 Improve Federal Financial Report. 4 4 0 Material Weaknesses/Significant Deficiencies 38 35.5 2.5 AC IV.1 - IV.5 Advisory Comments 7 N/A N/A All FMO Findings and Advisory Comments 45 35.5 2.5 Page 62 of 97

FMO Follow-up Activity FTA FMO Testing & Validation Plan received 9/30 3 categories of requirements/items for review for: Removal of ECHO restriction for grants awarded after July 1, 2015 Removal of ECHO restriction for grants awarded before July 1, 2015 FMO closeout not conditional for ECHO restriction removal WMATA s Office of Internal Compliance FMO CAP Self- Certification Reviews on-going in the following areas Budget Controls Cash & Grants Management Federal Financial Reporting Procurement & Job Order Contracts Asset Management (FTA-funded assets) Financial Management System Access Controls Page 63 of 97

Summary of Review Activity Compliance Review Matrix Financial Management Areas FY Q2 Reviews (Oct Dec 2014) FY Q3 Reviews (Jan Mar 2015) FY Q4 Reviews (Apr Jun 2015) Planned In Progress Completed Planned In Progress Completed Planned In Progress Completed Procurement Controls 2 0 2 5* 0 4 1* 0 0 Grant Management Controls 2 0 2 3 0 3 0 0 0 Financial Management Controls 0 0 0 2* 0 1 3 2 1 Totals 4 0 4 10 0 8 4 2 1 Total Planned FY 2015 4 10 4 *The Quarterly Contract Reviews planned for Q3 and Q4, and the Cash and Investments Management Control Review initiated and reported as In Progress in the 3rd quarter were deferred to FY2016. Page 64 of 97

FMO CAP Follow-up Reviews Control Certification Reviews Completed as of September 30 Budget Control Cash and Grants Management Federal Financial Reporting Procurement & Job Order Contracts In Progress as of September 30 Asset Management (FTA Funded Assets) HR and Payroll Controls Page 65 of 97

Summary of Review Activity Other Activities and Reviews Special Project Direct Labor Draw Review March 30, 2014 June 30, 2014 Nov 30, 2014 Apr 18, 2015 Targeted FMO Reviews & Consultation Disposal of FTA Funded Assets & Biennial Inventory Procurement Contract Files Financial Management System Access Controls Grant Reporting (Federal Financial Reports & Milestone Progress Reports) Page 66 of 97

Summary of Review Activity Other Activities and Reviews GAO Recommendations Financial Management Scheduled Activities Financial Risk and Control Policy October 2015 Risk Assessment and Control Monitoring Procedures June 2016 Comprehensive Financial Management Risk Assessments June 2016 COSO Adoption for Financial Management Controls June 2016 Deliverables GM Approved Policy Board Information Item Formal Procedures Financial Management Risk Assessment Report Evaluation of COSO Components and Principles Page 67 of 97

Summary of Review Activity Financial Management Risk & Control Policy Policy Highlights Purpose and Scope Responsibilities Standard for Financial Management Controls Risk Management Process Training and Education Page 68 of 97

Next Steps Prepare for FTA FMO CAP validation reviews Continue drawdowns of unreimbursed costs WMATA s Office of Internal Compliance continues reviews of FMO CAPs compliance monitoring and Labor Drawdown Reviews Page 69 of 97