APPROVED 2/27/08

Accountability Structure 1 2/26/08 

### Strategic Growth Plan Bond Accountability

Goods Movement Emission Reduction Program

Administering Agency California Environmental Protection Agency

Bond Proposition 1B

Department Name Air Resources Board

Program Title Goods Movement Emission Reduction Program

Bond Statute Government Code 8879.23(c)(2)

Implementing Statute (if needed) Senate Bill 88 (2007) and Assembly Bill 201 (2007)

Background Information

In January 2007, Governor Schwarzenegger issued Executive Order S-02-07 highlighting the importance of transparency and accountability in administering the over $40 billion in bond funding approved by voters in 2006. The Executiv e Order directs all State government entities responsible for expending bond proceeds to establish and document a three part accountabilit y structure. This document details the accountability provisions for the Proposition 1B: G oods Movement Emission Reduction Program (Program) that provides $1 bill ion in funding to the Air Res ources Board (ARB or Board) to quickly reduce air pollution emissions and health risk from frei ght movement along California’s priority trade corridors.

The State Fiscal Year (FY) 2007-08 budget includes the first installment of $250 million, plus implementing legislation via Senate Bill 88 (Chapter 181, Statutes of 2007) that

created the Goods Movement Emission Redu ction Program. Assembly Bill 201 (Chapter 187, Statutes of 2007) includes a minor clarification. Under the enabling legislation, ARB will award grants to fund projects propos ed by local agencies that are involved freight movement or air qual ity improvements a ssociated with goods movement activities. The local agencies wi ll then be responsible for providing financial incentives to owners of equipment used in freight movement to upgrade to cleaner technologies, consistent with Program Guidelines to be adopted by ARB.

The 130-page Proposition 1B: Goods Movement Emission Reduction Program -- Guidelines for Implementation adopted (February 28, 2008) detail the ProgramAPPROVED 2/27/08

Accountability Structure 2 2/26/08 requirements and the accompanying Staff Report describes the basis for those requirements. The Guidelines include:

• The public process for development of the Guidelines and subsequent updates.

• Criteria and procedures for ARB alloca tion of funds to local agency projects.

• Criteria and procedures for local agency selection of equipment projects.

• Project funding demonstrations, contingenc ies, and remedies for projects that withdraw or don’t perform.

• Specific project eligibi lity requirements, f unding caps and match requirements, and project life.

• Operating conditions and enforcem ent mechanisms for bond-funded equipment.

• Maximum timeframes for ARB to obli gate funds via grant agreements with local agencies.

• Criteria that local agenci es must meet to receive grant funds from ARB and ARB

internal controls on release of funds.

• Maximum timeframes for local agencie s to obligate funds via contracts with equipment owners.

• Criteria that equipment ow ners must meet to receive grant funds from the local agency and local agency internal controls on release of funds.

• Maximum timeframes for local agencies to complete projects and make final payment (specific to each source category).

• Physical inspection requirements for old and new equipment.

• Ongoing monitoring and repor ting on project operations.

• Ongoing tracking of f unds obligated and expended.

• Enforceable grant agreements between AR B and local agencies, and enforceable contracts between local agencies and equipment owners.

• Periodic reporting to local agencies, ARB, the Department of Finance, and the Legislature.

• Program and fiscal audits of ARB and loca l agencies administer ing the Program.

Front-End Accountability

Program Objectives The Guidelines are a detailed strategic pl an to expend bond dollars over multiple funding cycles, with a public process to solicit input in each cycle. The provisions of the

Guidelines are consistent wit h the implementing statutes, t he specific directives from Governor Schwarzenegger in Executive Order S-02-07 and his signing statement on the FY2007-08 budget, and ARB’s mission to protect pub lic health from the harmful effects of air pollution. ARB staff has designed the Program to meet the following key objectives:

• Reduce existing emissions and health risk as quickly as possible in the four priority trade corridors, with a focus on communities heavily impacted by goods movement.

• Incorporate simplicity and efficiency.

• Ensure cost-effectiveness and leverage other funding sources.APPROVED 2/27/08

Accountability Structure 3 2/26/08 • Provide transparency and accountability to the public.

Project Eligibility, Selection Criteria, and Performance Measures

SB 88 and AB 201 detail more than 15 factors that ARB is directed to consider when allocating funds and selecting local agency projec ts. Some of these criteria are most effectively applied by targeting levels of funding to trade corridors and emission source categories, while others lend themselves to selecting among competing local agency projects or equipment projects . The steps ARB will take to allocate funding include:

• Identifying funding targets for the overall Program and setting funding priorities (Guideline Chapter II.B.).

• Defining the equipment project options for each appropriation (Guideline Appendices A-G).

• Competitively ranking and selecting local agency proj ects for funding in each appropriation cycle (Guidelines Chapter II.D.6.).

• Establishing the procedures that local agencies will use to competitively rank and select equipment projects for fundi ng (Guidelines Chapter III.D.6.).

Only local public entities able to fully implem ent the Guidelines are eligible to compete for Program funds. ARB will evaluate each application to det ermine the eligibility of both the agency and the proposed pr oject. The local agency must also demonstrate its ability to implement the project, including the availability of funding and resources. These entry requirements are set forth in Guid elines Chapter II.D.3 -4 and Chapter III.B.

ARB staff will use a two-step process to recommend local agency projects for funding within each trade corridor and source category. ARB staff will competitively rank eligible local agency projects based on their potential to reduce emi ssions and to realize the greatest benefits per State dollar invested, as described in Guidelines Chapter II.D.6. With public input, ARB staff will then develop recommendations on the level of funding for the top project(s) in eac h corridor and funding category. This approach will consider the availability of Program funds, the corridor and source category funding targets, and priorities established by the Board for eac h funding cycle, as described in Guidelines Chapter II.B.

Following a public hearing and Board action to allocate funds for specific local agency projects, ARB staff will execute Local Agen cy Project Grant Ag reements with the successful local agencies. Grant agreement s will contain the Program expectations and performance criteria. Minimum provisions fo r grant agreements are listed in Guidelines Chapter II.D.10.

The Guidelines define a competitive process that local agencies must use to prioritize and select equipment projects for funding, based on the sa me quantitative criteria

described above for ARB and detailed in Guidel ines Chapter III.D.6. Local agencies will pre-inspect the old equipment according to Guidelines Chapter II I.D.8 prior to the execution of the equipment contract. Loc al agencies will execute Equipment Project Contracts with equipment ow ners that establish the technical, financial, andAPPROVED 2/27/08

Accountability Structure 4 2/26/08 administrative requirements for the life of the bond-funded equipment, consistent with Guidelines Chapter III.D.10. The local agencies will verify the scrappage of old equipment and inspect the new or upgraded equipm ent prior to final payment, according to Guidelines Chapter III.D.13-14.

In addition to establishing criteria for both local agency and equipment project selection, the Guidelines define funding schedules to make certain bond money is spent in a timely manner. These schedules address bo th ARB’s expenditure and liquidation of bond funds to local agencies (Chapter II.E.2 ), and the local agencies’ expenditure and liquidation to equipment owners (Chapter III.E.2 ). The Guidelines accelerate both of these schedules ahead of the statutory r equirements where practicable and require proof of progress prior to payment.

SB 88 authorizes ARB to use five percent of the funds for administration and audits, and allows local agencies to apply for up to five pe rcent of the grant aw ard for administrative costs. To allow more funding for clean ai r projects, ARB and its local agency partners (in the aggregate) will limit their bond-funded expenses to well below the five percent each is authorized to use by the statute. In addition to reducing ARB’s administrative costs to an expected 2-3 perc ent through Program design, t he Guidelines include lower caps on local agency compensation for the sour ce categories that will require fewer

resources to administer. The Guidelines require that expenditures of administrative funding are separate from any expenditure of project funding. ARB expenditure of administrative funding for the local agency wi ll be completed according to the schedule outlined in the Guidelines Chapter II.E.2.

Public Access and Transparency The Guidelines provide for public involvemen t in many steps of Program development and implementation, as well as public access to inform ation on the status of bondfunded projects. Table 18 of the Staff Report (Question 45) highlights the major products and decision points within the Progr am, along with the res ponsible agency and the mechanism(s) for public input and/or access. The first major decision point is Board adoption of the Guidelines in a public hearing, followed by the Board’s selection of local agency projects for funding. ARB has also established requirements for community meetings to solicit input on the developm ent of local agency proposals and to report back annually on progress.

ARB will maintain a website at: http://www.arb.ca.gov/gmbond to make information readily available to the public. The websit e will include at minimu m: documents and notices of meetings, the Program Guidelin es and accountability stru cture, Notices of Funding Availability, lists of the local agen cy projects being considered for funding, the local agency projects awarded bond funds, the local agency pr oject status, links to local agency websites showing the prioritized lis t of equipment projects considered for funding, the equipment proj ects awarded bond funds, an d periodic updates on the status of equipment projects.APPROVED 2/27/08

Accountability Structure 5 2/26/08 In-Progress Accountability

ARB and local agencies are responsible for ensuring bond funds are spent on equipment projects that meet the provisions of statute and the Guidelines. ARB will utilize multiple mechanisms to ensure accountability through its own actions and requirements imposed on local agencies. These mechanisms include the equipment project inspections discussed above, ongoing evaluations, reporting, and audits.

Evaluations ARB procedures for ongoing evaluations of local agency projects and equipment projects are detailed in Guidelines Chapter I I.E.4. Ongoing ARB evaluations of the local agency include review of the local agency proj ect records to ensure consistency with the Guidelines and the performance benchmar ks in the grant agreement. Ongoing ARB evaluations of equipment projec ts include review of equipment project records to ensure those projects are meeting the performance benchmarks in t he contract, including the operating conditions for t hat project option.

ARB will issue an adverse finding in the lo cal agency’s evaluation and/or audit if it finds that Program funds have been expended on ineligible projects. The ARB Executive Officer may require that the local agency reim burse the Program funds identified in an adverse finding, or may seek other remedies from the local agen cy. ARB will issue a non-performance finding in the local agency' s evaluation and/or audit if ARB finds issues related to Program implementation. Specific issues and remedies for local agency non-performance are detailed in Guidelines Chapter II.E.7.

Local agencies are required to provide di rect oversight and enforcement of their executed equipment project c ontracts. Local agency staff will evaluate equipment projects on an ongoing basis to confirm t hat they on schedule and within the scope and cost outlined in the contract. Requirement s for local agency evaluations are listed in Guidelines Chapter III.F. Equipment project non-performance and remedies are discussed in Guidelines Chapter IV.G.

Reporting and Recordkeeping The Guidelines define reporting and reco rdkeeping for equipment owners, local agencies, and ARB to maintain accountabi lity, and enhance the effectiveness of

evaluations and audits.

Equipment owners must keep project record s and report annually to the local agency. The specific information depends on the type of equipment and project as described in Guidelines Appendices A-G.

The local agencies must report the following information while t he project is in progress, as detailed in Guidelines Chapter III.G.:

• Quarterly data updates on the implementat ion of all local agency projects and the status of specific equipment projects (under contract, inspected, funded, etc).APPROVED 2/27/08

Accountability Structure 6 2/26/08 • Semi-annual reports whic h include: the quarterly data, information on the performance benchmarks achieved, and actions undertaken to ensure the local agency project is on schedule and within budget.

• Project completion reports that describe the final project costs, timelines, and performance outcomes, as compared to the original project proposal.

As required by statute, ARB will forward t he semi-annual and project completion reports submitted by local agencies to the Departm ent of Finance (DOF), consistent with Guidelines Chapter II.E.6.c.

ARB staff will prepare an annual report documenting progre ss in implementing the Goods Movement Emission Reduction Progr am. Once the Program is fully implemented, ARB will submit t he report to the Legislature by January 10 of each year. Requirements for ARB’s annua l report are included in Chapter II.E.6.d. of the

Guidelines.

ARB staff will periodically upd ate the status of local agen cy projects on the Program website and will post all final reports.

Follow-Up Accountability

ARB will utilize the reports submitted by local agencies to assess each local agency’s progress and compliance with the te rms of the grant agreement.

Audits In addition to ongoing evaluations, the Guideli nes contain auditing procedures to ensure that all funded local agencies co ntinue to meet the requirem ents of the Program. ARB will use a risk-based approach to select specif ic local agency projects for program and fiscal audits. Local agencies demonstrating good performance when audited will likely be audited less frequently in the future than similarly-funded local agencies with poorer audit results. Auditing procedures and the res ponsibilities of all parties are detailed in Guidelines Chapter II.E.5 for ARB audits of local agency projects. Guidelines Chapter II.E.7. describes the process for dealing with a poor audit finding, including the

remedies available to ARB.

ARB staff is currently discussing with DO F the best mechanism(s) for performing concurrent program and fisca l audits of local agencies, using staff from ARB and potentially other State agencies. Local agencies and equipment owners must give ARB, DOF, Bureau of Stat e Audits, or authorized parties access to records and equipment.

ARB is also subject to audit by DOF, the Bureau of State Audits, and other agencies to determine whether the bond expenditures we re made according to the established front-end criteria and processes (i.e., the Guidelines), and achieved the intended

outcomes.