NCDOT releases review of budget management process

RALEIGH — The N.C. Department of Transportation released today a review conducted by McKinsey & Company of how NCDOT manages multiple funding accounts and expenditures. This review was initiated by the Office of State Budget and Management on May 16 to identify any areas where NCDOT could find efficiencies or improve internal processes.

“While NCDOT has continued to complete projects and serve communities across North Carolina, we have been forced to respond to unprecedented natural disasters and financial pressures,” said NCDOT Secretary Jim Trogdon. “While we have many points of pride as an agency, our state faces new challenges every day that we must ensure we are using our resources to address. I appreciate the careful work by McKinsey & Company on this review to ensure that NCDOT can best serve North Carolinians.”

OSBM asked for this review following NCDOT’s concern about the strain placed upon the department’s cash reserves due to weather-related events (Hurricanes Florence, Michael and Matthew, snowstorms, rockslides and isolated flash floods), Map Act settlements, and project scoping issues (actual costs greatly exceeding initial projections). Current state law requires NCDOT to maintain a cash balance between $282 million (7.5% of revenue) and $1 billion. The extraordinary costs over the past year reduced NCDOT cash reserves close to the minimum required by the General Assembly.

McKinsey & Company examined NCDOT’s processes for cash management and project completion.

Key findings of the review include:

NCDOT is facing great changes and uncertainty in revenue streams and costs facing the department:

• Revenue streams for infrastructure construction are at risk as gas prices remain low and drivers are less dependent on gas-powered vehicles;
• The increased frequency of natural disasters dramatically and unpredictably increases costs and impacts the department’s cash reserves; and
• Greater complexity of construction projects and threats of litigation makes projecting costs more difficult.

While multiple factors contributed to the cash variance, one-third was directly attributed to natural disasters.

Recommendations include:

• Continuing to refine forecasting methodology to reduce budget overruns on increasingly complex construction projects;
• Improving contracting practices to provide more project and budget flexibility;
• Enhancing organizational performance metrics and governance to ensure budget accountability across departmental divisions; and
• Increased use of data to improve organizational agility and strengthen controls for budget accountability.

NCDOT is reducing expenditures to remain above the legislatively mandated “cash floor.” These efforts have been underway for several months and include:

• Where possible, reducing the number of embedded consultants/contract employees;
• Implementing new policies and procedures to require any project in the Transportation Improvement Program that has a large cost variance from the original estimate to be reprioritized;
• Suspending work on preliminary engineering for projects that are several years away from construction;
• Implementing strict hiring reviews; and
• Limit travel and the purchase of supplies and equipment.

Despite increasing budget uncertainty, NCDOT is committed to maintaining a high-quality workforce able to efficiently complete construction projects statewide and respond to emergency situations impacting state infrastructure.

The department will evaluate the recommendations and implement those that will offer further process improvements. The entire review can be found on the NCDOT website.