April 2007 Report to the Board that saved taxpayers millions

By Peter H. Hanley

Read my April 2007 report to the Board that led to the restructuring of our $298 million bond implementation to incorporate construction best practices and the fee schedule the State's Office of Public School Construction recommends. My recommendations were adopted, saving district taxpayers millions in unwarranted costs.

April 3, 2007

To: The Board of Trustees

Subject: Measure M Issues of Concern and Recommendations for Corrections

As the Trustee most actively involved in Measure M implementation, often as one of the Board's designated representatives as in the Facilities Master Plan Committee and the architect and construction management selection committees, I am reporting to the Board my views on the implementation of Measure M to date. I have become more interested in construction related issues because improving our facilities is a priority and because we can utilize Measure M and related activities to aid in efforts to create a 21st Century academically rigorous vocational program. Moreover, I raised as a volunteer in excess of $40,000 to pass Measure M.

I have great respect and admiration for Supt. Johnson, especially his implementation of the core curriculum and his tireless efforts to pass Measure M. In my view, however, the administration is not effectively implementing Measure M. In fact, to utilize an appropriate metaphor, the train is off the tracks. Millions of public dollars are at stake. I have profound differences with the Administration on implementation and despite my efforts to correct poor and unwise decisions on how to structure Measure M implementation, the situation is deteriorating. The board needs to intervene and the voters of the district deserve a full and open public debate on these serious issues. I will also provide copies of this report to the Citizens' Oversight Committee.

My concerns fall into two areas: failure to adopt and follow best practices in the industry and continuing and increasingly inaccurate and misleading information provided to the Board from the Administration. Information about the complete costs of the $15 million COP was never provided to the Board. The Administration has also failed to follow normal protocol that requires contracts be reviewed by counsel and by the District's own Chief Business Officer (CBO) prior to presentation to the Board for approval. This has already resulted in the adoption of architectural fees in excess of industry standards without any justification for doing so and nearly resulted in the adoption of a construction management contract that exceeded the State's Office of Public School Construction's (OPSC) guidelines by between $10-12 million.

Failure to Implement Industry Best Practices

The primary concern in this area is the refusal to hire an internal construction manager and/or program manager. Everyone with whom I have spoken has told me this is essential as only an "owner's representative" can truly protect an owner's interest, in this case the District's taxpayers. I am attaching my February 26 email (Appendix A) to Superintendent Johnson that reports on my discussions with the San Mateo Community College District president, the leader of the San Mateo Construction and Building Trades Council, officials in the West Contra Costa School District that is implementing $1 billion in bond construction, and our own construction attorney Mark Haesloop, who also is a developer. Our former construction management firm, Kitchell, provided the same recommendation in a November 14 briefing attended by Supt. Johnson, Mr. Griffin, and me. Its recommendations for improving District performance have largely been ignored. Excerpts from its November 9 report to the District are appended (Appendix B). Mark Williams, another construction attorney for the District, has also recommended an internal construction manager.

Instead, the District is substituting a Leadership Committee, which I have attended in both February and March. Its major and significant deficiency is that the District has no employee with substantive knowledge and experience in construction management sitting at the table. The only such expertise resides in the architectural firms and Skanska, the District's construction management firm, both of which can gain significantly financially from decisions this Committee makes. At the March meeting, I was in fact the only District employee in attendance for at least 85% of the meeting at which major change orders and modifications were discussed. I am not qualified to pass judgment on technical matters and other District staff were tied up in teacher negotiations or on jury duty.

This Committee has already failed its first major test when it did not detect architectural fees in excess of industry standards and raise questions and did not detect the Skanska fee proposal substantially in excess of OPSC guidelines. Put bluntly, I have found no other organization managing hundreds of millions of public construction dollars that proposes to operate with this structure.

Second, the structure of Measure M with 74 mostly small projects is not consistent with industry practices. Both our attorneys, Mark Williams and Mark Haesloop, have raised these issues and been ignored. I have raised this issue several times based on my own conversations with industry personnel. This practice increases soft cost fees--architectural, construction management, etc.--and reduces the interest of general contractors who usually prefer large contracts. This is especially of concern in this booming construction market where billions of dollars are being bid.

Third, Mark Williams and others I have spoken with question the assignment of multiple architects to the same sites. According to them, this violates industry best practice and is almost certain to lead to conflicts in drawings and expensive change orders.

Omissions, Misleading, and Inaccurate Information to the Board

The Board will recall the April 20, 2006 Board meeting at which we were informed that the District must borrow an additional $15 million to complete the first phase of the Capital Improvement Program. The information provided that night was by the Superintendent's own admission insufficient and incomplete. He asked and we agreed to approve the borrowing due to significant time constraints and his personal assurance that all relevant information would be provided to the Board.

Unfortunately, I only learned additional details recently when I asked questions about this COP as it was about to be consolidated into the larger COP that we just approved. According to CSBA's Suzi Rader, who has assisted districts on 221 COPs and 454 other school financings, our April 20 COP was most unusual and costly COP that she has ever seen. It failed to close on at least 7 occasions, something that had never occurred in her previous experience. It partially closed on June 28, allowing us to access the $15 million, but until final closing on November 6 SMUHSD paid 8 1/4 % interest compared with the normal 3.5% interest, a cost of $200-300K to the District. The board was never informed of either the delayed closings of the COP or the interest costs incurred.

The February 27 transmittal to the board of architect contracts had a memo from Skanska saying the contracts had been "thoroughly reviewed by District counsel." This is inaccurate, according to my conversation with Mark Williams in which Trustee Lees-Dwyer participated. In fact, Williams states he never saw the fee and scope statements at all before the March 8 board meeting and was only beginning to review the contract boilerplate on March 2.

Supt. Johnson's March 2 transmittal to the board was misleading and inaccurate in its description of the Skanska contract. He incorrectly conveyed to the Board the accepted OPSC methodology by which construction management contracts are to be calculated, recommending using the total of the bond rather than the smaller actual amount of construction dollars. In this case, according to Mark Williams, the variance was $139 million for which Supt. Johnson was recommending that Skanska be undeservedly compensated. Supt. Johnson also failed to draw to the Board's attention the increase in construction management fees from $10.9 million in July 2006 to nearly $24 million. In a breach of protocol, the District's Chief Business Officer, the most knowledgeable District employee on construction and contracts, was never allowed to review this contract. According to my conversation with Mark Williams, the fee schedule had not been reviewed by counsel, another violation of Board procedure. These actions are all inappropriate and constitute a breach of trust with me in my role as an elected board member. Only Trustee Lees-Dwyer's alertness in catching the increase in budget management fees prevented this contract from being approved March 8.

Both Mark Williams and Mark Haesloop have subsequently provided the District with opinions that Skanska's management fees were approximately double those of the OPSC guidelines. Mr. Haesloop's March 28 memo is attached. (Appendix C) I independently asked an industry specialist to give me an estimate of the appropriate fees and that estimate concurred with the attorneys' assessments.

At the March 20 meeting with Mark Williams, he reported to Trustee Lees-Dwyer and me that when he met with Skanska it could not answer his and his consultant's most fundamental questions:

1) Why did Skanska intend to bill the District 192,000 hours, a figure far above industry standards? How was this derived?

2) Why were projects split into 74 separate projects, again a practice not in line with industry standards and which will drive soft cost fees, particularly construction management to extraordinary levels?

3) Why did Skanska's fees more than double from July 2006 to March 2007? How was the fee proposal derived?

I met privately with Supt. Johnson on March 26 to convey once again my grave concerns about Measure M implementation as I am reporting to the Board tonight. On March 28 Mark Haesloop, who notes he is functioning in a non-legal capacity as an operations and development consultant, delivered his assessment. Significantly absent from the list of documents the Administration provided Mr. Haesloop are the architectural fees and scopes of services, which both Mark Williams and others have found out of compliance with industry standards.

The Haesloop memo is an indictment of both District process and Skanska's fee proposal. Haesloop found "no evidence of a negotiation process with Skanska." Its $24 million dollar fee is termed "shocking." Moreover, he finds significant exclusions from this fee that would incur additional expenses to the District, stating that "Skanska's lump sum fee of $24 million is certainly the large portion of the iceberg, but not all of it." He further points out "a significant oversight"--Skanska's proposal "includes absolutely no support to the District in any dispute resolution procedures." John Maloblocki, Skanska's program manager will be compensated at $274,000 per year, according to Haesloop.

In addition to criticizing the District for lack of due diligence in its negotiations with Skanska, Haesloop comments, "We cannot stress how important it is for the District to have its own people managing its managers." Further, he states he made this recommendation the first time he became aware of the potential for Measure M projects many months ago. As did Kitchell in its assessment of the first phase of construction, Haesloop describes the District's construction administration duties as "scattered rather haphazardly throughout the District."

In the most alarming communication I have received as a Board member, Supt. Johnson transmitted the Haesloop memo with his own March 29 memo, which I would most charitably describe as an exercise in creative writing. He pulls out a few sentences from Haesloop that "Skanska is qualified to manage this project," but presents it completely out of the context of Haesloop's overall shock and concern at both the Administration's and Skanska's actions. Supt. Johnson notes that neither Williams or Haesloop had all the information, but that is because the Administration failed to provide it to them.

Amazingly, Supt. Johnson concludes that Measure M has "begun well; very well." This is in the face of significant expert criticism of the District's structure for the work and the fees adopted or proposed thus far. Supt. Johnson asserts incredibly that "it is about refining contract language and fees" in the face of two separate expert reviews from Williams and Haesloop that the District is being significantly and substantially overcharged without any justification from Skanska for its own fee proposal and those it negotiated with the architects. The Board must determine if our good faith and trust have in fact been betrayed and breached. I conclude and assert they have.

Following are my recommendations for the Board to consider on an early agenda:

1) Terminate all relationships with Skanska forthwith. Maya Angelou cautions, "when a person shows you who he is, believe him--believe him the first time." Skanska has shown us who it is. We should negotiate a final fee and the return of all District materials.

2) Suspend all Measure M work pending a review of the management structure and processes. We should await the report of the civil Grand Jury, FCMAT, and a consultant or consulting team the Board retains to conduct such an analysis. This should only be a matter of two to three months. The Citizens' Oversight Committee should be provided all relevant materials, including all attorney communications. No construction is actually taking place at this point and the District can find someone, perhaps Mr. Haesloop or someone like him, to perform program management services when work resumes. A new Request for Proposal for construction management services can be issued later in the year.

3) The Board should direct that well established and accepted protocols that all contracts must be reviewed in their entirety by District counsel and the Chief Business Officer be scrupulously followed. The Board should direct that the CBO have primary responsibility for oversight of the Measure M construction and implementation, with regular reports to the Superintendent and directly to the Board of Trustees. The Board should further direct that the CBO undertake a review of industry best practices and recommend to the Superintendent and Board the internal District resources necessary to comply with those practices.

As the Trustee the Board has frequently designated to monitor bond finance and construction issues, I urge the Board to make these serious concerns and my recommendations a Board priority for a full and public discussion.