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Not Such a Hot Deal

A contract that was supposed to provide air conditioning for 150 schools has instead cost the school district $19.3 million without buying a single air conditioner, the Weekly has learned.

The $19.3 million went to a consortium of contractors headed by Denver-based CH2M Hill, which was to have managed the installation of the A.C. units. The money was for a contract buyout and to cover the costs of advance work that never quite included actually installing an air conditioner.

That original $155 million deal, signed three years ago, was the culmination of a highly publicized, nearly two-year struggle involving major construction firms, the region‘s largest energy providers, and political figures including unsuccessful mayoral candidate Steve Soboroff, former Mayor Richard Riordan and state Senator Richard G. Polanco. At one point, even the now-bankrupt energy giant Enron became a player.

Eventually, the district went for a package arrangement to provide both air conditioners and electricity for much of the school system. This solution was heavily influenced by outside political pressure, but also was born of a genuine desire to break a logjam of delays and failure in the school-construction program. Instead, the deal raised the bar for school-district futility: Officials decided that a $20 million loss was preferable to going forward with the contract. The all-in-one approach, it turns out, was either dead wrong from the start or would have required, to be successful, a level of sophistication in negotiation and management that the school district lacked.

This battle royal was front-page news only on the front end, when the contract was fought over and approved. When the school board quietly approved a costly escape last summer, it didn’t even get reported. The issue has surfaced recently because a local activist perked the interest of the independent committee that oversees local school-bond spending. The elected school board is now revisiting the matter because of the Enron piece. And information about the entire chain of events has been referred to the school district‘s inspector general for possible investigation.

The roots of this debacle go back to April 1997, when voters approved Proposition BB, the $2.4 billion bond to pay for building and upgrading L.A. schools. Air conditioning for schools was a major selling point for voters, especially in the San Fernando Valley, where summer temperatures regularly reach triple digits and overcrowded campuses are forced to operate year-round. But five years later, about 100 schools remain without air conditioning and other schools have recently installed cooling units that are too noisy. Officials estimate that the school bond will fall $600 million short of completing projects that it was expected to fund.

Soon after the bond passed, the chair of the school-bond oversight committee, Steve Soboroff, began pushing a seductive solution: Hire a single group of contractors to air-condition all the schools, he suggested. The work could be done faster and at lower cost. Soboroff added another wrinkle as well: Why not throw into the package the cost of electricity for schools?

In retrospect, it’s a stretch to imagine that a construction firm would sell cheaper air conditioners in exchange for the school district agreeing to purchase energy from an unrelated outfit, or vice versa. But that‘s the combination advanced by Soboroff, who is a developer by trade. The notion met with immediate resistance from school-district staff, who questioned the underlying motivation of Soboroff, who also was a senior adviser to then-Mayor Richard Riordan.

”Mr. Soboroff, in his capacity as chairman of the BB Oversight Committee, is actively promoting this agreement, even though the Department of Water and Power (a department of the city of Los Angeles) has a financial interest in the outcome,“ wrote Roger Rasmussen, the head of the district’s Independent Analysis Unit, in a memo.

At the time, Mayor Riordan and city officials were concerned about whether the city‘s DWP would survive the deregulated energy market. If the DWP failed, city revenue would decline and thousands of jobs could be lost. In his defense, Soboroff insisted that he was only recommending an approach, not a vendor, although senior staffers recall that his initial interest was to involve the DWP specifically. Whatever the case, Soboroff made a compelling argument.

”I think without Steve bringing this proposal to our board, it would not have gone anywhere,“ recalled David Barulich, a businessman who served on the school-bond oversight committee from April 1997 till January 1999. ”Steve brought this concept to our committee of an entity that would be willing to take the risk to get this done on an accelerated timetable at a fixed price.“

With Soboroff, Mayor Riordan and the oversight committee on board, there was substantial pressure for the school district and then-Superintendent Ruben Zacarias to adopt the package approach. The final consortium included CH2M Hill to manage construction and at least three major subcontractors to provide air conditioners and installation. The primary energy provider was to be PG&E Energy Services, a subsidiary of Pacific Gas & Electric, the giant Bay Area utility. The DWP, ironically, was left with scraps, making its participation short-lived and almost irrelevant. For his part, Soboroff soon veered much of his focus toward other matters, including an unsuccessful campaign for mayor. Soboroff, who is now spearheading the Playa Vista development on the Westside, did not respond to an interview request.

At the school district, negotiations between the consortium and the school district bogged down. The consortium had trouble delivering a ”guaranteed“ price without guessing high, because the huge number of old and diverse school sites presented construction challenges that were difficult to cost out en masse. On the other side, district administrators, unimpressed with the consortium’s offer, were either bravely resistant or merely intransigent, depending on the interpretation. ”Fast track was just about the slowest thing going,“ commented one district veterano.

Rasmussen also weighed in again. ”We believe that cost considerations favor the normal competitive-bidding process,“ wrote the internal analyst in a July 1998 memo. ”Spending an extra $16 [million] to $20 million for air conditioning would mean less [bond] money for other needed repairs and construction of new schools.“ Rasmussen‘s numbers incorporated presumed savings of $11 million in energy costs, so the real disparity between the package deal for air conditioners and the district’s calculation of appropriate charges was even greater.

Nonetheless, the single-contract approach had some touted advantages: The price was fixed, so that costly ”change orders“ could be avoided; and the consortium would take on management and oversight duties that the district would otherwise have to pay for. Or at least that‘s what was advertised. A new district analysis, released just last week, contends that these presumed advantages were overstated.

The mammoth air-conditioning contract was not signed until January 1999, a nearly two-year delay that, by itself, nixed the premise of a quicker path to cool classrooms.

Another problem loomed because the district had not used the traditional competitive-bidding process. To avoid a future legal challenge, the school district asked a Superior Court judge to validate the contract. After a review, the judge refused, ruling that the matter was outside the court’s jurisdiction. Which is where state Senator Richard G. Polanco joined the fray.

Polanco‘s staff contends that the senator was merely acting at the behest of the school district when he accepted a rider to an unrelated Senate bill. This addendum declared the LAUSD air-conditioning contract, by legislative fiat, to be eligible for state funding. Governor Gray Davis signed the legislation in September 1999.

Just last month, in an unrelated transaction, Polanco took a media drubbing for coaxing board members to adopt a $6.3 million software contract that later was canceled because of alleged improprieties involving Polanco. But on the air-conditioning deal, Polanco, apparently, was merely a willing middleman for the school district’s legislative maneuvering.

By this time, the school district had removed dozens of schools from the consortium‘s contract, because the stalled fast-track plan was holding them up and state funds for such projects were rapidly evaporating. In the process, an unsettling discovery was made. These schools were installing air conditioners at a dramatically lower price than that offered by the consortium. The consortium, meanwhile, adjusted its per-school price upward, asserting that the 92 remaining schools would cost $146 million.

After the departure of Superintendent Zacarias, a new group of district officials quickly judged the A.C.energy deal a bust. Even with the $19.3 million buyout, they concluded the district could save millions of dollars by bidding the work anew. The savings for 58 schools alone are in the range of $5.8 million to $9.6 million, reported Tom Rubin, a consultant for the bond-oversight committee. A.C. jobs at about 180 schools are finished or under construction. Work is not yet under way at about 90 schools.

The entire episode was brought to the oversight committee by community activist Gene Krischer, who has pored over air-conditioning transactions for more than four years. In a tribute to Krischer’s research, Rubin included him in the official staff presentation.

”One lesson here is that laws requiring competitive bidding exist for good reason,“ said Krischer. District staff also validated Krischer‘s discovery that the contract would have permitted air conditioners that surpassed maximum noise levels permitted by the district’s own specifications. These decibel levels also far exceeded widely accepted industrywide standards for classrooms. And while CH2M Hill never installed any A.C., the same ill-conceived noise thresholds were permitted in installations that did take place. Recognizing that noisy air conditioners make it difficult for students to learn, the school system is currently reviewing the extent of the problem, said James L. Delker, acting deputy chief for facilities.

The energy part of the deal had its own peculiar and happier fate. The DWP continues to power most of L.A.‘s schools and at a discounted rate that has nothing to do with the installation of air conditioners.

As for the consortium deal, PG&E Energy Services held up its part of the bargain, which was to provide energy for 120 L.A. Unified campuses that lie outside the city of Los Angeles, within the territory of Southern California Edison. When the PG&E subsidiary was sold off, Enron ended up with the school-district contract. This portion of the deal has saved millions of dollars, according to the school district. Still, it’s hard to imagine why air conditioners ever needed to be part of such an arrangement. They aren‘t any longer.

And this week, Enron also got the boot. Even though the Enron rates were better than SoCal Edison’s, district officials have nailed down a better arrangement, with the city of Corona, of all things. Corona will provide surplus power to the school system at a price that significantly undercuts Enron.

Of course, even that positive outcome doesn‘t justify the A.C. disaster.

”The district was not ready to start the school-bond construction program,“ said consultant Rubin. ”It did not have the right people, the right systems, the right plan on how to do this. And the district was having to start a whole bunch of projects at the same time. That is how they got into the situation they did.“ He added, ”These were expensive lessons, but they were well-learned.“

The district hopes the last part of the message is one that will stick with voters, who will be weighing new school-bond measures in the fall.

Research assistance provided by

Dennis Dockstader.