Howard BlumeWhen school-board member David Tokofsky and others sought an internal investigation of the Belmont Learning Complex, they hoped for an exhaustive look at the misdeeds of their management team and consultants.
This week‘s internal auditor’s report documents an assortment of conflicts of interest at Belmont, the high school that sits half-finished atop an oil field. But it falls short of the intended mark, never quite making sense of the money trail or the workings of the now-defunct Office of Planning and Development, which oversaw the project on the contaminated site.
The report is unequivocal, however, in its sweeping condemnation of the $7.5 billion school system‘s financial apparatus, which gets a failing grade in the view of internal audit chief Don Mullinax. To the audit team, the Belmont episode underscores grave problems in how the district handles all of its budgeting matters. “The findings involve the waste and mismanagement of funds that could have been used to provide a better education for Los Angeles children,” said Mullinax. “In short, we found the school district as a whole did not place a sufficient priority on financial management. We found significant breakdowns in financial controls, procedures and systems.”
This assessment immediately cost the job of Chief Financial Officer Olonzo Woodfin, who was demoted a notch to district controller.
When it came to the $200 million Belmont project itself, Mullinax chased meticulously after lost nickels and quarters until they added up to more than $2 million in potentially fraudulent overbillings by subcontractors.
Mullinax singles out six subcontractors, including those who performed work on tile, dry wall and electrical wiring, as having overcharged the school district. He faulted not only the subcontractors, but also the developer, district staffers, and two private firms hired to oversee and review the project.
An immediate denial of wrongdoing came from the team of developers, which is anchored by a unit of the Kajima Corp. “Our development agreement includes a process for addressing billing issues, and we are confident of resolving any disagreements between the district and subcontractors in that forum,” said project executive Ken Reizes in a statement. He added, “It is important to note that the district has not paid a penny on any of the disputed pay applications cited by the auditor.”
While this bread-and-butter auditing of subcontractors is the sort of valuable analysis that the school system has long lacked, it’s also far from the heart of the matter at Belmont, the nation‘s most expensive high school project ever. In fact, much of the Mullinax report sits at the opposite end of where critics wanted to point auditors. What’s missing are any groundbreaking information or analyses on the origins of the project, and a detailed review of all the operations of the disbanded Office of Planning and Development, headed by former planning director Dominic Shambra.
That‘s not to say that Shambra didn’t take some hits. Mullinax singled out the retired planning director for “ultimate responsibility as the senior LAUSD official directly responsible for the current Belmont situation . . . Mr. Shambra failed the children, staff and taxpayers.” Specifically, he said, Shambra and his advisers, time after time, left the district unprotected and ill-prepared for the environmental problems that have halted construction. In addition, Shambra allegedly failed to require proper documentation on payments to consultants, including one who became his girlfriend.
Shambra, in turn, defends the validity of the payments to all his consultants. And he classifies the environmental issues as a “scam” of self-serving environmental consultants: “If you take the environmental B.S. away, the auditors haven‘t found a whole lot in there.”
Mullinax also took on the development agreement itself, arguing that the project’s touted “Guaranteed Maximum Price” was more of a “guaranteed minimum” price.
“This analysis went to the heart of the development agreement,” commented board member Tokofsky, “and its lack of protection for the district and the ability for the developer to continually hide costs in another area and shift costs around.” At the same time, said Tokofsky, he wanted Mullinax to reach even further: “I would have liked to see more on the texture of how the interpersonal relationships between the consultants, staff members and developers actually worked.” The auditors “clearly cut off from some significant issues, like an examination of the very money that created the Office of Planning and Development.”
The text of the audit report concedes that it‘s less than definitive regarding Shambra’s consultants. But for this, the auditor frequently blames Shambra‘s own record-keeping and the lack of district oversight. In the case of consultant Wayne Wedin, the report states, “the Internal Auditor has probable cause to believe that Mr. Shambra failed to exercise sufficient supervision and control over the activities of Mr. Wedin, to the point that it is not possible to document accurately the value of services delivered to the LAUSD by Mr. Wedin.”
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The school system paid Wedin more than $1 million over a 12-year period for his work with Shambra on a variety of projects, including Belmont.
Contacted at his Orange County office, Wedin said he hadn’t seen the report. “My generic comment is that I was given assignments. I performed that work, turned in the invoices. Those were reviewed by the district and approved ultimately. And now I guess I‘m being criticized for that.”
Wedin served as Shambra’s development guru; he actively pushed the idea of including a shopping center in the Belmont complex as a way to return revenue to the school system. For now, this plan bears little hope of coming to fruition. Meanwhile, the school system is probably on the hook for at least $7 million spent to build the retail space under the superstructure of the school. The report does not address why and how a speculative retail development became a defining, costly feature of the school.
Mullinax provides somewhat more detail on Shambra‘s hiring of consultant Betty Hanson, a longtime family friend who began dating Shambra in the months after the death of his wife. Before becoming a consultant, Hanson had worked as a school-site analyst for the California Department of Education. In that capacity she had approved the Belmont site as suitable for a campus. Soon after, as Shambra’s aide, she helped prepare Belmont project applications for state agencies.
The Mullinax report, for the first time, puts Hanson in the middle of key decisions. She and Shambra together decided not to seek state reimbursement for the costs of dealing with contamination at the Belmont site, a shallow oil field that emits explosive methane gas and toxic hydrogen sulfide. Not seeking state reimbursement was a grave omission, in the view of Mullinax. Completion of the half-finished school has been halted until experts determine the cost and feasibility of addressing the gas emissions.
In an interview, Shambra asserted that Mullinax‘s analysis is flawed. He said the district had no realistic hope of getting cleanup money from the state. If he had included a claim for these funds, he said, the project application simply would have been kicked back to the district, delaying possible state approval of the project.
Mullinax also questions Shambra’s assignment of Hanson to the task of applying for federal earthquake repair funds. This task “became highly controversial,” says the report, “in that the work outlined to be done in the contract . . . was already being undertaken by existing school district employees, who opposed the retention of Dr. Hanson on those grounds.”
In a handwritten notation to Hanson‘s work proposal, one district employee wrote, “There is nothing here that can’t be done by District Staff at no additional cost except for the costs to prepare repair estimates” for the Business Services Center.
The matter eventually was submitted to Roger Rasmussen, head of the Independent Analysis Unit, who concluded, “A $50,000 fee with no guarantee of performance seems high. If we wanted to use her, we could suggest a smaller initial fee and more dollars if she is successful, or we could hire her as a consultant for an appropriate daily rate, or we could hire her to provide specific work products.”
Evidently, the contract went through without these suggested amendments. Shambra said he knew of no discomfort over the deal until well after Hanson began her earthquake-related work. Eventually, he said, Hanson reported tension over her presence, so Shambra decided to reassign Hanson, under the same contract, to work directly for him instead.
Mullinax also noted that, based on a review of available contracts, the company for which Hanson works was paid $256,325, which is $11,325 more than the district contract authorization. The report recommends directing Hanson to return the money or justify the expenditure.
Shambra said he and Hanson have discussed the matter and concluded that Mullinax missed a contract in his review. Through Shambra, Hanson declined comment, but in an earlier interview, Hanson maintained that she ended her district work before earning the full authorized amount of her final contract. She added that she left the district — voluntarily — because of continuing questions over her relationship with Shambra, who was in charge of authorizing her contracts and reviewing her billing.
While Mullinax revealed some new documentation about Hanson, his information about Wedin was sparse, less comprehensive even than in past Weekly articles. Mullinax, for example, did not assess Wedin‘s conflict of interest in evaluating the work of project architect Ernesto Vasquez, who has been Wedin’s business partner elsewhere.
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But for the first time, district auditors did point a finger of blame at Shambra‘s financial advisers from Ernst & Young, one of the nation’s leading accounting firms, which billed more than $2 million to the school system. Ernst & Young played a role in both selecting a developer and negotiating the terms of the development agreement. The Mullinax report claims that Ernst & Young “breached its professional duty of care” by not alerting Shambra about the need to budget for and insure against the effects of oil-field contamination. The report also discloses that Ernst & Young was simultaneously doing work for the chosen developer, the Kajima Corp., at Ernst & Young‘s Dallas and Washington, D.C., offices. Apparently, this conflict of interest was never disclosed to the school board. An Ernst & Young spokesman said the report “grossly mischaracterized our role,” and defended the firm’s work.
Taken together, the two Mullinax reports on Belmont paint a still-unfinished portrait of an operation — managed by Shambra — that was fatally undermined by conflicts of interest at virtually every turn, from Hanson‘s relationship with Shambra to Kajima’s business ties with both Ernst & Young and the law firm of O‘Melveny & Myers. Project architect Vasquez embodied a dual affiliation all by himself. He started as an evaluator of the teams competing to build the school, then slid to the other side of the table — joining one of three competing teams as its architect. It was this team that eventually got the bid. Of the six people who conducted the final evaluation only one — Shambra himself — had no direct or indirect business ties with a member of the winning development team, which won the bid based on subjective criteria rather than on its price, which was the highest of the three finalists.
One of the key evaluators was consulting attorney David Cartwright of O’Melveny & Myers, who gets slammed in this Mullinax report for a December 1998 memo in which Cartwright advises the school system “to relax its normal accounting procedures in tracking the expenditures by the developer, contractor and subcontractors at Belmont.” The report characterizes this advice “as remarkably ill-conceived.” The assertion is more grist for the school system‘s ongoing lawsuit over Belmont against O’Melveny & Myers, the prestigious law firm that advised L.A. Unified on Belmont and helped prepare the development agreement. The Mullinax report recommends pursuing litigation against other involved parties as well.
A statement from O‘Melveny said that Mullinax misinterpreted the intent of the Cartwright memo. An O’Melveny spokesman declined to elaborate.
Until the Mullinax report, Shambra‘s office had never been audited. That’s partly because the office reported directly to the superintendent. The arrangement was established by Superintendent Bill Anton, a close personal friend of Shambra‘s, and later continued by Sid Thompson, Anton’s successor. In addition, Shambra scrambled for operating funds from a variety of nontraditional sources, effectively putting him outside the normal budgeting process. He obtained some funding from the city‘s Community Redevelopment Agency and additional dollars, a $150,000 “planning grant,” from the seller of 24 acres at the Belmont site. In an interview, Mullinax said that Shambra never had a traditional budget to reconcile expenditures against.
On the other hand, it might not have mattered given the district’s loose financial controls. Shambra himself fully agrees with the auditor‘s findings in this arena. And also with Mullinax’s contention that district managers have carved out petty fiefdoms that undermine the entire operation: “Apparently, not only did departments not know what the other departments were doing, but they appeared not to want to know.” The audit describes a budget-oversight system in disarray, with millions of dollars filed under untraceable “miscellaneous” categories and payment invoices altered by hand without any indication of who made the changes. “It is an understatement to say that LAUSD‘s way of managing its financial affairs at Belmont borders on total and utter breakdown,” said Mullinax. “When the Chief Financial Officer struggles to answer the basic question — what has the LAUSD spent on Belmont to date? — you know the accounting system should get a failing grade.”
This lack of precision helped push CFO Woodfin from his job. Woodfin was just about the only senior official available for purge on this round. An earlier Belmont report, issued in September, already had contributed to the departures of other top administrators. An interim chief financial officer, or perhaps a financial-management team, will be in place within seven to 10 days, said Chief Operating Officer Howard Miller.
Miller’s recent arrival insulates him, for now, from the auditor‘s lashes. On Tuesday, he vowed to abide by a laundry list of Mullinax suggestions for reforming financial operations. “We fully accept the recommendations of this report and shall implement all of them,” said Miller. “Our intention is to drive a stake through the heart of the culture that produced these results.”
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