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Clarification: ‘Mayor backs off of pursuit of utilities audit’

By Staff | Mar 3, 2011

A story in the Tuesday, March 1, 2011 edition of The Breeze entitled “Mayor backs off of pursuit of utilities audit” contained a summation paragraph that stated: Sullivan maintains that MWH — the city’s utility contractor — knowingly stole money from the city and evaded Michael Kessler to those ends while he performed his audit.
Mayor John Sullivan, in his presentation to Cape Coral City Council on Monday, did not use the phrase “stole money.”
For readers interested in the complete text of Mayor Sullivan’s introductory statement to city council concerning his proposal that the city fund a construction/forensic audit of SE 1, SW 4 and SW 5, The Breeze offers it below.
Readers may also view the entire discussion on the matter at:
The city’s website allows most users to click on the agenda item of interest to “jump” to the appropriate portion of the video. If that does not work on your computer, the discussion may be found at the three hour, seven minute, 19 second mark.

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Mayor John Sullivan:

I’m going to summarize most of what’s been said in the past and I’m going to make this as quick as I can.

The audit can keep us from making mistakes in the future, it could be a recovery of taxpayer money. Kessler’s credentials are far and above anyone else I know of, Townsend and Kessler are familiar with how we’ve done business in the past. I believe the higher level city employees did not protect our residents thereby giving the contractor a great advantage in a way of charging the city and billing the city for services and I believe we were taken for a ride in more ways than one.

We use data and pricing that was applied by our prime contractor to determine pricing. This was a real conflict of interest, and anyone with any common sense would not have allowed this as a basis for what we paid for services. In the follow up audit, the state auditor’s audit, there was some problems that were not fixed only partially addressed. I’m going to read those right now:

Finding 4: Budget preparation, no corrective action.

Finding 5: Budget over-expenditures in four funds of $89,098,022, partially fixed.

Finding 6: Bank reconciliations, partially fixed.

Finding 10: Determinations of contributions in construction, no corrective action.

Finding 11: Collection of contribution in name of construction, partially fixed.

Finding 13: Use of capital expansion and CIAC fees, no corrective action.

Finding 15: Allocations of cost, partially fixed.

Finding 16: Unauthorized expenditures, no corrective action, the same problem as in New Orleans.

Finding 17: Procuring contract for bond councils, don’t know.

Finding 18: Written agreements, partially fixed.

Finding 19: Contract monitoring, partially fixed.

Las Ojas, California, very troubling, a duplicate of what happened in Cape Coral. There was a report put out, if you had read this report, if you put it in a word processor and you did a change on it, a global change, and you changed it from Las Ojas, California to Cape Coral, it would fit like a glove.

New Orleans, exorbitant amounts of money spent on overtime, hourly charges exploded from $23 an hour to $207 an hour, contracts were awarded without competition. A worker earned overtime pay for 14 consecutive 24 hour days. How do you work 24 hours a day for 14 days and get overtime for it? I’d like to have that job.

Fees were charged faster than work was done. MWH has a history of overcharging and is considered standard business practice. Inspector General in New Orleans found the city improperly paid MWH employees $48,000 up to $275 an hour for negotiating their contract with City of New Orleans.

KBR/MWH partner, MWH here has a bad history. At one point their parent firm Halliburton was fined $559 million for illegal activities in government contracts. Upper level city staff gave orders to engineering firms to use data generated by MWH and reports that may have influenced the expansion of plants. This is a conflict of interest.

MWH hired Price Waterhouse Coopers and paid them $450,000 to dispute the Kessler report which cost us $130,000. I don’t know about this, but PWC I can tell you this much, was fined $225 million to settle a class action lawsuit over a multi-billion dollar accounting fraud that ended with with Tyco’s top executives going to prison. I don’t think I would depend on anything they put down on paper.

We see in SE 1 a charge of $174,841 for a secretary/administrator for 14 months. We see a letter sent from Dona Newman who states, our conversation with you, meaning me, caused me to wonder who was representing the city’s best interest. The contract was adjusted in 2004, yet we see the concerns regarding the new contract in two letters. One from former Mayor Burch and one from the past president of the CCCIA in 2008.

I’m going to read a synopsis of what was on the Office of the Inspector General in the City of New Orleans

Finding 1: The city selected MWH through a flawed procurement process that failed to produce meaningful competition. That really sounds familiar to me. MWH was not required to submit a competitive cost proposal and the city had no assurance that MWH fees are competitive. Again, sounds familiar. MWH has refused to provide evidence that it is honoring its contractual obligation to charge the city its most favored customer rates. The city improperly paid MWH for negotiating the contract. The contract did not require MWH to sign key personal to the infrastructure project. The contract calls for MWH to be paid on a time and materials basis, a form of compensation that presents a high risk of excessive charges. The contract calls for MWH to be paid for expenses on a cost plus percentage of cost basis, a form of compensation that is specifically prohibited under FEMA rules. FEMA was the one the one that was footin’ the bill for all this. The not-to-exceed contract cost was not based on a realistic budget for an infrastructure project.

Finding 9: MWH’s billings for capital projects provide no basis for allocating costs to specific projects for keeping MWH’s fees in line with overall project costs.

Finding 10: The city allowed MWH’s fees to mount faster than a rate of progress on capital projects.

Finding 11: The state revolving fund has been depleted to expedite payments to MWH without regard for whether the expenditures will be reimbursed.

Finding 12: The city paid MWH $1,309,572 for unspecified expenses during the first 18 months of the contract. This relates to our Finding 16 here, MWH employees sought reimbursement for gifts to city employees and elected officials. The city used the MWH contract for a vehicle for procuring other professional services without competition.

Recommendation 1: The city should procure a new contractor project management services.

Recommendation 2: The city should develop contract terms that protect the city’s interest and provide incentives for containing costs.

Recommendation 3: The city should institute effective contract oversight procedures. That’s one of our problems as well.

Recommendation 4: The city should ensure that all employees and elected officials receive training in state ethics laws and the city’s code of ethics.

This is not John Sullivan saying this, this is the Office of the Inspector General of the City of New Orleans. These guys have been pulling this stuff all over the country, not just here.

Here’s a letter from James, uh, Jim Burch, my predecessor, that was written on Tuesday, June 4th, 2008. This is in the packets.

Number 1: The objective is to ensure there is no ambiguity on how the contract is to be audited. Two, the new language will be fully responsive to the auditor’s concerns and fully reflect her recommendations. How can the auditor make recommendations if she doesn’t understand the language? Please provide me with the auditors findings verbatim and provide the answer to the above question.

All these things that are in this letter show that costs and so-forth could be manipulated. It’s an open contract to allow for people to over-bill because they can’t even read the contract or make out what it says.

Here’s another one from the Cape Coral Construction Industry Association. I don’t have a date on it but we received it July 14th, 2008.

Again, after our contract was already revised, we had a contract in 1999 and another one in 2004 which was supposed to fix the problems. This said it didn’t fix the problems.

It says over the years various audits and state Auditor General have provided comments to the city which should be reviewed and implemented to ensure further controversy is minimized or eliminated. The current contract structure should be strongly reviewed and revised to reflect the current market realities and current salary parameters for Southwest Florida. Reviewed, that means audited. The city should compare the various fees and add on costs to the contract to determine if they are appropriate and reflect the current realities of the South Florida market. Again, that points to an audit. The city should strongly review the reason for enacting a reduction force in DCD, I’m not going to go further with that, but it says the City of Cape Coral needs to review and change the current contract methodology and pricing structure being utilized for the Utility Expansion Program to reflect the standards used in this area and take advantage of current pricing realities.

That’s all it says in here, audit, audit, audit. These guys are in trouble in California, they’re in trouble in New Orleans and they should be in trouble with Cape Coral.