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Auditors say Md. highway agency concealed unspent funds as it asked for more

Agency failed to make required disclosures, report says

By Michael Dresser, The Baltimore Sun

7:53 PM EST, December 2, 2011

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The State Highway Administration repeatedly requested new contracts from the Board of Public Works while concealing that millions of dollars remained unspent from previous awards for the same work, according to legislative auditors.

A new report by the Office of Legislative Audits, released Friday, comes after a scathing audit last summer outlined a "revolving door" relationship between the highway agency and its contractors. The audit led to significant management changes at the highway administration, including the departure of senior officials.

The new "special review," which did not amount to a full-scale audit, focuses largely on the SHA's failure to fully disclose significant details of its contracting practices to the public works board. The board — made up of the governor, comptroller and treasurer — is the body charged with reviewing the awards of large government contracts in a manner open to the public.

State Comptroller Peter Franchot said the SHA's actions were "just the kind of taxpayer abuse that BPW is designed to prevent."

"I would describe SHA's conduct as a conspiracy with its own contractors to cover up inappropriate spending by avoiding the oversight that is afforded by the BPW under law," he said.

In addition to pointing out the requests for unnecessary money, the report also expanded on an earlier finding that the agency routinely evaded oversight by shifting money between contracts without the required approval of the board. In one sampling of contracts, auditors found that in 10 worth a combined $45 million, one-third of the money was spent for work outside the scope of the contracts.

In some cases, the auditors determined, money was moved between contracts to "conceal overspending." The review says the deals made between the agency and some of its contractors "are indicative of a less than arm's-length relationship between those parties that, in turn, could raise questions about the integrity of the procurement and payment process."

In other cases, the auditors found, the SHA — acting outside its authority — extended the expiration dates for contracts without board approval and kept $26 million in unspent funds.

One of the most serious findings was that the agency sometimes sought new awards even though little of the money for previous contracts had been spent.

In the most extreme case, the auditors found that in October 2008 the agency asked the board to approve a $16 million contract for inspection services at a time when $15.4 million remained from the previous contract for such work in the same district. Two months later, with $30 million still available for such services, the SHA went back to the board for an additional $16 million. Almost a year later, with $36.5 million unspent, the agency sought $10 million more.

In each case, the administration failed to disclose to the board that it had failed to spend the previously approved money. Franchot said board members "were in the dark" when they approved the requests.

"Apparently the SHA bureaucrats were hoarding taxpayer money so they could avoid the BPW review solely for the sake of spending it at will," he said.

The two $16 million contracts are the same ones identified in the previous audit as having been awarded in a way that circumvented the agency's bid evaluation process. Those contracts went to groups the audit identified as having contributed money to a golf course in which an SHA construction office employee who played a role in the procurement had a financial interest. Auditors also found irregularities in how agency contracting officials scored the winning bidders' proposals.

The bid groups were headed by Johnson, Mirmiran & Thompson of Sparks and Rummel, Klepper & Kahl of Baltimore — two of the state's largest highway contractors. The employee left the agency shortly before the first audit was released. In the case of the JMT contract, auditors determined that a former SHA employee was involved in the procurement both when he was working for the agency and when he was working for the company — a violation of state rules.

The companies have denied any knowledge of improprieties in the way they were awarded contracts and have said that their dealings with the agency were aboveboard.

Maryland Transportation Secretary Beverley K. Swaim-Staley said the department agrees with the auditors' findings and either has made or will make changes to address their concerns. She noted that the two $16 million contracts and others have been referred to the attorney general's office for criminal investigation.

Swaim-Staley said the abuses were the product of "sloppiness" that had built up over many years. "People tended to stretch the rules to the point where they started ignoring the rules," she said. "It's something that happens to the culture gradually."

The secretary noted that nothing in the auditors' findings suggested SHA money was spent for purposes other than transportation, though auditors said a preliminary survey indicated that some money may have been diverted to other department agencies.

The questionable transactions identified in the reports took place at a time when the highway administration was led by Neil J. Pedersen, who retired at the end of June after 29 years with the agency. Deputy Transportation Secretary Darrell Mobley has filled in as interim administrator since then, and former Intercounty Connector project manager Melinda Peters is expected to take over as permanent administrator in about a week.

Swaim-Staley said that since Pedersen's departure, there have been several personnel changes — "some of them voluntary, some of them not" — at all levels of the agency.

She said Peters, whose promotion places her over an entire tier of Pedersen's former deputies, will be given the task of cleaning up the abuses identified by the auditors. "She understands that her first challenge is to restore the integrity of the process and make sure everyone understands these rules are in place for a reason and we are going to follow them," Swaim-Staley said.

michael.dresser@baltsun.com