No-bid contracts show city schools' lack of oversight

THE BALTIMORE SUN

Not long after he was promoted to a new job that gave him power over all school contracting in Baltimore, Wilbur C. Giles Jr. undertook an ambitious project to cut utility costs.

He had little trouble convincing the city schools chief and school board that it would be worthwhile. What they did not realize was that the first to benefit would be two consultants who got lucrative, no-bid contracts to finance and manage the $12.3 million project.

One is Columbia financial broker J.P. Grant, whose company is making, by the school district's estimate, at least $1 million in fees - up to eight times the industry standard. Grant is a friend of Giles' and the two went on a four-day golfing trip together in late March at a luxury resort in Puerto Rico.

The other is a Baltimore energy planning firm, Carnegie Morgan Resource Management, for which Giles arranged a $670,000 management contract that wasn't even shown to the school board.

If school officials had been more vigilant, they might have saved about $800,000 in fees that went to Grant - enough to send 1,500 students to summer school or give 2,000 teachers a week of intensive training.

The way in which Grant and Carnegie Morgan were hired reveals a lack of safeguards commonly required by other governments in Maryland to protect tax dollars and make sure work is properly done.

Three years after the Baltimore school system became independent, taking over millions in contracting and purchasing that used to be handled by City Hall, it still does not have its own spending rules in place.

Contracts no longer must be scrutinized by the Board of Estimates, the city's financial review panel, nor are they audited by the city comptroller.

Fiscal oversight is largely left up to the school board, run by nine leaders from the private sector who have little experience in government, and only one of whom follows business matters closely.

Education chief Robert Booker, hired for his financial expertise, now acknowledges that he was unfamiliar with many details of the consulting agreements. He said he did not know that the Carnegie Morgan contract wasn't properly executed, and only in the past two weeks did he review the fine print of the financing deal that discloses Grant's fees.

His chief financial officer, Roger Reese, handled the financing and signed for Booker. Reese, who is Giles' boss, did not consult with the school treasurer as is customary, or get quotes from other brokers to determine whether Grant's fees were reasonable.

"Unbelievable," said Charlie Feinstein, a financial adviser in the San Francisco Bay area. "Traditionally, you try to keep your fee to less than 1 percent. It doesn't sound like a good deal."

Booker contends that he has "a fairly good system of fiscal and business controls" and said he had been led to believe that the school district "got a good deal." But he acknowledges that mistakes were made and said he plans to "strengthen internal controls."

In two interviews, Booker said he is particularly concerned by the financing agreement and that he is hiring an outside auditor to look at it. He said he wants to know "whether [Grant's] gross profit was excessive."

"If I find out we did not get the best deal," he said, "I will take appropriate action."

This is the second time in three months that Booker has been forced to take a closer look at the district's management of multimillion-dollar contracts.

He also has ordered an audit of a school technology contract that doubled in costs within a year as the company billed for subcontractors and work that had not been publicly discussed or approved.

Common-sense savings

The energy project, now under way in 30 elementary and high schools across Baltimore, was billed as a common-sense way to save on heating and lighting costs.

Giles says he is "very satisfied" with Carnegie Morgan, which he credits with devising a creative retrofitting of old schools. The project, he says, is "under budget and ahead of schedule."

But the school system has given up a significant degree of internal control to the two consultants. Interviews with those familiar with the contracts and a review of several hundred pages of financial documents, internal correspondence and billing records obtained by The Sun reveal key details:

The idea was to modernize 30 schools at once, without spending limited construction funds to replace lights, caulk windows and buy boilers one building at a time. The project, which was to pay for itself, was conceived by Carnegie Morgan, a firm brought on by school board as its "energy consultant" in October 1998.

But Carnegie Morgan's role quickly expanded. The company wrote Giles' first presentation to the school board, delivered at a closed-door session Jan. 26, 1999, picked the 30 schools and played the leading part in selecting two national contractors to install the energy-efficient equipment.

Then, without considering any competitors, Giles made Carnegie Morgan the project manager.

Looking for a quick way to raise money to pay for the energy project, school officials turned to J.P. Grant's firm. Grant devised a deal that set himself up profitably as a middleman.

The school system agreed to a deal under which it would receive $12.3 million from Grant's company. Grant, meanwhile, effectively borrowed the money more cheaply from Morgan Guaranty Trust Co. of New York. The difference amounted to $570,000, which Grant's firm kept.

Grant also is collecting interest on the $12.3 million until it is spent on the new lights and boilers. By the time the work is done in December, Grant will have made as much as $481,000, according to a school district estimate.

Three leasing experts from Baltimore and elsewhere call the practice highly unusual and said the school system ordinarily would be getting the interest.

School officials first began reviewing the contract documents in recent weeks when questions were raised by The Sun.

Oversight was so lax that the school board belatedly learned Carnegie Morgan had been paid management fees for seven months under a $670,000 contract that had been tucked into the energy deal.

The official document in school headquarters had blanks where the signatures should have been. On May 10, the board had to approve the contract retroactively.

Giles, whom Booker said he counts on to be "always looking over the shoulder of contractors," has more than a business relationship with Grant. The two men are longtime friends, according to Grant, and they vacationed together March 23-26 at Las Casitas, a secluded, cliffside resort overlooking the Caribbean where the two-room villas cost $1,275 a night.

Asked about the trip, Giles, 50, initially suggested that it was a coincidence that he was in Puerto Rico at the same time as Grant.

"OK," he said, "that is really wonderful. So were probably a thousand other people."

Grant, however, acknowledged that they had vacationed together.

"We had separate rooms. He paid his bill," he said in a telephone interview. "We're just friends. It's that simple. There's nothing clandestine or anything like that. In Baltimore City, it's hard to be in business, to be in government, without knowing people."

Hotel records show that Grant booked two villas in his name at Las Casitas, where the guests stay in a private, lushly landscaped enclave but can take advantage of the golf course, tennis courts and spa next door at the El Conquistador Resort and Hotel.

Split the bill

After The Sun raised questions, Giles produced a $2,041 Diner's Club receipt from El Conquistador and said in a later interview that he had "stayed with some other guys" at a villa and that "we split a bill."

Despite their friendship, Giles insists that the decision to hire Grant was not up to him and that he has "not seen any documents which clearly explain his compensation."

Who did hire Grant is a mystery that baffles at least one school board member.

"That's a question I have myself," said board member Colene Y. Daniel, vice president of community and corporate relations at Johns Hopkins Hospital.

Booker says Reese recommended Grant. Reese signed the financing documents "for Robert Booker." Reese did not return phone calls to his office and would not discuss the matter when reached at home.

In many ways, Grant was a logical choice. Billing records show he had been consulting with Carnegie Morgan since the energy project's inception in fall 1998.

He also was financing a similar retrofit of state buildings to save utility costs and was a frequent visitor to the city school administration building, where he went to lunch with Giles while arranging a $24 million loan to the city school district to upgrade its computers.

Grant, 45, is a Harvard-educated financial broker with a long track record in the region who runs his firm, First Municipal Credit Corp., out of his Columbia home.

He refused to answer written questions and did not accept a letter delivered by courier last week to his home.

Context of the deal

In a brief telephone interview, however, Grant said he gave the school system a good rate.

"When you are doing your research, look at the context of the deal," he said, noting that the city schools have not borrowed much on their own and are still "trying to establish credit."

Larry E. Jennings Jr., 36, founded Carnegie Morgan as a financial advisory business in 1994. He has since added energy conservation and technology divisions and has clients from Prince George's County to Chicago and Detroit. Jennings was outspoken in his company's defense.

"You're making inquiries about a program that's completely sound," he said. "If you talk to anyone, and someone tells you we're a bunch of political hacks, they're lying.

"The school system believes we are doing an outstanding job, and their belief is accurate. They're saving money over 15 years and freeing up $12 million to accelerate capital expenditures that they would otherwise not be able to do."

Booker agrees that the project is a useful endeavor that will help the schools run more efficiently. He says Carnegie Morgan appears to be doing good work and that the energy project is on schedule, but that he will not make a final assessment until he determines whether the financing fees were reasonable.

Power of connections

The tale of how Jennings and Grant won the no-bid work illustrates the power of connections in government contracting in Baltimore. It began in City Hall.

In the second half of his third term, then-Mayor Kurt L. Schmoke assigned his Cabinet to look into reducing energy costs. The Mayor's Energy Task Force hired Carnegie Morgan, through competitive proposals, to help analyze city agencies' energy usage, negotiate utility rates and do similar work.

Giles, known for his taste in cigars and his lavish Christmas parties, was then the school facilities director. He soon joined the task force, which included George G. Balog, the city public works director; Daniel P. Henson III, the housing chief; and Lynnette W. Young, the mayor's chief of staff - who now works for Carnegie Morgan.

Jennings knew the high-powered department heads, having served as a Schmoke appointee on the city housing board.

He resigned in 1994, after being cited by federal auditors for conflict of interest when his relatives won $1.18 million in no-bid housing repair work. Jennings denied any involvement.

A former vice president at Legg Mason Inc. who by age 30 had been chosen by Baltimore magazine as one of "27 members of Baltimore's next business establishment," Jennings impressed the mayor's task force, recalled William R. Brown Jr., former city finance director.

Brown liked Jennings' ideas but had already ruled out doing an energy retrofit project if it required nontraditional borrowing. He didn't want the city to incur more debt.

By fall 1998, Carnegie Morgan had billed almost to its limit on the two-year $250,000 contract advising the mayor's task force, according to city records. But Carnegie Morgan was about to get another business opportunity.

Impact of reform effort

Baltimore's school district had just become independent of City Hall under a far-reaching reform effort. The state became heavily involved, giving $254 million in additional aid to turn around the underachieving schools, and the city gave up a significant degree of say in hiring and business matters.

One mission was to restore financial order after years of disarray, and Booker, a quiet, precise finance officer from Los Angeles, appeared ideally suited for the job.

State Comptroller William Donald Schaefer, who was Baltimore's mayor for 15 years, said he still believes school purchasing and contracting should go before the Board of Estimates.

"The city schools always thought they were independent, shifted money around and did what they want, and I think that was wrong," he said. "All the items of procurement should go before the Board of Estimates. ... I think it's essential to keep the school system on a straight line."

Giles soon suggested to Booker and the new school board that Carnegie Morgan be hired as an energy consultant. The board agreed, and joined the City Hall contract in October 1998.

Six months later, Giles was promoted, taking charge of contracting as well as facilities in a new $96,000-a-year job as business officer. One of his first acts was to demote the schools' respected procurement officer, who would have reviewed both contracts.

Two months before being hired, Carnegie Morgan analysts already were meeting frequently with Giles to develop the energy project, according to billing records. The company wrote the bid proposal, arranged the legal review and took the four responding bidders on bus tours of the schools.

A review panel dominated by Carnegie Morgan chose two national contractors, Johnson Controls Inc. and Siebe Environmental Controls, to do the energy work in the schools.

Providing expertise

Daniel, the board member who tracks business matters, says she was not troubled by Carnegie Morgan taking control in a fashion not ordinarily permitted by the city.

"We do that all the time," she said. "Let's say your staff are generalists, but you need the help of a specialist. They were providing their expertise."

Daniel also defends the decision - though she says she doesn't know who made it - to look for alternative financing. Other options were ruled out as inefficient, she says.

Energy conservation programs can be financed in several ways. Some governments issue bonds; others ask the contractors to borrow the money and split the savings. A third option is to borrow through a middleman, as the school system did, using a borrowing arrangement called a "lease."

The deal that Grant and the school system arranged was a lease, a form of loan that despite its name doesn't involve the renting of equipment.

Municipal leasing is a growing industry, reaching nearly $12 billion nationwide last year, as governments look for faster routes to pay for capital improvements.

Leases are less cumbersome than bonds, according to two municipal finance experts and two leasing industry officials, because they don't require taxpayer approval. But they can cost more in interest payments.

Daniel P. O'Connell, president of Evergreen Capital Advisors of Baltimore, has advised Howard County and other governments against using leases: "They never get you as good a deal as general obligation bonds."

An effective tool

Other experts say leases can be effective financing tools for municipal governments, but they raised questions about the Baltimore arrangement.

"It's not at all uncommon to use a lease with an energy retrofit," said Don Haydon, executive director of finance and operations for Minneapolis schools.

Thomas A. Mills, a former Philadelphia school board member and a senior lecturer at the University of Pennsylvania's Fels Center of Government, said leases can have "definite advantages under certain circumstances." Governments often resort to leases when they have reached the limit they can borrow with bonds, he said.

"The thing that puzzles me is, why doesn't the school district get the interest on the $12.3 million. It is a strange-sounding situation to me," Mills said of the city school deal.

In today's highly competitive market for leases, the school system could have eliminated the middleman and borrowed the money directly from a financial institution, said Laurie Zissimos, board chairman of the Association of Governmental Leasing and Finance.

In any case, she and Karen L. Keeler of the Manhattan-based Baystone Financial Group said the schools ordinarily should have paid the industry average of between 1 percent and 2 percent as a broker's fee. On a $12.3 million lease, that would be $124,000 to $240,000.

The school district did not get quotes from competitors for either the project management or financing because the companies had been hired previously through bidding for similar city and state work, according to Booker.

He and Daniel say they were told Grant "gave us the same terms" as he did the state of Maryland.

In fact, the terms are quite different: Grant is not collecting any interest off the financing he has arranged in the past two years for the state to retrofit buildings.

In lending the school system the money, Grant collected twice and made an unusually large profit.

First, he made the difference in selling the lease to Morgan Guaranty Trust Co. under terms more favorable than the school system was paying him. Next, he is collecting the interest while the $12.3 million is in Baltimore's Harbor Bank, estimated by the school district to reach $481,000 before the energy project is complete in December.

It is Grant, not the school system, who gets to make investment decisions until the money is spent. However, the deal requires that he invest in conservative, government-backed securities.

"I know less than a handful of brokers in the industry who will from time to time structure a deal with the escrow interest going to themselves," Zissimos said.

Should have asked

Two weeks ago, a subdued Giles appeared before the school board and said he should have asked the board's permission to award the contract to Carnegie Morgan.

He said he picked the company because it had developed the energy retrofit and had expertise with equally large projects, including the Chicago schools.

"We didn't want to take the risk of turning this over to another contractor," Giles said.

The project will result in annual savings of $1.5 million a year, Giles said, enough to cover the loan payments the school system will have to make for the next 15 years.

More importantly, he said, schoolchildren will get brighter, more comfortable classrooms.

His comments before the board were the most detailed public explanation to date of a project he had nurtured for 18 months.

Sun staff writer Walter F. Roche Jr. contributed to this article.

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