Blueprint
for a $6 billion boondoggle
Waste, poor management and
politics crippled the state plan for urban school
construction.
Sunday, November 13, 2005 • BY DUNSTAN McNICHOL AND
STEVE CHAMBERS • Star-Ledger Staff
It was a raucous ovation bestowed upon
the guest of honor in the summer of 2003 at a Passaic County
banquet packed with 1,000 union electrical
workers.
On the dais, Gov. James E. McGreevey
basked in the cheers, reminding the crowd of his promise to
get the unions a cut of a $6 billion urban school
construction program, the biggest capital construction
undertaking in state history.
The happy union workers were not the only
ones with cause to rejoice. Campaign contributors, party
loyalists and key political constituencies all stood to
benefit from the building bonanza.
But the state's promise of more than 500
new or rebuilt schools turned out to be a hollow one. Kids
in trailers and cramped, decrepit school buildings have
found themselves shortchanged as the money set aside to
rebuild their schools disappeared in an unregulated flood of
waste, mismanagement and political favors.
Now nearly broke, with less than a
quarter of the needed schools built, the state's Schools
Construction Corp. has been such a dismal failure that its
very future is in doubt.
To understand how the state could spend
so much money with so little to show for it, The Star-Ledger
reviewed hundreds of documents and interviewed more than 50
people involved with the program. Among the
findings:
- Key cost-saving safeguards were
ignored while generous arrangements were made in favor of
politically connected firms -- including more than $400
million in consulting contracts that went to campaign
donors.
- Speed trumped all else. In its zeal
to get things moving, the SCC sacrificed financial
oversight and paid contractors and designers premium
rates to get things done.
- Union labor was used almost
exclusively, adding millions of dollars to the cost while
rewarding some of McGreevey's most generous campaign
contributors.
Top McGreevey administration officials,
concerned about political fallout, ignored the fact the
school program was running out of money. Instead they let
the program spend hundreds of millions of dollars designing
and promising schools they knew the state could not
deliver.
Top McGreevey administration officials,
concerned about political fallout, ignored the fact the
school program was running out of money. Instead they let
the program spend hundreds of millions of dollars designing
and promising schools they knew the state could not
deliver.
McGreevey, who resigned in August 2004
after admitting to a extramarital gay affair with a member
of his Cabinet, has made few public statements since leaving
office and refused to discuss his role with the SCC. Many
others who served in his administration were reluctant to be
quoted about what has become an embarrassing episode for
Democrats.
But Mark Lohbauer, a Republican who
helped write the legislation that created the program in
2000 and was among its first employees, called the
initiative's unraveling a bitter disappointment.
"We all felt this was a significant piece
of legislation," said Lohbauer, now a private consultant.
"'And now it's something shameful."
GETTING STARTED
In the summer of 2000, Caren Franzini,
the longtime head of New Jersey's Economic Development
Authority, was handed the reins of a court-ordered
initiative -- approved by a Republican-controlled
Legislature -- to replace or refurbish hundreds of aging
schools in the state's poorest 30 districts.
Edward Neafsey, an assistant state
attorney general who had been designated watchdog for the
school building program, gave her a report to read:
"Corruption in the New York City School System."
The black-bound compendium described how
New York's school building program had been infiltrated by
organized crime and dishonest contractors.
"I read it and I was scared out of my
mind," Franzini recalled in a recent interview.
"(Neafsey) said, 'This is what we're
going to avoid in the state of New Jersey,'" Franzini said.
"'We need to put the processes in place before you start any
of your work.'"
That caution led to thousands of
background checks on contractors, a stringent oversight that
weeded out undesirable companies but nearly paralyzed the
project in the process.
The slow start offered McGreevey, making
his second try for governor, an opportunity. On the campaign
trail in 2001, he hammered Republicans for delays and vowed
repeatedly to unions and urban audiences that change was
coming.
Once elected, McGreevey moved quickly to
keep his promise.
The new governor created the Schools
Construction Corp. within months of taking office in January
2002 and hired a hard-knuckled veteran of the construction
industry to run it.
Alfred McNeill, the 68-year-old retired
chief executive officer of Turner Construction Co., was a
no-nonsense builder with disdain for the red tape of public
contracting.
Under McNeill, the SCC instituted
overlapping scheduling that allowed architects to create
final designs for schools before the state's departments of
Education and Community Affairs had finished their reviews.
It also let the state begin negotiating land purchases for
schools that had not yet been approved.
Over the next 12 months, the new agency
poured $1 billion into school building contracts -- eight
times the amount spent in the preceding two years. The SCC
also doubled the number of contracts with architects and
increased 12-fold the amount spent acquiring
land.
While lean budgets were forcing other
state departments to trim personnel, the schools corporation
went on a hiring binge. From 2002 to 2003, the agency's
staff swelled from 70 to more than 200.
And projects were finally getting under
way. After launching just 12 in 2002, the SCC started 67 new
schools or additions in 2003.
"McGreevey wanted to get schools built as
quickly as possible for the kids and so he would have
something he could crow about in a re-election campaign,"
McNeill said in an interview.
The increased output drew rave reviews
from urban school officials who had grown weary from years
of inaction.
And it pleased McGreevey, who made
attendance at ribbon-cuttings and groundbreakings a staple
of his public appearance circuit in 2003.
But as the money rolled out the door,
problems were already beginning to emerge.
POLITICS
McNeill said that when he took the SCC
job, he shook hands with McGreevey and extracted a
promise:
"I said, 'I'll try to get the thing set
up. You keep the politics out of it. Then you can get rid of
me and do what you want to do,'" he recalled.
While McNeill insists McGreevey never
foisted contractors on him, he concedes he was ordered to
fire Lohbauer, the SCC's director of communications and the
highest-ranking Republican in the program.
The order, Lohbauer said, originated with
George Norcross, a prominent South Jersey backer of
McGreevey's, who had a long-standing feud with Lohbauer
stemming from local Camden County politics.
"It sounds small-minded, but I guess the
South Jersey machine can't abide someone who is a Republican
being in a job like that," McNeill said in an interview. "It
didn't make sense to me, but I guess that's how things work
in a state like New Jersey."
McNeill, who said he only intended to
keep the job for a year, resigned in September 2003. Less
than a month later, two Democratic Party political
operatives were awarded a $1.5 million contract to help the
SCC improve its community outreach.
Rick Thigpen, former executive director
of the Democratic State Committee, and Idida Rodriguez, a
former staffer for Assemblywoman Nellie Pou (D-Passaic), won
out over seven other bidders -- five of whom offered lower
prices.
The pair were given the contract despite
the fact the SCC already had 40 employees on staff charged
with the exact same duties -- attracting minority
contractors and smoothing relationships with urban
mayors.
Thigpen, in an interview, defended the
contract, saying he and his partner landed it fairly. But he
conceded the SCC -- and its billions of dollars -- became an
increasingly attractive vehicle for rewarding friends and
advancing McGreevey's political agenda.
"There's no question that some people in
the McGreevey administration saw that the greatest value of
the Schools Construction Corporation was political, and not
actually building schools," Thigpen said.
Before McGreevey took office, the schools
program had issued only 11 professional consulting
contracts, worth a total of $37 million. But after McGreevey
took office, the program issued 90 such contracts worth a
total of $438 million.
A typical series of deals took place in
early 2003, when the SCC decided to hire 24 engineering
firms to perform "site investigations" of properties being
considered for schools.
Forty companies submitted bids for the
work, which was advertised on March 20, 2003, the same day
the Senate voted 34-1 to limit campaign contributions from
state vendors.
By the time bids were opened three months
later, companies seeking the work had contributed $246,350
to the Democratic State Committee, campaign finance reports
show.
And when the winners were announced in
September, the 24 companies awarded the $192 million in
contracts had given $214,500 of that $246,350. The 16 firms
left on the sidelines, by contrast, had contributed just
$31,850.
Though McNeill and other SCC officials
insist politics played no role in the awarding of contracts,
one state assemblyman says it is no coincidence the most
generous contributors won most of the work.
"When it was taken away from Caren
Franzini, the whole thing was designed to be a political
situation," said Assemblyman Joseph Malone (R-Burlington), a
sponsor of the original school-building bill. "It was not
designed to put schools and kids first. It was designed to
put McGreevey and his re-election front and
center."
The politically connected also benefited
from no-bid contracts awarded in connection with the
financing of the schools program, state records
show.
Since 2000, the state has issued $4.7
billion in long-term bonds to pay for the schools projects,
generating about $95 million in fees for attorneys,
underwriters, banks and investment advisers.
Until this year, the state's bond counsel
for the school work was almost exclusively the law firm of
Wolff & Samson, whose partner David Samson was
McGreevey's first attorney general. Through January, Wolff
& Samson had earned $315,886 handling six school bond
issues for the state.
The bond counsel for its last two school
borrowings, in April and October this year, was DeCotiis,
Fitzpatrick, Cole & Wisler. Until McGreevey resigned
last year, Michael DeCotiis, a partner with the firm, was
McGreevey's chief counsel, and dealt directly with the
SCC.
Labor unions, which heavily backed
McGreevey's campaign, also benefited.
In creating the SCC, McGreevey required
the use of union laborers on any school job of more than $5
million, in exchange for the pledge not to strike. McGreevey
officials insisted such arrangements -- known as Project
Labor Agreements -- saved the SCC money by ensuring labor
peace, but critics say they increased costs by shutting out
nonunion companies.
A draft of a state Labor Department study
estimates the agreements have added at least 7 1/2 percent
to the cost of construction work in New Jersey -- enough
money in the SCC's case to build 20 elementary
schools.
"With the construction industry in a
downturn around the country, the SCC was a nice buffer,"
Wyatt Earp, a union representative who attended the
electricians meeting in Passaic County, said in a recent
interview. "It brought needed projects, but it also kept our
people gainfully employed."
STRUCTURALLY FLAWED
For all its early promise, the agency
McGreevey hoped would play a major role in his re-election
plans was in many ways a runaway train. Reformers later
brought in by acting Gov. Richard J. Codey said they were
shocked to discover the SCC lacked the most basic fiscal
controls.
"What we are dealing with at school
construction is an organization that had virtually no
financial organization, no chief financial officer, no
budgeting plan," said Alfred Koeppe, the former Public
Service Electric & Gas president who has chaired the
SCC's board of trustees since May.
"They were essentially an organization
that was task-oriented in terms of building schools without
a real sense of what the budget was that would be required
to build those schools," Koeppe said in an
interview.
One ostensible safeguard was to hire one
construction company to oversee the work of another. In
theory, the system would enable the state to manage its
construction work in a cost-effective manner. But in
execution, the model proved flawed.
The Project Management Firms (PMFs), as
they were called, were not barred from taking on
construction work themselves, so a company charged with
overseeing contractors on one job would find the roles
reversed elsewhere.
For example, McNeill's old firm, Turner
Construction, is scheduled to collect more than $35 million
overseeing projects in Hudson County, where one of its
subcontractors is URS Corp. URS returns the favor in South
Jersey, where Turner subcontracts for URS.
As state Inspector General Mary Jane
Cooper pointed out in a scathing report issued earlier this
year, "PMFs are inherently conflicted."
Since the fees the PMFs earn are based on
the value of work they oversee, the companies have little
incentive to keep costs down. In her report, Cooper said the
arrangement helped contribute to more than $540 million in
cost overruns and change orders.
Other safeguards also were
lacking.
Districts picked the school sites and
wrote their own design criteria, based on what they deemed
to be their own particular educational needs. But unlike
wealthier districts, where voters are asked to approve
projects, there was no mechanism for keeping costs in
check.
A story in The Star-Ledger on Sunday Feb.
12 found that SCC projects were costing 45 percent more than
ones built in the suburbs during the same time
period.
Architects on SCC jobs collected fees
almost double the industry standard, The Star-Ledger found,
while PMFs hired by the state were compensated at triple the
rate local officials paid construction managers.
In one instance highlighted by the
inspector general, the SCC hired temporary professional
staffers at pay rates triple that of state employees. The
2003 contract, canceled after just nine months, paid 17
part-time workers more than $100,000 each, including one
part-timer who got $175,000, or $10,000 more than the SCC
pays its chief executive officer.
Even the Legislature's most basic
cost-control formula -- a maximum price per square foot --
was ignored by SCC and the Department of Education, which
approves all projects. Adjusted several times for inflation,
the allowable cost now stands at $149 per square foot, which
also includes land and design costs.
Based on the state's formula, the new
183,257-square-foot First Avenue School in Newark should
cost $27.3 million, for example. But when the SCC approved
the project this summer, it earmarked $43.6 million for the
job -- or $232 a square foot.
The result is far fewer new schools --
only 11 to date, according to the SCC -- than was hoped. By
the time the $6 billion is gone, the agency says it will
have erected 63 new buildings, made major renovations or
additions to another 55 and spent more than an $800 million
on emergency repairs -- still far short of what was
promised.
"You can't give an insatiable monster all
this money," Malone said. "It will just gobble it up and
have nothing to show for it."
LAND WOES
From the beginning, one of the SCC's most
vexing problems was the lack of land.
City officials statewide had been
reluctant to give up large properties they felt were better
used for commercial redevelopment. Many sites offered to the
SCC were polluted or hopelessly complex assemblages that
required buyouts of dozens of property owners.
In Gloucester City, for example, the site
for a new middle school was on the federal Superfund cleanup
list and required the purchase of 70 houses and businesses
at a cost of more than $10 million.
Complicating land purchases was a ruling
by the state Attorney General's Office that said the SCC
must pay full market value for land owned by municipalities
and slated for new schools. As a result, properties that
were part of proposed school sites were often snatched up by
speculators and then sold to the SCC at a huge
markup.
"By law, you can't make the cities give
you land, period," Attorney General Peter Harvey said in an
interview. "That was a flaw in the legislation. They never
addressed the issue of land."
Despite the problems, the SCC under
McNeill ramped up its acquisition of properties, making
overtures to property owners in hundreds of places around
the state.
But in the midst of this buying spree,
McNeill uncovered a potential disaster. In January 2003, he
gave top-level people in McGreevey's office the bad news:
The program appeared to have a multibillion-dollar shortfall
and would need more money to finish the job.
It was a message the governor's office
did not want to hear -- and only half believed.
"Of course, we didn't have more money,
given what was going on with the budget," said Jamie Fox,
McGreevey's former chief of staff. "And I thought, frankly,
they couldn't possibly be running out of money. There was a
sense that a bureaucracy couldn't possibly get things done
so fast."
For months, McGreevey's staff debated
whether it would serve them better politically to seek new
funding for the schools outright, or cover up the looming
cash shortfall until after the 2005 governor's election,
according to interviews with top officials in both the
governor's office and the SCC.
As McGreevey continued to appear at
ribbon-cuttings and groundbreakings, his staff ordered the
SCC to keep silent about the program's shortage of money,
according to McNeill and other SCC officials.
After McNeill resigned in the fall of
2003, McGreevey replaced him with Jack Spencer, a
soft-spoken engineer who had worked for decades at the Port
Authority of New York and New Jersey. McNeill said he sat
Spencer down on his first day and explained the looming
shortfall.
Spencer continued the conversations with
McGreevey staffers, and his entreaties grew increasingly
emphatic over the next year, according to several SCC
officials.
"There were assurances they were going to
engage on this issue, that there would be additional
dollars," said Gerald Murphy, who remains the SCC's chief
operating officer. "Jack (Spencer) pointed out that we were
still out there buying properties, that you can't be
half-pregnant."
Before the SCC finally put the brakes on
land deals this summer, the state had purchased hundreds of
properties and evicted scores of homeowners for schools
there was no money to build.
But it was only after McGreevey was gone
and Codey took office that the SCC began to slow down land
deals. By then, it was too late.
Following the Feb. 12 Star-Ledger story
that detailed huge cost overruns and questionable spending,
Codey ordered Cooper to investigate.
In a highly critical report two months
later, Cooper found a "wide range of internal weaknesses"
that "make the agency vulnerable to mismanagement, fiscal
malfeasance, conflicts of interest and waste, fraud and
abuse of taxpayer dollars." She questioned hundreds of
millions of dollars in change orders and cost
overruns.
Those deficiencies have arisen despite
the fact the SCC spends far more on project oversight and
management than school districts in wealthier towns who
oversee their own building projects.
Besides its own staff of 235, with a
payroll of $25 million, the SCC has paid more than $271
million to coordinate and monitor construction work, and has
paid architects millions more to keep tabs on the schools it
has designed.
In July, Koeppe and other reformers
announced a radical shift in direction for the SCC: they
looked at the $1.4 billion left in the corporation's account
and winnowed the list of 266 pending projects to 59 they
could afford to build.
This bitter pill angered urban
superintendents and parents. It also brought the debacle
into sharp focus for property owners, hundreds of whom had
been notified their property was needed and now found
themselves in limbo.
Angry school officials have returned to
court seeking new infusions of cash, but politicians of both
parties say nothing is likely to happen until January at the
earliest.
"A lot of districts and children will
suffer because of the rush to build and spend," Assemblyman
Malone said. "This was a massive giveaway to reap political
benefits."
Dunstan McNichol may be reached at
dmcnichol@starledger.com or (609) 989-0341. Steve Chambers
at schambers@starledger.com or (973) 392-1674.
© 2005 The Star-Ledger. Used by NJ.com with
permission.
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