Highlights from Undergrounding Audit Subcommittee Report
The following are recommendations and highlights from individual draft reports prepared by Mayor Dean Barbieri, Vice Mayor John Chiang and Judge Ken Kawaichi, the three members of Piedmont’s City Council Audit Subcommittee. Their separate drafts are scheduled to come together in a final report to the Piedmont City Council which examines the Piedmont Hills Underground Assessment District problems and provides recommendations for policy changes to preventing future similar problems. Public input is requested by the Subcommittee prior to its next hearing on March 15. Email dbarbieri@ci.piedmont.ca.us, jchiang@ci.piedmont.ca.us, kkawaichi@ci.piedmont.ca.us.
Recommendations
- Ensure homeowners will be voting knowledgeably on whether to proceed with an undergrounding project by:
- Establishing a clear threshold of favorable votes, including the number/percent necessary to have the Council support the project, and announce it to the public
- Establishing a clear policy regarding to what extent the City vs the homeowners will pay post-approval direct and indirect expenses
- If legally possibly, set a cap on City contributions to private district costs post-approval costs
- Delay issuing a final report until pending litigation has been resolved, in order to allow a public hearing with testimony under oath from subpoenaed witnesses.
- Provide a comprehensive set of policies and forms for undergrounding which are clear, uniform, transparent, and easy to follow
- Require a preliminary geophysical report for all future utilities undergrounding project
- Establish a minimum approval percentage threshold before Council approval of a district
- Redesign private undergrounding district structure to avoid placing the City at risk
- Implement a risk-based approach to managing the City, both for major project and ongoing operations. (A risk management process identifies and proactively addresses risks and opportunities, assessing them in terms of the likelihood and magnitude of impact and determining a responsive strategy and monitoring progress.)
- Hire an outside Project Manager for complex construction
- Establish a minimum approval percentage threshold before Council approval of a district
- Redesign private undergrounding district structure to avoid placing the City at risk
- Implement a risk-based approach to managing the City, both for major project and ongoing operations. (A risk management process identifies and proactively addresses risks and opportunities, assessing them in terms of the likelihood and magnitude of impact and determining a responsive strategy and monitoring progress.)
- Hire an outside Project Manager for complex construction
- Notify the City Administrator and City Council “immediately” of any “unexpected significant circumstance which could impact the City and its resources”
- Daily financial oversight when necessary
- Name a staff project manager – and hiring an outside project manager, if needed – to oversee technical construction phases
Editor’s Note: The Piedmont City Charter currently provides that the City Administrator “Shall keep the council fully advised as to the financial condition and future needs of the City and make recommendations to the Council concerning the affairs of the City.” (Section 3.03 (8); emphasis added).
Findings
Chiang:
Timing of Disclosure of Financial Issues and its Impact on City Options to Terminate or Pause Work
The 21-page report by Council Member John Chiang provides detailed information on the Piedmont Hills Underground Assessment District cost over-runs, and attempts to examine the legal and financial rights/risks which the City, homeowners, and bondholders take on as part of a 20B private undergrounding district. (For basic information on the differences between 20A, 20B, and 20C districts, see the prior article: The ABC’s of Undergrounding.)
The Chaing report concludes, “Certainly, City Management could and should have brought forth the project financial problems earlier to evaluate the options.” However, the report also makes the important finding that, at any point after the project was started, even as early as August 2009, the least costly alternative to the City was always to finish the project. This conclusion is based on the City’s Bond Counsel’s assessment of the legal ramifications of terminating the project: the City’s potential costs and expenses from possible homeowner and bondholder litigation versus the cost of completing the project.
This analysis indicates that, as a practical matter, once the “private” PHUAD was approved by the City, bonds had been issued, and ground had been broken, public monies had to be used to cover all cost overruns and “Acts of God” exceeding the project’s contingency fund.
Chiang:
The Rock Penalty Clause
This report points out that the contractual rock clause rate of $2,190 per cubic yard was reduced to a lesser rate of $998 per cubic yard due to Valley’s voluntary offer to do the work on a time and materials plus 15% basis, rather than insisting on its original contractual terms. If Valley had not renegotiated its rock penalty clause, the City would have incurred $5.8 million in cost over-runs, more than twice the $2.6 in cost over-runs actually experienced. The City had the ability to pay the $2.6 million cost over-run: $500,000 from contingency funds and $2.1 million from General Reserve Funds, approximately.
Editor’s Note: Reserve funds appear to have been insufficient to pay the higher amount of $5.8 million.
The $998 per cubic yard rock cost was significantly higher than five of the six other bids the City received. For instance, the next highest overall bidder, Tenneyson, charged only $425 for rock work. As a result, five of the six bidders would have charged less for the total project than Valley charged: $2.2 – 3 million compared to Valley’s $4.1 million total charged by Valley. (See Exhibit D.) Rock trenching represented 61% of the total linear footage trenched. The report describes this amount as “beyond any reasonable expectation”.
Editor’s Note: A factual basis for this opinion has not yet been provided in the draft.
Kawaichi:
Elements Needed in a Comprehensive Undergrounding Policy
This 11 page report identifies numerous specific elements which should be included in the development of a clear and comprehensive set of undergrounding policies and forms:
- Require a preliminary geophysical report for all future utilities undergrounding projects
- For any change in policy, stating on the face of the document whether the change will be applied retroactively to existing projects, or only to future projects
- Set up reasonable contingency funds
- Ensure the focus is on the inception and pre-inception stages, because once a project has begun, the potential economic consequences of delay or stoppage appear to rise steeply
- Include, as part of the bidding process, reasonable provisions for unforeseen problems such as bedrock, springs, etc.
- Prohibit the City Engineer (or other entity) from bidding on projects for which they evaluate bids
- Include, as part of the bidding process, an examination of existing [geo-technical] reports
- Assign a project manager or independent monitor to report regularly to the City Council
- Provide an up-to-date online website with all relevant policies, forms, and information
In addition, the report recommends that the City should ensure that homeowners will be voting knowledgeably on whether to proceed with a undergrounding project. With this end in mind, the following is recommended:
- Announcement to the public of a clearly established threshold of favorable votes, including the number/percent necessary to have the Council approve the project
- A clearly established policy regarding to what extent the City vs the homeowners will pay post-approval direct and indirect expenses
- If legally possible, set a cap on City contributions to private district costs post-approval costs
Kawaichi:
Review of Regulations and Statutes
This report concludes after review: “The Piedmont Hills Utilities Assessment District project has placed in focus a number of potential weaknesses in policies, procedures, management and oversight. Even this auditing process is flawed because it is much less effective due to constraints of pending investigations and litigation. In my view, this audit process has revealed no violations of criminal law. There is little credible evidence that any participant knowingly or intentionally violated a regulation or statute. A number of weaknesses came together with a number of bad circumstances with the result that the residents of Piedmont have had to contribute approximately $2,064,000.00 (again, it is too early to be specific) to the PHUAD project. The lack of apparent criminal conduct, however, does not mean that there was no negligent or performance below the applicable standard of care.”
Kawaichi:
Responses to Questions from the Community (Excerpts)
- Current City undergrounding policy prohibits use of general funds for pre-formation expenses, but not post-formation expenses.
Editor’s Note: The Audit Subcommittee report appears to be making a distinction between “general funds” and “20A funds”. Current undergrounding policy prohibits the use of the former, but not the later. Public 20A funds are public monies Piedmont receives from PG&E to underground arterial streets such as Oakland and Moraga Avenues. This is in contrast to 20B Districts which are funded privately through assessments on the homeowners in the district.
The City Council has, several times, committed 20A public funds to private 20B districts:
-$25,000 for Central Piedmont, initially
-$128,000 for Central Piedmont after it failed to be approved – to eliminate the District’s debts
-$150,000 for Piedmont Hills
-$150,000 for Hampton-Sea View
- The first draft of the Engineer’s Report for Piedmont Hills used a contingency figure of 30%. The final report intended to use a lower figure of 15% because this was the figure used in Wildwood-Crocker and Central Piedmont. The actual contingency fund was 14.25%. No document was found recording the change from 15% or reason for the change.
- Soils reports indicated there had been work on at least four properties in the district which disclosed potential rock problems.
- The PHUAD Steering Committee denies that bedrock was ever mentioned by any resident during the course of discussions.
- A figure of “zero” was put into bid documents for “quantity of rock” by Harris & Associates initially and then RGA. Only the City Engineer, Harris & Associates, reviewed the bids. Harris was responsible for recommending which bid to accept.
- No one addressed the issue of the rock bids being “unbalanced” in the process of reviewing bids. The City Engineer had the responsibility to notify the Council of potential bid irregularities. The Valley bid was chosen on the recommendation of the City Engineer, Harris & Associates. In hindsight, the Valley bid appears unbalance. “The facts that were known or knowable, however, must be taken into account. The Valley bid was within the range of other bids at the time.”
- Geo-technical work was not required by staff, once substantial bedrock was found in the first week of work, because past experience had been that the presence of bedrock was sporadic and irregular. In this case, there was normal progress after the first week. Then more rock.
- Tennyson Electric was not brought in to replace Valley early on, or another contractor, such as Ranger Pipeline who had extensive experience with blue granite, because the City was trying to perform under its contract with Valley at the time and avoid expensive disputes. The extent of the blue granite was unknown at the time.
- “Community Question: Why wasn’t a competitive price in line with the other bids negotiated with Valley once substantial bedrock was found? In spite of having a 10-day notice to terminate right, it (termination)was thought to be not feasible in economic terms given the circumstances. See Chiang Report.”
- “Community Question: Why didn’t the City staff inform the Council members immediately in July? In July, there was still substantial uncertainty about the geological situation. There does not appear to be a good reason not to share the uncertainty with the Council. City staff indicate they were aware.”
Barbieri:
Notification timeline
Due to pending litigation, the report’s discussion of PHUAD was necessarily circumscribed. The report briefly addresses the time line for notification of cost over-runs, indicating the City Administrator:
- Notified the Mayor of problems in October, 2009,
- Consulted with legal counsel immediately thereafter,
- Advised the City Council in closed session on November 2, 2009.
The report concludes that, as to all issues, “Administrator Grote followed City policy and procedures and sought the advice of legal counsel as soon as it became evident that there was a need for legal representation . . .”
Editor’s Note: The timing of notifications to the public was not addressed.
Editor’s Note: Questions have been raised by residents regarding the timing of the disclosure of bailout requests vis-a-vis municipal elections. For instance, disclosure to the public of the need for an initial $1 million bailout occurred on December 7 , 2009 with a large public hearing on Saturday, December 12, which was after the filing deadline for the 2010 City Council Election. A second bailout was raised, but the magnitude not disclosed, at the Council meeting of Monday, February 1, 2010, the night before the City Council Election held on February 2, 2010. Critics have asserted the late release of this information prohibited candidates and voters from using this information. This issue is not addressed in the report
Editor’s Note: The Barbieri report indicates the Council was notified on November 2, 2009. The Minutes of November 2 do not reference this notification; video (not reviewed) may reflect verbal discussions.
Editor’s Note: The City Charter Section 3.06(4) requires the Council to control legal representation, rather than the City Administrator or the Mayor.
Barbieri:
The role of staff and cost over-runs in past districts
This 5 page report notes an increasing role of staff over the history of 20(B) Districts. For instance, the first district, Dudley, was “treated as a private project” and City staff was not involved until the final legally-required City approval process, while in later districts the City “became even more involved” in the early formation process.
The report also notes cost over-runs occurred in each district that proceeded to the construction phase*:
- Dudley homeowners provided additional private funds to cover streetlight specification errors
- Wildwood involved a City contribution for the removal of City-owned trees and the use of contingency funds to cover unexpected bedrock costs, and
- Piedmont Hills required a City bail-out due to unanticipated bedrock costs.
League of Women Voter Report (link)
Link: Kawaichi complete draft report – 11 pages
Link: Chiang compelete draft report – 21 pages
Link: Barbieri complete draft report – 5 pages
Prior Related Article: Piedmont’s Flawed Construction Bid Process
Prior Related Article: The ABCs of Undergrounding
These points are fine, but the real problems are two-fold:
1. LACK OF ACCOUNTABILITY in the City structure. I know the City Manger and the City Clerk acknowledged that they had made a mistake. That is NOT accountability.
The most serious lack of accountability is that two of the City Council Members who are part of the problem are on the “audit committee”, which brings me to the second point.
2. Checks and balances. The fact that two of those who are responsible for the problem are now investigating the cause/remedy does not tell me there are adequate checks and balances.
Why does the judge not address these two points. These points are not new. They were brought up many times in the City Council meetings and letters, etc. Do we have the right outside (and supposedly impartial) person?
The Council under former Mayor Friedman, as well as Mr. Grote, clearly, generously, unambiguously and appropriately accepted responsibility for the serious mistake(s) made.
However, the Subcommittee Report issued by the Council seems to conclude that Mr. Grote acted appropriately, while completely ignoring the responsibility of the previous Council.
The issue of what consequences should take place is a separate matter. Here, some of the principal participants have seemingly been exonerated despite their own insistence that they had made serious mistakes. Isn’t that a bit odd?