School District Over Spends $11 Million From Measure J Bond

South San Francisco, CA   July 1, 2015

Public concerns over the expenditures from the Measure J Bond, which was approved by South San Francisco voters to improve school infrastructures within the SSFUSD, have been exposed in a recent Forensic Audit prepared by Cossolias, Wilson, Dominguez, Leavitt CPAs “CWDL” which reveals $11 Million the Trustees have over spent to date. The Winston Manor Community Association (WMCA) has taken the lead on following the money and continues to bring to light inaccurate and questionable practices including the lack of transparency provided to the Citizen’s Oversight Committee and the community at large.

Included in public concerns, beyond the $11 Million overspent, is the fact the Measure J Bond must be paid back in 40 years yet the projects funded only have a warranted life of 10 to 20 years. There have been suggestions made another Bond Measure should be put to voters in the future.

As Measure J Funds were to go towards ‘Brick and Mortar’ school upgrades many questioned the modular classrooms built under contract from Project Frog who offer only a ten year warranty on the life of these buildings.

Further Project Frog, having only been in business a few years, did not have the credentials required to properly bid or construct this type of development.  An outside company from Southern California, USS Cal Builders, was awarded the project.  The district did not submit the project for other contractors to submit competitive bids.   Swinterton Construction Company had abandoned the project, giving notice last August 2014 due to ‘concerns over a lack of collaboration and transparency by the District and concerns of District violation of District policy, state law and public trust’ as was stated in the Forensic Audit.

In addition the solar panels installed on the schools were sold to the public as a twofold benefit; reducing carbon footprint and a reduction in electrical costs to the District. The savings was to be $1M a year with the monies going to the District general fund which could be used for administrative costs outside of the Measure J Bond purpose of infrastructure upgrades, which continues to be questioned. No money has been put aside for solar panel repairs, maintenance or replacement at the end of their projected 20 year life span, although tax payers will continue to pay off the Bond for an additional 20 years. Further this $25M solar project will cost taxpayers a minimum of $45 million, by the time the Bond is repaid.  This project will only save the district $20 million in electricity costs, which is an inappropriate use of public funds. It should be noted other districts and municipalities partnering with Chevron on solar projects received funding through traditional loans which was available to our SSFUSD as well.

The South San Francisco Unified School District has been under scrutiny the past few years as lack of leadership and continuity undermine what taxpayers, and the public at large, expect and deserve. Some members of the community have called for those Board Members who are responsible for the current situation, to step down immediately for failure to perform their fiduciary duties and responsibilities. Short of that, there needs to be another more thorough outside examination of what is actually happening within out District beyond the scope of the Measure J Bond monies.

“The outcome of the CWDL audit indicates that the Measure J financial position as of April 30, 2015, that the District does not have sufficient Measure J funds to complete all remaining projects.  CWDL indicates that there is a deficit of $11 million” Marty Romero, Good and Welfare Director of the WMCA “CWDL examined documents for Measure J disbursements totaling $93,795,839.94, with emphasis on Project Frog/USS Cal Builders Modular Project, including 16 lease-leaseback “LLB” agreements between the District and USS Cal Builders, LLB pay applications, contract amendments and change orders.” Mr. Romero also serves on the Citizen’s Oversight Committee and has expressed frustration at the District’s lack of transparency and providing essential documents needed for the Committee to do their job thoroughly.

After the 100 page audit was made public, School Board Trustee President Judith Bush published a letter on the District website outlining how she believes the Board has acted in the best interest of the community although the following excerpts bring into question the District’s actions.  Ms. Bush’s letter appears below. For the full transcript of the audit please CLICK HERE.

TIMELINE OF MEASURE J BUILDING PROGRAM

11/8/2012 – The Board of Trustees approves the award of all modular construction projects to Project Frog.

4/11/2013 – Motion to approve adding Mr. Scott as an authorized District representative under the School Facility Program for Bond related items. Motion carried unanimously.

8/26/2014 – Swinerton provides notice to Superintendent Hogan and the Board of Trustees that they have elected to terminate their services provided to the District, effective 9/5/2014. Swinerton cites concerns over a lack of collaboration and transparency by the District and concerns of District violation of District policy, state law and public trust.

2/5/2015 – Superintendent Hogan presented three options for the Martin School site:

1. Stay with the current plan – he stated that there are sufficient funds (current budget was listed as $6.1 million)

2. Add more classrooms due to potential increase in student enrollment with City developments – proposed budget $13-16M.

3. Build a completely new school – proposed budget $20 -24M.

Superintendent Hogan briefly reviewed funding options:

• Other funding within the District
• New Bond
• Development of unused properties

Based upon information obtained during the CWDL examination, Superintendent was incorrect in that the District did not have sufficient funds for option 1 as budgeted at $6.1 million.

3/26/2015 – Superintendent Hogan announces his resignation effective 6/30/2015

FINDINGS

Finding #1 – Award and Contract Language of Lease-leaseback Contracts

November 8, 2012 – All of Measure J’s sixteen modular construction projects, the bulk of the construction work performed under the program, were awarded to Project Frog, a modular building company, as the result of a competitive selection process (see Exhibit B). Critical selection criteria appear to have been absent from this process, however, because following the award it was determined that Project Frog did not have the general contractor qualifications and bonding capacity to perform the projects. Once this was discovered, USS Cal Builders was quickly selected as a general contractor (“GC”) tasked with oversight of all of Project Frog’s work. This was a major contract award which positioned Project Frog as a subcontractor to USS Cal Builders.  Per inquiry and examination, we noted no evidence of a competitive selection process for the award of the GC role to USS Cal Builders.

1. Following the hire of the bond director, the District’s own construction managers were frequently excluded from meetings that occurred with only the bond director and general contractor in attendance. These one-on-one meetings focused on critical aspects of the program, from review of projects to negotiation of change orders and contract amendments. In particular, between August 2014 and February 2015, construction managers were not involved in the review of change orders, and had their role in the review of payment applications reduced below a level meeting industry standards.

1. Concerns by construction managers brought to the attention of management regarding advanced billing for work not yet performed and detailed questions regarding specific line items on pay applications were dismissed by the bond director (see Exhibit E). The minimization of the construction manager role appears to have resulted in an increase to the autonomy of the bond director while simultaneously reducing the quality of review of payment applications and change orders and lessening the District’s negotiating power over change orders and contract amendments.

Finding #4 – Improper Use of Contingencies

From our testing, we noted that the bond director exercised full authority to approve the usage of contingencies to cover change orders independent of review and oversight. Any change orders in excess of contingency balances would necessarily trigger an increase to GMS, a significant event that should go to the District’s board for approval. Instead, it appears that contingencies were transferred from one of the 16 LLB contracts to another in order to cover excess change order amounts. We performed detail walkthroughs of scheduled values of selected pay applications, noting one example on Pay Application #7 for the Monte Verde Middle School Project Frog Modular Project/Phase 1 (see Exhibit G). For this Pay

Application, we noted that change order #1, for “site utilities” changes of $176,051.75 singlehandedly exhausted the contractor’s and owner’s contingency balances of $28,876 and $115,509, respectively. The $31,666.75 excess cost of the change order, over the allotted contingencies should have resulted in the submission of a proposed increase to GMS to the District’s board. Instead, the excess was “transferred” to draw down the contingency balance of an unrelated project contract, Parkway Heights Middle School.  Per inquiry with program staff and examination of project budget reports, such transfers, authorized by the bond director, were common and apparently used for the express purpose of avoiding Board oversight.  The first GMS increases finally were presented to board only after nearly all projects’ contingencies were extinguished.

Finding #5 – Approval of Change Orders

During our testing of change orders that were approved and paid by the District, we noted that 13 of 16 LLB contracts awarded to Project Frog/USS Cal Builders had exhausted 100% of contingency balances and were impacted by change orders causing them to exceed their respective GMS. Of particular concern were three contracts, #0410 South San Francisco High School, #0730 Spruce Elementary School and #0660 El Camino High School, with change orders in excess of GMS of 40.1%, 16.6% and 16.0%, respectively. According to Public Contract Code section 20118.4(a)(2) change orders in excess of 10% of contract value require board approval to determine whether it is in the public’s interest to approve the change order or re-bid the project. Based on Public Contract Code section 20118.4(a)(2), all change orders in excess of 10% cumulative totals of their respective contract values should have been placed on the Governing Board’s agenda for consideration. Instead, we noted that none of the change orders related to these projects were brought to the Board. As a result, the District may be out of compliance with Public Contract Code.

Finding #6 – Review and Approval of Payment Applications

In our testing of payment applications we noted that over the life of Measure J, the District received payment applications on an industry standard form which included signature lines for inspector and architect, along with the other aforementioned signatures. Despite the indications on the forms, however, we noted that the presence of inspector and architect signatures was inconsistent throughout the program until March, 2015. At that time, District management imposed the requirement that all signatures, including inspector and architect, be present in order for payment to occur (see Exhibit H).  The inconsistency of signatures on payment applications throughout the life of Measure J appears symptomatic of the relative informality with which program funds were approved for disbursement. It also affects a lower degree of accountability over the substance and merit of the work being submitted for payment.

Finding #7 – Payments in Advance of Work Performed

Through inquiry and examination of correspondence and payment applications, we noted that controls were not in place to prevent pay applications from being submitted and paid in advance of the related work being performed. This occurred in at least two different forms, on-book and off-book. In a typical on-book advance payment, a pay application for work performed June 1-June 30 would be submitted, approved and paid prior to June 30. In an off-book advance payment, the June pay application would be submitted, approved and paid subsequent to June 30, notwithstanding that, the scope of work included in the pay application would be unfinished at the date of payment. Off-book advance payments are harder to detect and became apparent only through inquiry and review of correspondence. Critically, as noted in the exhibit, the District’s own construction manager noted that work billed was not performed and declined to approve payment (see Exhibit I). However the construction manager was overruled by the bond director who insisted on the approval and ultimate payment

Finding #8 – Incomplete Bid

The modular buildings contract was awarded to Project Frog by the District’s board on November 8, 2012.  A listing of clarifications about the contract, published on December 6, 2012, identified inclusions and exclusions from project scope, including, significantly, the exclusion of “sitework beyond 5’ of building footprints and utilities brought to within 5’ of the building” (see Exhibit B). As a result of this exclusion, a relatively common condition for a modular buildings contract, the District faced significant additional work to connect its modular projects to existing campuses, both above and below ground.  At this time, the District should have gone out to bid for this necessary scope of work. Failure to do so shrouded the costs for years. When the estimation of the work was finally performed in 2015, the District’s ability to rebudget projects to cover the shortfall was severely impacted, contributing to the program’s current deficit status as detailed in section 5.

FINANCIAL STATUS SUMMARY

A detail of USS Cal Builders costs by project including all change orders is presented at Exhibit A. This total of $61,919,744 has been included in the summary below. Based upon the information we obtained, the District does not currently have sufficient Measure J funds to complete all remaining desired projects. The current deficit appears to be, at minimum, approximately $11,042,591.

SSFUSD School Board Trustee President’s Response

On November 2, 2010, South San Francisco Unified School District voters overwhelmingly passed our Measure J bond measure with a 77.5% yes vote. The community’s commitment to its schools and local students was clear in this vote. Our school district is grateful for community support and committed to ensuring that we provide safe and modern classrooms, labs and other school facilities to help our students succeed.

To keep our commitment to transparency, our community, students and staff, the South San Francisco Unified School District Board of Trustees recently directed an independent, third-party review of our full Measure J program, the results of which we will share with the community tonight.

First, I want to say that we are proud of all of the improvements we have completed with Measure J funds. We kept our promise to the public and have completed or are in the process of construction on high-priority, large-scale projects to renovate our schools for improved student safety and learning, including at Buri-Buri Elementary School, Parkway Heights Middle School and South San Francisco High School.

In addition, we completed essential district wide projects, including prioritizing the replacement of deteriorating portable classrooms; upgrading and adding new science labs and science classroom wings; improving safety systems; replacing aging infrastructure, such as wiring and plumbing; renovating aging restrooms and improving safety in our athletic facilities and play yards. We have accomplished so much, but there is still more to do.

Part of this Board’s duty to the community, students and staff is to ensure that we remain focused on our commitment to complete bond projects consistent with the Measure J project list. We enlisted the community in this effort through an independent Citizen Bond Oversight Committee that reviews bond expenditures and projects. We are grateful for the committee’s work, engagement and oversight throughout our bond program.

In furtherance of our commitment to transparency, this Board also voluntarily directed a third-party forensic examination of our Measure J program to ensure that we can complete the high-priority projects we promised voters we would deliver and to ensure that our bond program employs the best management practices.

[READ: **] The third-party examination revealed that due to unforeseen project cost increases, driven in part by recent economic growth, and in part by project oversight issues, bond funds were overspent by approximately 6.8%, which represents approximately $11 million of the voter approved $162 million bond. The report also found that all Measure J funds were spent on projects to improve our schools. [**]

The district and Board of Trustees are committed to completing all promised Measure J projects and we have identified alternative sources of funding to complete those projects. The district has already made changes that address many of the findings and recommendations of the third-party auditing team and district staff will continue to work to ensure that there are no further oversight issues with the Measure J program.

Many of the auditing team’s recommendations aim to improve the flow of information about the bond program to the Board and our district’s Citizen Bond Oversight Committee—information that we need to perform our oversight functions. The district will be pursuing any and all remedies available based on the findings of the examination and will be working with counsel to determine next steps.

Our Chief Business Official, Michael Krause, will explain to you very shortly the changes we have made to address the examination report’s findings and recommendations.

Transparency, accountability and oversight are a necessary part of our district’s culture and the Measure J bond program. We will continue to provide Measure J updates to the community to this end, just as we are doing tonight.

Judy Bush

President, Board of Trustees