Heavy cost overruns may have caused Occidental Petroleum officials last summer to use accounting devices to switch millions of dollars from the Armand Hammer Museum of Art and Cultural Center books to other corporate categories.
In order to settle a shareholder suit over financing of the center, Occidental had earlier agreed to hold costs for the Westwood facility to $60 million or less. To meet the goal, the oil company had to reduce the price of the museum by $18.4 million from its highest cost estimate.
Details of the bookkeeping transactions and many other cost-cutting decisions are included in internal Occidental documents--some of them stamped "confidential"--that were obtained by The Times.
The documents describe millions of dollars worth of opulent features and details originally planned for the museum--including a $258,000 VIP reception lounge, with a $25,000 fireplace, to house Hammer's personal memorabilia; vast areas of marble floors, and a radiant heating system for an outdoor courtyard. Inclusion of the luxuries had caused the projected museum cost to balloon to more than $78.4 million from an originally announced total of $30 million to $50 million.
The museum, which is under construction in Westwood, is to house the personal art collection accumulated by Armand Hammer, 91, Occidental's chairman. He announced plans to construct the museum, using Occidental money, two years ago after a tiff with the Los Angeles County Museum of Art, to which Hammer had originally pledged his collection.
The budget crisis apparently prompted Occidental to move more than $2 million in costs from bookkeeping accounts reserved for the museum to those of Oxy Westwood Corp., a wholly owned subsidiary that owns and operates Occidental's headquarters building adjacent to the museum site, according to the documents.
The papers include memoranda, meeting minutes and internal reports. Occidental declined to provide any official to discuss the papers and cost overruns. The company also declined to respond to written questions submitted by The Times.
"Regarding your questions about the museum," said Occidental spokesman Howard Collins, "we will have no comment because of pending litigation."
Gary McCormick, vice president of McCormick Construction Co., the museum's general contractor, referred all questions to Occidental. Ronald Asquith, Occidental's vice president in charge of the construction, as well as the firm's outside construction-cost consultant, Deryl Redden, both failed to return calls.
The museum and a subterranean garage are being constructed behind Occidental Petroleum's headquarters. The bottom four floors of Occidental's 16-story office tower are being gutted for conversion to museum space. The museum and office building will be structurally joined.
Occidental Petroleum officials stepped into the museum cost-overrun situation last summer after they agreed to a proposed settlement of a shareholder lawsuit filed to block construction of the museum as an inappropriate use of Occidental money. Cuts left the museum auditorium, library and restaurant as vacant space.
Even with the cuts, the museum budget was between $1 million and $7 million higher than the $60-million objective, which came to be known within Occidental as G-Max-- or guaranteed maximum cost . Court records show that the proposed settlement would be declared invalid if the total cost for the museum was more than $60 million. If the court accepts the settlement, all other litigation against the museum would be concluded.
Attorneys representing shareholders challenging the museum expenses expressed concern that the apparent cost-shifting by Occidental could indicate that the proposed settlement had been circumvented. California Deputy Atty. Gen. Susan Henrichsen, who represents the California Public Employees Retirement System, whose pension plan owns more than 2.4 million shares of Occidental stock, said the apparent shifting of costs "is certainly something one would want to know more about. If the settlement is not really putting a lid on (the price of the museum by artificially shifting budget costs), that's something all the shareholders should know."
Henrichsen, however, was cautious. "I would really be surprised if they (Occidental) would do anything that bold," she said. "If they simply made a bookkeeping transfer to artificially reduce the cost of the museum, I would be quite surprised. If there was some bookkeeping transaction (of that nature), that would be a real serious indication of further problems."
New York investor Alan R. Kahn, the lead plaintiff in the shareholder litigation, asserted that "any attempt to conceal the actual cost (of the museum) . . . would, in my opinion, represent an attempt to deceive the court in Delaware and Occidental shareholders." Kahn said his attorneys may take up the issue of the money transfers with Delaware Vice Chancellor Maurice Hartnett, the judge hearing the case in Wilmington, where Occidental is incorporated. Hartnett has set an April 4 hearing on the proposal.
Court documents in the shareholder lawsuit show that, as early as last February, Occidental included $5 million in the museum budget for reconstruction of existing Occidental building areas as museum space. The museum is to have a total of 76,000 square feet of floor space.
In a memorandum reporting on a meeting last Sept. 21, a construction consultant noted that a discussion occurred over whether work for Oxy Westwood was to be "separated out" of the overall total price of the museum. The minutes indicate that the work was to be "excluded from G-Max." Minutes from an Aug. 17 meeting show that an accounting transfer of $2,226,066 was approved to shift costs from a museum budget to categories associated with Oxy Westwood Corp. The papers allude to other transfers as well.
A letter to Hammer last March 8 from Bruce W. McNeil & Associates Co., which was employed at the time as the museum construction manager, includes a postscript that Oxy Westwood would absorb costs of asbestos removal from the second, third and fourth floors of the office building being converted to museum space. The letter, which included no amounts for the charges, added that Oxy Westwood would absorb costs of refinishing a first-floor entrance to the office building and would pay "the museum promotional cost"--which was not defined. Other documents indicate costs originally classified as related to museum construction were to be recategorized as for building maintenance and renovation or placed in an amorphous "tenant improvements" category.
In the original litigation, stockholders challenged proposed expenditure of a total of $85 million by Occidental--including $60 million in construction budget and overrun costs and $25 million in endowment funds. But as construction continued, costs rose far above the originally announced total that provoked the lawsuit. The museum, at Wilshire and Westwood boulevards, is scheduled to open in November.
The papers indicate that the construction budget for the museum, which had ballooned to $78.4 million, was to be slashed to $61.8 million under a plan discussed in mid-summer. But cost-control problems continued in the following weeks. A week before the decision to reassign construction costs to the building maintenance and renovation account, the final budget estimate was set at $67.4 million.
A budget summary dated Aug. 9 shows savings objectives intended to bring the total museum cost down to $59 million--by making cuts of $7.6 million in construction costs and $915,000 by scaling back on furniture, fixtures and equipment.
Another summary prepared two days later breaks down the museum's major cost elements. They include $27.9 million for the parking garage beneath the museum, $25.3 million for the new museum structure itself, $4.1 million in acknowledged costs of reconstructing the existing Occidental building for museum use and $1.7 million for site preparation. The $59-million total is described in the memo as "the most current budget adjustment data for the 1990 plan." The memo bears the heading "Armand Hammer Museum of Art and Cultural Center, Budget Status, Aug. 11, 1989."
The opulence of planned museum appointments--many of which became casualties of the cost-control drive--appears to contrast with descriptions of the museum's intended operations disclosed earlier in the institution's official business plan. The business plan depicts the museum as a lean, entrepreneurial venture intended to make large profits.
The business plan, written by Hillary Gibson, a key Hammer aide, projects a first-year net of $1.5 million, to be achieved in part by cutting staffing levels to the bare bones--with the museum opening without a full-time curator or conservation department and an education staff of one. Part-time workers were to be emphasized to avoid paying fringe benefits.
The memoranda and other papers provide new detail on expensive museum appointments and architectural features. Many of the items--like interior detail of the museum's restaurant for which an architect received $14,000--underwent expensive design only to be cut. Other costly features ranged from the $80,000 electric radiant heating system and $75,000 for lettering at the museum's entrances. The heating system was eliminated and limestone was substituted for much of the proposed marble flooring. Changing courtyard floor surface materials saved $1 million alone, the documents show. The "Hammer Memorabilia Room" and its "Hammer Fireplace" were also cut, the papers show.
The papers also document the extent of Hammer's personal involvement in the project--down to his proposal to reproduce a metal gate he saw at an airport in Moscow for use at a museum entrance. Elsewhere in the papers, there is a listing for a $60,000 gate that "will be custom metal work, possibly in bronze or wrought iron."
The Occidental documents also show that, at a meeting last June 26 that focused on a key building permit for the museum that had been delayed, a construction official urged a telephone call to City Councilman Zev Yaroslavsky, who represents the Westwood area, "to apply some pressure on the (Los Angeles City Fire) Department," which had held up permit approval. Hammer, according to minutes of the meeting, "instructed (an Occidental official) to give him a memo today on this subject so that he could phone the councilman himself."
The meeting minutes include a notation that "Dr. Hammer indicated that the councilman was well disposed to aid the project at the present time."
Yaroslavsky's office said that the councilman took action on July 14, writing a letter to the fire department that said, "I would appreciate it if the necessary clearances . . . could be processed as quickly as possible."
Katharine Macdonald, a Yaroslavsky spokeswoman, characterized the letter as "absolutely standard." "There's nothing special about it," she said. "It's a form of assistance we lend to any large project. It's not a question of asking any particular city department to ignore or bypass any steps.
"We're supportive of the project. That's no secret."
BACKGROUND Disclosure of bookkeeping transfers that apparently lowered the cost of the Armand Hammer Museum of Art and Cultural Center is the latest development in the evolution of the controversial Westwood museum, creation of which was announced two years ago. Armand Hammer, chairman of the Occidental Petroleum Corp., which is financing the museum, set up his own museum in a dispute with the Los Angeles County Museum of Art, to which Hammer had pledged to donate his art collection, estimated to be worth $400 million. Two shareholder lawsuits were filed against Occidental Petroleum asserting that the museum was a waste of corporate money. Last summer, a tentative settlement was reached in one, but a second--filed by New York investor Alan R. Kahn--remained. Last year, the California Public Employees Retirement System, the state's largest pension plan, petitioned to be allowed to enter the case, which is being heard in Delaware. Lawyers indicated disclosure of the bookkeeping transfers may prompt still additional court action.