Audit Finds Managers’ Prop. BB Fees Too High

The Los Angeles school district’s top investigator said Wednesday that the firms overseeing $2.4 billion in school construction and repairs authorized by Proposition BB have been charging management fees that average about 20%--well above industry standards.

“Regardless of what measure you use, management fees being paid here in Los Angeles are higher than anywhere else in the country,” said Inspector General Don Mullinax.

But he did not blame the firms for the high fees and made no formal recommendations.

Instead, Mullinax pointed to a variety of possible causes for the high costs, including the lack of an initial budget, the rush to get projects started after the 1997 bond election, repeated staff changes and a lack of teamwork between the district, its outside managers and the citizens committee set up to oversee the bond spending.

He said that all three of those entities could have done a better job and that he would propose they all work together on reducing costs.

The private program manager, 3D/I-O’Brien Kreitzberg, did not contest the findings and said it looked forward to forming a better relationship with the district.

Mullinax said inadequacies in the district’s financial accounting system prevented him from making conclusive findings about fees. Instead he provided a range of total costs from 18.5% to 20.7%, using several calculation methods. Even the lower figure is too high, he said.

A survey of other school districts, including those in Chicago, Dallas, Detroit and New York City, found that their management costs for school construction ranged from 4% to 11%.

The audit found 3D/I-O’Brien Kreitzberg’s fees to be from 3.7% to 4.1%, compared with the firm’s estimate of 2.4%. Estimates for the 10 project management companies working under the firm varied from about 10% to 30%.

The district’s chief operating officer, Howard Miller, who called for the audit in December, did not rule out the possibility of firing 3D/I-O’Brien Kreitzberg or any of the 10 project managers.

“We clearly have to sit down and look at what these costs mean, and make a decision,” he said.

Miller raised the issue of Proposition BB management costs in December during a public squabble with the oversight committee over his decision to hire the U.S. Army Corps of Engineers to help the district build 150 new schools. That was seen by 3D/I-O’Brien Kreitzberg as an attempt to limit its role to school repairs.

On Wednesday, Miller and Mullinax both sharply criticized 3D/I-O’Brien Kreitzberg for contesting Miller’s estimate in December that management fees were running at 19% of all Proposition BB costs.

“The response we would have hoped for was, ‘Let’s sit down and find out if that is true,’ ” Miller said. “Instead what we got was denial.”

The firm had acknowledged that fees were too high, but disputed Miller’s estimate and blamed district mismanagement.

Early Wednesday, a Superior Court judge denied the firm’s request to have the report sealed on the grounds that the information in it is confidential under business law.

Judge Dzintra J. Janavs said the right to issue the report was protected, both by the 1st Amendment and by the statute establishing the district’s office of the inspector general.

“What you are seeking is a prior restraint on free speech,” Janavs said. “He has a right to publish it, and people have the right to know what is going on.”

Attorneys for the firm also filed a damage lawsuit Wednesday, alleging that published accounts of Miller’s accusations have hurt the firm’s international reputation, causing it to lose business.

Janavs excluded any part of the audit from such claims, ruling that Mullinax has “an absolute privilege from being sued” for performing his public duty.

Mullinax said the ruling “sends a clear message that my office is not going to be intimidated by threats.”

After reviewing the report Wednesday, a spokesman for 3D/I-O’Brien Kreitzberg said the firm was pleased with the final product and would not have gone to court to seal the document if Mullinax had provided an advance copy.

“Frankly, we’re breathing a bit of a sigh of relief,” said Tom Bishop, executive vice president of O’Brien Kreitzberg, one of the joint venture’s partners.

The firm gave Mullinax an 82-page critique of an initial draft in which it alleged numerous errors. Mullinax said the final document responded to those criticisms.

“It’s clear that our meetings with the inspector general were constructive and that he incorporated quite a bit of our commentary,” Bishop said.

He also praised Miller and interim Supt. Ramon C. Cortines for making changes in the leadership of the district’s facilities division that should help control costs.

Several members of the Proposition BB oversight committee said they supported the audit’s findings but complained that it implied more than it said.

“I wish they had spent more effort and time coming up with the ‘whys,’ ” said committee member Tyler McCaulley, assistant auditor/controller for the county.