L.A. Utility Overbilled by $4.2 Million, Audit Says

Public relations firm Fleishman-Hillard overcharged the Los Angeles Department of Water and Power by $4.2 million through “unsubstantiated, unsupported and questionable” billings, the city controller said in an audit released Tuesday.

Controller Laura Chick said she turned her findings over to federal and local prosecutors investigating the contract, and to City Atty. Rocky Delgadillo, who has sued the firm seeking reimbursement.

“What my audit found are millions of dollars in bills that boggle the mind and defy common sense,” Chick said at a news conference near the DWP’s downtown headquarters. “Fleishman-Hillard treated the ratepayers of Los Angeles like a cash cow, milking them for millions.”

Richard Kline, regional president of Fleishman-Hillard, acknowledged for the first time in public Tuesday that some of the firm’s bills were not supported by documentation, but he said they amount to no more than $652,457 over five years.

Kline said Fleishman-Hillard disagreed with most of the audit’s findings but would submit to mediation to work out a financial settlement.

“It appears time was added to the L.A. DWP billing that cannot be supported,” Kline said. “We reported this to representatives of the controller’s office, and we have been working with the U.S. attorney and district attorney since July to fully understand what happened.”

Chick’s audit is the first estimate of how much Fleishman-Hillard may have overbilled the Department of Water and Power. The Times reported in a July 15 article that seven former employees of the firm said they were encouraged or directed to inflate bills to the municipal utility. Some of the former employees said bogus billings sometimes totaled $30,000 per month.

Chick’s office looked at $24 million the firm billed to the DWP for public relations work during the last five years. The DWP originally contracted with Fleishman-Hillard in 1998 to promote its services because the Legislature was considering allowing private utilities to compete for power customers in Los Angeles.

The audit found $1.2 million in billings not complying with the contract, $1.1 million in unsupported labor costs, $488,000 in unallowable charges to cover the cost of billing the city, and $314,000 in questionable markups by subcontractors, among other alleged overcharges that bring the total to $4.2 million.

In some cases, auditors found that original time sheets turned in by Fleishman workers were changed to add hours before they were submitted, a practice Chick said was bill padding.

“Much of these questionable billings appear in the form of padding of thousands of hours that were added to time sheets on a consistent and calculated basis,” Chick said.

The auditors found 2,788 more hours billed than were initially recorded on Fleishman time sheets.

In other cases, the auditors said employees added hours so they were reporting 11.25 hours in a day, without explanation.

Kline said the firm’s own internal investigation was hampered because many of the employees involved have left. That investigation has been put on hold so the firm can assist federal and county prosecutors investigating the allegations, he said.

“We will continue to cooperate with those authorities, and we will reimburse the city when the actual amount is determined,” Kline said. “Fleishman-Hillard would never condone this type of activity.”

Chick called on the firm to immediately repay the entire $4.2 million. Delgadillo, meantime, is preparing to take his case to court.

“Based on our initial review, it appears that the findings in the audit are consistent with what we have uncovered in the civil litigation,” said Katie Buckland, a spokeswoman for Delgadillo.

Delgadillo’s lawsuit names the PR firm as well as Douglas R. Dowie, former general manager of Fleishman’s Los Angeles office, who is on paid leave pending the outcome of investigations.

The audit does not identify Dowie or any other employees who may have been involved in bill-padding.

“The city attorney has talked to employees of Fleishman-Hillard,” Chick said. “My auditors did as well. There certainly have been lots of allegations of padded bills and inappropriate billings.”

Federal and county grand juries have subpoenaed records for all large city contracts, including Fleishman-Hillard’s, and the U.S. attorney’s office filed subpoenas in April seeking records from Fleishman-Hillard’s St. Louis headquarters.

Federal and county prosecutors declined to comment on the city’s audit.

The audit touched off a testy exchange at City Hall, with Mayor James K. Hahn and foes trading charges over who was responsible.

Chick and others said some of the responsibility rested with Hahn, who appoints the DWP board and had close ties to Fleishman-Hillard.

The firm and its employees donated $131,200 to local races and initiatives since 1998, including $15,000 to Hahn’s 2002 anti-Valley secession campaign. In addition, the firm provided free public relations advice to the mayor’s office worth tens of thousands of dollars, according to city records.

“Contracting with the city isn’t a way to pay back people who have helped you with fundraising,” Chick said.

City Councilman Jack Weiss, who has endorsed Councilman Antonio Villaraigosa for mayor, also questioned how Fleishman-Hillard could have gotten away with overbilling on such a large scale.

“It is certainly suspicious that this contractor, among all others, was given such lax oversight at a time when the firm was intimately involved in the political life of the mayor,” said Weiss, a former federal prosecutor. “I don’t know what is more alarming, the overbillings or the neglect of the Hahn administration that allowed them to occur.”

Hahn responded to the audit by sending a letter to Delgadillo, taking a hard line with the public relations firm and saying an apology was not enough.

“Any wrongdoing by Fleishman-Hillard must result in full compensation for the taxpayers of Los Angeles, an appropriate punishment for any abuse of public funds and a deterrent to future abuse,” he wrote.

Hahn spokesman Yusef K. Robb said the controller shares some responsibility for the overcharges under the contract, which started under former Mayor Richard Riordan. “Laura Chick cut the checks for Fleishman all the way through,” he said.

Chick, however, was not elected controller until 2001.

In the detailed report, Chick said auditors found $258,000 in billings at hourly rates in excess of what was allowed by the contract and an additional $666,000 by employees whose names were not listed in the contract.

Fleishman officials said there were allowable written notifications to DWP when new employees were brought in on the contract.

Chick also questioned $488,000 billed to cover the cost of preparing and submitting billings. “These tasks are generally considered part of a company’s overhead,” the audit concluded.

Company officials said the contract does not expressly prohibit billing for administrative time by people servicing the DWP contract.

Chick also questioned $744,000 in commissions the department paid to Fleishman-Hillard for negotiating sponsorships with the Los Angeles Dodgers and other businesses.

The contracts, auditors said, “do not have provisions for the payment of commissions.” In addition, Fleishman also billed for hourly work on developing the sponsorships, the audit said.

Chick also disallowed $144,800 in out-of-pocket expenses such as cellphone and local phone costs, and charges for facsimile services and supplies that the auditors believed should be part of the company’s overhead. The disallowed costs include $8,424 for meals.

Fleishman officials said those expenses were allowed.

“Most of the assertions in the document cannot be supported by the facts,” Kline said. “The report presents preliminary questions and erroneous assertions to arrive at an inflated overall estimate of questioned costs.”

The auditors also said subcontractors hired by Fleishman-Hillard engaged in unreasonable markups of $314,600.

As an example, the audit cited subcontractor Lee Andrews Group, which contracted out work on the “Green Power Hero” program. Lee Andrews paid $137,000 for the work, but billed Fleishman-Hillard $316,000, for a markup of 130%, the audit found.

City Councilman Tony Cardenas, chairman of the council committee that oversees the DWP, said the audit pointed out the need for additional contracting reforms.

“We can’t allow our city departments to fall short of protecting themselves against questionable practices,” he said. “In this case, our ratepayers ended up being the victims.”

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Audit results

City Controller Laura Chick’s audit of Fleishman-Hillard’s billings to the Department of Water and Power over the last five years turned up the following alleged overcharges (in millions):

Labor costs not allowed by the contract$1.2

Unsubstantiated labor costs1.1

Sponsorship commissions0.7

Cost of preparing billings0.5

Subcontractor services, excessive markup 0.3

Unsubstantiated subcontractor costs0.2

Disallowed out-of-pocket expenses0.1

Total* $4.2

* Not exact due to rounding

Source: City controller