Audit

Controller’s SFPUC Audit — A Limited Hangout

Integrity of the competitive bidding process compromised

Aaccording to a former CIA official, a limited hangout is “spy jargon for a favorite and frequently used gimmick of the clandestine professionals. When their veil of secrecy is shredded and they can no longer rely on a phony cover story to misinform the public, they resort to admitting — sometimes even volunteering — some of the truth while still managing to withhold the key and damaging facts in the case. The public, however, is usually so intrigued by the new information that it never thinks to pursue the matter further.” That definition fits the carefully critical audit of one SFPUC community benefit initiative.

Auditing the Audit

The long-delayed Controller’s audit only assessed the Social Impact Partnership component of SFPUC’s controversial Community Benefits Program. Technically, the Community Benefits Program refers to the SFPUC’s own funding and support of community educational, job training, art and environmental programs. This program was not audited despite a Board of Supervisor’s motion to examine its workforce development projects. The related Social Impact Partnerships (SIP), the subject of the audit, refers to contractors who promise money, volunteer hours or in-kind donations to community non-profits in exchange for extra points awarded to their contract proposals.

quotes

Most contractors lagged in delivering community benefits and submitting required progress reports. And, once a contract ended, undelivered benefits were not recoverable. Unlike other jurisdictions with similar programs, SFPUC had no policies to monitor compliance. Further, 85% of sampled contractors had modified their commitments, either shifting between volunteer hours, in-kind or financial commitments, or changing the total value of the commitment — after the contract was awarded. ”

Appropriately, the Controller engaged an outside auditor to do the job. That offsets self-serving bias and cover-ups. Even so, “independent” audits can dispense limited hangouts. As we learned from the 2008 global financial crisis, outside auditors can be so enmeshed with their clients that misconduct is overlooked. Auditors who rock the boat risk losing future contracts.

Sjoberg Evashenk Consulting, a reputable Sacramento firm with a $1.7 million multi-year contract with the City, was hired to conduct the audit. However, as the Westside Observer reported in April, former SFPUC officials with glaring conflicts of interest meddled with the scope and timing of the audit. Moreover, the audit floundered in bureaucratic shuffling between the Budget & Legislative Analyst and the Controller’s Office. All this parleying, amid FBI and COVID disruptions, foisted a 2.5 year delay between the Board of Supervisors’ call for the audit and its delivery.

Audit-hesitancy is expected when federal agents circle City Hall. If the audit digs up new dirt, the City’s exposure to liability grows. If it misses sleaze that the feds later uncover, the City’s credibility is damaged. Given this precarious context, the audit was likely to be constrained if not performative. Since the audit parameters and findings must be approved by the Controller’s Office (and probably reviewed by City Attorney), it isn’t really independent. The Controller’s oversight could promote a sound process — or a slanted one.

The audit, packaged as the Controller’s 8th Public Integrity Review, arose from a January 2019 whistleblower complaint, a February 2019 SF Labor Council Resolution that prompted the July 2019 Board motion, as well as a July 2020 federal probe of SFPUC contracting. Despite allegations of corruption, the Controller commissioned a Performance Audit rather than a Forensic Audit. Its objective was to “assess the appropriateness and effectiveness of SFPUC’s governance and oversight of the program.” Performance Audits seek to determine if agency policies and procedures are aligned and abide by accepted standards. Forensic Audits probe for corruption like fraud or bid-rigging, are more intrusive and rely on certified forensic accountants rather than regular CPAs. While Performance Audits can uncover skullduggery, they are not designed to do so.

The audit’s methodology section makes no mention of interviewing — or even reviewing the claims, of Union leaders, contractors and whistleblowers who criticized the program. According to the SF Labor Council’s Kim Tavaglione and the Building & Construction Trades Council’s Rudy Gonzalez, neither organization had been contacted by the auditors. No reference to program irregularities exposed by the Marina Times, Westside Observer, or NBC Bay Area. The audit was independent - of non-City sources.

Instead, interviews were limited to SFPUC and associated City officials, while acknowledging that; “Most of the SFPUC staff currently responsible for overseeing and managing the SIP Program have been in their current role for less than a year.” No indication that Juliet Ellis, the former Assistant Manager for External Affairs who oversaw the program, was contacted. Ellis and several subordinates had already bailed out, taking key information with them.

Audit Findings

That said, the audit provides a clearer accounting of the program than the SFPUC’s own reports. While it doesn’t touch on SFPUC’s promotion of non-Union workforce training programs — the crux of Labor complaints — it delivered a smoking...something; many community benefits promised by contractors vanished because SFPUC managers failed to monitor and enforce their delivery. As shown below, contractors often reneged on their commitments.

Chart

All told, 84 SFPUC contractors pledged $35 million in community benefits. Of 22 completed contracts, 7 or 30% defaulted on $685,000 in obligations. That is, they delivered just 68% of the value committed. The auditors concluded; “SFPUC’s lack of enforcement of commitments allows some contractors to default on them while others strive to meet them, placing contractors on unequal footing and jeopardizing the program’s long-term sustainability.” 

Most contractors lagged in delivering community benefits and submitting required progress reports. And, once a contract ended, undelivered benefits were not recoverable. Unlike other jurisdictions with similar programs, SFPUC had no policies to monitor compliance. Further, 85% of sampled contractors had modified their commitments, either shifting between volunteer hours, in-kind or financial commitments, or changing the total value of the commitment — after the contract was awarded. Allowing such alterations could “compromise the integrity of the competitive selection process.” That’s because contractors’ bids were scored on their oft-inflated initial pledges. In fact, one contractor would have lost a bid, had it been judged on what was furnished rather than promised.

SFPUC didn’t penalize contractors who previously defaulted on their community benefit commitments. Therefore, derelict contractors “may propose on future contracts, with commitments resulting in winning scores, and may again default on those commitments,” creating an unfair solicitation process. Additionally, while SFPUC stated that the community benefits portion of a contract proposal was worth 5% of the points awarded, in one-third of cases the points assigned fell between 3% and 4% - a potentially unfair variation.

Pay-to-Play Scenarios

The audit debunked the fallacy that offering community benefits in a contract proposal was “voluntary” as SFPUC long insisted. Notably; “a proposer who does not submit a (community benefit) proposal cannot receive a full score…they can only receive 95 percent of the total available points.” Only here does the audit deign to cite any outside criticism; “In at least one case, a contractor raised this concern, questioning the voluntary nature of the program and suggesting perceptions of ‘pay to play’.” That contractor, known to the Westside Observer, did not “suggest perceptions.” He ardently accused the SFPUC of pay-to-play, as have others.

Additional evidence “conflicted with SFPUC’s assertions that it cannot and does not guide or influence commitments, and that contractors’ commitments are fully voluntary.” For example, in 7 of 13 sampled contracts, “the contract language indicates that SFPUC could direct SIP commitments after contract award. Some contracts specifically state that contract commitments must be ‘aligned with, directed by, and driven by the SFPUC Assistant General Manager for External Affairs’ community benefits strategy…’”  As the Westside Observer previously reported, a post-contract revision by Juliet Ellis extracted an extra $125,000 from contractor AECOM/Parsons. Of that, $50,000 went to the Willie L. Brown Middle School.

Why were “voluntary” offerings “driven”? “Per SFPUC, ‘The purpose of affirmatively identifying the program areas or categories… was to reflect the priorities identified by the community…’.” No word on how the SFPUC dubiously gauged “community” priorities.

Potential conflicts of interests were identified among panelists who scored contract proposals. Starting in 2011, panelists had to attest they had no relationships with contractors who submitted proposals. It wasn’t until 2017 that they had to declare no interests in the community beneficiaries chosen by the contractors. For 6 years, some panelists may have harbored financial connections with these beneficiaries.

Nothing precluded contractors from switching their commitments — after the contract award — to a non-profit connected to a panelist. However, the auditors did not detect such collusion in the 10 cases they sampled. Unaddressed was whether SFPUC General Managers, who did not sit on community benefit panels, had urged contractors to add beneficiaries with whom these executives had gainful relationships.

In sum, the SFPUC’s Social Impact Partnership Program failed to enforce contract provisions resulting in lost community benefits. Inconsistent policies and procedures led to “confusion and a perception that practices are not fair nor transparent.”  Program performance disclosures, “necessary to gain public trust and ensure fair and equitable practices,” were lacking. These limited findings provided suitable targets for official opprobrium.

Conflicting Viewpoints

In a 12/9/21 Press Release, Controller Ben Rosenfield declared; “The lack of clear policies and controls also created an environment where conflicts of interest, inappropriate steering of funds, and other abuses could occur.” City Attorney David Chiu echoed; “The lack of clear policies and oversight in the Social Impact Partnership Program has left the program susceptible to favoritism and abuse.” SFPUC General Manager Dennis Herrera vowed; “No one at the SFPUC will tell contractors which organizations to make commitments to or how much to give them.” (bolding added) So, no actual corruption: just disembodied potential corruption due to…formerly weak policies. Responsible managers and the City Family’s culture of self-dealing got a pass.

Days later, the San Francisco Building and Construction Trades Council issued a response. It called for “a full investigation into the PUC because the recently released audit has only scratched the surface.” It cited “more than a decade of subterfuge, secrecy and potential money-laundering.” Again denouncing non-Union workforce training projects promoted by SFPUC’s Community Benefits Program and Social Impact Partnerships, it added; “Linking jobseekers to legitimate career paths and aligning those with registered apprenticeships is long overdue”.

Dr. Derek Kerr is a San Francisco investigative reporter for the Westside Observer Contact: watchdogs@westsideobserver.com

January 2022


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