FRESNO BLOGGER UNCOVERS INCRIMINATING EMAILS
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For more than a year, the FBI and federal prosecutors have been conducting a criminal investigation of the construction contracting process used by the Fresno Unified School District – and it turns out several of the key players in the Fresno scandal have been involved in a remarkably similar series of transactions at the Monterey Peninsula Unified School District.
In both districts, the construction contracts were financed by huge bond measures approved by district voters in November 2010. In both districts, much of the construction work was awarded to Harris Construction of Fresno, much of the architecture work went to the Teter Partnerships of Fresno and the financial adviser overseeing both bond measures was Keygent Advisors.
Each set of bonds was underwritten by a team of bond firms. In Monterey, they were Piper Jaffray and Stone & Youngberg. In Fresno, it was Piper Jaffray and Stifel, which acquired Stone & Youngberg the next year.
And in both cities, the various entities were linked through one man, Terry Bradley, the former superintendent of the Clovis Unified School District, who agreed last month to pay a Securities & Exchange Commission fine of $50,000 for providing Keygent Advisors with confidential information that enabled the company to obtain bond work with five school districts while he was a paid consultant to Keygent.
Though the Monterey and Fresno bond issues — for $110 million and $280 million respectively — were among the largest that involved Bradley and Keygent, they were not among the districts involved in the conflict-of-interest scheme uncovered by the SEC. Those districts were in the San Joaquin Valley communities of Clovis, Caruthers, Dinuba, Reedley and Sanger, each of which was using Bradley as a financial adviser. (See the previous Partisan article on SEC case.)
Newly surfaced emails subpoenaed by the FBI suggest that while Bradley was helping administer the proceeds of Monterey’s Measure P by helping the coastal district select architects and contractors, he also was the mastermind behind a creative contracting process in Fresno designed to guarantee large construction contracts with Fresno firms that agreed to help finance successful bond measures. The biggest beneficiary of that scheme, focus of the FBI inquiry, was Harris Construction, where Bradley maintains his office.
Critics of school bonding practices in California have long complained that it has become a “pay-to-play” system: Companies that cough up money for bond campaigns have a distinct advantage when it comes time to divvy up the bond consulting and contracting work. But according to numerous news reports in Fresno, it appears that Bradley took the system a step forward and created a way to guarantee that big campaign spenders would get their reward in the form of construction contracts. Apparently as reward for contributing to the Fresno bond campaign, Harris was given a contract to build a middle school without having to go through a competitive bidding process. Instead, the district used a “lease-leaseback” method, involving secret negotiations with Harris, in a process that an appellate court later ruled to be illegal.
At the Monterey Peninsula Unified School District, or MPUSD, the 2010 bond measure financed considerable renovation work, not new schools, but the district used the same non-competitive, “lease-leaseback” structure to award several renovation contracts to Harris, some of which were worth more than $1 million.
On its Facebook page in 2011, Harris Construction congratulated MPUSD for its facilities upgrade project and said it was “proud to be part of the Lease-Lease Back team implementing the plan ….”
Based on the number of commonalities, including the timing, it seems likely that the Monterey school district’s Measure P of 2010 and Fresno Unified’s Measure Q may have been sold to bonding and construction companies as a package deal. Harris and the Piper Jaffray bond firm contributed to both bond campaigns, for instance. Keygent contributed to both the Monterey and Fresno bond measures.
Although they sound complicated, school bond measures really aren’t that difficult to understand. In most cases, districts wanting to build or renovate schools ask voters to allow the district to borrow money. Rather than simply go to a bank to borrow cash, the districts hire various bond specialists who invite investors to buy the bonds or, in other words, to lend money to the districts at a pre-determined interest rate.
With California schools borrowing billions of dollars annually, a cottage industry has grown up around the state’s education system – a self-perpetuating, self-dealing cottage industry. Bonds can’t be issued without the approval of district voters, so the districts set up quasi-independent committees to run campaigns to persuade the voters to say yes. Those campaigns are largely financed by the various bond specialists who hope to obtain contracts to handle the technical aspects after the successful elections.
In the case of MPUSD’s Measure P, the committee was headed by Sharon Albert, wife of Dan Albert Jr., who retires this week as MPUSD’s associate superintendent for business and finance. Only three bond firms contributed to the campaign and each received a piece of the action. Those were Stone & Youngberg and Piper Jaffray, which each gave $20,000, and Keygent, which gave $10,000. In other words, the decision on who would handle the bonds was essentially made when the bond companies wrote their checks out to the Measure P campaign. Presumably Keygent didn’t need to contribute as much because it had already been hired as the district’s bond overseer.
The San Francisco law firm of Stradling Yocca Carlson & Rauth contributed $3,000 and was later hired as bond counsel for Measure P.
Fresno’s Harris Construction contributed $2,500 to the Measure P effort. The Teter architecture partnership in Fresno, closely affiliated with Harris, contributed $10,000 to the Measure P campaign before the November vote and $5,000 more two months after voters enthusiastically approved the measure. Like Harris, Teter received several significant contracts for projects financed from the Measure P proceeds.
Which bond firms get the work matters because lack of competition enables them to charge higher fees and could take away incentives to shop for the lowest interest rate for the district. With such a large amount of money being financed over a long period, even tiny variations in interest rates can cost or save a school district considerable sums. In the case of Measure P, MPUSD officials have said it is costing the owner of a $500,000 property about $150 annually.
The best reporting on the Fresno investigation has been by author Mark Arax, a former Los Angeles Times reporter who now produces a blog, the Arax File. In a post this week, he wrote of a series of emails dating to 2010 in which Bradley apparently hatched his plan to attract bond campaign money by promising construction contracts for contributors.
Arax referred to Bradley as “the man in the middle,” a role he played in Monterey as well as Fresno.
In Fresno, Arax wrote, “it was Bradley, also acting as a paid consultant to Fresno Unified, who helped persuade the district to convert to a lease-leaseback method of school building. In doing so, the district’s long practice of competitive bidding gave way to a controversial—and ultimately abused— method in which a single favored contractor controlled the construction process from design to turnkey.”
Key to making it all work was getting the Fresno bond measure passed. To do so, the district turned to Bradley, Fresno Mayor Ashley Swearengin and Harris Construction, headed by Richard Spencer, one of Fresno’s most active builders and most generous campaign contributors.
“Persuading taxpayers to pass the bond was no easy challenge,” Arax wrote. “The economy was mired in a deep recession, for one. The school district and its public and private partners—the so-called Citizens for Quality Neighborhood Schools— were trying to raise tens of thousands of dollars for yard signs and radio, TV and newspaper ads.
“As the campaign kicked off, Richard Spencer and his subcontractors were playing hard to get, emails show. Early on, Spencer had committed $5,000 to the Measure Q effort, but weeks passed without a cash contribution from him or his family members ….
“On Aug. 11, 2010, emails show, Terry Bradley stepped forward to assume the role of a broker. For the first time, he informed a member of the Measure Q committee that the Spencers were holding back on campaign cash because they were unhappy with the way Fresno Unified awarded its construction contracts.
“Whether (district officials) knew it at the time, Bradley was a man with divided loyalties. He was wearing—or was about to wear—three different hats: a paid consultant to Fresno Unified on Measure Q, an adviser to an education bond firm based in El Segundo called Keygent and a promoter of lease-leaseback contracts on behalf of Harris Construction.
“This juggling feat, as it turned out, was not only impressive and highly lucrative but a flagrant conflict of interest that would land Bradley, six years later, in the crosshairs of the U.S. Securities and Exchange Commission.”
Arax wrote that Bradley suggested that Harris would hand over more money for the bond campaign if the district would agree to a more Harris-friendly method of awarding construction contracts.
“’If FUSD would use construction delivery methods that Harris has emphasized for the past several years (construction manager with multiple primes and/or lease-leaseback), the contribution would have been much higher,’” Bradley wrote in one email. “’Contractors are reluctant to give large contributions to bond campaigns when projects are awarded on a design-bid-built delivery method with the project always going to the lowest bidder.’”
Additional discussions transpired and, with the bond measure election rapidly approaching, “the Spencers and their subcontractors would pony up tens of thousands of dollars in campaign contributions for Measure Q; Fresno Unified would soon begin to tout the lease-leaseback method in its public presentations,” Arax wrote.
Over the next two weeks, campaign records show, Richard Spencer gave $25,000 to the Measure Q effort. Over the next four years, without competitive bidding, Harris Construction would receive $117 million of the more than $280 spent by Fresno Unified.
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