McCarthy contract never reviewed by legal counsel, Prop P panel told

First of two parts

By MIKE ANTHONY

A former Mehlville School District chief financial officer last week told members of a committee reviewing the Proposition P districtwide building improvement program that a construction-management contract never was reviewed by the district’s legal counsel.

Randy Charles, who served as chief financial officer from July 1, 2001, to June 30, 2005, addressed the Proposition P Review Committee last week.

Charles, former Superintendent John Cary and Dwight Dickinson of Dickinson Hussman Architects addressed the panel and answered questions during the committee’s sixth meeting Jan. 9.

Dickinson Hussman Architects served as the architect for Proposition P, and Don Hussman of DHA also responded to committee members’ questions.

The Proposition P Review Committee has been meeting since last September, and members early on raised questions about the district’s contract with McCarthy Building Cos. Inc., which served as construction manager for Proposition P.

Construction-management fees, budgeted at $2.835 million in October 2001, increased to more than $7.415 million by the time the district ended its relationship with McCarthy in 2004. More than $3.5 million of that difference was a result of the cost of reimbursable expenditures.

Voters in November 2000 approved Proposition P, a nearly $68.4 million bond issue funded by a 49-cent tax-rate increase. However, a final budget revision approved by the Board of Education in December 2005 raised the Proposition P budget to $89,137,440 — a roughly 30.3-percent increase — more than $20.7 million over the nearly $68.4 million building improvement program envisioned six years ago.

The Board of Education voted unanimously in June to approve a motion by Vice President Karl Frank Jr. and seconded by board member Tom Diehl to establish the Proposition P Review Committee.

Addressing the committee last week, Charles, who currently serves as superintendent of the Hillsboro School District and who will begin serving as superintendent of the St. Charles School District on July 1, said that he was involved with Proposition P on a daily basis when he served as chief financial officer.

“… This was pretty much my life for about four years during the period of working as CFO for the school district,” he recalled. “It was a great opportunity for me personally, and I think despite some of the things that are being questioned now and things that all of us will probably agree in hindsight we’d do differently, I think some of the results we see around as John (Cary) said, the benefits to the kids are beyond question …”

On more than one occasion during their discussions, committee members have referenced the numerous boxes of Proposition P documents the district has, and Charles said, “Those boxes of documents you talked about, I’ve probably touched every one of them. Probably 90 percent of the signatures you see are mine. Decisions that were made, if they weren’t decisions I made, I was at least an observer or got a chance to listen into the decision-making process …”

The former chief financial officer raised the issue of the McCarthy contract, which was approved by the Board of Education in May 2001.

“I know that one issue that’s been an issue is the contract itself and how some of the reimbursables and how some of the expenditures were allowed to occur. You asked a question of John (Cary) about how those are typically reviewed,” he said, adding that when he was CFO, Cary would ask him to send contracts to the district’s contract attorney, Courtney Shands of Kohn, Shands, Elbert, Gianoulakis & Giljum, for review before they were submitted to the Board of Education.

“… Courtney would review that, and we would literally go back and forth with the other party or the other party’s attorneys many times until we hammered out a contract that was acceptable to both parties,” Charles said. “I was not part of that discussion when the McCarthy contract was developed. But in a discussion I had with Courtney Shands, the district’s contract attorney, at a later date — Dr. (Tom) Foraker I believe was the CFO prior to me — Mr. Cary directed him to send that McCarthy contract to the attorney, which was done.

“But the attorney said: ‘I was never asked to review it.’ He received it. Put it on file. That was it. And to listen to John (Cary), obviously I don’t think he ever knew that.

“So if it had been reviewed in the way John (Cary) had expected that it would be and we typically would, there’s no doubt in my mind that some of those loopholes and various things would have been sewn up.

“As I worked for the district in this capacity and as we continued to go on and on and started to see the kinds of invoices that were coming from McCarthy, we did … an internal audit of I guess it turned out to be about the first 30 or so pay applications from McCarthy.”

The internal audit “identified item after item after item — and I don’t know if you’ve seen that document or not — of things that were questioned, and then we started using that information when we negotiated the termination of the agreement between the district and McCarthy. We estimated at the time we did that if we had not ended the contract when we did, it probably would have cost the district about another million dollars more to have continued with McCarthy to the end …,” he said.

Committee Co-chairman Kurt Witzel asked Charles about the district’s contract with DHA, noting that the contract was signed by Charles on April 1, 2001.

“… Looking back at the time line, you were the Mehlville High School principal at that point,” he said. “We were just curious as to how that …”

Charles interjected, “Yeah, when I came on board as CFO, there wasn’t a full, formal contract yet signed. There was in the file a letter, and if you want to call it a letter of agreement, there was a letter from DHA that outlined specifically the fees for the various projects. So it was, at the point that I was involved, it was merely a matter of taking what was agreed upon in principle and content and converting that to a proper form.

“And I don’t remember the date that I dated that, but I assume that what you’re telling me is correct, and I would guess that we dated that to go back to when payments were started to DHA and so on,” he said. “I know one of the questions that we tackled at the time was one of the questions you brought up here about the process for selecting the architect and so on. I had that conversation with our — the district’s contract attorney, Courtney Shands, and he said … the only group really potentially at risk is actually DHA. If they would do all this work and then the district would decide not to pay them, they might have a difficult time. But I did receive assurance from Mr. Shands that whatever concerns there may have been about the process, it didn’t at that time pose any risk of any kind to the school district …”

Witzel also asked Charles why the 49 cents had been split into two funds, and the former chief financial officer explained all of the revenue generated by the 49 cents was placed in the district’s capital fund.

Charles further explained that bond-like certificates of participation, or COPs, were issued to fund Prop P construction projects and the revenue from the certificate sale was deposited with a trustee, UMB Bank.

Revenue from the majority of the 49 cents — roughly 42 cents — was used to make semiannual payments on the COPs, he said, noting the additional seven cents accrued in the district capital fund. Revenue from the seven cents was used to fund Prop P-related projects and first was called non-Prop P funds and later called district capital funds.

“… The 49 cents was generating more money going into the capital fund than needed to go out to pay off the COPs. So that’s why there were two pots of money that the district could, if it chose to, pay from,” Charles said.

Witzel said, “But it was really the same 49 cents?”

Charles said, “It was the same 49 cents. At one point, somebody asked me: ‘Well, about how much of the levy is needed to make the payments on the COPs?’ And I did some calculations and came up with about 42 cents and people ran with that … Some of the — 42 cents here, seven cents here — that was discussion (that) happened well outside these walls. But that became part of the perception and part of the misperception, too, that was out there and the confusion …”

Much of the confusion stemmed from re-porting the COP funds and the district capital funds separately, he said, noting that early on the financial reporting was done by McCarthy.

“I think in talking to other CFOs and other superintendents who have worked with construction and construction managers in the past, that’s not unusual for the construction manager to do the reporting, all of it from beginning to end. Early on in the process, I was a little concerned about the way McCarthy was managing our budget. Whenever we would have a project come in over budget or more than we anticipated, rather than be realistic and adjust the overall budget or the overall projections, they would just take a proportionate amount out of the remaining projects … You can’t do that very long before you’re going to build an early childhood center for 10 bucks …,” he said.

Charles added that he finally said, “Guys, tell us what it’s going to cost. Don’t sugar coat it. We want real numbers because our board needs real information to make their decisions on. To make a long story short … I don’t know how it evolved, but I ended up taking over the reporting piece of it.”

Next week: More comments from Charles and remarks from Cary and Dickinson.