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The $1.4 Billion Dollar Question
by Jamie Moses
Is Something Smelly in Schools Deal with Ciminelli?
On January 5, the Buffalo News reported that the Buffalo School Board was questioning LP Ciminelli’s profits during the billion-dollar schools construction project. That’s not surprising, considering in the last phase of the “billion dollar” project $28 million was vaguely listed as “incidental costs” and $41 million was simply unaccounted for. Since LP Ciminelli refused to provide details of their costs, school board members Larry Quinn and Carl Paladino, who are also developers and knowledgeable in construction costs, demanded an audit to discover how much Ciminelli was paid and how much was actually spent on construction.
“That information is proprietary,” company spokesman Kevin C. Schuler told the Buffalo News. That’s been the company line from the beginning. In 2006, a state comptrollers audit couldn’t verify $24 million in expenses and Ciminelli called those expenses “Proprietary Information” also and refused to explain.
But in the original schools construction contract signed by Mayor Masiello and Ciminelli Management on June 4, 2002, the company agreed to share Proprietary Information–Article XV (ii). The contract recognized Proprietary Information might contain “business information and trade secrets” and declared that the School Board and other school officials or groups associated with the project “shall not divulge, disclose or disseminate Proprietary Information to any third party without prior written consent of the Program Provider.” The contract goes on in part (iii) to designate “the Chief Operating Officer of the District as its agent for receiving Proprietary Information.” Ciminelli Management signed off on it but no information was ever provided.
Another provision in the original project agreement signed by Mayor Masiello and Ciminelli Management includes a requirement (Article VI (d)) for neighborhood development. The idea was that streets directly surrounding schools would not be blighted with vacant homes and trashed lots. A new school and a decent surrounding block might serve as a catalyst to further develop the neighborhood. A Ciminelli employee no longer with the company believes that element was a big part of what won the contract. But that nieghborhood development didn’t happen. The City has demolished a number of buildings near schools, but if the City is doing it at their own expense why are we paying Ciminelli?
Getting back to the Proprietary Information, there appears to be a hell of a lot of money hiding behind Proprietary Information on this $1.4 billion public project. On January 15, the Buffalo News reported Ciminelli “paid its contractors $851 million—leaving $549 million for project overhead and profit.” The article went on to cite four industry experts who said project overhead could reach a high of 10% or $140 million. That would leave a possible profit of $409 million or more than 29% hiding behind Proprietary Information.
$409 million is quite far from the original projection of a 2.5% profit when the project began. That would be standard for a project of that size. In fact, on January 25, 2002 the Buffalo News announced Ciminelli had been picked to over see the schools construction project and that Ciminelli “will control several hundred million dollars” and “also stands to make $25 million in fees [2.5% of $1 billion].”
There’s nothing wrong with making a profit
There is one misperception heard over and over that needs to be cleared up. Several defenders of Ciminelli’s possibly obscene profits at taxpayer expense have said Ciminelli took all the risks by agreeing to a fixed price to rehab or build dozens of schools and as long as Ciminelli delivers it’s nobody’s business how much profit he makes. Let’s make one thing clear: Ciminelli had zero risk. They never put up a dime and never took a loan. In 2000 the State Legislature and Gov. Pataki approved legislation for Buffalo to build schools through private developers and finance the project through bonds sold by the Erie County IDA. It had to go through the county because the county had a $1.7 billion borrowing capacity compared to the City’s meager $41 million capacity. The firm who got the job would be reimbursed for costs with the state paying 94% and 6% coming from the local share. The ‘cost’ is what’s paid to the developer, Ciminelli, and is not equal to what the developer pays to subcontractors or employees, so there’s plenty of opportunity for profit. But the bottom line is Ciminelli didn’t have spit in the game.
Under a fixed price contract though, Ciminelli would still risk overrun costs on the $1billion project, right? No, not right. In 2005 when Artvoice tried to draw attention to this issue with two cover stories, former School Board member Chris Jacobs said, “The school district has a fixed price contract with Ciminelli, where they agree to provide what is within the scope of the contract. How they go about doing that is up to them. But they can’t come back and change-order us to death [driving up the cost]. So we are in some ways protected.”
That didn’t prove to be true. They came back with $400 million in change-orders and the $1 billion project turned into a $1.4 billion project. That happened in spite of the fact the District scaled back the number of schools to be renovated. On January 15 the Buffalo News printed that Ciminelli officials “maintain that they delivered the product the district asked for under budget and on time.” How does going $400 million over translate into delivering the project “under budget.” And does anyone believe Ciminelli coughed up that $400 million in overruns? They didn’t.
The reason Ciminelli didn’t pay for overruns is explained in an April 5, 2006 letter to the School Board from former Buffalo Schools Chief Financial Officer Gary Crosby who tried to point out the risks in the Ciminelli agreement.
“It is in the District’s interest to maximize the quality of the reconstructed schools and it is Ciminelli’s interest to minimize cost and maximize their profit,” wrote Crosby. “Before the start of Phase I and after Ciminelli won the bid, Ciminelli demanded revisions designed to shift risk to the District. A compromise was reached to shift risk to the local share account. If there is a cost overrun Ciminelli can seek to increase the cost allowance or change the original approved plans, subject to approval of the Joint Schools Construction Board (JSCB) and School Board. If a change in cost or scope is not approved Ciminelli has the right to be reimbursed [from the local share].”
That’s a direct contradiction to what BPS Chief Operating Officer Roy Rogers said in June 2001. “The District will turn over to Ciminelli all state aid it receives and Ciminelli will pay the [6%] local share of the cost,” said Rogers. “Ciminelli also will assume the cost of all budget overruns.”
Both of those statements proved to be false. Ciminelli didn’t assume overrun costs and didn’t pay the local share. Ciminelli was supposed to seek out private funding to cover the local share. Instead the local share was coming from promised energy savings from Johnson Controls and from interest earned on the public funds deposited. Why? That interest didn’t belong to Ciminelli to cover his obligations, it belonged to the public. And there’s no evidence any private local entity has ever actually written a check towards the local share. Probably no one was ever asked.
On January 15 the Buffalo News printed that “The company said it also assumed financial risk for any cost overruns...” The same article said company chairman Louis P. Ciminelli said whether he made a big profit on the project is the “wrong question.” “Was it on time? Was it on budget? Did it meet the specified quality standards?” Ciminelli said. “Is anyone disputing any one of those three points over 10 years?” The answer is yes, a lot of people are.
Something else Crosby pointed out in his warning his letter to the school board was that “Architects of Record are under contract to Ciminelli. The District’s architects expressed concern about a potential conflict of interest. Typically the architect of record is under contract with the owner, the School District in this case, and represents the owner’s interests.”
That’s important because the architects draw up the scope of the project. If Ciminelli controls the architects then the construction company controls the scope of the project and can design it to benefit the company. Unless someone from the School District really understands construction costs, materials, design, etc. the District will be clueless about what they’re paying for. The District had no such knowledgeable person.
Politics, Minorities and Subcontractors
There was much grumbling when Ciminelli got the schools contract that it was due to political influence. That’s an easy assumption for people to make considering Louis Ciminelli owned the largest construction company in WNY, was Chairman of the New York Power Authority, sat on the Executive Committee of the Buffalo Niagara Partnership and had close ties to County Executive Joel Gaimbra who championed for him. Furthermore, he is a staunch Republican and generous contributor the party and at the time we had a Republican governor, a Republican County Executive, and two powerful Republican congressmen—Tom Reynolds and Jack Quinn. It was a good time to be a NY Republican seeking public funding (although in 2014 Ciminelli contributed $91,500 to Governor Cuomo—that’s to be expected for a businessman dependent on government funded projects.) To go over Ciminelli’s political maneuvering would take more space than is available for this article and would stretch from Niagara Falls to Albany—and it would most likely bore readers who won’t even recognize the names of half the players.
However, it is worth mentioning that early on Ciminelli hired Kevin Schuler as Senior Director of Public Relations. Schuler, a veteran of Albany politics for many years under Tom Reynolds and Nick Spano, and had been VP of Government Affairs (lobbyist) for the Buffalo Niagara Partnership.
The minority issue, on the other hand is definitely worth looking at. Squabbling over minority participation began even before the project was given to Ciminelli. As project manager, if Ciminelli wanted to be paid then women and minority owned businesses (MBE/WBE) had to make up at least 25% of the work force. Subcontracted companies that weren’t MBE/W had to meet diversity goals within their company.
Ciminelli and its subcontractors struggled to meet the goals. There weren’t a lot of skilled minority workers around because for decades they hadn’t been hired or trained by anyone. There weren’t many minority or women owned construction related companies because there was little work for them either. Eventually the project did manage to meet most of the required goals. Most of the time the MBE/W companies and minority workers were legit, occasionally it was suspected fake companies were created just to meet goals, but other times the situation was comical.
One instance of note was Ciminelli’s hiring of Grassroots founder and professional lobbyist Maurice Garner, a former executive assistant to County Executive Dennis Gorski and ally of political operative Steve Pigeon. Garner had a full time job with the County Community Acton Organization (CAO) but on the side in 2005 he created a consulting firm, Urban Visions for Tomorrow. Ciminelli hired the firm at $120,000 a year, although no one knows exactly what Urban Visions did, including, it seems, Ciminelli since they refused or were unable to answer that question. When Garner was found at fault by auditors for not hiring minorities his answer was very direct. “I am a minority, and there’s not enough money in this to open it to other people,” said Garner.
Hundreds of articles were written about whether or not the Schools Construction project was meeting its diversity goals. What was not written about (except by Artvoice in 2005) was the effect the fixation on minority goals was having on the overall project. The relentless focus to ensure minority participation by the School Board and the JSCB created deep neglect on construction oversight and cost issues. Five black women, Florence Johnson, Betty Jean Grant Vivian Evans, Janique Curry and Dr. Catherine Collins, dominated the School Board. Former Board member Ralph Hernandez told Artvoice “Based on what I’ve seen the way the JSCB operates is ‘let’s just focus on the minority situation.’ The result is nobody knows what else is going on with the project.”
In our 2005 interview, then school board member Chris Jacobs said “At the majority of the board meetings, I’d say ninety percent, the talk is all about minority goals. Not to diminish the importance of minority goals, but rarely is there any discussion on the quality of the construction. We need a sub-committee that would just talk about construction. I wanted to hire a person with construction experience to be on our side to represent the board. The board wanted to hire Steve Rollins, who was a former executive at Ciminelli and so also knew the company. Steve understands the convoluted state reimbursement formula and how to make sure we get as much of the money as we can into the schools. No one on the board understands these things so no one can authoritatively challenge Ciminelli on anything the company does. But Ciminelli immediately threatened to sue us if we brought Rollins on.”
In a May 2005 letter to the board agreeing with Jacobs, Mayor Masiello wrote “The board overseeing the schools project needs an expert to advise it, especially in its dealings with Ciminelli,” Masiello said. He also suggested hiring Steve Rollins.
Rollins told Artvoice he “was recruited by Masiello and Chris Jacobs and the Board voted unanimously to put me under contract as their representative to interface with Ciminelli and help them through the complex construction issues they didn’t understand. The mayor instructed Chief Operating Officer Roy Rogers to get me under contract. Rogers contacted me and asked me to write up my own contract because he didn’t have time to do it. The day I delivered the contract was the same day Ciminelli’s attorneys advised the City that if they hired me Ciminelli would sue the city and would sue me. Mr. Rogers went silent on me and went underground. I never heard from him again. So it appears Ciminelli won that round.”
There certainly was just cause for JSCB to have a knowledgeable person of authority overseeing things. A regular school employee, even one with the necessary knowledge, didn’t have the clout to make an impact. A good example:
Over a period of at least two years, 2004-2005, Frank Sandarelli, Supervisor of Building Construction for Buffalo Public Schools, sent a bevy of forceful and well written letters to Bill Mahoney, Project Manager at Ciminelli complaining that Ciminelli was not meeting construction specifications. On July 14 he wrote “Your staff seems shocked at times when I am asked to review a supposedly finished product, and I reject it. I am rejecting completed work because it either didn’t meet a generally accepted standard, or the specification wasn’t met. Excuses from Ciminelli have been numerous. In one instance, I have been told, ‘This is going to put this company under if we [Buffalo Public Schools] don’t accept concessions.’ Very weak, Bill.”
Frustrated with the situation Sandarelli resigned. He told Artvoice “I left because with the Joint Schools project there were just way too many players.”
There are many more problems we don’t have room to go over like beating down subcontractors to increase profits, an exclusive contract with Johnson Controls and Ronco Communications that their proprietary systems and equipment would be the standard for all schools, thereby shutting out dozens of other qualified companies from getting any work.
A comment from “Construction Dude” on the online January 5 Buffalo News article is revealing.
“I worked as a foreman for a contractor at 3 of the schools during the project. LPC made it impossible for the contractors to make any profit. Funny I would even care, because if my contractor makes a profit, it doesn’t affect me one way or another. Any time unforeseen “extras” would come up, LPC would fight us tooth and nail by refusing to pay for the extras that were beyond the contract obligations. I know the people I was dealing with were just receiving their marching orders from higher ups. The one school on Main St, right accross from LPC office, their minions in charge at THAT school were obnoxious and impossible to work with. Par for the course for most of LPC employees. A few I ran into were ok. But nonetheless, LPC was obviously making millions over cutting corners, and boy did I see a TON of corners cut and kickbacks.”
On January 14th the Buffalo School Board voted to hire the Harter Secrest law firm to review and investigate spending on the Joint Schools Construction Project. Maybe some answers will finally come. We hate to say I told you so, but Artvoice tried to draw attention to this mess ten years ago and no one paid any attention. Actually, we do like to say I told you so.blog comments powered by Disqus
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