[LAUSD BOND OVERSIGHT COMMITTEE LETTERHEAD]
Ramon Cortines, Superintendent September 28, 2009
Los Angeles Unified School District
333 South Beaudry Avenue, 24th Floor
Los Angeles, California 90017
Via: Hand Delivery
Dear Superintendent Cortines:
Over the past several months, the LAUSD School Construction Bond Citizens’ Oversight Committee (BOC) has become greatly concerned about the detrimental impact on the efficient management of Facilities Services Division (FSD) and smooth operations of the construction program posed by recent actions to reorganize and move FSD closer to District bureaucracy. The level of concern has increased to the level that I have had three meetings with BOC on this subject this month alone, plus several e-mails and phone conversations each week.
These proposals, set forth in detail below, will substantially reduce FSD’s ability to successfully carry out the mandate of the voters to complete the construction bond program as rapidly, cost-effectively, and successfully as possible. We are concerned that these proposals and the District’s recent decisions concerning FSD management compensation will adversely impact the Strategic Execution Plan and will contravene requirements of Measures Y and Q.
Accordingly, pursuant to section 7.6 of the BOC’s MOU with the District, as the proposals taken together constitute a major project affecting the expenditure of bond funds, we respectfully insist that the District present the BOC with adequate information for oversight regarding this project so that the BOC may recommend against any expenditure of bond funds if the project appears to be impermissible or imprudent.
As we understand them, your recent actions in regard to FSD organization, which we refer to as the “Single District Proposal,” including elimination of co-located dedicated legal counsel, the mandates for abbreviated
FSD manager contract periods and for “E-basis” hiring for new positions that only provides ten months a year of work and pay, and the uncompetitive management compensation levels that fail to comply with requirements of Measure Y not only contravene bond requirements but will damage FSD’s ability to manage the difficult transition currently underway and will preclude continuation of the successful management of the building program.
In short, these measures may be proposing to break the one operation in the District that is fixed.
The BOC understands your desire to move the District towards the Single District concept. While we find this an admirable concept, the BOC’s mission is to protect the bond program – and the Single District objective, as it is being implemented, appears to us to be having negative consequences for the bond program. Therefore, we respectfully request that you reconsider your recent actions impacting FSD organization and move FSD compensation in line with the market, the requirements of the bond measures passed by the voters, and the terms of the BOC’s Charter and Memorandum of Understanding with the District (the “MOU”).
We recognize that complying with these legal imperatives could cause a lack of compensation equity within the District employment pool and that this is generally something that should be avoided. However, compliance with the law is the higher priority that must be satisfied in this instance, plus promoting superior management and productivity of public funds by employing experienced, proven construction professionals to help assure the bond construction program is properly managed and the taxpayers’ dollars are being spent as wisely and productively as possible.
EXECUTIVE SUMMARY
Our two primary concerns are bond construction team organization and compensation.
In the early years of the bond construction program, it was very clearly, failing, and failing badly. In many instances, it did not have proper top leadership, nor staff, nor organization, nor support from other District departments. The transition from a failed management structure, with no credibility in the construction industry, to a national model was due to many changes, but one of the most important organizational improvement was incorporating many vital support functions within the FSD team itself, where accounting, information technology, legal, personnel, procurement, and construction industry/intergovernmental/public/ press relations professional became dedicated components of the FSD team, working with their planning/ design/construction/maintenance peers on a daily basis, participating in management planning, oversight, and meetings, and helping the FSD team recognize, and act to cure or mitigate, issues early.
The BOC’s MOU with the District, the “contract” between the BOC and the District, contains section 6.5, part of Article 6 of the MOU articulating the District’s “Commitment to the Committee.” It is my fear that the District may be falling into a breach of its commitment to keep in place the necessary professional staff and management systems to keep the bond-funded program spending these limited funds wisely and efficiently.
Section 6.5 of the MOU provides as follows (emphasis added):
“6.5 The Committee will work with the District so that the District has in place the necessary plans, professional staff and management systems to build schools wisely and efficiently.
“6.5.1 The District agrees that responsibility within the District for implementation of the construction and modernization program funded by the bonds shall be vested in the Facilities Services Division, which shall be headed by a Chief Facilities Executive who shall report directly to the Superintendent.
“6.5.2 Managers of the Facilities Services Division shall have educational and employment experience comparable to that of persons with similar responsibility in the private sector.
“6.5.3 To ensure that the District employs managers of the Facilities Services Division who are so qualified, the District shall, no less than biennially, cause a survey of compensation of managers of major construction programs and managers of major public and private facilities in comparable locations across the United States in both the public and private sector, and the District shall make a finding that the managers of the District’s Facilities Services Division are being compensated accordingly.
“6.5.4 The District shall provide the Facilities Services Division with dedicated procurement, accounting, legal, information-technology, personnel, and other support services sufficient for implementation of the construction and modernization program funded by bond proceeds.”
We understand your desire for a Single District. However, we submit to you that perhaps the proper way to achieve high performance for the District, at least for some activities, is not through over-centralization of support activities, but rather by continuing your own decentralization initiatives by putting more support function staff where they can work directly with the managers and staffs of the prime functions that they support. We ask you to reject the historical District centralized decision model of decision-making – with its obvious poor results – and consider instead a shift to the most successful management model that the District has seen in decades, that of FSD.
Even if you do not wish to decentralize the entire District support functions in this manner, we ask you to not destroy the organizational framework that has allowed FSD to operate as one of, if not the, most respected units within the District for the last seven to eight years, when the transition to this management model was made.
In addition, the District must now plan and execute the transition from reducing the bond construction program as available bond funding is depleted to maintaining the necessary personnel, skills, and procedures until the ability to sell bonds returns in order to avoid the difficult ramping up activities of the late 1990’s – we do not want to replicate that long, painful, and expensive learning curve.
If the District does recentralize these support functions presently distributed within FSD, it must take care with charging staff compensation to the bonds, as their work will likely no longer be totally for bond-funded activities.
Our compensation concerns begin with the very clear mandate of the voters, in their approvals of Measures Y and Q, as well as, MOU sections 6.5.2 and 6.5.3 (supra), that FSD managers be paid at market rates, considering comparable positions in both the public and private sectors. The District has demonstrably failed to satisfy this requirement by the first deadline of November 2007. Our review of the District’s actions to come in compliance by the second deadline of November 2009 leads us to believe that compliance will again be existent, and we are now providing clear notice that a second failure to comply with these legal requirements will result in the BOC taking actions to highlight this illegal practice and, if necessary, to attempt to bring the District into compliance with the will of the voters and the law through other means.
Such failure to pay market rate is having significant negative impacts on the bond program. For two key positions, the Planning and Design Directors, your directive to set the compensation at the 75th percentile, rather than the 90th percentile as had been previously agreed to, has led to the best qualified candidates refusing the appointments because taking on these more challenging positions would have required them to take cuts in pay.
Further, there is no savings from underpaying top FSD managers. First, there is no savings to the “general fund” budget, no impact on funding for the classroom, because these positions (with a few exceptions) are paid 100% from bond funds that cannot be utilized for classroom or other non-construction bond activities. Second, there are no savings to the bond-funded activities because, in the absence of District employees in these roles, FSD instead engages contract professional managers – which OIG has found costs 75% more, on average, than employees. Third, being unable to pay at market to engage the highly capable people that FSD needs requires both FSD and Personnel Commission staff to do more work to try to find capable candidates – so far, without success. Finally, the greatest cost is not having skilled managers in place when they are needed.
Getting into the specifics of our concerns:
FSD ORGANIZATION Rationale for Independent, Dedicated FSD Functions
For the first years of the bond program, there is very little doubt that the management of the program was far less than it needed to be. While some of the direct planning/design/construction processes were often not well managed, the support functions, such as procurement, finance, legal, information technology (IT), personnel, and others were also causing great problems. Finally, beginning around 2001, there was a realization that the only way for the bond program to succeed was for FSD to directly control many of its key support functions.
These internal support functions were implemented and, for several years, have been doing a fine job of getting the support job done so that the construction program proper could succeed.
Recently, we have observed several actions to eliminate some of these support functions by consolidating them with non-FSD District functions that, we believe, may negatively impact the bond program. We understand that you want to move to a Single District and to break down walls, but, given that the bond program is almost undeniably one of the best things that the District has done for decades, we urge great caution in making such changes. There is an old saying, “If it ain’t broke, don’t fix it” – one that we believe should be applied to these support functions, where the existing organization should not be changed unless and until there is a great degree of assurance that the new function will support the bond program at least as well as it is currently being supported.
One matter that has been of particular concern to the BOC over the past several months is preparing for the Measure Q program. As you know, the downturn in the economy and reversal of the property valuation trend of the past decade will mean that the District will not be able to sell the $7 billion of Measure Q bonds, as well as approximately $700 million of Measure Y bonds, for several years. The existing new construction and facilities modernization programs will essentially run out of bond funding in approximately the 2013 school year, with no funding for renewal of these programs for another several years.
Our concern is, how will the District be able to restart the current program? We of the BOC are all-too-aware of the great pain that the District went through before the present, highly effective FSD emerged. Unless steps are taken soon, we run the risk of the total disbandment of the bond-funded programs of the FSD, its leaders, its technical skills, its processes, and its corporate memory.
We need to work together to develop a strategy to retain at least a minimum level of these individuals, skills, and capabilities during the down years. We have some preliminary concepts that we would like to discuss with you as to how this could be done, but we believe that the current issues, as discussed in this letter, must be tackled first – but, these must be undertaken with the understanding that we are planning not for three or four years, but for a decade and more, through some most challenging periods of transition.
Ideally, there should be a minimum level of facilities modernization projects being performed during the down period. The planning function must be maintained, both the planning for bond-funded construction projects and the normal planning activities that are independent of bond construction program proper, such as joint use, so that, when the District is able to again sell bonds, there will be projects that are ready to enter construction.
Also, the design function must be brought back up to speed approximately a year in advance of bond sales – again, so that there will be projects that are “shovel-ready” when there is funding to begin then. To accomplish this will require saving some bond funding and either delaying some projects or using program savings to fund added activities and projects during the down period.
Measures Y and Q Stipulations
As with FSD compensation, Measure Y, and now Measure Q, has very specific requirements for the organization and staffing of FSD. Measure Y states: “The Board shall provide the (Facilities Services Division) with dedicated procurement, accounting, legal, information-technology, personnel, and other support services sufficient for implementation of the construction and modernization program funded by the Bond proceeds.” As with the management compensation requirements discussed below, this is a voter-approved mandate that cannot be changed, or ignored, even by the Board of Education or the Superintendent. Moreover, the District’s MOU with the BOC makes the identical commitment at section 6.5.4 (supra). While the language above does not go into great detail as to exactly how these functions shall be organized, as this would not be appropriate for a voter referendum of this type, the clear understanding is that the status quo – or better – would be the standard and that reassignments that would reduce the effectiveness of the bond program are not allowed. That is also how the BOC understands the District’s obligations under section 6.5.4 of the MOU.
Procurement
While having some of the following functions directly supporting the bond program, and working for the Chief Facilities Executive (CFE) is important, procurement is one of those functions that is absolutely vital. It is not only that, as the District has finally acknowledged, engaging major construction contractors is a very different matter from buying pencils, it is that the Facilities Contract Branch is very good at working with its clients to help them get what they require, when they need it, at the best possible price, and in compliance with statutory and regulatory requirements – so good, in fact, that we are aware of at least two other, non-FSD, District departments that have asked Facilities Contracts Branch if it could take over their contracting. The physical placement of Facilities Contracts, close to and working side-by-side with other Facilities functions, is another key to the success of this function. The ability to successfully attract highly qualified general contractors to build new schools under Education Code 17406 (lease-leaseback) would have been impossible if the procurement/contracting person had not had extensive facilities experience and engagement.
Accounting – Finance
By 2001, the then-existing District financial team was totally unable to meet the needs of FSD for financial information. A function that was doing fiscal-year, budgetary reporting on a long-after the fact basis was totally unprepared to assist FSD with project-life-to-date, budget vs. actual reporting on a real time basis, let alone assist with other vital Facilities requirements such as project scheduling. The then-District CFO finally told FSD that FSD could do whatever it wanted to for its own needs; as long as it would get him the information he needed to close the books. Indeed, after FSD got done with improvements to the pre-existing financial reporting system it required, many of the features were taken District-wide. To this day, there are two entirely different sets of needs and, while the District-wide and the FSD financial functions certainly talk and work together, these are two entirely different functions doing very different things – and, again, the proximity of the FSD Finance Support Services Branch to the rest of the FSD functions are vital to its high degree of performance. It was the existence of this free-standing FSD financial planning function that led to the decision to engage the property tax base valuation consultant that highlighted the downturn in property tax receipts to enable the sale of bonds which, in turn, allowed the District to maximize the amount of bonds that can be sold to complete the BB, K, R, and Y promises to the voters and to provide significant additional time to plan for cycling down the level of activities during the years of no bond sales.
This independent Accounting-Finance Function within FSD is another not only important, but vital, component of FSD.
Accounting – Invoice Processing
By 2001, the inability of the District to pay facilities contractors’ bills was creating problem so serious that many contractors refused to work for the District – and, understandably so, as the District’s failure to pay had actually driven some of these into bankruptcy. In order to correct this situation, FSD had to establish its own Facilities Contract Invoice Unit (FCIU) to take over this function.
Payment of invoices in FSD is a very different process than elsewhere in the District. The contracts are of very different types, the administrative requirements for payment are far more onerous, and there needs to be constant communications – and mutual understanding – with the project-level field personnel who are responsible for project and contract management. The District’s ability to pay its contractors on-time, with the terms of the contract agreement, has made the District a preferred customer of many superior contractors, which has undoubtedly saved the District significantly in the costs of its projects because its contracts do not add in major cash flow costs under the all-too-common assumption that they will not be paid on a timely basis.
This specialized and dedicated level of support for the payment of FSD invoices cannot be allowed to end without severe consequences for the program. This is another vital internal FSD function.
On September 18th, you sent an e-mail throughout the District congratulating FCIU on its ability to process invoices for payment on non-delay basis.
Legal
The dedicated, and very well qualified, specialized FSD Legal team has been a major component of the success of the program. Having the in-house LAUSD lawyers assigned to FSD participate in not only the projectspecific issue meetings, but the general meetings, allows them to identify, prepare for, and respond to important legal concerns before they are problems. Being right down the hall from Facilities Procurement personnel allows the frequent and rapid resolution of issues with procurement and contracts, a constant and continuing process.
Rather than moving the in-house LAUSD lawyers assigned to FSD away from FSD, a better alternative could be to determine if the overall level of legal services might be improved by locating other in-house LAUSD lawyers to frequent-customer functions such as Human Resources, Personnel Commission, and the Procurement Services Group so that they, too, can receive the more efficient level of legal services that FSD has been receiving. For example, having the FSD Legal team co-located with Facilities Contracts Branch, FSD senior management, and other functions is regarded as a key factor in the very significant reductions in both processing construction claims and in reducing actual claim settlements and awards.
Increasing decentralization of support functions such as Legal would also be consistent with your decentralization initiatives, placing more resources closer to the decision-makers who are closer to the issues.
(BOC has not studied such reorganizations in detail, nor are we attempting to perform as consultants to the District. What we are saying is that the success of co-locating Legal, and other support services, with the FSD decision-makers indicates that studying similar support staff structures for other District functions may prove wise.)
Information Technology
FSD Facilities Technology Services (FTS) operates and supports the several vital software systems that are both vital and unique to FSD. These include COLIN (program management), EXPEDITION (budget management for New Construction projects, contract management, and change orders), MAXIMO (maintenance management and budgeting for Modernization projects), and P6 (project scheduling and control), as well as document control systems. FTS also does data extraction, manipulation, and report preparation not only from the FSD IT systems, but from the District-wide systems, in order to support decision making and control.
These functions are not supported by the District’s general IT function and, to be frank, it has neither the personnel nor the time to attempt to do so. The IT requirements of FSD are, for the most part, not found elsewhere in the system and the support is best done by dedicated FSD FTS personnel who work time in FSD, gaining a far superior understanding of the needs of their clients.
FSD IT is a vital function to have in-house within FSD.
Personnel
While the majority of FSD’s human resources function work is performed by the Personnel Commission, as per the requirement of statute, having a small, dedicated staff to interface with the Personnel Commission and to assist in assuring that the many fine details required for personnel transactions are properly performed has been extremely useful to FSD. The size and activities of the FSD Personnel function are consistent with those of personnel functions in other major District functions, such as preparation of specialized position descriptions and coordinating interviews of employment candidates.
FSD Press/Public Relations
This is a function that, for the most part, works on all FSD matters, most particularly with a construction industry focus. Being able to get the FSD story out to A/E firms and construction contractors has been a very important part of making working for the District something that the superior providers now are very anxious to do, totally reversing the early years of the program when many contractors would not work for the District under any circumstances.
Press relations and crisis communications is certainly an important part of this position, but also included is this scope is preparing most of the CFE’s speeches and presentations to outside bodies, cultivating and maintaining relationships with various professional and civic organizations and trade publications, and writing and distributing newsletters, collateral material, and award documents highlighting FSD programs and activities. If the personnel currently in this office are removed from FSD, much of this work will not go with them, requiring it to be performed by other FSD employees, which would likely include some new faces and an extremely high learning curve.
FSD MANAGEMENT COMPENSATION AND STAFFING
We believe that you have made several recent decisions regarding FSD compensation to reduce District costs in a period of drastic funding shortages and budgetary challenges and for reasons of internal equity of compensation between FSD and non-FSD personnel. However, most FSD management positions are paid from construction bond funds that are legally separate from “general fund” revenues and reducing FSD compensation has no positive impact on general District finances. We recognize that compensation equity is a concern, but the District’s agreement with the BOC stated in section 6.5.3 of the MOU (supra) – one that has been ratified by the LAUSD voters – is that ensuring FSD management is compensated at the proper level is of greater importance. The BOC was the sponsor of specific provisions in two bond measures that make payment of FSD managers at market levels a legal requirement for the District that must be honored.
Measures Y and Q Compliance
Measure Y, passed by the voters in November 2005, contains very specific requirements for FSD compensation, which has also been incorporated into last year’s Measure Q bond issue and into sections 6.5.2 and 6.5.3 of the BOC’s MOU (supra). Measure Y states: “Managers of the (Facilities Services) Division shall have educational and employment experience comparable to that of persons with similar responsibility in the private sector. To ensure that the District employs managers of the Division who are so qualified, the Board shall, no less than biennially, cause a survey of compensation of managers of major construction programs and managers of major public and private facilities in comparable locations across the United States in both the public and private sector, and the Board shall make a finding that the managers of the District’s Facilities Services Division are been compensated according.” The above is a binding requirement on LAUSD and cannot be overridden by the Board or the Superintendent.
LAUSD was required to be in compliance by November of 2007, it did not comply, it is still not in compliance, and, at this time, we are extremely concerned that the District does not intend to comply. The BOC is very troubled by this situation and, if there is not a true and factual finding of compliance by the Board of Education by the end of November of this year, we will be forced to reevaluate our options to ensure compliance.
There appears to be some belief that, since the economy is currently down, demand and compensation for such positions is less than it was before. However, the American Recovery and Reinvestment Act alone has funneled well over $100 billion – not including county, state and local matching funds – into public sector works programs. State programs such as the $9.9 billion high speed rail bonds and local programs such as MTA’s Measure R one-half cent transportation sales tax have actually made this a very good time to be an experienced public sector facilities planning, design, and/or construction manager, particularly in Southern California.
In order to compete for, and to retain, the best people, there must be competitive compensation, or the program will suffer.
Recent Management Compensation Decisions
Earlier this year, as part of the reorganization of FSD, there were questions regarding the proper level of compensation for the “branch manager” positions. In your memo to Guy Mehula to May 11th, which you provided to the BOC Executive Committee Members as an attached to your letter of May 12th, you indicated that you would not approve paying FSD managers at the 90th percentile of the public sector survey that had been agreed to previous. After the meeting between you and BOC Executive Committee Members on this matter on May 15th of this year, we believed that we had reached a compromise acceptable to the BOC, i.e., that these positions would be advertised, the results would be observed, and if it was not possible to fill these positions at these levels of compensation, the levels of compensation would be reviewed. In fact, it has not been possible to hire for two of these positions, the Design and Planning Directors, at the reduced compensation levels and these positions were not filled as originally intended. This has also increased the cost to the construction bond program of recruitment, in terms of identifying and interviewing candidates, only to have the desired candidates refuse the positions because they would means actual reductions in compensation.
A-Basis vs. B/E-Basis Positions
In your memo of July 23, 2009, as a cost reduction measure, you instituted a process that new positions and vacancies would only be budgeted and funded on a “B-basis” or “E-basis” “school year,” or approximately ten months pay per year, rather than the full year “A-basis”. While this is certainly understandable and very common for school districts for two-semester school employees, the bond program is a year-round effort with no such standard vacation schedule. There are no FSD positions that can be left unstaffed for two months without backfilling with other employees, which increases the costs of personnel and/or does significant harm to the program from not having the right person at the right place when needed. Many of the impacted positions are at job sites, where there may only be three or four total FSD employees on a project of 24-36 months – and losing people for two or four months during this period is very poor staff management. Also, some projects are designed to be done while school is not in session to avoid inconveniencing the teachers and students. While BOC Staff informs me that there has been some loosening of this requirement in response to Guy Mehula’s arguments, we have noted that Mr. Mehula is spending an inordinate amount of time on making the case for year-round employment for positions where formerly he had to do little more than review the requirements and sign a form to have the hiring progress commence.
Management Contract Terms
The District has recently been reducing the contract terms of the more senior LAUSD positions, including, but not limited to, FSD positions.
Given the difficulty of retaining the best FSD personnel when they know that the program will be winding down over the next few years, this shift to shorter contract terms has sent a message that, not only is employment security significantly reduced, but these individuals are expendable, thereby reducing their motivation to remain at the District. We understand that this is a change that is being made throughout the District, but we view it a particular problem with FSD, where the District is attempting to retain many individuals until the program winds down to a point where they can be discharged without risk of major harm to the program.
DISTRICT COST SAVINGS AND THE BOND PROGRAM
Although bond funds are limited, the bond-funded program has not been as negatively impacted as the vast majority of the rest of the District’s programs. Also, by detailed projecting and modeling of the availability of future revenues, FSD has anticipated its downturn in funding and has instituted mitigations.
What this means in the short run is that, while most other District functions are forced to undergo major reductions in expenditures that are having major negative impacts on their programs – and, of course, the students – FSD has, at least to some degree, been spared from the worst of these reductions.
Because there is no fiscal necessity to cut, cut, cut, no matter how much it hurts, FSD has the ability to continue most of its programs and projects and has been able to schedule a “soft” landing a few years out when the bond funding will be temporarily cut off.
In fact, the greater danger to the construction and modernization program is in not spending money the bond funded program does have, resulting in unnecessary impairment of the program’s results.
As Superintendent, you should also be mindful of the fact that if the current dedicated FSD programs are organizationally and/or physically shifted away from FSD, then it will likely become inappropriate for all of the program expenses to be paid from bond funds. From what BOC Staff has learned, it appears that at least some of these currently dedicated FSD personnel will begin to do non-FSD bond-fund eligible work. This would mean that the amount of bond funding for these positions and functions would be reduced and their draw on “general fund” monies would increase. It could also require the completion of detailed time cards to keep the accounting straight. If not properly executed and documented, these changes could jeopardize the tax exemption of the bonds. Finally, we will note that having dedicated support functions has significantly reduced the District's exposure to claims that bond funds are illegally and improperly being utilized to subsidize the “general fund” activities of the District.
We would like to schedule a meeting with you at your earliest possible convenience to discuss several specific matters, as noted in the enclosure, and LAUSD’s ongoing bond related school construction and modernization program.
[CONTACT INFO REDACTED]
Sincerely,
/s/
David Crippins, Chair
cc: Members of the Board of Education
Bond Oversight Committee
In a brief letter to subordinates Monday, Mehula gave no hint of discord, painting his departure as an opportunity to search for new challenges. "The work that we have done together and the investments we have made in our schools, community, and economy are significant," he wrote. 
