Katrina spending target of audit
Michelle Krupa, The Time Picayune (Louisiana)
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New Orleans officials paid some workers exorbitant amounts of overtime and awarded huge service deals to two well-placed contractors without seeking competitive bids in the months following Hurricane Katrina, a federal audit report shows.
A second audit report, meanwhile, describes deficiencies in the city's efforts to assess damage to flooded homes and in the appeals process for those assessments, both of which aroused controversy in the months after the storm.
Both reviews, which were not full audits but relied on document analysis and interviews with public officials, were conducted early this year by the inspector general's office of the U.S. Department of Homeland Security, which oversees FEMA. The reports were completed in late September and provided to The Times-Picayune this week.
Among the most eye-popping cases laid out in the review of fiscal matters are claims that amid $39.2 million in overtime costs that the city asked the Federal Emergency Management Agency to reimburse was an employee who earned $207 per hour after the storm; that employee normally was paid $23 per hour. Another worker earned overtime pay for 14 consecutive 24-hour days, the report says.
Though auditors deemed both "ineligible" for compensation, city officials said this week that all overtime requests were proper and blessed by FEMA.
The fiscal report also claims that city officials used "illegal contracting methodology" in inking agreements worth more than $92 million with two national firms, the Shaw Group and Montgomery Watson Harza. It says the deal with Montgomery Watson tied profits to costs, an arrangement that violates federal rules because it provides no incentive to keep costs low.
The report also claims both contracts were awarded without competition, which boosted the risk of "unreasonable prices," and that the city failed to monitor contractor performance. The Shaw contract, for home inspections and environmental mitigation, was written after the storm. Montgomery Watson already had a contract with the city that was amended to include storm-drain cleaning and construction management.
'There is no problem'
Though the report does not demand the return of federal money paid so far, the allegations related to Montgomery Watson may be delaying the release of almost $10 million already in hand at the state level for the contract and could hamper FEMA's approval of the remaining $14.8 million, city documents show.
Speaking generally about the reports, a spokeswoman for Mayor Ray Nagin said she does not view the federal audit reports as a rebuke but as a guide to how the city should handle future reimbursement requests.
"I don't see this as allegations," spokeswoman Ceeon Quiett said. "I see it as recommendations for support."
Quiett noted that FEMA has approved at least some invoices for all of the deals in question, suggesting the contracts and overtime requests passed initial muster with state and federal officials. Further, she noted that the reviews took place five months after Katrina, when the city was just getting up to speed on the complicated federal reimbursement process.
"Many of these issues have long been addressed," she said. "We've gone so far past these issues that are in these documents."
For example, Quiett provided a March 31 letter indicating that FEMA had approved $58.5 million in regular and overtime pay related to Katrina. She said the extraordinary cases of overtime payments described in the report were not "true at all."
"There is no problem," she said. "All overtime was reviewed by FEMA and the state before it was paid."
A separate analysis by The Times-Picayune of post-Katrina overtime, meanwhile, showed other stunning payments; for instance, 23 employees claimed to have worked at least 500 hours of overtime in the six weeks after the storm, meaning they had worked at least 18 hours per day for 42 days in a row.
Money is held up
City officials said at the time that employees had filled out time sheets in line with FEMA guidelines.
Despite Quiett's assertions that most of the federal audit issues have been addressed, it is clear that at least one remains in limbo.
According to a Nov. 3 letter by Public Works Director Robert Mendoza, state officials are using the findings of the fiscal review as a reason to hold back $9.6 million that they already have received from the feds for the Montgomery Watson contract. The state department serves as the pass-through agency for disaster appropriations to local entities.
Though the city has received $9.9 million in reimbursements for the Montgomery Watson deal, the state has suspended payments related to the contract, Mendoza and a state auditor said.
"The city is certainly surprised that the state now, without prior discussion, is attempting to use this months-old inspector general's office document as a basis to justify its refusal to release funds properly due the city," Mendoza writes.
Mendoza contends in the letter that "the OIG review contains numerous factual errors" and that the "contract compensation method has been misunderstood."
He said in an interview this week that -- far from the bonanza hinted at by auditors -- the Montgomery Watson deal is capped at $34.4 million. He also said the contractor is not earning 13 percent profit on subcontractors' work, as the report claims.
The confusion, Mendoza said, stems from a report Montgomery Watson generated for FEMA officials, who requested a cost breakdown of time and materials, plus overhead and profits, on the drain-cleaning deal. Such an accounting, he said, can mirror the framework of a "cost-plus-percentage contract," which federal officials say is prohibited.
"But bottom line, it's a lump-sum contract for $34.4 million," he said. "So had (Montgomery Watson) kept running up more and more subcontractor costs, they would have reduced their profits. Their ceiling was fixed."
Many were called
As for the claims that the contract was not competitively bid, Mendoza said that despite extraordinary circumstances in the weeks after Katrina, officials called known vendors to solicit bids for the deal. Montgomery Watson offered the lowest price, he said, adding that the new work was added to an existing contract for the sake of expediency.
Mendoza said the city's position has been laid out in a comprehensive appeal, which the city did not provide immediately.
Jack Lankford, the federal auditor who wrote the fiscal report, said he has not received an appeal, or any documents for that matter, from the city. "That does not mean that the city has not corrected some of the problems. That just means we have not received any of the information," he said.
In a recent letter to the federal government seeking reimbursement, the state defended the city's contracting practices related to the Montgomery Watson deal. Nevertheless, they have refused to release the $9.6 million as long as the Montgomery Watson contract is under review by FEMA.
"The state has held the line on how we handle our contracts," said George Schmidt, an auditor with the state's Office of Homeland Security and Emergency Preparedness. "When the documentation comes through, we either pay the money, or if we find problems, we hold the money. . . . If a contract doesn't seem to me to meet the muster, we're not paying the money."
While not a subject of the federal audit, Montgomery Watson also won a contract with the Sewerage & Water Board to perform emergency assessments of the city's water and sewer lines, work for which the company billed about $15 million. That contract, like the storm drain work for the city, was handled by amending an existing contract the firm has held for years.
One of the Montgomery Watson subcontractors on both the city and S&WB jobs is a company called Management Construction Consultant Inspection, which was created months after Katrina by politically active minister O.C. Coleman and two associates.
The amount MCCI billed on the city contract could not be determined Wednesday because the city has said it dealt directly with Montgomery Watson and does not have details of subcontractors' pay. Meanwhile, MCCI billed about $2.5 million for work on the water and sewer systems, S&WB records show.
The firm has links to Benjamin Edwards, a minister and friend of Coleman's as well as a longtime member of the water board who often has been involved in contracting disputes. Federal investigators have been probing those connections, subpoenas indicate, and a source close to the probe said that a B. Edwards who signed MCCI's invoices is Bruce Edwards, a brother of Benjamin Edwards. Benjamin Edwards has denied that his brother worked for the company.
Edwards spent $269,250 of his own money to support Nagin's re-election bid, according to reports he filed with the state. He said he did not coordinate with the Nagin campaign, freeing him from the normal spending caps.
Inspecting buildings
The fiscal report also criticizes the city for a separate deal that it describes as a wide-ranging, noncompetitive contract handed to the Baton Rouge-based Shaw Group about a month after Katrina.
Under that contract, the firm was to perform a number of tasks, including building inspections, mitigation of environmental hazards and "stabilization" of city-owned buildings. The contract had a maximum value of $58.5 million, the report says, though it's not clear whether Shaw ever reached that ceiling.
City officials made no apparent effort "to ensure that prices were reasonable," the report says, nor did they monitor work to make sure bills were in line.
Those shortcomings "represent a significant concern," especially for a contract awarded without competition, the report shows.
The Shaw contract was controversial when it was awarded, and before the tasks were complete, federal and city officials announced they would seek competitive proposals for the remaining work.
In January, the city announced it would award contracts for several tasks that overlapped with the work originally assigned to Shaw. Shaw wound up winning two of those deals, one to handle federal reimbursement paperwork and the other to renovate public buildings.
Shaw spokeswoman Stephanie Dixon declined to comment on the report.
Despite outstanding issues outlined in the fiscal report, at least one finding apparently has been laid to rest.
According to the review, as of Dec. 31, the city had failed to pay FEMA $860,110 in interest earned on $102.3 million in federal aid, violating a federal law prohibiting local entities from earning interest on federal grants.
But documents provided by the city show that Finance Director Reginald Zeno mailed a check for $1.7 million to Schmidt, the state auditor, on June 5 for "accrued interest earned by the City of New Orleans" in an account tied to the federal payment. The documents included the canceled check.
Quiett said she did not know why the city's payment had not been noted by federal auditors in their Sept. 29 report.
Assessing home damage
The second audit report delves into the city's procedures for evaluating flood damage to homes.
Under the rules of the National Flood Insurance Program, administered by FEMA, homes judged more than 50 percent damaged cannot be renovated unless they are elevated to comply with the latest federal flood maps -- a standard many New Orleans homes fail to meet.
Numerous newspaper articles, in The Times-Picayune and other publications, documented the capricious way in which teams of mostly private contractors conducted the surveys, and the alacrity with which city officials were willing to change a damage assessment if a homeowner didn't like it. The report, which is dated Sept. 21, cited a critical article in The New York Times as the impetus of the review.
The audit report essentially confirms the findings of the news reports that spawned it.
More than 10 percent of the 56,000 homeowners whose houses were deemed beyond
repair filed appeals, and city officials "lowered damage ratings for the overwhelming majority to less than 50 percent," the report says. In nearly every case, officials did not keep any documentation supporting their decision to change the initial damage assessment, the report says.
As a result, it is unclear whether the changes were warranted. As a further consequence, the report warns, "erroneous rating reductions could result in homeowners rebuilding without upgrades needed to prevent damage and loss of lives in future floods."
But if there was little to support the changes to damage assessments, the report notes, there was likewise little to support the original findings.
As has been previously reported, the assessments were ballpark figures generally based on the height of the water mark on a house. Though FEMA guidelines say inspectors should examine a home's interior, inspectors in New Orleans lacked permission to enter homes. Consequently, inspectors spent an average of six to eight minutes on each house, the report says.
For the future
In general, according to what the report calls a "questionable rating methodology" developed by the Army Corps of Engineers, one-story houses that received 2 to 7 feet of water received damage assessments of 51 percent. The guidelines "may have been too broad to produce accurate ratings," the report says.
The report thus describes the flawed process: "Having no assurance that the original inspection ratings or the appeal ratings were reliable, we could not determine whether the city, in its appeal process, was applying objective standards or whether systematic abuses were occurring."
When it was reported that city officials were gladly changing damage assessments without any real basis for doing so, some observers of the National Flood Insurance Program -- including a couple of its former directors -- said New Orleans should be sanctioned.
Cities that, in FEMA's view, are derelict in enforcing program rules may be suspended from the heavily subsidized program or see flood insurance rates rise.
While the inspector general's audit is critical, it does not call for such measures, focusing instead on fixing the deficiencies auditors observed so that they don't recur in a future disaster.
The flood insurance program's managers had a similar take -- no surprise, perhaps, given that a small-scale FEMA review in January essentially blessed the city's generous policy of reducing damage assessments on demand.
Butch Kinerney, a spokesman for the flood program, said that FEMA may require some of the appeals to be reviewed again. But generally, the point is to learn lessons for the future, he said.
"Our goal is not to kick people out of the program; it's to make safer, stronger communities," he said. "Quite frankly, the city government gets a little bit of a bye in this case. Taking punitive action isn't really going to . . . serve anyone's interest."
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