The Santa Clara Valley Water District has been in deep water in recent months, following allegations of fraudulent charges and conflicts of interest that could have tainted the district's relationship with one of its contractors.
District staff were on the defensive at last week's board meeting, spending two hours attempting to assuage any fears the board of directors might have regarding recent media reports. Emails written by Engineering Unit Manager Roger Narsim and published by San Jose Inside in September indicated that the engineering firm RMC Water and Environment had billed the district for $350,000 for work that it had not performed on a project it was hired to do several years ago, and called into question costs paid to the firm totaling $512,000.
The district has continued to work with RMC despite the possible financial discrepancies. Earlier this year the board authorized CEO Beau Goldie to negotiate and execute contracts without board approval to get work started on a $800 million recycled water program, citing the severe four-year drought as a reason to move quickly on the project. Goldie awarded RMC a $1.3 million no-bid contract to do "preliminary engineering work" for the new project.
For some, that contract is raising red flags. One of the district's high-ranking officials, Deputy Operating Officer Melanie Richardson, is married to RMC co-owner Tom Richardson. Media reports claim the "firewall" policies created to keep Richardson from working directly on RMC projects were weak, and allowed her to sit in on meetings related to her husband's work.
The red flags were enough to prompt an investigation of the water district by the Santa Clara County District Attorney's Office, including requests for district contracts with RMC, according to a September story by San Jose Inside.
At the Oct. 27 board meeting, Chief Financial Officer Najon Chu said the district did an internal audit of its financial documents with RMC, including a review of invoices, and found no irregularities and no noncompliance issues. Chu assured the board that the district pays only for work completed, and has ways of avoiding the large-scale fraudulent billing reported in the press.
"The district has system controls in place ... to prevent payments made beyond the executed contract agreement amount," he said.
But this was contradicted in an email by Narsim in April 2014, where he raised red flags about payments to RMC that he said exceeded the amount of money authorized in the firm's "not to exceed" contract. Instead, he wrote, the contractor was charging the district for time and materials, rather than sticking to the contract's maximum amount, which allowed costs to balloon well above what was authorized.
The issues raised by Narsim went unaddressed, and in May of this year Narsim wrote another email explaining that RMC appears to have been paid $350,000 for work that it had not performed.
The work in question was for the Lower Silver Creek Flood Protection Project in San Jose, where a number of amendments to the contract boosted costs and raised questions by staff.
Deputy Operating Officer Chris Elias explained that one project "task" RMC was to perform had a $375,000 price tag. But because of changes in the plans and a "number of needs that emerged," that amount jumped to $1.7 million.
Payment of the added costs was made through an inter-task fund transfer, according to Deputy Operating Officer Katherine Oven, effectively pulling money out of subsequent tasks and forcing district staff to complete the remaining work.
Board member Barbara Keegan criticized the shifts in funds, calling it an "informal process" that skips important steps in modifying the consultant's contract and paying for the work done under the revised agreement. The board also received no notification of these modifications.
Elias agreed that the process was flawed. "That is one of the lessons we've learned," he said.
The idea of an internal audit didn't sit well with board president Gary Kremen, who pointed out that no outside third-party auditor had been involved in looking through the invoices and other financial documents.
"Basically, you've audited it yourself," Kremen said.
Goldie said the board could authorize an independent audit to see whether the district's accounting was up to snuff. Though some board members questioned whether an outside review was needed, they all agreed to send it to the board's audit committee.
Board member Linda LeZotte said she would go along with the audit referral if it would satisfy any concerns, but that she had total confidence in district staff. She told staff that they have been "maligned" by innuendo and some of the questions posed to them over the last several months.
"If we want to spend the money to re-do your work, that for 15 years has been impeccable, I'll go along with it," LeZotte said.
Conflict of interest in the high ranks
District staff also attempted to dispel concerns that Melanie Richardson had been somehow involved with RMC contracts. Chief Operating Officer Norma Camacho told the board she reviewed the correspondence, invoices and agreements with RMC and found no formal or informal communication between her and water district staff working directly on RMC projects. While Richardson did conduct annual reviews for two "unit managers" working on RMC projects, Camacho said, the district will be looking to change that and further increase that degree of separation from the company.
Former board member Brian Schmidt spoke at the meeting, saying he felt the characterization in the San Jose Inside article that suggested Richardson had an undisclosed conflict of interest was not accurate. He said working with district staff, Richardson would always disclose her relationship anytime a project came up that RMC was working on.
"The process of disclosure and maintaining a wall to protect against conflict of interest was in place. I never saw any problem with that," Schmidt said. "I think it's just a shame the newspaper didn't try to find out additional information. All they needed to do was pick up the phone."
Schmidt said potential conflicts of interest are something the district just has to deal with. He used the city of Palo Alto as an example, and said plenty of employees and even council members have spouses at Stanford, which occasionally creates conflicts. "These just exist," Schmidt said. "You just have to work them out."
Expedited plan under fire
At the April 28 board meeting, the board voted to grant Goldie the power to jump-start the district's recycled water plan. In the agreement, Goldie could execute contracts with several consulting firms, including RMC, for up to $10 million.
Now that the controversies surrounding RMC have surfaced, Deputy Operating Officer Garth Hall said, there are new allegations that the staff "created" an urgency around the problem, leading to a contract agreement with RMC that bypasses the normal bidding process. These allegations are completely unfounded, Hall said.
"Ms. Richardson had absolutely nothing to do with the development of any part of the expedited program, and in particular the part that had to do with the selection of RMC," Hall said. "This accelerated program is not something that staff created at all. This is something that staff brought forward to the board in light of the (drought)."
Kremen was again unsold. He demanded to know how the project could be considered an emergency worthy of bypassing the bidding process when the recycled water facility wouldn't be functional until 2021.
"How is this an emergency in any sense of the word?" Kremen asked.
Hall said these types of large infrastructure upgrades can't be done at the drop of a hat, and that the district needs to get started now. He reminded the board that the state is in the fourth year of the worst drought on record in California, and said no one knows enough about the predicted El Nino storms' effects yet to rely on getting relief this winter. Retailers are cutting as much as they can, he said, but the fact remains that they may be in the same situation next year.
"We can't keep doing this to the community without causing economic harm, failing to provide tangible long-term water supplies," Hall said. "To sit and not pursue this with the prospect of an ongoing drought, in my view, is irresponsible"
Board member Tony Estremera, who called the two-hour exchange a "Benghazi hearing," said the focus should be on the board, not district staff and not Richardson. He said it was the board's decision to act with urgency and use single-source contracts, and that any heat about that decision should be on the board instead.
At the meeting earlier this year, the board voted 5-2 to allow Goldie to execute the $10 million in contracts with no board approval, with members Dennis Kennedy, Rich Santos, Nai Hsueh, Estremera and LeZotte voting in favor, and Keegan and Kremen voting against. Estremera said the media hardly mentioned that five board members supported the expedited process.
"We wanted this to be quick; we expect to be quick. We know that you need to start right away," he told staff. "So yeah, you're right, you followed our direction as a board, you did what we asked you to do with respect to getting the contracts out."
LeZotte criticized Kremen and Keegan for feeding into the controversy by talking to the press about their opposition to the expedited process, rather than keeping it between board members.
"Two people who disagreed took their beef to the press, instead of taking it to us," LeZotte said. "That's the shame, that we've spent the last 20 minutes nitpicking a contract because somebody lost a vote."
Keegan said she took exception LeZotte's comments, and that there were plenty of people from the public and staff members who were concerned about the issues regarding contracts with RMC.
"People asked me why I voted the way I did, and I explained that," Keegan said. "I was not out rabble-rousing, I was not out disrespecting either staff or my fellow board members. I believe that I have a responsibility to answer the questions from the public and also to answer the questions from the press."