January 21, 2015

 

To:  Charles A. Szuberla, Jr., Asst. Commissioner  NYS  Education  Department & 

Gabriel F. Deyo, Office of the State Comptroller

Gentlemen:

According to the attached letters responding to the request from the Joint Schools Construction Board (“JSCB”) and my request set out in my letter of December 12, 2014, each of your departments has decided not to participate in the cost of an audit of the activities of the Program Provider, LP Ciminelli (Ciminelli) in connection with the 11-year, $1.4 billion Joint Schools Construction Project (Project.)

The attorney for Ciminelli is now citing your declinations as evidence that there is nothing wrong with the way the contracts were drawn or administered.

To date Ciminelli has refused to provide any details or supporting records to justify the basis for its 33% overhead, characterizing such information as proprietary.

Pursuant to the enabling legislation and the PPDS agreement, Ciminelli has been and is a fiduciary of the JSCB as its Program

Provider/Construction Manager and, as such, has an obligation to provide the JSCB with any and all information pertinent to the Project as it would be required to do by the State of New York. Ciminelli’s argument that any such information is proprietary is unsupportable.

Ciminelli was not given just the responsibility to build the school projects, but was charged with fully representing the JSCB in financing, cost estimating, defining scope, preparing plans, identifying cost savings, preparing and keeping a budget, etc., all on behalf of the taxpayers.

New York had passed unique hybrid legislation to primarily avoid the requirement for a local share but also with the intent to maximize the benefit to the City, the schools and the schoolchildren. If, as it turned out, the actual results in the field were showing that costs were not as high as estimated, the benefit and savings should inure to the State, allowing it to expand the scope of the project or return the savings to the bond holders to reduce debt.

Ciminelli had a right to earn a fair profit and overhead for its services but not the right to over-estimate the costs in order to pocket all monies saved on behalf of the public. It has a fiduciary, moral and legal obligation to advise the client of actual results and recommend changes to maximize use of public funds. Ciminelli appears to have done the opposite by hiding the results and failing to disclose that the costs were considerably lower than estimated. In fact, it appears that Ciminelli used the savings that the hybrid system intended to create, to enrich itself rather than benefit the school children. For over a decade members of the JSCB and Board of Education (BOE), who were supposed to be watchdogs, looked the other way.

When the disconnect between actual cost and maximum cost allowance funding became clear ten years ago during phase one, why didn’t Ciminelli disclose that fact to its client? If it had disclosed would the later phases have been conducted with the same hybrid plan? Ciminelli created an extremely profitable vehicle to produce work at costs well below the Maximum Cost Allowance and then put all the surplus into its own pocket.

As identified in the enclosed summary for Phase 5, the aggregate budget schedule of values for construction costs for all projects in Phase 5 was $147,013,940, and the total “contracts awarded” for construction work was $106,229,875 (a difference of $40,784,000.) We assume that the total “contracts awarded” amount includes all of the hard construction costs associated with the project. Why did the estimated cost of such hard construction exceed the actual cost by 38%. It appears that the practice of over estimating the costs was deliberate and continuous through the entire term of the 5 phase project. Why did the cost estimator for the JSCB allow excessive estimates?

Revelations recently in the Buffalo News and elsewhere, based on documents furnished by Ciminelli, indicate that there is over $550 million unaccounted for in the 5-phase project.

Ciminelli has refused to furnish the JSCB with specific information to which it is entitled other than the names and amounts paid to hard cost sub-contractors under phase 5, which had a $175 million Maximum Cost Allowance (MCA). Ciminelli refuses to send detailed digitized information or name the bidders and provide copies of the bids for hard sub-contracted work with a detailed schedule and proof of payment of hard sub-contractors and detailed names, copies of contracts, amounts paid and proof of payment for all soft costs and general conditions which they say totaled $27 million. Finally, Ciminelli claims that any definition of what happened to the remaining $42 million gap is “proprietary information” and they have no fiduciary burden to disclose the details because the contracts were “stipulated sum.”

According to the Jonathan Burman memo of January 8, 2015 (attached) Ciminelli assumed risk which is not true. Ciminelli in fact assumed no risk. It was a false illusion created to justify undefined profits.

An example is Discovery School #72, where it was ultimately determined that the gymnasium area did not need a new roof. At the time that a new roof was eliminated from the scope, the old roof was leaking. The contractor nevertheless proceeded to paint the 12 x 12 interior ceiling tiles, which after encountering the leaks of the faulty roof, resulted in falling tiles and damages to the interior of the gymnasium. The roof is still leaking today. If Ciminelli had risk, why hasn’t the roof been replaced or repaired?

A resolution to require an audit of all of the financials of the Project was passed not only by the JSCB but also by the Board of Education (BOE.)

The Buffalo News has investigated minority participation information furnished to the BPS over the years and determined that the sub-contracts for the entire $1.4 billion project total approximately $850 million. If one were to allocate 10 percent or $85 million to General Conditions, soft costs and incidentals, there is a balance in excess of $450 million unaccounted for. Did the State intend to give Ciminelli a 33% overhead and profit when the industry standard fee for construction management on a project of this size should be no more than 3%?

This discrepancy must not be ignored.

The BOE has engaged Harter, Secrest & Emory LLP as counsel to prepare an RFP for an appropriate forensic audit, order the same and supervise the conduct of the audit with collateral investigation of the activities and contract compliance of Ciminelli during the entire project.

It is incumbent that SED finance the cost of an independent audit including attorney fees and costs in connection with the investigation. Public servants are charged with protecting taxpayer money. Appearances are that the taxpayers have been fleeced out of $465 million. It is the State’s duty to provide transparency and open the underbelly of this beast by financing the audit and investigation.

 

Very truly yours,

Carl P. Paladino

School Board Member

 

CPP/pg

Encls.

Cc: Ken Wagner, Sr. Deputy Commissioner, NYSED

Jonathan Burman, SED

Don Ogilvie, BPS Superintendent

Buffalo Public School – Board of Education

Buffalo Public School – Joint School Construction Board

Harter, Secrest & Emory LLP

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