The Delta tunnels project was just gaining steam, and a San Francisco engineering firm had outbid its competitors to win a $60 million, seven-year state contract to help plan the project.
But officials at the California Department of Water Resources weren’t happy with a manager that the company, URS Corp., had assigned to help oversee the planning process.
What the state did next was the focus of a highly critical state audit released Thursday. State Auditor Elaine Howle charged that DWR directed URS in 2009 to replace its employee with the president of a Sacramento consulting firm that lacked the qualifications to do the job, in what amounted to a no-bid multimillion-dollar contract that ran afoul of state contracting laws intended to ensure public dollars aren’t being wasted on unqualified firms.
A whistleblower cited in the audit raised questions about whether DWR – an agency in charge of overseeing billions of dollars of state water infrastructure as well as Gov. Jerry Brown’s $17.1 billion tunnels project – is routinely giving sweetheart no-bid deals to contractors without vetting them.
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In a 97-page report on the tunnels planning process, Howle said the Sacramento company, Hallmark Group, was hired to work on the “conservation and conveyance” phase of the project. That phase has included evaluation of alternatives for rehabilitating the troubled Sacramento-San Joaquin Delta and planning for the chosen alternative: the Delta tunnels, which Brown’s administration says will improve water deliveries to south-of-Delta water agencies while improving the estuary’s ecosystem.
The $17.1 billion tunnels are to be paid for by the south-of-Delta water agencies that would benefit from them, and the audit said DWR hasn’t used any state taxpayer funds to plan the project. Nevertheless, state contracting laws still apply.
Howle’s audit said Hallmark “does not appear to possess the technical credentials or experience on relevant projects.” Howle said Hallmark’s hiring violated a state law that requires state agencies “that are contracting for architectural and engineering services to select contractors based on demonstrated competence and professional qualifications.”
State officials, however, said the audit misses the point of Hallmark’s work on California WaterFix, the official name of the project.
In a written response to Howle’s audit, DWR said Hallmark was perfectly qualified to do the work it was hired for: project management and cost control, not engineering work. “Within a year of being hired, Hallmark reduced staffing on the project by 40 percent, reduced monthly burn rate costs by 44 percent and within two years costs were reduced by 65 percent,” DWR said.
DWR said it complied with all state laws in contracting with Hallmark.
Hallmark president Charles “Chuck” Gardner Jr. wasn’t available for comment Thursday, but the firm issued a statement saying it’s “rightfully proud to play a significant role on the California WaterFix team, helping complete what by many accounts is one of the most complicated planning processes ever undertaken.”
A biography Gardner submitted to the state says he is an economist with more than three decades of experience in program management, organizational leadership and strategic planning. On Hallmark’s website, he describes himself as a “project-turnaround specialist,” whose accomplishments include overseeing the development of the UC Merced campus in the early 2000s.
Lester Snow, who was DWR’s director when Hallmark was brought in, said in an interview Thursday that Gardner’s lack of engineering credentials were irrelevant because his firm was hired to manage expenses, not oversee design of the project.
Hallmark’s work “did not include designing tunnels,” Snow said. “It was about cost control.”
The general manager of the Metropolitan Water District of Southern California, one of the leading advocates for the tunnels, said he insisted that DWR bring someone in to bring order to a chaotic process. Water districts “had spent $150 million, we had consultants all over the map ... with no cost containment, no management,” said general manager Jeff Kightlinger.
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Kightlinger said Gardner “has done a good job.”
Hallmark eventually got its own no-bid contract, separate from URS, earning the company at least $13.8 million since being brought into the tunnels planning, according to the audit. A total of $280 million has been spent planning the tunnels.
However, the audit said Hallmark’s hiring may have contributed to rising costs. The audit said “Hallmark has had to subcontract many of the program management functions, and DWR is generally paying a markup of 5 percent.”
The hiring of a subcontractor without going through the normal vetting and bidding process is quite common, according to a DWR whistleblower whose emails were included in Howle’s audit.
“No pesky (request for qualifications), no (statement of qualifications), no review, no silly determining if the new folks are actually the most qualified, no allowing other firms to apply for the work, no following the code,” the DWR employee said, according to the audit. “The practice has become so prevalent, we’re actually starting to address it in our additional payment provisions where we allow a higher markup on (subcontractors) we direct the contractor to add. This looks surprisingly like a bribe to keep them quiet.”
Howle’s audit comes at a critical time for the tunnels, which Gov. Jerry Brown’s administration says will improve water deliveries south of the Sacramento-San Joaquin Delta. The Westlands Water District, serving farmers in Fresno and Kings counties, last month voted against participating in the project, leaving a multibillion-dollar funding gap. Trying to keep the tunnels alive, the Metropolitan Water District of Southern California is expected to commit to a share of the project when its board votes next Tuesday.
Critics of the tunnels project said Hallmark’s hiring shows significant flaws in WaterFix. DWR chose a firm with “absolutely no experience in running a very large engineering project, or running a large water project,” said Patricia Schifferle, a Truckee environmental consultant and WaterFix opponent.
The audit said DWR brought in Hallmark based on recommendations from top officials at Metropolitan and Westlands, two of the largest south-of-Delta water agencies in the state.
“Nonetheless, DWR was unable to provide us with documentation of any assessments or with any other records supporting the selection of Hallmark,” the audit said.
Howle’s audit also criticized DWR for not completing an economic analysis of the tunnels project. Although the department released a draft economic analysis last year, Howle said a final analysis “is critical in determining whether water contractors are willing and able to pay for the construction” of the tunnels.
In a written response to Howle’s report, DWR said an economic analysis isn’t needed until it’s clear which south-of-Delta agencies will commit to the project. A DWR consultant “has already provided a wide range of financing options to water contractor governing boards as tools to enable each contractor to determine what financing option would best work for them,” DWR said in its response. “To date, we have received no requests for additional information.”
Barbara Barrigan-Parrilla of Restore the Delta, an anti-tunnels group, said the audit shows that the state is following a “completely backwards” process of trying to persuade water customers to pay for the tunnels before even finishing its financial analysis of the project.