Federal audit recommends Texas pay back millions in overcharges billed by HNTB

AMERICAN-STATESMAN STAFF

Updated: 9:55 p.m. Sunday, March 11, 2012

Published: 8:52 p.m. Sunday, March 11, 2012

A federal audit has found that Texas improperly contracted with the engineering firm HNTB to manage hundreds of millions of dollars worth of hurricane recovery grants, and it recommends the state be required to pay back $9 million in overcharges billed by the firm and paid in federal dollars.

The report by the regional inspector general for the U.S. Department of Housing and Urban Development said the Texas Department of Rural Affairs also acted improperly last year when it more than doubled the size of HNTB's contract from $69 million to $144 million and expanded the scope of its work. Auditors said the state did not adequately monitor the firm and billings that contained "inflated" and "unreasonable" labor costs.

In a series of exclusive articles beginning last fall, the American-Statesman reported that the state had outsourced the public works portion of hurricane recovery to HNTB and focused attention on the high administrative costs of the outsourcing and the lack of oversight of the HNTB contract by the state.

The results of the audit are no surprise to Gary Hagood, deputy commissioner of financial management at the state's General Land Office, which inherited the troubled program from the now-defunct Department of Rural Affairs. HUD has been closely monitoring Texas for more than a year and has expressed concern about the rapid depletion of federal money needed to administer the disaster grants to communities stricken by hurricanes Ike and Dolly, and the slow pace of construction.

"I'm happy they (the inspector general's office) did what they did," Hagood said after the audit was released last week. "The state didn't do a good job — we're doing better now. We're changing everything."

Hagood canceled the original HNTB contract in August 2011, but the company hasn't stopped working on the program. It continues to administer the HUD infrastructure grants under a different contract with the land office, which has authorized work orders for HNTB totaling up to $13.5 million through June.

Officials said they have not changed contractors because it would only cause more delays for towns still trying to finish their projects.

As for the $9 million repayment sought by HUD auditors, Hagood said that is "under negotiation. That's about all I can tell you right now."

Asked why the state does not seek reimbursement from HNTB, Hagood said, "We could." But his aim, he said, is to avoid a monetary penalty altogether.

"They wanted the contract to be managed," Hagood said. "We know how to do contracts at the GLO. We follow all the rules. We're making this happen. Don't penalize us."

In a statement issued Friday, HNTB said the firm had fully complied with the terms of its contract with the rural affairs agency and that concerns identified in the federal audit have since been addressed by the land office. HNTB "cooperated fully with the auditing process," the statement said.

"The Hurricane Recovery program remains on target and on budget, and HNTB is proud of the work we are doing for the state of Texas," said the company, which is based in Kansas City, Mo., and is well-connected to Gov. Rick Perry's administration. In fact, various delays — including a disagreement between state and federal officials over guidelines for the housing portion of the program — have put the recovery effort two years behind schedule.

Perry's office has said the governor had no involvement in the HNTB contract.

In its report, the inspector general said the state didn't follow its own procurement rules, which ensure that it pays "fair and reasonable" prices for services and which prohibit substantially altering the scope of a contract without first reopening the solicitation to other vendors.

Based on invoices the auditors sampled, the company submitted only summary invoices for its work, without supporting documentation. When they examined the actual labor costs, auditors found that instead of using the standard federal multiplier of 147 percent, HNTB "stated that it multiplied the total average hourly rate for each position by 320 percent. As a result, we determined that all of its invoices contained inflated costs."

As the American-Statesman also has reported, the state arrangement with HNTB began to unravel last year.

Charlie Stone, the former executive director of the Department of Rural Affairs, laid off half his staff in February 2011 and outsourced to HNTB the management of $1.4 billion in HUD grants for counties that suffered damages during the 2008 hurricanes. The federal money is meant for new infrastructure — everything from emergency generators to new water treatment facilities.

This plan to outsource the work had been spelled out in a memo produced by HNTB, whose fee schedule listed rates of between $200 and $360 an hour for its highest-paid contract employees, amounts that were several times what their state counterparts earned.

Six months later, Stone had been dismissed, his department disbanded and the job of disaster recovery handed over to the General Land Office, which promptly canceled HNTB's contract.

In its audit, the HUD inspector general praised that move, saying that it "avoided the improper spending of an additional $75 million in disaster recovery funds" — the difference between the original $69 million contract and the $144 million expansion.

Hagood said last week that about 40 HNTB employees are working on the grant program, down from 60 to 70 before the contract was canceled. And in an unusual arrangement, about 30 land office employees are sharing space with HNTB employees at offices at Congress Avenue and Third Street. This is office space that the state is paying HNTB $21,000 per month to lease.

Through an agreement with the land office, the Texas Department of Emergency Management has begun hiring HNTB to perform wildfire damage assessments. All told, the state has paid the firm about $58 million for post-disaster-related services, which are funded almost entirely with federal grants.

Primarily a highway engineering firm, HNTB has earned $112 million from the Texas Department of Transportation for various projects since 2007, including $38 million in consultant fees for Perry's proposed Trans-Texas toll road project. Ray Sullivan, Perry's former chief of staff, is a former lobbyist for the firm, as was the late Reggie Bashur, a Perry campaign adviser.