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Billions to Spend: Part 3

Markups by 'body shops' inflate the public's cost

As the Los Angeles Community College District launched a massive building program, contractors with ties to trustees reaped benefits.

March 03, 2011|By Gale Holland, Michael Finnegan and Doug Smith, Los Angeles Times

The Los Angeles Community College District had launched a $5.7-billion campaign to modernize its nine campuses, and district leaders wanted the world to know. They hired marketing consultant Joan Marshall to help spread the word.

She worked closely with Larry Eisenberg, the official in charge of the building program, booking speeches for him and seeking construction industry awards.

Billions to Spend: Complete Coverage

But on paper, Marshall did not work for the district. Her paychecks came from a construction management firm called TBI & Associates. "I never knew why," Marshall said of the arrangement.

Here's something else she didn't know: Every time she got paid, TBI got paid too, and handsomely. During the seven months she was on the firm's payroll, Marshall earned $88,000, records show. After TBI and another contractor added markups for overhead expenses and profit, her services cost taxpayers $152,000.

Similar arrangements with other contractors have needlessly inflated the cost of employing more than 200 people on the college construction program, a Times investigation has found.

Marshall was a bargain, comparatively speaking.

A computer specialist earned $391,000 over 31 months, but his work cost taxpayers more than $1 million after contractors added their markups, records show.

A contract administrator was paid $226,000 over three years and four months but cost $607,000.

The prime beneficiaries of this setup have been about two dozen contractors with political ties to the district's board of trustees. Most have contributed to campaigns to elect trustees or pass construction bond measures, records show. TBI made $30,000 in contributions from 2007 through 2009.

The district has paid the companies generously to serve as employers of record — known as "body shops" in the construction industry — for people who do no actual work for them.

District leaders were vague or unresponsive when asked how the companies were selected and how hiring slots were divvied up among them.

Here is how the staffing system has worked, according to records and interviews:

When district officials hire someone for the construction program, URS Corp., the San Francisco company that manages the program day to day, puts the new employee on the payroll of a subcontractor like TBI.

Each month, the subcontractor submits a bill for the employee's salary, adding a markup intended to cover the cost of health benefits, worker's compensation insurance, office rent and other overhead and provide a margin for profit. Then URS or another prime contractor adds a smaller markup of its own.

The combined markups often double — in some cases triple — the cost of employing staff members. The money comes from bonds sold to finance the program. Taxpayers will be paying the debt, with interest, for at least 40 years.

Eisenberg, the district's executive director of facilities planning and development, defended the system as a way to ensure that a diverse group of local contractors share in the program's financial rewards.

"We would like to spread the wealth around," he said in an interview.

As to how contractors were chosen, Eisenberg said that was left to URS. Officials there declined to comment, but in a statement the company said it "does not control or select all the contractors, subcontractors or other parties."

Eisenberg also said that civil service rules made it difficult — and a statewide ballot measure made it impossible — for the district to employ construction management staff directly, although he acknowledged that would cost less.

Civil service rules have not deterred other college districts from putting construction staff on their payrolls, however. And the state attorney general's office has ruled that the 2000 ballot measure, Proposition 39, poses no obstacle to doing so.

To gauge the cost of the staffing system, The Times reviewed thousands of pages of financial records from April 2007, when URS began managing the program, to July 2010. Reporters identified two dozen contractors serving as conduits for pay and benefits for employees they did not supervise.

At least 230 people were employed in this manner, at a total cost of about $40 million, the records show.

Approximately $18 million of the total was paid to the employees, according to the Times analysis. The remaining $22 million went to profit and overhead for contractors, the records indicate.

For employees on its own payroll, the district says that medical and other benefits increase compensation costs 40% above base salaries. So if the district had employed its construction staff directly, the total cost for the period studied would have been $25 million instead of $40 million, a savings of $15 million, The Times calculated.

Nearly every contractor with a stake in the system refused to discuss it.

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