School District Disbands Its Oversight Committee to Avoid Oversight

October 29, 2014

Inside Insight

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school district 2TAXPAYERS: BEWARE OF SCHOOL BOARD AUTONOMY

I was excited to accept an invitation to join, in June, 2013, the Public Oversight Committee (“OC”) newly formed by the Board of Trustees of Dorchester School District #2 (“DD2”). DD2 voters had approved a $179 million bond referendum the previous November, and I looked forward to helping oversee how that money would be spent.

The DD2 Board would not tolerate real oversight but, as it turned out, instead wanted an “overlook” committee of DD2 cheerleaders. Outraged OC members insisted on correct answers to so many tough questions about deception and incompetence, which DD2 could not or would not answer, that on June 23, 2014, DD2 disbanded its OC and replaced it with a newly composed “Yes4Schools Public Advisory Committee.”

I should not have been surprised. In the early 1990s I learned that DD2’s Superintendent was an owner and chairman of the board of a Summerville bank at which DD2’s millions of reserve funds were deposited, without other banks having been allowed to bid. I was proud to have helped taxpayers by forcing DD2 to transfer those funds to the bank that would pay the most interest.

I also was aware that, in 2006, a Circuit Court Judge had ruled that DD2 had illegally shut down the district’s sole operating charter school, using “improper actions” that were “clearly erroneous,” “without due process,” “clearly outside [DD2’s] authority,” based on an “improper standard” and wrongful ex parte communications, and “in violation of [state law and policy]”; and by engaging in “mere sophistry” Despite this ruling, DD2’s actions shut down that charter school permanently and created such a hostile environment that no charter school has since operated in Dorchester County. (In contrast, eleven charter schools operate in Charleston County.)

I also was aware that many citizens believed that DD2 employees had illegally campaigned during work hours and used district resources to obtain passage of the district’s 2012 bond referendum. Berkeley County School District (“BCSD”) Communications Director Amy Kovach was indicted in February 2014, for her “use of public funds, property, or time to influence the outcome of” BCSD’s 2012 Yes 4 Schools $198 million dollar bond referendum. BCSD’s superintendent and deputy superintendent are being investigated, and BCSD’s superintendent has resigned.

Many think DD2 officials did the same. In August 2014 Amy Kovach’s attorney filed court papers alleging that “DD2 officials engaged in activities similar to the conduct of Mrs. Kovach and other [BCSD] officials and employees, and [BCSD] employees helped DD2 employees draft pro-referendum materials.” Indeed, DD2 and BCSD officials attended the same meetings to promote the bond referendum in each county, and DD2 voters observed DD2 officials promoting DD2’s referendum on school property.

My doubts about DD2 were reinforced when on August 15, 2013, the Post and Courier, in its lead editorial, entitled “What’s to Hide in Dorchester 2 Schools?,” opined that “the people who run [DD2] appear to be slow learners, at least in civics,” and asked, “Why else would the Dorchester District 2 school board flout the State’s Freedom of Information Act and then try to defend its actions?” Afterwards DD2 Board member Barbara Crosby assured local Red Hatters that DD2 really had not violated the FOIA law. Apparently Barbara did not get the memo.

Our OC first attempted to exercise oversight by sending DD2 a letter, dated February 21, 2014, explaining why DD2’s method of spending $7.5 million for an aquatics center was not in the public interest. DD2 Board Chairman Gail Hughes was quoted in a newspaper saying that DD2 had an “obligation” to partner with the YMCA to build the aquatics center because the YMCA had helped DD2 get the bond referendum passed. The OC letter asked that the YMCA not be given preferential treatment, pointing out that voters “do not expect, and did not approve, DD2 spending bond money based on understandings, agreements, deals or commitments made with the YMCA without voter knowledge or approval.”

The OC’s letter explained that the city of North Charleston offered to build, at the same cost to DD2, a much larger aquatics center than that offered by the YMCA; to locate it in DD2’s population center instead of at a remote location proposed by the YMCA; and to use that city’s vast expertise and assets, unavailable from the YMCA, to guarantee forever the smooth operation of the aquatics center; and asked that DD2 receive input at public hearings before making aquatics center decisions. The letter wisely advised that “[a]ll potential options should be considered together, side by side, and the best option chosen based on the merits of cost, risk, location, expertise, etc. This is in the public interest and … what voters intended when they voted for the aquatics center.”

These OC aquatic center recommendations were defensively rebuffed by DD2, and there is no indication that they’ll ever be implemented. Some DD2 Board members continue to give the YMCA priority, refusing to accept the clearly superior offer of the city of North Charleston.

OC members also asked DD2 Board members why, at the behest of Dorchester County largest real estate developer, two of the new schools to be built with the bond monies were relocated far from the population centers where voters had been led to believe they would be located, to more remote areas requiring more busing of students by a busing system already under fire in the press for its incompetence. That developer appears to have bought DD2’s relocating the schools to benefit the developer, by financing the bond referendum campaign and donating to the schools.

The most important attempt – a colossal failure due to insufficient cooperation by DD2 – by the OC to oversee DD2’s $179 million bond fund started soon after, on March 24, 2014, DD2 fired “for convenience” MB Kahn (“Kahn”) as its “Construction Manager at Risk.” Kahn, one of the largest, oldest and most respected builders of public facilities in the world, having experience on over 100 successful school building programs at a value of over $2.5 billion, had been working for DD2 preparing to oversee construction of the new school facilities, and had expected to complete those projects.

Kahn offered in writing to guarantee the cost, timing and scope of all projects as committed in the bond referendum, secured by 100% performance and payment bonds and insurance, and to thereby “remove any risk for the District and Taxpayers.” Kahn guaranteed further that “we will provide overall program management and coordination services answering directly to the Administration and Board of Education at no additional fee. All savings (100%) under the GMP will remain with the District. Any overages will be paid by M.B. Kahn. . . . This proposal will remove all risk, lowers the cost, expedites project schedules and provides superior communications with the Board and Community.” Kahn also offered to give all cost savings to DD2; to have full-time, on-site supervision at every site; to charge a reduced “volume discount” 2.65% fee; to use local contractors; and to fully disclose and have audited all payments to subcontractors.

Those offers by Kahn were rejected by DD2 in favor of a “Design-Bid-Build” approach whereby, according to Kahn, DD2 would “pre-qualify” (using non-public interviews and criteria) bidders rather than let everyone bid; legally would have to accept the price of the lowest bidder even if that exceeded DD2’s budget; would be responsible for all cost overruns and receive none of any cost savings; and would be totally dependent for management of the construction on one person, who may or may not be available during the entire construction period, whose performance already was questionable and who has limited school building experience and no bond or insurance independent of DD2 to guarantee performance; no one would be on-site full-time representing DD2’s interests; the lowest bidder would charge a 5-7 percent fee, nearly three times what Kahn would charge; there would be a general contractor whose role would be adversarial to DD2 and seek to maximize change orders; and the potential for litigation would be high.

Investigation showed this termination of Kahn and DD2’s new spending approach was orchestrated almost entirely by one board member and a new employee of DD2, hired on the recommendation of that board member and whose employment with Kahn had been terminated years earlier due to cost overruns on an unrelated project. MB Kahn complained that it had not been permitted to regularly communicate directly with the DD2 Board, and that its information and positions had been misrepresented to the DD2 Board by that DD2 employee, who served as the gate-keeper of communications between MB Kahn and the DD2 Board.

Unable to communicate directly with an unwilling DD2 Board, MB Kahn warned OC members in writing the “DD2 Board has been ‘bamboozled’”; “DD2 is headed for very unsatisfactory results in their building program”; “it is a very sad day for DD2”; and “the District is placing themselves at great risk following this guy’s advice”; and predicted that DD2’s new “Design-Bid-Build” approach was “extremely risky” and would put DD2 “on a path of ruination” resulting in time delays, cost overruns and “very unsatisfactory results in [its] building program.” Citing “misinformation amongst many in DD2,” Kahn wrote that “[f]orcing these bids without thoroughly complete plans significantly increases the potential for increased cost, excessive change orders, claims and litigation”; and that “The RFQ is not clear. There are several provisions in this RFQ that [are] in violation of DD2’s procurement policy.” Kahn told OC members that it has dealt with numerous school boards over the years, and that DD2 was uniquely non-cooperative and irresponsible.

In response to these dire accusations and predictions, OC members attempted to ask questions of DD2 Board members. Most of the few board members who would talk with OC members responded with evasion, spin, non-sequiturs, inconsistent statements, misinformation, and, in some cases, combativeness and hostility. None provided satisfactory answers.

As predicted by Kahn, when the bids from the pre-qualified general contractors were opened on May 21, 2014, using DD2’s new approach, all bids for two schools exceeded by over $2 million the estimates that had been made by MB Kahn and by almost $10 million what DD2 had predicted. Consequently, DD2 cancelled the solicitation, which created a pretext for DD2 to declare a state of “emergency”, which DD2 claims justifies DD2’s adoption of yet a third approach to spend DD2’s bond monies. According to the Dorchester County Taxpayers Association and Kahn, this third approach, whereby DD2 negotiates with the low bidders, is completely illegal, violating the holding defining what is a legitimate “emergency” in Sloan v. Greenville County School District, Civil Action No. 98-CP-23-2816, and both the S.C. School Building Code and DD2’s own procurement code (Procurement Policy #3020.2.4).

As a result, Kahn claims DD2’s new schools will not be built on time; there will be cost overruns and/or cuts in quality of materials without public knowledge; and DD2 will suffer “disaster”, “catastrophe” and a “SLED investigation.”

DD2 Board members defensively rebuffed attempts by conscientious OC members to learn why MB Kahn was terminated by DD2; not permitted to communicate directly with the DD2 Board, and forced to deal with the DD2 Board through a DD2 employee who may have had an incentive to sabotage MB Kahn; how DD2 could possibly justify accepting the risks of the new “Design-Bid-Build” approach, instead of the guarantees of the “CMaR” approach with MB Kahn; why DD2 continued to employ and rely on a consultant to run DD2’s school construction operation who had been fired by MB Kahn and had misled DD2 and the OC about the cost savings from the “Design-Bid-Build” approach; and why the third-money spending approach, involving DD2’s declaration of an “emergency,” was not illegal, as MB Kahn claimed.

For example, Barbara Crosby continues to refuse to meet with several OC members and constituents to answer questions about these issues, claiming there would be no value in such discussion since all issues have been decided and are moot. Her only concern appears to be that stated in her angry e-mail – “You told a lie on me,” surprising words for a schoolteacher – in response to criticisms of her refusal to discuss these issues. Charles Stoudenmire stated that firing MB Kahn to opt for the new bid procedure was justified by the fact that the numbers used in the referendum were inflated, and there were other factors that we do not know about but he could not reveal. Sam Clark, head of the DD2 Board Construction Committee, angrily shouted at an OC meeting (attended by DD2’s largest developer’s attorney, presumably to keep an eye on its investment in DD2) that the OC committee was not really an “oversight” committee but was merely a “communications” committee, and asked whether my questions about how DD2 was spending its bond monies was motivated by my having lost a recent election to the S.C. Senate. Perhaps I should have told Mr. Clark that my losing an election was totally irrelevant, but that if it were relevant, my questions should be answered since I had won eight elections to the South Carolina Senate previously; he had won only one election; and the consultant on which DD2 was risking the entire DD2 school building program had just lost an election for the Pickens County School Board.

This dysfunctionality of the OC can be explained by more than that OC members really were trying to exercise effective oversight but DD2 Board members really did not want oversight. Also undermining the effectiveness of the OC was the fact that some of those who positioned themselves as OC leaders were working against OC members to avoid oversight and to ingratiate themselves to the DD2 Board and the interests promoting the bond referendum. Key OC leaders had conflicts of interest or business incentives that appeared to turn them against their own OC to protect DD2 Board members from OC questions. For example, Justin Farnsworth, one of the co-chairs of the OC, was collecting signatures to enable him to run for the DD2 Board at the same time he was supposed to be representing the OC to provide oversight over DD2. He resigned from the OC only after I demanded he do so due to his conflict of interest, explaining that he could not provide oversight over the very people from whom he was soliciting support to be elected to the DD2 School Board. Similarly, the other co- chair of the OC begged off from pushing for answers because, as he explained, he feared losing clients as a stockbroker if he did so. An architect heading the OC’s Construction Committee who had sought to be employed by DD2 failed to draft minutes of a meeting in which DD2 Board members embarrassingly had resisted answering questions, claiming no minutes were necessary since she had not called the meeting when in fact she had done so.

Ultimately, on June 23, 2014, as the pressure to explain DD2’s actions mounted, Mr. Farnsworth told the DD2 Board, without authority from the OC members and contrary to Farnsworth’s specific written representation about what he would say at the meeting about the OC, that the DD2 Board should dissolve the OC and create as a substitute a new Yes4Schools Advisory Committee. As obviously prearranged, the DD2 Board readily agreed with Farnsworth and we OC committee members learned afterwards that our OC had been disbanded and a new substitute committee created. It looks like we OC members will not receive thanks from DD2 for our public service!

Given the history of DD2’s part-time board, partially described above, DD2’s latest proposal to increase its authority to raise taxes – to acquire “fiscal autonomy” – should be rejected to avoid a terrible mistake taxpayers would forever regret.

As background, at least 25 (31 percent) of South Carolina’s 81 school districts have no authority to approve tax increases and 27 (33 percent) districts have only limited authority. Only 26 (31 percent) of the districts have “fiscal autonomy,” meaning they can raise taxes without approval from any other government entity. DD2 currently has only limited authority to raise taxes. It is seeking complete authority.

A bitter political dispute arose in Dorchester County when Dorchester County Council (“Council”), citing wasteful spending, rejected two successive budgets of DD2 in the early 1990s. At that time state law required that no budget of DD2 or Dorchester School District 4 (“DD4”) be valid unless approved by both the DD2 or DD4 School Boards and by Dorchester County Council. Conservatives rejoiced over Council’s providing this second layer of scrutiny as a means of minimizing waste in what was the greatest source of taxation in Dorchester County, DD2’s budget. Others objected to having to account to Dorchester County Council and demanded that elected DD2 Board members have the sole authority to set the amount of property taxes paid for their schools.

The Legislature broke the bitter impasse between these warring factions by obtaining passage in 1992 of a compromise bill I introduced, Act 593, which provides that “each Dorchester County school district may set their operating budgets up to the revenue requirements of the Education Finance Act and the Education Improvement Act”; “the tax millage set by [DD2 and DD4] may not increase beyond the revenue requirements of EFA and EIA plus a limited cash reserve without the approval of the Dorchester County Council”; and “Dorchester County School District 2 and 4 [may] maintain a limited cash reserve, to provide the method of calculating an increase in the tax millage.”

Recognizing that state law already required that each school district’s budget be increased annually by a certain amount over the preceding year’s budget, Act 593 allows DD2 and DD4 to avoid obtaining Dorchester County Council’s approval of a budget, if that budget’s increase is no more than the amount of increase required by state law, and requires DD2 and DD4 to obtain Council’s approval of a budget only if that budget’s increase is more than the minimum increase amount required by state law. Since Dorchester County Council would have to obey state law, I reasoned that there was no sense requiring DD2 and DD4 to obtain budget approval from Dorchester County Council, if the amount to be approved was no more than the amount state law required Council to approve.

DD2, DD4 and County Council officials, conservative, liberals and other taxpayers all seemed thrilled with the compromise in this Act 593. Conservatives liked the fact that DD2 and DD4 would have an incentive to not increase their annual budgets beyond the minimum increase required by state law, to avoid having to seek Dorchester County Council approval. DD2 and DD4 officials liked the fact that they could avoid having to obtain Council’s approval by keeping the increase in their budget no more than the minimum required by state law.

Some DD2 and Dorchester County officials now want Act 593 changed to allow DD2 to pass annual budgets in excess of the minimum increase required by state law, without having to obtain County Council approval. DD2 officials portray that they will be more hesitant to raise taxes if they have the sole authority to raise taxes, and that taxpayers can hold them accountable.

I disagree. DD2 and DD4 officials already have to vote on their annual budgets, before submitting those budgets to County Council; and voters already can hold them accountable for their budget votes. Eliminating the requirement of Council approval will not change the fact that DD2 and DD4 board members have to vote on their budgets, and there is no logical reason to believe board members would be more hesitant to raise taxes just because they do not have to get Council’s approval. Given the DD2 Board’s track record of lack of transparency and accountability, irresponsibility and secret deal-making regarding spending its bond monies, as described above, giving DD2 fiscal autonomy to raise taxes without Council’s approval is a formula for more and more taxes. DD2’s authority to authorize taxes should be limited or non-existent, as occurs in at least 52 (64 percent) other South Carolina school districts.

Michael T. Rose, JD, MBA, is a Summerville attorney and former Republican state senator representing Dorchester, Berkeley and Charleston counties.