Check for priors, Prior Lake

by Loren Martell

Four years ago, I pursued an audit of the Red Plan. I wanted an accounting of what had happened in Duluth, and also wanted to expose a scam that is being perpetrated by a corporate hustler on local governments--especially school districts.
The “audit” proved largely a disappointment, sort of like dipping a toe in the ocean and pretending we’d all gone for a swim. Every government and media watchdog I’ve turned to has been a paper tiger. When I met with the State Auditor’s team before the public meeting, I told the audit manager how disappointed I was. “You’ve seen enough to have some sense of this.” I said. “You’re aware a scam was pulled here, and I know you’re also aware of what happened in the St. Louis County district. You’re aware this company is pulling this scam all over the State.”

I showed the accountants from the State Auditor’s Office some of the glossy brochures the corporate hustler was handing out at annual Minnesota School Boards Association conferences, claiming wonderful educational success stories in Duluth and elsewhere. “Other clueless school boards are going to fall for this hustle.” I said. “If the citizens of Minnesota can’t turn to the Auditor’s Office to expose the truth, who can they turn to? Who’s going to put a stop to this?”

 
Apparently, no one

If you want to get a sense of the scam that’s going on, read an excellent article entitled “Hook, Line and Suckered” (Jan. 25-31, CITYPAGES.com.) The best aspect of the article is that it shows an awareness is beginning to awaken, and raises hope something may yet be done to curtail this hustle that is robbing from education. For Duluth, an important detail of the article is a candid quote from one of our city’s leaders, joining in with the chorus of long-maligned naysayers, who have accurately decried the Red Plan as an ill-conceived boondoggle.

“If it was possible to do again, I know there’s no way, no way at all, the community would choose the same.” Former city councilor, Sharla Gardner, told the City Pages reporter, adding that she thought the new buildings “are nice. But--” she rhetorically asked, “at what cost? (The Red Plan) hasn’t been worth the dollars or the harm it’s done.”

The only inaccuracy in this trenchant observation is that the Duluth community did not choose the Red Plan; it’s leaders did. And most of our leaders, still in denial, have learned virtually nothing from the experience.
School districts are made for this kind of scam. School boards are usually made up of former teachers and PTA boosters--good citizens who care about education, but are not savvy about construction and finance. And the general population has a knee-jerk inclination to back anything to do with education. Everybody loves teachers; everybody wants the town’s children to be properly equipped with all the skill sets needed to succeed. In other words, the scam comes with a perfect, built-in pr strategy:

We’re going to build all new schools for the teachers and the kids! What’s not to like about that? Yayyyy!
Corporate “consultants” have identified a lucrative mark and are purposefully preying on the good intentions of good citizens. But it isn’t just the ability to tug at the heartstrings of the public that makes a school district the perfect terrain for a scam. School district finance is also extremely complex. It is very easy to overwhelm everyone and embed a scam into school district numbers. “A consultant sinks its talons into Prior Lake, for very big money” is the subtitle of the City Pages article.

In Duluth, corporate giant Johnson Controls portrayed itself as an unparalleled expert in the school construction arena. Looking at the promises made, and the results achieved, suggests the company has unparalleled expertise in working this hustle. The corporation painted itself as an educational dream factory. This is just some of the hyperbolic nonsense it threw around in its original sales pitch to our public school district:

“(Our wise and well-meaning corporation) believes that a plan without a corresponding financial solution is not a plan at all; rather, it is simply a list of needs. A key differentiator of our approach is our financial solution. Furthermore, as a Fortune 100 company, (our stupendous organization) has the wherewithal to guarantee the financial solution, in writing (italics included.) By doing so, we enable you to move forward with little or no risk…We have specialists on staff with unprecedented knowledge of school finance. They are truly experts who specialize in developing innovative financial solutions for school construction projects…In Duluth, once we understand your needs, we will custom tailor a financial solution that works in harmony with your overall financial strategy. We understand that your financial resources are limited and that in order to gain community support for the comprehensive plan it must be property tax friendly. In other words, we must develop a plan that does not rely solely on a bond referendum for funding…”

From this point, the company began hustling all its easy-money claims: “With this in mind, our goal is to build a program that addresses your facilities’ needs in both a budget and tax neutral manner. To accomplish this, our financial experts will consider leveraged savings possibilities, restructuring debt, grants, rebates, available capital, existing levy authority, bond referenda, and even the possibility of special legislation. Most importantly, we have the experience to predict the interaction between combinations of approaches. The end result will be the most comprehensive and efficient plan possible; one that leverages your financial opportunities to their fullest extent, while minimizing the impact on both your budget and tax levies. The iterative process of building the financial solution begins by loading the financial data from our web-based, capital planning tools into our financial modeling software…”

The sales hype goes on and on in this vein. It was a first-rate fertilizer job, but produced very poor yields. Our town didn’t end up with the most comprehensive and efficient plan possible. Duluth’s financial opportunities were not leveraged to their fullest extent. The impact on our school district’s budget and tax levy clearly was not minimized. Our reserve fund is gone and the budget went south--deficit after deficit. The tax levy jumped from $13 to $33 million. The difference between these promises and actual results should be the basis for legal prosecution.

   
Get expertise and make money

The Devil is spawning. Michael David, a Johnson Controls account executive during the Red Plan and Brent Jones, JCI’s Red Plan Program Manager, have now formed their own company, called “Nexus.” Why not? After all, there are 328 school districts in the State of Minnesota, enough pigeons for several hustlers to work this scam for years. In their first contract pitch, to the Prior Lake-Savage district, the former JCI operatives showed they’d learned much from their years with the corporate master. According to City Pages, they made sure the consultant contract to evaluate what should be done in Prior Lake included language “that Nexus would also be contracted for all professional services required to do this work.”

During the Red Plan sales pitch, back in 2006, David had already been a JCI corporate team player for 14 years; Jones 12. The way their qualifications for the Red Plan project was pitched to the Duluth school board is very revealing. David was promoted as someone who had “extensive knowledge of education finance, legal and legislative matters.” Jones was pitched as an all-around wizard who could “blend the technical and financial elements of facility planning.”

The sales pitch Johnson Controls--and now its child prodigy, Nexus--are employing is that they possess preeminent expertise in energy use and facility management, as well as top-notch professional capability to manage the project’s financing and the rest of the process. They can map out a plan that will greatly improve the efficiency of a district’s operations. Despite all the up-front expenditures, the district will actually SAVE money in the long run, while simultaneously (almost miraculously) getting brand new, state-of-the-art facilities.

Already adept at the tricks of this school-house hustle, Jones and David further honed their expertise at the expense of Duluth taxpayers. The City Pages article points out that the two enterprising corporate players were “part of the Johnson’s team overseeing Duluth’s ambitious school plan. By all accounts, the $315 million project on the North Shore was a show…”

The show goes on. After years of corporate grooming, Brent Jones and Michael David are ready to fly solo. Confident of their acquired skill at baiting a big-money building project with a flashy financial scheme and hooking a gullible school district, they’ve formed an entrepreneurial partnership to seek fortune in the “project consultant” gig.

“The business of public education has spawned a specialized kind of vendor.” The City Pages article reports. “They’re called construction service managers. They serve as consultants, assessing facilities operations and planning future needs. But these companies don’t just consult. They parlay their expertise into managing the very work they say is needed, providing incentive for them to urge as much building as possible. They oversee refurbishments and new construction from planning to completion, collecting fees with each move…”

There can be some advantages to having one company run the whole show. “The upside is cohesion from start to finish.” City Pages admits. “But the risk is an incentive to increase costs.”
 
The heart of the scam

If the deal David and Jones put together in Prior Lake is “a case study in how consultants find gold in Minnesota schools,” as City Pages described it, the way Johnson Controls played school district 709 was the master plan.
In its assessment of our Duluth schools, the company uncovered $202,012,170 worth of ‘major capital expenses’ based on ‘1600 major capital defects.’ (Our schools were discovered to be in a disastrous state, described as “crippled” and in need of hundreds of millions of dollars of repair and upgrade, only five months after the MDE had approved a $37 million ten-year facilities plan that met the Department’s requirements for all district 709 facilities.) Our expert consultant’s list of major capital expenses was padded with many items that were just normal maintenance--repainting, replacing carpet, resealing parking lots, replacing chain-link fences. $50.8 million in air quality upgrades were also recommended (JCI brazenly recommending use of its own products,) and 620 areas were uncovered as unacceptable educational spaces in our shameful schools, requiring an additional expenditure of $41.5 million to correct all these ‘educational inadequacies.’

Our public school district handed Johnson Controls a no-bid contract to eliminate all these problems the company had assiduously uncovered. On top of that, instead of putting any oversight in place, to verify the necessity and quality of work, and the prudent use of taxpayer dollars, Johnson Controls recommended ISD 709 put together “design teams,” which added millions of dollars of additional work during construction.

The engineers and architects involved in the Red Plan (very few of them licensed in Minnesota or local) were essentially representing Johnson Controls, rather than the school district. The State of Minnesota licenses architects and engineers to represent the client in construction projects, but Johnson Controls turned the tables on this arrangement. The corporate giant stipulated that all Red Plan documentation generated by architects and engineers was JCI propriety property. The company was therefore able to dictate what Red Plan information could be disclosed to any other party, even to the local decision-making body--our hapless school board. This arrangement gave Johnson Controls great flexibility to alter the scope and cost of the project, with infinitesimal accountability.

About the only thing Johnson Controls ever talks about publicly (and profusely) is the company’s superior ability to accomplish wonderful things for education: “The Duluth public school district has a once-in-a-generation opportunity to revitalize the district’s schools.” The company bragged to our simpleton Board. “We are confident that the holistic solution we have brought to you is the best approach to fuse all the stakeholders and create a customized facilities plan that carries the district forward through actualization. Due to our local community involvement, national resources, proven processes, education finance knowledge and unique consensus-building methodology, Johnson Controls is the partner who can make this happen. Long-range facilities planning should be an exciting endeavor and a positive experience for your School Board members as they help chart the educational future of the community…We are confident we will be able to develop a program whereby the district wins, the community wins, and most importantly the children win!”

Two of the three JCI operatives who signed this document for our school board were Michael David and Brent Jones.
 

A once-in-a-generation opportunity in every town

In Prior Lake, the spawn of JCI, (David and Jones’ new company, Nexus,) also employed a lot of touchy-feely lingo like “holistic,” in its sales pitch. In the City Pages article, the Prior Lake-Savage Superintendent was quoted as saying that even though Nexus is more expensive, she likes the company’s “fresh, holistic look at our district.”

Nexus has already collected $8.7 million in fees and bonuses overseeing $35 million worth of facility projects in Prior Lake. City Pages compared contract percentages in the Nexus/Prior Lake agreement to other school projects (not including Duluth) and found them substantially higher. City Pages also discovered an additional 10% charge tacked onto reimbursable expenses, and a subsequent contract that guaranteed most of the savings realized from the company’s work would be “devoured” by its performance bonuses. The company has been raking money in from Prior Lake, but is angling for more. It has assisted the district in putting together a wish list of future “needs,” extravagant enough to make its parent corporation proud--$150 million worth.

As in Duluth, the process in Prior Lake has been exciting, but not exactly positive. A Prior Lake school board member who tried to question putting local taxpayers on the hook for “125 different construction projects” had her reputation attacked. She was accused of holding a party for school kids with alcohol and marijuana. A full-fledged investigation was launched and the charge was proved to be completely baseless.

Any of this sound familiar?
The first ballot referendum for $150 million more facility work in Prior Lake failed by 457 votes, but the district is set to try again. Before they take another step, the town’s leaders should take a closer look at the biggest consultant shakedown in the State--the good city of Duluth, where we didn’t even get a vote. A multi-million dollar investment all of us--our community, our district and our kids--were supposed to win from left a fiscal disaster in its wake. Our tax levy has jumped 60%. We blew a $30 million dollar reserve and ran up a $21 million dollar annual debt. Millions more were lost when investment of Red Plan bond proceeds went south. In a conference call I have recorded, the State Audit Manager states very clearly that the Red Plan’s $122 million savings claims are “not coming to fruition.” We were also advised by our corporate expert to dump 11 “excess” buildings (9 of them school buildings) and nearly 200 acres on the market at the same time, while eliminating the most viable sales prospect--other educational organizations.

We ran up a bill of $481 million with bond interest to make things better, and our school district is still in deficit (millions in the RED) and 1400 students below the crummy plan’s projected enrollment. Red Plan promises were baseless from the beginning. It’s time all our local leaders start speaking out, and our State leaders put a stop to this scam.