Santa Cruz County Grand Jury • 2005-2006

Bond Measures E and H: Santa Cruz City Schools

Published: May 10, 2006 37 pages

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Note: Missing finding numbers detected: F45

Findings 70 findings

The E and H bonds were originally each sold in three series: A, B, and C:7 Bond Sold Date Bond Amount Bond Term Ends Series A, Elementary July 1, 1998 $7,000,000.00 August 1, 2027 Series B, Elementary March 1, 2000 $15,500,000.00 August 1, 2029 Series C, Elementary October 2001 $5,598,115.65 February 1, 2026 TOTAL ELEM. $28,098,115.65 Series A, High School July 1, 1998 $15,000,000.00 August 1, 2027 Series B, High School March 1, 2000 $31,000,000.00 August 1, 2029 Series C, High School October 2001 $11,997,433.50 February 1, 2026 TOTAL HIGH SCH. $57,997,433.50 In April 2005, Series A and B Elementary and High School bonds were refinanced: Refinance, Series A and B, Elementary April 2005 $22,785,000 August 1, 2029 Refinance, Series A and B, High School April 2005 $45,500,000 August 1, 2029 Table 2. Santa Cruz City Schools Bond Sales, Measures E and H.

Total Elementary bond sales, Series A, B, and C exceeded the $28 million dollar cap established in Bond Measure E.

When asked about exceeding the $28 million cap on the Elementary bonds, district administrative staff referred the Grand Jury’s questions to the district’s bond financial advisor, Northcross, Hill and Ach. The Grand Jury was told, “Unintentionally, $98,115.65 was issued in bonds over the 28 million dollar amount approved by the voters. The district has made provision to repay the $98,115.65 and all interest that has accrued.” The amount of the interest earned is unknown to the Grand Jury. Official Statements, Santa Cruz City Elementary School District, General Obligation Bonds, Election of 1998, Series A, B, and C; Official Statements, Santa Cruz City High School District, General Obligation Bonds, Election of 1998, Series A, B, C; Official Statement, Santa Cruz City Elementary School District, 2005 General Obligation Refunding Bonds; Official Statement, Santa Cruz City High School District, 2005 General Obligation Refunding Bonds. - 10 The Dollars and Sense Don’t Add Up:

The last of the original Elementary bonds was sold in 2001, but repayment of the $98,115.65 overage has not yet been made as of June 10, 2006.

When Elementary and High School Bonds, Series A and B were refinanced in April 2005, the total amount of the refunding bonds was $4,280,000 higher than the remaining principal of the original Series A and B bonds. The Elementary Series A and B Bonds were refinanced for $22,785,000 (the outstanding principal was $21,030,000); the High School Series A and B Bonds were refinanced for $45,500,000 (the outstanding principal was $42,975,000).8

SCCS District’s bond financial advisor stated that “the amount of the refunding bonds is determined by the amount needed to establish an escrow to pay off the old bonds, which includes interest and principal due . . . and pay the costs of issuance.”

Elementary bonds, Series C and Elementary 2005 Refunding Bonds total $28,383,115.65, again exceeding the $28 million cap established by the bond measure.

The April 2005 refinancing of the Elementary and High School Bonds, Series A and B is not detailed on the SCCS Bond Projects Budget, Report from July 1, 1998 to April 30, 2006.

F09

The contract was awarded for $1,204,700 when the lowest bid was actually $1,151,399. Change Orders

According to the Official Statements for the bond sales, property owners residing in the Santa Cruz City Schools District will be repaying bonds E and H until 2029.

F10

The Voter Information Pamphlet for Bond Measures E and H contained an “impartial analysis by County Counsel” stating that “under current California law, the term of the bonds cannot exceed twenty-five years.”9 This term is also stated in the California Education Code, Section 15144: “The number of years the whole or any part of the bonds are to run shall not exceed 25 years, from the date of the bonds or the date of any series thereof.”10

F11

On April 13, 2005, the SCCS Board of Education passed resolutions authorizing the refinancing (refunding) of the general obligation Bond Measures E and H, Series A and B to take advantage of decreased interest rates.

F12

SCCS District’s bond financial advisor stated that the refunding of the bonds will result in lower debt service payments, with the majority of savings in 2006-2010, and that the refinancing will lower taxes.

F13

For tax year 2004-2005, property owners residing in the Santa Cruz City Schools District within the City of Santa Cruz were paying property taxes at a rate of .068% toward bonds E and H. In tax year 2005-2006, the rate increased to .081%. Official Statement, Santa Cruz City Elementary School District, 2005 General Obligation Refunding Bonds; Official Statement, Santa Cruz City High School District, 2005 General Obligation Refunding Bonds. County of Santa Cruz Sample Ballot and Voter Information Pamphlet for Special School District Election, Tuesday, April 14, 1998. California Education Code, Section 15144, http://caselaw.lp.findlaw.com/cacodes/edc.html. The Dollars and Sense Don’t Add Up: - 11

F14

Interest earned on bond sale proceeds has been used for the bond projects and has not been used to repay the bond.11

F15

As property tax is collected to repay bonds E and H, the money is deposited in the pooled investment fund of the county until the district draws it out. These deposits earn interest. Budget Expense Summary

F16

Following is a summary of the SCCS Bond Projects Budget expenses from July 1, 1998 to April 30, 2006:12 ITEM EXPENSE PERCENTAGE OF EXPENSES Construction Contracts $82,431,328 74% Architects/Engineers $11,212,596 10% Construction Management $6,928,864 6% Miscellaneous Construction Costs $4,178,084 4% Reserves $3,901,483 4% Staff Salaries and Other Support $2,225,522 2% TOTAL EXPENSES $110,877,877 100% Table 3. Summary of SCCS Bond Projects Budget Expenses, July 1, 1998 to April 30, 2006. Project Management

F17

In January 2001, the Bond Projects staff requested authority from the school board and the BOC to use their discretion before bidding projects in the future, and to decide whether to bid projects with one general contractor or use multiple-prime contractors.

F18

Results of the first four major bond projects undertaken at one high school, one junior high school and two elementary were described as follows: “All four projects were completed late, two of the four projects are over budget, the quality of some of the work was sub-standard on two projects, and sub-standard work was allowed to stand when first done, assuming it would be rectified as part of the punch list at the end of the projects, but after many spaces had been reoccupied. Some work that was planned to be included in some projects was left out of the initial plans and specs and had to be added with change orders, adding time and cost to the project.”13

F19

At the October 24, 2001, SCCS Board of Education meeting, district administrative staff dissatisfaction with the ability of the construction managers to monitor and 11 Santa Cruz City Schools, Bond Projects Budget, Report from July 11, 1998 to April 30, 2006. Santa Cruz City Schools, Bond Projects Budget, Report from July 11, 1998 to April 30, 2006. Santa Cruz City Schools, Request for Proposals, Management Services for Construction Projects, 2001. - 12 The Dollars and Sense Don’t Add Up: control the work on multiple prime projects was reported. District staff recommended: • bidding future construction projects using general contractors • terminating the two elementary and secondary Construction Managers’ contracts • increasing Inspector of Record time on projects to better monitor quality of work • increasing architect involvement in construction administration • reorganizing district support and oversight of projects • pre-qualifying bidders for future projects

F20

District administrative staff stated that using general contractors had the advantages of less contract administration, total coverage of work, and direct lines of accountability. Disadvantages were that the general contractor might not select the lowest subcontractor bid and could charge up to a fifteen percent markup on subcontractor change orders.14 District administrative staff stated that using general contractors could cost more, but there would be clear lines of responsibility and “headaches would be reduced.”

F21

On November 15, 2001, district administrative staff reported to the BOC that the SCCS Board had approved a plan to hire a consultant to provide general oversight and management of the construction program. The board’s preference was to hire professionals in the construction management field to manage future projects, instead of having district employees in the project management role. The board stated that it did not have confidence that district employees could provide management, in light of the problems that had been reported by school staff at Branciforte Junior High on that school’s projects.15

F22

Seven firms responded to the district’s Request for Proposal (RFP) for a construction program manager. Three finalists were interviewed, and Strategic Construction Management was chosen by the SCCS Board as the Construction Program Manager to be effective February 1, 2002. District administrative staff and volunteers stated the board liked the fact that Strategic Construction Management was local and had ties to the community.

F23

The district has not been able to produce the fixed-price bids and requested supporting documentation for this selection process. This documentation is public record.

F24

The Grand Jury could find no documentation that the bids for the Construction Program Manager were opened publicly as required by the Public Contract Code.16 14 “Advantages/Disadvantages of Using Multiple Prime v. Single General Contractor, agenda packet, Bond Oversight Committee meeting, January 27, 2000. Santa Cruz City School Bond Oversight Committee Meeting Minutes, November 15, 2001. California Public Contract Code, Section 10180, http://www.aroundthecapitol.com/code/contents.html?sec=pcc The Dollars and Sense Don’t Add Up: - 13 25. “Previously, the district used its staff to oversee multiple contractors at individual schools. Officials expect the new system, which includes hiring a general contractor for each project, will simplify the process and attract more bids, particularly from area contractors. The district will pay Strategic $1.2 million. District officials expect to finish all projects by December 2004.”17

F25

Since district and DSA documentation of IOR assignments and dates do not match, the Grand Jury was unable to determine whether projects progressed without an assigned IOR, or without a DSA-approved IOR. School Closures/Leasing

F26

Construction Management budgets were reduced by $2,128,663 due to termination of the two previous Construction Management contracts. Architect Fee budgets were then increased $1,288,160 for increased services for construction administration due to reorganization of management for the projects. These adjustments, when combined with the new Strategic Construction Management contract for $1.2 million, produced an immediate overall increase for the bond projects of over $360,000.

F27

Since February 1, 2002, there have been numerous contract extensions and additional payments approved for Strategic Construction Management, summarized as follows: Original Moving Contract Contract Moving Contract Contract18 Services19 Renewal20 Extension21 Contract22 Extension23 TOTAL Term 2/2/02 – 8/23/02 – 3/1/04 – 10/1/05 – 5/05 – 7/1/06 – 2/28/04 2/28/04 8/31/05 6/30/06 9/05 12/31/06 Amount $1,205,104 $99,825 $958,058 $374,325 $27,254 $224,500 $2,889,066 Table 4. Approved Contracts for Strategic Construction Management Paid by Bond Funds.

F28

In addition to bond funds, payments totaling $68,273 to Strategic Construction Management have been approved by the SCCS Board: $48,221 from the General Fund to “plan and coordinate moving of furniture, equipment and supplies (March 24, 2004); and $20,052 from the Capital Facilities Fund to “plan and coordinate the relocation of 21 portable classrooms” (April 21, 2004). Santa Cruz Sentinel, “Firm will oversee school construction projects,” February 15, 2002. Santa Cruz City Schools, Board of Education for the Elementary and Secondary Districts Minutes, February 27, 2002. Santa Cruz City Schools, Board of Education for the Elementary and Secondary Districts Minutes, August 14, 2002. Santa Cruz City Schools, Board of Education for the Elementary and Secondary Districts Minutes, December 10, 2003. Santa Cruz City Schools, Board of Education for the Elementary and Secondary Districts Minutes, June 8, 2005 22 Santa Cruz City Schools, Board of Education for the Elementary and Secondary Districts Minutes, June 8, 2005. Santa Cruz City Schools, Board of Education for the Elementary and Secondary Districts Minutes, April 26, 2006. - 14 The Dollars and Sense Don’t Add Up:

F29

In the RFP for Management Services for Construction Projects that was part of the Strategic Construction Management Agreement with the district, one requirement is to “plan and coordinate the moving of staff, furniture, material and equipment related to the construction projects.” Strategic Construction Management submitted a fixed fee proposal to secure this contract.

F30

In March 2002, the board approved a district Construction Projects Coordinator position to serve as a liaison between Strategic Construction Management and the district sites. The position is funded through the elementary and secondary bonds. The head of the district Maintenance Department was appointed to the position. Bidding

F31

The SCCS Board of Education approved a resolution to no longer require a public re-bidding of work once change orders exceeded the cost of the original bid by over ten percent (10%), as had been previously required. It was stated that the re-bid process can cause a six- to eight-week delay, and since the district had a general contractor in charge of bond-funded projects, the chances of exceeding a ten percent overrun were considerably less.

F32

The SCCS Bond Project, Status of Project Closeout, May 10, 2006, revealed that out of sixty-nine projects, thirty-seven (or 54%) exceeded a ten percent cost overrun due to change orders.

F33

In October 2005, the SCCS Board voted to become subject to the Uniform Public Construction Cost Accounting Procedures and to provide for informal bidding procedures under the Uniform Public Construction Cost Accounting Act Procedures. This allowed projects from $35,000 to $125,000 to be bid using a pre-approved list of satisfactory contractors, while projects over $125,000 were subject to formal bidding procedures. The rationale was that this would allow more flexibility in the execution of work; speed up bidding procedures; improve timeliness of project completion; reduce paperwork and expenses related to advertising; and simplify administration.

F34

The SCCS District was advised by legal counsel to set a consistent policy for the acceptance of bids. Subsequently, it was decided to award contracts based on the lowest total bid on each project. Projects often contain several alternates, which may or may not be actually included in the final project. The contract, however, is still awarded on the total bid.

F35

When projects contain alternates, contractors can bid low or even zero (0) on some alternates, thereby lowering their overall total bid.

F36

In March 2006, the district awarded a bond project contract to a bidder whose past projects for the district included a project that had change orders totaling 34.1% of the original contact amount, a Stop Notice, and had gone to court. That same bidder had previously completed district bond projects with change orders of 32.3%, 36.9%, and 118.8% of the original contract amounts. The Dollars and Sense Don’t Add Up: - 15

F37

Contracts were not always awarded to the lowest bidder as evidenced by Bid # 2006-

F38

The SCCS Bond Project, Status of Project Closeout, May 10, 2006, document does not include all bond projects, notably those undertaken in 1998-1999. Approximately $4 million worth of projects are not detailed, nor are their change orders.

F39

The SCCS, Bond Project, Status of Project Closeout, May 10, 2006, showed twenty projects with change orders exceeding twenty percent (20%) of the original project contract. These percentages range from 21.7% to 118.8%, resulting in additional costs of $5,479,544 above the original contract amount of $17,779,162 for those twenty projects. This reflected a 30.8% increase over the original contract amounts.

F40

Sixty-nine completed or nearly-completed projects detailed on the SCCS, Bond Project, Status of Project Closeout, May 10, 2006, had change orders totaling $9,621,580, or fourteen and one-half percent (14.5%) of their original contract total of $66,457,279.

F41

District officials stated that general contractors typically make a fifteen-percent markup on change orders. Division of the State Architect Oversight

F42

According to the Santa Cruz City Schools, Bond Project, Status of Project Closeout, dated May 10, 2006, sixty-four projects have had Notices of Completion filed. Of those sixty-four projects, only one is listed in the “DSA Closeout Complete” column, and only two are listed in the “Closeout Sent to DSA” column. The Architect of Record is responsible for submitting the required closeout documents for final certification.24

F43

The Grand Jury found at least one instance of a project being started without prior DSA notification by the IOR (DSA Project Code 01-106000). This appears to be a violation of the Code of Regulations, Title 24, Part 1, Section 4-331.

F44

Inspector of Record assignment date records obtained from the SCCS District and the DSA do not match. 45. “The school board must provide for and require competent, adequate and continuous inspection by an inspector . . .” and; “The project inspector . . . must be approved by the DSA for each individual project.”25 24 2001 California Building Standards Administrative Code, California Code of Regulations, Title 24, Part 1, Sections 4-339 and 4-341, http://www.bsc.ca.gov/title_24/documents/Part1/2001_part1.pdf. 25 2001 California Building Standards Administrative Code, California Code of Regulations, Title 124, Part 1, Section 4-333(b). - 16 The Dollars and Sense Don’t Add Up:

F46

In reviewing the IOR field reports for Santa Cruz High Modernization, project number 01-103363, there is a gap of eighteen days with no IOR reports or notations. One inspector had been terminated on May 2, 2002, and the next IOR report was dated May 20, 2002.

F47

DSA Field Notes from the supervising field engineer from July 10, 2002, stated the first item requiring resolution on project 01-103363 was that the IOR had been replaced by two subsequent IORs, the last of which had not submitted DSA Form-5. The DSA Form-5, which must be signed by the district, architect, and engineer, must be filed ten days prior to an IOR beginning a project.26 School Closures/Leasing

F48

In January 2001, the BOC questioned the prudence of using bond funds to modernize schools that might be closed in the future due to declining enrollment.

F49

In June 2004, Natural Bridges and Branciforte Elementary schools closed. Branciforte became a campus for small district alternative schools. Natural Bridges is leased by Pacific Collegiate, a charter school that is funded by the state. This site is not being used as part of Santa Cruz City Schools. Proposition 39 obligates the district to provide a certain amount of space rent free since sixty percent of the students come from within SCCS boundaries. Pacific Collegiate leases space for the forty percent of the students from outside the district. The district also leases space to another school, Carden El Encanto, at the former Loma Prieta High School site. Lease funds go into the general fund. Following is a summary of the current and projected lease income for these two sites:27 LEASE REVENUES 04-05 05-06 06-07 07-08 08-09 Natural Bridges $68,000 $83,232 $84,897 $86,595 $88,326 Loma Prieta $140,000 $165,000 $200,000 $228,400 $275,500 $208,000 $248,232 $284,897 $314,995 $363,826 Table 5. Santa Cruz City Schools Lease Revenues, 2004-2009.

F50

In August 2004, a citizen who attended two BOC meetings expressed concern about bond funds that had been used on schools that were later closed. The citizen felt that the lease money from those schools should be used to reduce the bond debt.

F51

District administrative staff reported to the BOC committee that legal counsel said it was not illegal to lease out the renovated schools and not use the revenues to defray 26 California Department of General Services, Division of the State Architect, Project Inspector Qualification Record, DSA-5, revised, March 27, 2003. Agenda Packet, Santa Cruz City Schools, Bond Oversight Committee Meeting, November 18, 2004. The Dollars and Sense Don’t Add Up: - 17 the debt. The BOC approved a motion to not recommend using lease revenues to retire bond debt. District Office Relocation/Renovation

F52

Even after Natural Bridges and Branciforte elementary schools had been closed, and the four alternative schools on three sites were moved to the former Branciforte Elementary campus, the district still needed to reduce overhead and save operating expenses due to declining enrollment. The district offices on Mission Street were sold, and ten classrooms at Soquel High School were chosen to serve as administrative offices (Soquel High School’s enrollment dropped from 1693 students in 1998 to 1234 students in 2005-06). The Adult Education Office, the Purchasing Department, and District Warehouse were moved to Palm Street. The Workability Program and Food Services Office were moved to DeLaveaga Elementary School.

F53

Classrooms identified to house the district offices at Soquel High had already been remodeled using bond funds. At least an additional $460,537 in bond money was spent for the district office remodel.

F54

At its April 9, 2003 meeting, the SCCS Board approved the use of up to $1 million in bond funds for district office relocation and improvements. In its advisory capacity, the BOC did not recommend this action.

F55

To date, at least $1,285,486 of bond project money has been spent on district office and adult education relocation. This total includes $274,424 for change orders, or twenty-seven (27%) of the original contract amount of $1,011,062.

F56

A BOC member called the use of bond money for offices “not ethical,” and stated that the district could use anticipated redevelopment revenue to pay for the classroom conversions and other relocation projects. “There was a promise (the bond money) would never be used for administrative costs. It was to improve the student environment, not the district office environment.”28 Oversight/Public Communication

F57

The BOC has been meeting bi-monthly since 1998. These meetings are open to the public. Minutes and any reports released are public information. Meetings are held at Soquel High School, Room 312. Oversight committee members stated that meeting notices are posted at school sites and the district office.

F58

In 1998, a bond web page was developed with links to each school site providing regular updates on bond-related issues.

F59

In June 1999, the communications sub-committee of the BOC worked on placing bond-related information on the SCCS web page. Signs relating to bond projects were designed for placement at the school sites. Santa Cruz Sentinel, “Moving costs stir school-bond debate,” May 29, 2003. - 18 The Dollars and Sense Don’t Add Up:

F60

On August 26, 1999, the BOC stated that the Board of Education, Bond Oversight Committee, and district administration should work jointly to create a public relations program and method of presentation for each school site, the press, and the public in general.

F61

District staff and BOC members were interviewed for “Community Express,” a Community Television of Santa Cruz show. The show aired four times in Fall 1999 and outlined the school bond issues and future project plans.

F62

A brochure “The Road to Renovation” detailed the status of Measure E and H projects and was distributed to parents from the school sites and mailed to households within the district in May 2000. This brochure indicated there would be ongoing communication to keep the public aware of progress and improvements.

F63

In July 2000, a Board of Education member noted that the district’s web site was in need of updating.

F64

The Grand Jury observed that as late as October 17, 2005, there was a “Bond Projects” section on the Santa Cruz City Schools web site. Information was out of date; the last update had been posted in 2001. By February of 2006, that section of the web site was no longer accessible, and posts “Forbidden: You don’t have permission to access … (this site) on this server.”

F65

When asked about the inaccessibility of the web site, district staff responded that the webmaster worked one half-day per week and that there were no resources in the district to put more effort into the web site.

F66

Strategic Construction Management publishes SCCS site construction newsletters on its web site. Newsletters for completed bond projects include construction budget summaries, schedules, and architect, inspector, and contractor information. Web site summaries of current projects have none of this information.29

F67

The construction budget summaries for “Completed Projects” on the Strategic Construction Management web site do not match the figures printed on the Santa Cruz City Schools Bond Project, Status of Project Closeout, May10, 2006. The Strategic Construction Management web site is the only one displaying information on the SCCS bond construction projects.

F68

According to district administrative staff, by the end of summer 2006, ninety-eight percent (98%) of bond funds will be spent. The BOC’s final meeting is scheduled for November 2006. If there is any money left over, district staff will oversee expenditures. Construction projects could extend into Spring 2007.

F69

Strategic Construction Management will be paid $34,500 to produce a Bond Projects Report. This fee is included in their July 1, 2006 to December 31, 2006 contract extension. Strategic Construction Management, http://strategic-cm.com/main/santacruzcityschools.htm. The Dollars and Sense Don’t Add Up: - 19

F70

At its May 18, 2006 meeting, the BOC reviewed options for its final committee report which may be in the form of newspaper ads or inserts, postcards, a newsletter, a twenty-four page report, or a video. Conclusions Bonds E and H

Recommendations 15

R1

The Grand Jury recommends that the Santa Cruz County Auditor initiate an outside, independent audit to scrutinize the bond sales and refinancing, and expenditure of bond funds. If there was surplus cash gained from the refinancing, it should be accounted for and used to reduce the bond debt.
R2

An outside, independent performance audit should be conducted to analyze, assess, and report on the Santa Cruz City Schools District’s operational and construction management policies, procedures, and practices regarding Bond Measures E and H. Investigation as to whether all California Code of Regulations, Title 24 standards were followed should be included.
R3

The SCCS District should insist that the architects submit all documents related to completed bond projects under DSA supervision so the projects can be certified and closed out. Architect fees should be withheld until DSA certification is complete.
R4

For future major construction projects, the SCCS District should consider hiring an experienced, qualified construction project manager or team as a limited-term district employee(s). This would cost less than hiring a construction management firm.
R5

The SCCS District should replace the funds used for District Office relocation and renovation to reduce bond debt.
R6

The SCCS District should use lease revenues and interest on future property tax collections to reduce the bond debt.
R7

The SCCS District should provide a complete bond projects budget document that includes bond refinancing details.
R8

The SCCS District should provide a complete bond projects closeout document detailing all bond construction projects.
R9

Future construction projects should be awarded to the contractor submitting the lowest base bid. Alternates should be bid separately. The Dollars and Sense Don’t Add Up: - 23
R10

For future construction projects, the contractors hired should adhere to the ten-percent cap on change orders previously in effect.
R11

The SCCS District should provide an objective summary and analysis of bond projects from beginning to end. This should include project details, budget, and completion dates; financial accounting; analysis of successes and failures; and suggestions for improvement for any future bond or construction projects.
R12

The SCCS District should make sure its web site is comprehensive and updated frequently. The final bond projects report and analysis should be posted on that web site.
R13

The BOC should continue to operate until all bond projects are completed.
R14

District support staff is to be commended for its helpfulness, promptness, and courtesy when providing requested documentation.
R04-05

05-06 06-07 07-08 08-09 Natural Bridges $68,000 $83,232 $84,897 $86,595 $88,326 Loma Prieta $140,000 $165,000 $200,000 $228,400 $275,500 $208,000 $248,232 $284,897 $314,995 $363,826 Table 5. Santa Cruz City Schools Lease Revenues, 2004-2009. 50. In August 2004, a citizen who attended two BOC meetings expressed concern about bond funds that had been used on schools that were later closed. The citizen felt that the lease money from those schools should be used to reduce the bond debt. 51. District administrative staff reported to the BOC committee that legal counsel said it was not illegal to lease out the renovated schools and not use the revenues to defray 26 California Department of General Services, Division of the State Architect, Project Inspector Qualification Record, DSA-5, revised, March 27, 2003. Agenda Packet, Santa Cruz City Schools, Bond Oversight Committee Meeting, November 18, 2004. The Dollars and Sense Don’t Add Up: - 17 the debt. The BOC approved a motion to not recommend using lease revenues to retire bond debt. District Office Relocation/Renovation 52. Even after Natural Bridges and Branciforte elementary schools had been closed, and the four alternative schools on three sites were moved to the former Branciforte Elementary campus, the district still needed to reduce overhead and save operating expenses due to declining enrollment. The district offices on Mission Street were sold, and ten classrooms at Soquel High School were chosen to serve as administrative offices (Soquel High School’s enrollment dropped from 1693 students in 1998 to 1234 students in 2005-06). The Adult Education Office, the Purchasing Department, and District Warehouse were moved to Palm Street. The Workability Program and Food Services Office were moved to DeLaveaga Elementary School. 53. Classrooms identified to house the district offices at Soquel High had already been remodeled using bond funds. At least an additional $460,537 in bond money was spent for the district office remodel. 54. At its April 9, 2003 meeting, the SCCS Board approved the use of up to $1 million in bond funds for district office relocation and improvements. In its advisory capacity, the BOC did not recommend this action. 55. To date, at least $1,285,486 of bond project money has been spent on district office and adult education relocation. This total includes $274,424 for change orders, or twenty-seven (27%) of the original contract amount of $1,011,062. 56. A BOC member called the use of bond money for offices “not ethical,” and stated that the district could use anticipated redevelopment revenue to pay for the classroom conversions and other relocation projects. “There was a promise (the bond money) would never be used for administrative costs. It was to improve the student environment, not the district office environment.”28 Oversight/Public Communication 57. The BOC has been meeting bi-monthly since 1998. These meetings are open to the public. Minutes and any reports released are public information. Meetings are held at Soquel High School, Room 312. Oversight committee members stated that meeting notices are posted at school sites and the district office. 58. In 1998, a bond web page was developed with links to each school site providing regular updates on bond-related issues. 59. In June 1999, the communications sub-committee of the BOC worked on placing bond-related information on the SCCS web page. Signs relating to bond projects were designed for placement at the school sites. Santa Cruz Sentinel, “Moving costs stir school-bond debate,” May 29, 2003. - 18 The Dollars and Sense Don’t Add Up: 60. On August 26, 1999, the BOC stated that the Board of Education, Bond Oversight Committee, and district administration should work jointly to create a public relations program and method of presentation for each school site, the press, and the public in general. 61. District staff and BOC members were interviewed for “Community Express,” a Community Television of Santa Cruz show. The show aired four times in Fall 1999 and outlined the school bond issues and future project plans. 62. A brochure “The Road to Renovation” detailed the status of Measure E and H projects and was distributed to parents from the school sites and mailed to households within the district in May 2000. This brochure indicated there would be ongoing communication to keep the public aware of progress and improvements. 63. In July 2000, a Board of Education member noted that the district’s web site was in need of updating. 64. The Grand Jury observed that as late as October 17, 2005, there was a “Bond Projects” section on the Santa Cruz City Schools web site. Information was out of date; the last update had been posted in 2001. By February of 2006, that section of the web site was no longer accessible, and posts “Forbidden: You don’t have permission to access … (this site) on this server.” 65. When asked about the inaccessibility of the web site, district staff responded that the webmaster worked one half-day per week and that there were no resources in the district to put more effort into the web site. 66. Strategic Construction Management publishes SCCS site construction newsletters on its web site. Newsletters for completed bond projects include construction budget summaries, schedules, and architect, inspector, and contractor information. Web site summaries of current projects have none of this information.29 67. The construction budget summaries for “Completed Projects” on the Strategic Construction Management web site do not match the figures printed on the Santa Cruz City Schools Bond Project, Status of Project Closeout, May10, 2006. The Strategic Construction Management web site is the only one displaying information on the SCCS bond construction projects. 68. According to district administrative staff, by the end of summer 2006, ninety-eight percent (98%) of bond funds will be spent. The BOC’s final meeting is scheduled for November 2006. If there is any money left over, district staff will oversee expenditures. Construction projects could extend into Spring 2007. 69. Strategic Construction Management will be paid $34,500 to produce a Bond Projects Report. This fee is included in their July 1, 2006 to December 31, 2006 contract extension. Strategic Construction Management, http://strategic-cm.com/main/santacruzcityschools.htm. The Dollars and Sense Don’t Add Up: - 19 70. At its May 18, 2006 meeting, the BOC reviewed options for its final committee report which may be in the form of newspaper ads or inserts, postcards, a newsletter, a twenty-four page report, or a video. Conclusions Bonds E and H 1. Measure E, Series A, B, and C bond sales exceeded the voter-approved amount of $28 million by $98,115.65. The $28 million cap was exceeded a second time when the Measure E, Series A and B bonds were refinanced, this time by $383,115.65. 2. A savings of over $3 million in interest is projected due to the refinancing of the Elementary and High School Bonds, Series A and B that were sold for $4,280,000 million more than the principal remaining. Although interest was decreased, the total debt was increased. The purpose of the refinancing appears to be to extract more funds and not to lower property taxes. 3. The 2005 refinancing of the Elementary and High School Bonds is not shown on the SCCS Bond Projects Budget, Report from July 1, 1998 to April 30, 2006. Voters are entitled to full disclosure regarding all bond details. 4. Contrary to the language of the Voter Information Pamphlet, the bond terms of both the Elementary and High School bonds are greater than twenty-five years. 5. Property owners in the Santa Cruz City Schools District are paying a higher percentage of their property taxes to repay bonds E and H in the 2005-2006 tax year than they paid in the 2004-2005 tax year. To date, the decreased bond interest rates have not reduced property taxes. 6. Over the next twenty-three years, property tax deposits will earn interest that could be used to reduce bond debt. 7. The SCCS District has exceeded its fiscal authority granted in Measures E and H by selling bonds for more than the voter-approved limit. By so doing, it could make it more difficult for voters to approve future bond projects. Project Management 8. As of April 30, 2006, expenses for architects/engineers, and construction management total sixteen percent (16%) of the total bond project expenditures, or over $18 million. 9. The district did not have personnel on staff with adequate construction knowledge to manage large construction projects. 10. The district could not find an efficient and cost-effective method of construction program management. There were many layers of construction supervision and - 20 The Dollars and Sense Don’t Add Up: coordination paid for with bond dollars: general contractors, architects, Strategic Construction Management, and the district’s Construction Program Coordinator. 11. Originally, the Strategic Construction Management contract was for $1.2 million and all projects were to be completed by December 2004. , payments to Strategic Construction Management will reach nearly $3 million, and projects are still continuing. 12. Additional payments were made to Strategic Construction Management for moving services that were part of their original contract with SCCS for which a fixed-price bid had been submitted. 13. Total bond project construction management fees from 1998 to present appear excessive, and will top $7 million before the end of 2006. 14. The bidding process for the Construction Program Manager was not conducted according to Public Contract Code Procedures. Bid documentation is not available from the district to determine whether the lowest bidder was accepted; and documentation that the bids were opened in public as mandated by the Public Contract Code has not been made available by the district. Bidding 15. When the board voted to no longer require re-bidding projects that surpassed the ten percent change order threshold, it removed the cap on change orders. 16. A contractor should not have been considered “responsible” if that contractor’s previous jobs had excessive change orders and if court action was necessary. 17. When projects were bid with alternates, this allowed contractors to manipulate the system by giving a low bid or zero on alternates, thereby allowing a contractor to submit the lowest bid. The bid would not necessarily be awarded to a responsible bidder. Change Orders 18. The SCCS Bond Project, Status of Project Closeout, May 10, 2006 is incomplete; therefore, a true assessment of costs and overruns cannot easily be made. 19. The amount of change orders appears excessive. This could be due, in part, to the removal of the ten percent (10%) cap requiring project re-bidding. 20. There was no financial incentive for contractors and architects to keep change orders to a minimum. Division of the State Architect Oversight 21. The Architects of Record have not fulfilled their responsibilities to secure project closeout and certification by the DSA. The Dollars and Sense Don’t Add Up: - 21 22. District administrative staff has not seen the projects through to closeout by insisting that the Architects of Record submit all closeout documentation. 23. The district, architect, and engineer failed to file DSA Form-5 before IORs started project 01-103363 as required by the California Code of Regulations. 24. IOR documentation for project 01-103363 is incomplete and shows a gap of eighteen days with no IOR site notations or reports. It is a violation of the California Code of Regulations for a project to proceed without an IOR. 25. Since district and DSA documentation of IOR assignments and dates do not match, the Grand Jury was unable to determine whether projects progressed without an assigned IOR, or without a DSA-approved IOR. School Closures/Leasing 26. Although bond funds were used to renovate the Natural Bridges and Loma Prieta sites, lease revenues have not been used to repay bond debt. District Office Relocation/Renovation 27. Despite the fact that the Voter Information Pamphlet arguments in favor of the bond measures clearly stated that bond funds were not to be used for administrative offices, the SCCS Board used bond funds for this purpose. 28. The SCCS Board ignored BOC recommendations not to use bond funds for district office renovations and relocation. 29. Lack of planning resulted in wasted money at Soquel High when ten classrooms that had already undergone renovation and modernization were remodeled for district offices. 30. The SCCS District spent more than $1.2 million on district office renovations and relocations. The district inappropriately approved $1 million for this purpose; no bond money should have been used. Oversight/Public Communication 31. The BOC is scheduled to disband in November 2006. Projects may continue until at least Spring 2007, and there will be no BOC oversight. Bonds were passed under the assumption that an oversight committee would be in place for the duration of the projects. 32. The district has not maintained the bond project information on its web site. This could have been a valuable means of providing ongoing, up-to-date public information on the bond projects. 33. Over the last eight years, there has been no ongoing form of public communication with district residents regarding the bond projects. Efforts made, such as starting a - 22 The Dollars and Sense Don’t Add Up: web page, being interviewed for Santa Cruz Community Television, and producing a brochure, all took place between 1998-2000. 34. As of this late date, the BOC has not yet determined the format and scope of its final report. The Grand Jury questions whether this will give the BOC time to prepare a comprehensive report. 35. Paying Strategic Construction Management $34,500 to help prepare a final report detailing the bond projects could result in a loss of objectivity and detail in evaluating the projects’ successes and failures. Recommendations 1. The Grand Jury recommends that the Santa Cruz County Auditor initiate an outside, independent audit to scrutinize the bond sales and refinancing, and expenditure of bond funds. If there was surplus cash gained from the refinancing, it should be accounted for and used to reduce the bond debt. 2. An outside, independent performance audit should be conducted to analyze, assess, and report on the Santa Cruz City Schools District’s operational and construction management policies, procedures, and practices regarding Bond Measures E and H. Investigation as to whether all California Code of Regulations, Title 24 standards were followed should be included. 3. The SCCS District should insist that the architects submit all documents related to completed bond projects under DSA supervision so the projects can be certified and closed out. Architect fees should be withheld until DSA certification is complete. 4. For future major construction projects, the SCCS District should consider hiring an experienced, qualified construction project manager or team as a limited-term district employee(s). This would cost less than hiring a construction management firm. 5. The SCCS District should replace the funds used for District Office relocation and renovation to reduce bond debt. 6. The SCCS District should use lease revenues and interest on future property tax collections to reduce the bond debt. 7. The SCCS District should provide a complete bond projects budget document that includes bond refinancing details. 8. The SCCS District should provide a complete bond projects closeout document detailing all bond construction projects. 9. Future construction projects should be awarded to the contractor submitting the lowest base bid. Alternates should be bid separately. The Dollars and Sense Don’t Add Up: - 23 10. For future construction projects, the contractors hired should adhere to the ten-percent cap on change orders previously in effect. 11. The SCCS District should provide an objective summary and analysis of bond projects from beginning to end. This should include project details, budget, and completion dates; financial accounting; analysis of successes and failures; and suggestions for improvement for any future bond or construction projects. 12. The SCCS District should make sure its web site is comprehensive and updated frequently. The final bond projects report and analysis should be posted on that web site. 13. The BOC should continue to operate until all bond projects are completed. 14. District support staff is to be commended for its helpfulness, promptness, and courtesy when providing requested documentation. Responses Required Entity Findings Recommendations Respond Within Santa Cruz City 2-12, 14, 15, Schools Board of 19, 20, 23, 24, 90 Days Trustees 27-29, 31, 32, 1-13 (October 1, 2006) 34-44, 46, 47, 51, 53-56, 64- 70 Santa Cruz County 60 Days Auditor/Controller 1-15 1 (September 1, 2006) - 24 The Dollars and Sense Don’t Add Up: