Markups by ‘body shops’ inflate the public’s cost

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.

“I don’t think we need to answer your questions,” Brook Gness, business manager for TBI, told a reporter who visited the company’s small office suite in a Wilshire Boulevard skyscraper.

TBI’s genesis

TBI’s name derives from the first initials of its founders: Tarek “Rick” Hijazi, Bassam Raslan and Ivan Kesian.

All three were construction supervisors at the Los Angeles Unified School District when they started the company in 2002 to supply project managers for L.A. Unified’s $20-billion building program.

Kesian told a county grand jury last year that Raslan and Hijazi gave their wives majority ownership of the business because it is easier to get government work “if you’re a woman-owned business or a minority-owned business.”

Raslan pleaded guilty in December to a misdemeanor conflict-of-interest charge for steering L.A. Unified construction jobs to TBI. In return, the district attorney’s office dropped eight felony charges. A judge vacated the misdemeanor conviction in January after Raslan paid $250,000 in restitution and performed 200 hours of community service.

None of this affected TBI’s participation in the college construction program, where it has been a subcontractor since 2007.

The firm has served as the employer of record for 28 people on the program.

Marshall, who went on TBI’s payroll in 2009, said she set foot in its office just once or twice, to drop off time sheets or a tax withholding form. She worked at the district’s construction headquarters and answered to Eisenberg.

Her activities included meeting a Fox Studios official for lunch to pitch a speaking appearance for Eisenberg and accompanying him to a banquet at the Jonathan Club in downtown L.A., where the district received a Leonardo Award from the Society for Marketing Professional Services, records show.

Once a month, Marshall sent her time sheets to TBI, billing $100 an hour, records show. TBI and URS added markups that raised the rate to $171, and then URS sent a final bill to the district, records show.

This pattern was repeated over and over with other staff members and other subcontractors, usually with bigger markups.

Amy Yeager, a former aide to Los Angeles City Councilman Jose Huizar, sought grants for the college district in Sacramento and Washington, D.C. She was paid $115,000 a year, but her work cost taxpayers $305,000 a year once URS and subcontractor SASM Consulting collected overhead and profit, records show.

A niece and a nephew of district trustee Sylvia Scott-Hayes also found jobs on the program. The niece, Monica Ramirez, was hired as a project coordinator in 2009. Records show that the district authorized a subcontractor, ECM Group, to pay her at an annual rate of $65,000 to start and that markups for ECM and another contractor pushed the total cost to $179,000 a year.

The trustee’s nephew, Rick Ramirez, was paid $100,000 over 20 months in a public relations job, records show. After his employer, Seville Construction Services, and URS added markups, it cost taxpayers $292,000 to employ him, according to the records.

Wage surcharge

It is common for government agencies to hire private contractors to supervise big construction projects. When billing the client, the contractors often add a surcharge to employee wages.

The system is supposed to serve the interests of both parties: Construction management firms recoup their overhead expenses and earn a profit, and the client benefits from the resources and expertise they bring to the job.

Most of the $500 million that the college district is spending on construction management fits this description. Companies draw from staff already on their payrolls to provide seasoned managers who ride herd on builders to make sure projects meet design specifications and are finished on time and within budget.

But the district broke from standard public contracting practice by hiring additional staff members and inviting politically wired firms to employ them on paper and add markups to their pay.

Contractors were eager to take advantage of the opportunity. In an e-mail to Eisenberg, one contractor was explicit, offering to serve as “a shell pass-through” for building inspectors.

The markups varied from one contractor to the next and were approved by URS and Eisenberg with almost no scrutiny by the board of trustees.

After The Times asked questions about the markups, the trustees sought answers from Eisenberg. In presentations to the board last year, he said the markups for more than two dozen companies were based on their expenses, as determined by audits or as stated by accountants.

But in response to repeated requests from The Times, the district produced audits for only two companies: URS and TBI.

In the end, the trustees trimmed markups for a handful of subcontractors.

TELACU Construction Management has employed 10 people through the program, collecting $667,000 in overhead and profit, according to district records.

Its parent organization, the East Los Angeles Community Union, is a major player in Latino and labor politics in California; for the district trustees, both constituencies are mainstays of support.

Founded in the 1960s, the organization grew from an urban revitalization group into a web of nonprofit and for-profit companies active in banking, real estate and construction.

For decades, TELACU’s government contracts and political maneuvering have drawn controversy. In 1996, it paid $13,200 for a new tile roof on the Eagle Rock home of Richard Alatorre, then a City Council member who had just pushed to get TELACU a subway contract and a city loan for a shopping center.

TELACU’s leader, David Lizárraga, is one of the nation’s most prominent Latino businessmen and a frequent contributor to Democratic and Republican politicians. In May, he sat at President Obama’s table at a White House state dinner for Mexican President Felipe Calderon.

Among the construction program staff members on TELACU’s payroll is David Barilotti, who has served as one of the program’s top accountants.

TELACU recruited Barilotti after the district told a small group of contractors about the job opening. Rather than pay TELACU a one-time finder’s fee, the district allowed it to serve as Barilotti’s employer of record.

He was paid $151,000 over 16 months, but markups by TELACU and URS drove up the cost of employing him to $460,000, records show.

Lizárraga and other TELACU executives did not respond to requests for comment.

Barilotti’s case illustrates another downside of the system: It delegates core public functions such as accounting, procurement and contract oversight to people on the payrolls of companies that profit from the construction program.

Of the hundreds of people working full-time on the program, only two are employees of the district: Eisenberg and his deputy, Thomas Hall.

Bad idea, said David Umstot, vice chancellor for facilities at the San Diego Community College District. The San Diego college system has 10 public employees overseeing private contractors in a bond program one-quarter the size of the one in L.A.

“You don’t want to have non-governmental employees making decisions on changes in contracts, managing contracts. That’s key,” Umstot said. “They need to be public employees.”

Family business

One of the busiest contractors under the staffing system is Summit Consulting and Engineering, owned by a former school teacher named Michelle Gastelum.

Summit is based in a Pasadena office tower overlooking the 210 Freeway, but there is no company sign at the entrance. Summit is tucked inside the office suite of Gateway Science & Engineering, owned by Michelle’s father, Art Gastelum, a longtime L.A. City Hall power broker.

Together, the Gastelums have donated $55,650 to trustees seeking reelection and to their campaigns to expand the construction program. They have also held fundraisers to gather contributions from other contractors.

Since 2007, Summit has employed at least 28 construction program staff members.

One of them was Patricia Torres, who for three years oversaw bidding on construction contracts. Over that time, her pay was $210,000. After markups by Summit and URS, the cost to taxpayers was $563,000, records show.

Torres said she never worked at Summit. Her desk was at the district’s construction office in downtown Los Angeles, and she reported to a URS construction manager.

In an interview, Torres said she had problems collecting her paychecks and receiving health benefits from Summit, so she pleaded with Eisenberg and URS to place her with a different subcontractor.

To her disappointment, nothing came of it. She said a URS executive told her the reason was “political.”

Frustrated, Torres said she asked: “Who runs this program, the district or the Gastelums?”

In September, after Torres went on medical leave and threatened to go to The Times with her story, higher-ups reconsidered her request to change employers. Her boss, Werner Wolf of URS, left her a voicemail suggesting that she resign from Summit and ask another subcontractor, Seville Construction Services, to hire her. URS had alerted Seville to expect her call, Wolf told her.

“The key would be, this would have to be all done on your own,” the URS executive said in the voicemail.

So far, Torres has not taken up the offer. To her, the system of paying staff members through subcontractors is baffling.

“Why not just hire me and pay me?” she asked.

In an interview, Wolf called Torres a valued employee and confirmed her account.

“I have no idea why the people up above were not letting her go, or why they were abiding by Michelle Gastelum’s wishes,” he said.

Michelle Gastelum called Torres a disgruntled employee and denied blocking her request to switch employers. She also said neither campaign money nor her father’s connections helped Summit win district contracts.

“My business is my business; nothing has been handed to me,” she said in an interview.

Art Gastelum, whose company has a contract to manage construction at one of the district’s campuses, accused The Times of pursuing “a witch hunt” against minority contractors.

“When you’re a small business, you hire the right people for the right client at the right price, and that’s your expertise,” he said.

Personal ties

While some contractors in the construction program have political voltage, others have personal connections in the insular world of Los Angeles school builders. A powerful figure in that world is James Sohn.

Sohn leads the $20-billion building program at L.A. Unified. From April 2007 to July 2009, he was the URS vice president overseeing the college district’s construction program.

During that time, the district employed construction management staff through SASM Consulting, a company owned by Michael Kuehn, a longtime colleague of Sohn’s.

Kuehn is an information technology expert specializing in public works construction. He and Sohn worked in construction management for a Seattle transit agency, Continental Airlines in Houston and L.A. Unified.

They also made a real estate investment together in 2000, buying a house in Cerritos for $249,000. In 2001, Kuehn gave his one-third share in the home to Sohn, property records show. The house was later placed in a Sohn family trust. It is now a rental property, according to a tenant.

Initially, the college district paid SASM Consulting for the services of Kuehn and three other computer and accounting specialists.

Over time, the district put 17 more people on SASM’s payroll. Sohn personally approved five worker assignments to SASM, records show.

Many of those employed through SASM worked in areas other than information technology and accounting. Lynn Winter Gross went on Kuehn’s payroll a month after retiring as a spokeswoman for the college district. She was paid to conduct media tours, attend public relations strategy meetings and plan a sustainability conference, among other duties, labor logs show.

Over the last three years, construction program employees on SASM’s payroll have earned nearly $3 million, records show. But the district has spent $8 million for their services. The difference — about $5 million — has gone to SASM and URS for profit and overhead, records show.

Kuehn did not respond to phone calls and e-mails. Sohn refused repeated requests for an interview.

In corporate registration papers filed with the state, SASM lists as its “principal executive office” a studio apartment in the downtown Museum Tower. Kuehn moved out of the 12th-floor unit last year.

On its bare-bones website, SASM lists a San Mateo address as its corporate office. But there is no sign of SASM there; it is a store called Box Ship & More.

A bank of mailboxes — one of them Kuehn’s — lines one wall. The business rate to rent a mailbox is $54 for three months.

gale.holland@latimes.com

michael.finnegan@latimes.com

doug.smith@latimes.com

Times researchers Malloy Moore and Sandra Poindexter and correspondent Dianne Klein contributed to this report.