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Myers-Wilkins Elementary School in Duluth, as seen shortly before opening to begin the 2013-14 school year. The renovation project at the school was part of the Duluth school district's Red Plan. (2013 file / News Tribune)

Duluth school district: Cash OK'd for Johnson Controls was legal, and went to Red Plan projects

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Johnson Controls Inc. received approval for $8.7 million in Red Plan work for the Duluth school district in early 2012, as alleged by School Board member Art Johnston.

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But district officials say that money, approved legally by then-board Chairwoman Ann Wasson, related to the entire $315 million plan — and was not part of a $15 million increase in the cost of the long-range facilities plan first approved by the board in June 2011, as Johnston alleges.

“It was for work that already happened, and work still to happen,” said Kerry Leider, property and risk manager for the district.

The $8.7 million approved by Wasson in 2012 covered dozens of expenses for nearly every school in the project. Separately, the School Board had in June 2011 approved $15 million in additional money to complete the long-range facilities plan.

At that time many of the school projects were over budget, and more money was needed for the two schools where work had yet to commence.

Johnston has long accused Johnson Controls of wrongdoing, and he has contended that the $8.7 million approved to be paid to the company in 2012 did not all go toward work on school construction and renovations, threatening completion of the Red Plan projects. And Johnson Controls has been involved in controversy elsewhere in the Northland; in recent years the company was involved in a lengthy legal battle against an Ely newspaper seeking records of the company’s work on a construction and consolidation plan for the St. Louis County school district.

In Duluth, Superintendent Bill Gronseth said that most of the $8.7 million approved to be paid to Johnson Controls in 2012 went toward construction and construction-related costs. Gronseth said the Red Plan money still has not yet been depleted — even after the Red Plan work has been completed — so no school projects were at risk of being left unfinished.

The $8.7 million didn’t all go to the company, Leider said. About $3 million was paid by Johnson Controls to the construction companies building the schools, for example, for a laundry list of expenses called “reimbursables.” That money is used for things such as temporary heating, site managers and wetland analysis.

The district also maintains that of the $56.6 million it has so far paid to Johnson Controls, a large percentage has gone to pay sub-consultants that the company hired to do work for nine school projects, ranging from civil and structural engineers to kitchen consultants. Johnson Controls did not return a call Friday inquiring about financial details, but a 2007 News Tribune story quotes Brent Jones, a program manager for the company, as saying that “Johnson Controls acts as the conduit” of some of what it receives. “We get the money up front and use it to pay for the people we hire.”

The bulk of other taxpayer money has gone to construction contractors to pay for the roughly 400 contracts and various change orders that resulted during the years of work.

Johnston also contends that the $8.7 million amendment, or job order, along with a handful of others, was approved in secret without full School Board knowledge.

“It’s my right to know as a public official keeping track of the money,” he said. “There is an obligation to know when big contracts like this are signed.”

He said it not only “flies against” what the district says about transparency, but also it’s a violation of board policy regarding changes to the plan and a violation of state law.

But written into the Red Plan is a resolution allowing the head of the School Board the ability to approve project changes or amendments. And according to the Minnesota Office of the State Auditor’s position on contract change orders, it’s practical for public entities with many contracts to delegate someone to approve changes, using a set dollar amount or a percentage. Mark Kerr, counsel for the office, said the position is a recommendation and the governing board — in this case, the Duluth School Board — gets to decide its practice.

While the single $8.7 million job order for Johnson Controls wasn’t presented to the board in 2012, said Bill Hanson, the district’s director of business services, “every dollar that we distributed to JCI showed up in board reports.”

There were three other similar job orders during the duration of the plan that changed agreements with Johnson Controls. One shifted fees but didn’t increase them, and two reduced what the district paid the company when it was decided less work would be done at Historic Old Central High School and Congdon Park Elementary School.

Current board chairman Mike Miernicki signed one of the job orders that reduced the amount of money going to Johnson Controls. He maintained the board is in compliance with state laws.

“If I am Johnson Controls, I am going to make sure I am doing this correctly or I will have to pay a boatload of money back,” he said, noting that since he’s been on the board, payments to vendors and plan changes all have been published.

Where did the money go?

Former Superintendent Keith Dixon asked the School Board in June 2011 to approve an additional $15 million in expenses to the plan days before his retirement. Increased construction and unforeseen costs, bigger schools and added programs were part of it. But that plan, sent to the state education department for approval, was moot, the department later said, because no contracts for the final two schools had been awarded in two years. That meant the board had to submit a new plan and request for additional money.

The district was dealing with some transition and turmoil at the time: Dixon’s departure, the short-lived stint of former Superintendent I.V. Foster and an attempt by Johnston to foil the state’s renewal of the Red Plan. In March 2012, Johnston asked the state to reject the request for additional money. District officials at the time worried that it would prevent the remaining two schools — Myers-Wilkins and Congdon Park elementaries — from being renovated. Shortly after, the plan was approved and bonds were purchased.

In the midst of that, Wasson approved the $8.7 million job order for Johnson Controls. The largest chunk was an estimated $3.1 million in reimbursables for nine schools. The company always took a 10 percent markup of those, but it mostly used that money to pay the construction companies, such as Kraus-Anderson and Bossardt, who were billing Johnson Controls for things they paid for or needed on their sites, Leider said.

In this case, the project timeline had increased, so the construction superintendents and project assistants, for example, were billing for more time.

Also part of that was a $1.3 million increase for things such as asbestos abatement and nearly $4.3 million in new construction when, for example, it was decided that Denfeld and East high schools both would get Secondary Technical Center programs.

How is Johnson Controls paid?

Johnson Controls originally was to receive about $38 million, minus whatever it ended up paying sub-consultants. The company is paid today out of four different categories, but it wasn’t in the beginning. In 2009, a category was added for the coordination, inventory and delivery of furniture, fixtures and equipment, totaling about $837,000. The reimbursable category existed in the beginning, but an amount wasn’t defined. To date, about $11.2 million has been paid to the company for that category, but Leider estimates that the company has kept only its 10 percent markup.

A third category — and one that has increased by nearly 7 percent — is program management, where Johnson Controls has received about $6.1 million.

The final category is for professional service fees, which have increased by almost 19 percent. For this the company has been paid about $38.4 million. Along with reimbursables, payments to sub-consultants, including architectural firms and mechanical, civil and electrical engineers, came largely from this category.

It’s legal, but is it sound?

Longtime board member and former chairwoman Judy Seliga-Punyko didn’t have any issues with the resolution allowing the board leader to sign off on project agreements without knowledge or approval of the rest of the board. The board eventually was made aware of vendor payments, she said, and some decisions needed to be made quickly because of the nature of the construction business and the sheer size of the unique building plan.

“We had so many things going on at the same time,” she said, back in the middle of the consolidation and construction plan that lasted about seven years and came to an end with the opening of Congdon Park and Myers-Wilkins schools this past school year.

Board member Harry Welty said the resolution was an example of how the School Board at the time of the start of the Red Plan managed accountability.

“I think it was casual to the point of negligence,” he said. “All School Board members should oversee the running of the district and the finances are critical to that. Whatever reason the School Board chose to slough off this responsibility they were part of there is only poor justification for.”

Hanson said Wasson’s move changed the contract, not the scope of the work being done.

“It was part of what they had already approved,” he said. “The paperwork to make it happen needed to be signed. That’s what this is.”

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Jana Hollingsworth
(218) 279-5501
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