January 21, 2003

When the Minnesota Department of Transportation lost a $17-an-hour employee, it quickly hired her as a $100-an-hour consultant and gave her a string of contracts, despite repeated warnings from regulators that others should have been considered for the work.

When MnDOT was in a hurry to clean up a site that was to become a maintenance yard for the state's first light-rail line, it put an engineering firm to work without having a binding contract or money in place -- admittedly violating state law.

Under pressure to build roads and rail, MnDOT increasingly has turned to outside consultants, paying them nearly $60 million last year. Laws and regulations exist to ensure that consulting contracts are reached fairly and competitively and that tax dollars are spent prudently. But the Star Tribune has found that MnDOT -- the third-biggest spender among state agencies -- has played by its own rules.

A review of tens of thousands of government e-mails, memos and other documents shows that MnDOT often has avoided competition when awarding consulting contracts, has doubled or even tripled payments without bids and has broken laws by putting consultants to work before deals were approved or even funded.

Behind the scenes, state regulators have criticized such practices for years, describing the agency as a bully running roughshod over efforts to ensure fair contracting. Auditors, too, have criticized the way MnDOT
handles consultants.

Even so, Elwyn Tinklenberg, who led MnDOT for nearly four years before resigning in October, has called the agency's procedures "reasonable and appropriate." During a radio appearance in August, he praised the agency's 5,300 employees, "who are working like crazy to do the best job they can with limited resources to protect the mobility of Minnesota."
But as a new administration settles in, the agency will probably face tougher scrutiny. Gov. Tim Pawlenty said the newspaper's findings raise questions about whether agency officials have been too close to some consultants, and he called some of MnDOT's spending decisions outrageous.

Pawlenty named Lt. Gov. Carol Molnau to double as the agency's new commissioner. As a legislator, Molnau accused MnDOT of misrepresenting costs for the Hiawatha Avenue light-rail line and resisting scrutiny.

During last year's campaign, she promised "major reforms." In a recent interview, she said that employees already are suggesting improvements. "Our goal is accountability," she said. "So when we have contract issues, they will be done according to the standards." Unlike typical construction work or purchases, consulting jobs need not go to the lowest bidder -- agencies may consider a variety of subjective factors. But last week, the legislative auditor reported that six state agencies it surveyed, including MnDOT, broke laws or ignored sound management practices when hiring consultants. The Department of Administration has the authority to approve or reject most state contracts. Regulators there have said that MnDOT gives them the most trouble; many of their complaints are evident in internal documents.

According to the Minnesota Department of Finance, the state spent $2.2 billion on professional or technical consultants from 1996 through late 2002, an average of about $303 million a year. MnDOT was the biggest spender, accounting for 16 percent of the total.

Some of that money has gone to large companies. Some has gone to individuals. In both situations, regulators have questioned whether it was distributed fairly or in ways that produce a good value for taxpayers. One contract leads to another.

One of those cases involved Carolyn Bacon. MnDOT managers liked Bacon, who worked for them as an employee-development specialist in the early 1990s. About five months after leaving that $17.25-an-hour job in 1993, she returned part time as a $100-an-hour consultant, running meetings, planning retreats and reorganizing staff. She has received contracts worth $266,270, MnDOT records show.

Minnesota law forbids the hiring of consultants for jobs exceeding $5,000 if state employees are available. In addition, even small contracts are supposed to go through an informal bidding process. Heather Pickett, a contract watchdog for the Minnesota Department of Administration, questioned Bacon's contracts in 2000.

"It appears that Mn/DOT is giving a great deal of this type of work just to Ms. Bacon, especially when there are other people, as well as state employees, who could perform this work. Fair and open competition is the goal when selecting contractors," she wrote in a memo to the agency. Pickett, a lawyer and former MnDOT employee herself, wrote that in the future, MnDOT would need to explain why it chose Bacon and whether competitors were sought.

Soon after, a $66,100 contract of Bacon's was due to expire. The agency wanted her to continue working so she could help in a staff reorganization. Pickett said she told the department to seek proposals from competitors.

MnDOT did. But meanwhile, it hired Bacon on a separate, no-bid, $5,000 contract to lead a retreat for managers who were planning the reorganization. Four days after the retreat ended, the department chose
Bacon for a new contract worth $67,000.

The Administration Department, acting on a tip from a MnDOT source, looked into the contract. It found that:

• Weeks before the proposal was put out for bids, a MnDOT employee already had described the project in her notes as "Carolyn's Contract."

• The advertisement seeking proposals was too "sketchy" for competitors to understand, according to Pickett. She told MnDOT to fix it, but officials disregarded her directive.

• Three consultants submitted proposals. One was tossed for being 11 minutes late. Bacon's proposal -- the only one without a time stamp – was accepted.

• The committee that selected Bacon included Richard Stehr -- the senior engineer whose division first recruited her as a consultant -- and two of his subordinates. Auditors, regulators and even a former MnDOT manager have criticized such arrangements as a threat to the appearance of impartiality.

Administration Department regulators concluded that MnDOT had "preselected this contractor" even though it went through a competitive process. But they didn't recommend further investigation. Kent Allin, then an assistant administration commissioner who oversaw state contracting, said there were frequent discussions in his department about the tension between contract regulators and MnDOT. "I'm trying to pick my words carefully," he said. "We were encouraged [not to] air the dirty laundry publicly or with the Legislature."

MnDOT denies committing any improprieties. Nancy Pfeiler, the staff member who described the project as "Carolyn's Contract," said she viewed it as a continuation of Bacon's work with the department. Bacon said she didn't know why her proposal wasn't time-stamped. She defended her selection, saying she had worked for MnDOT for a long time and was familiar with the reorganization efforts. Stehr agreed: "I mean, she knew what we liked."

Competition is key -- and often is avoided One type of arrangement criticized by both regulators and auditors is the single-source contract -- in which an agency seeks to hire a contractor without competitive bids. The law allows no-bid contracts if state employees cannot do the jobs and the selected firms are the only ones reasonably available for the work.

But Administration regulators have complained that MnDOT frequently has sought permission to handpick its consultants -- as much as 41 percent of the time in 2000 -- often with insufficient reasons. Gerald Joyce, an Administration regulator, wrote in an internal memo that MnDOT often claimed it lacked time to advertise for competitors. But there often appeared to be enough time, he lamented, "for MnDOT to mishandle the contract and create a situation where work must begin or dire consequences will result, thus negating Admin's authority in enforcing a statute that was enacted for a very good reason -- to ensure a fair contracting process that when properly utilized benefits all parties."

On several occasions, regulators said, MnDOT evaded or even broke the law by hiring contractors without competition and putting them to work without approval. Sometimes MnDOT tries to justify its selections on grounds that it has worked with the companies before and they are familiar with the work -- factors that might save money. But regulators say that those alone aren't sufficient reasons.

Even if a company originally competes for a job, the cost of a contract can grow as the agreement is amended -- without competition -- to add work. The Star Tribune analyzed two MnDOT databases with nearly 2,100 consulting contracts. The analysis found 150 cases in which the value of amendments
equaled or exceeded the amounts of the original contracts. Some involved relatively small deals, such as a $2,590 engineering contract that increased by $11,410. Others were much larger, such as a $750,000 materials testing contract that increased by $2.1 million.

One example involves Short Elliott Hendrickson Inc. (SEH) of St. Paul. In 1998, the department signed a three-year, $750,000 contract with SEH for road-design services. Two years into the contract, it tagged on an amendment for $750,000, citing the heavy workload. It was among eight SEH contracts with supplements exceeding 60 percent of their original value. Taken together, the original contracts were worth $3.6 million, and the supplements added $3.3 million.

Generally speaking, state law allows agencies to amend contracts to order unexpected, related work or to deal with emergencies that involve public health and safety. MnDOT officials say they expand contracts out of necessity, generally to deal with unexpected problems or to avoid costly construction delays.

But regulators and auditors have noted that the practice can be used to skirt competitive-bidding requirements. They also say that supplements can be a sign that firms are allowed to bid low to win contracts and compensate with no-bid amendments.  Of the 2,100 contracts, nearly half had been amended. The original value of the contracts that were amended totaled $731 million; the amendments themselves totaled $422 million. MnDOT officials said their databases were designed to track contracts, not to be used for analysis. They said they could not vouch for "the accuracy, reliability, suitability or completeness" of their data and warned that any conclusions drawn from them could be misleading or false. However, the newspaper fixed many of the problems by clearing up inconsistencies in company names and using hard copies of contracts to fill in blanks. Spot checks afterward found relatively few errors. A practice that can shut out competitors Administration watchdogs say that when MnDOT chooses one contractor too often, others can't gain the experience to compete effectively.

Ed Knoyle, a software engineer from Bozeman, Mont., began telecommuting as a consultant for the agency in 1975. His contracts since 1996 have totaled $517,755. Some were awarded without competition. When MnDOT wanted approvals for no-bid contracts with Knoyle, it typically said he had so much institutional knowledge and technical expertise that he had no peer.

MnDOT also sometimes awarded contracts for amounts just under the threshold that would have required competitive bids. It later amended the contracts, pushing total costs far above the threshold.  Joyce suggested that MnDOT may have been dodging the law in one such case involving Knoyle. In a February 1999 memo, he wrote that a Knoyle contract had started at $24,000 -- "conveniently below" the $25,000 bidding threshold -- but that through amendments, it had nearly tripled in cost and had exceeded the original scope. He approved the amendment that sparked his comments but said he wanted assurance, for his file, "that the original intent of this contract was never to be this large and all-encompassing. It appears that there may be even more amendments anticipated; if that's the case, I would recommend a new contract or some explanation of why no MnDOT employees can now perform these services."
Later that year, Pickett raised more questions about MnDOT's use of Knoyle. Citing a contract that had grown from $60,000 to $95,000, she said, "This is not an appropriate amendment. The new work is unrelated to the original contract and should have been a separate contract."

In summer 2001, MnDOT found a detour around some of the regulators' challenges. According to an internal memo, managers reviewed contracting rules and found that if they used a special type of contract and kept the amount under $20,000, the agency could hire Knoyle directly without competition. MnDOT officials approved a $10,000 contract for Knoyle to work on a mainframe computer and a separate $15,000 contract for him to work on a database. Determining when a contract amendment is truly required can be difficult, said Gabriel Bodoczy, a former MnDOT official who oversaw consulting contracts for a decade before retiring in 1999. But he said that too many amendments are driven by consultants and not by the agency's needs.

Knoyle suggested that MnDOT extend one of his contracts a year ago, saying he had run out of work with two-thirds of the money remaining. An agency representative wrote back, asking whether he was looking for something to do. Knoyle responded: "My time is less committed now. . . . Everybody just looks at each other and wonders who is supposed to be doing what. . . . What this means is that I will have more time available than I have recently, so yes, I am looking for projects if you have some in mind." MnDOT extended the contract through June of this year.

Knoyle said his string of contracts stems from his ability to find a niche within MnDOT. He said that he follows the money, shifting to new projects as priorities change, but that MnDOT's employee turnover helps, too. "A lot of times, I'm coming in and educating MnDOT employees how we got to where we are today, because I've been here 20 years and they've been here, you know, six months," he said. "I don't think we intended it to work out that way. It's just kind of how it turned out."

Why break the law? Speed plays a role In its efforts to accelerate projects, MnDOT insists that it must sometimes violate statutes that prohibit contractors from starting work before money is set aside or before a contract is signed. "It takes too damned long to get a project developed and on the ground," Tinklenberg said in an interview last spring. The Star Tribune found dozens of examples in which the agency acknowledged breaking the law by starting work before contracts were signed or money was set aside.
In addition, Pickett complained in an internal document that MnDOT often steps around the rules when it decides it wants a particular consultant. The agency frequently asks for approval of no-bid contracts long after the work has begun, she said, even though "working without the benefit of a contract creates liability for the state."

In 1999, the agency wanted to hire Barr Engineering of Edina to draft a cleanup plan for part of the light-rail corridor. One reason it gave was that the company could produce a "scientifically and politically acceptable product the first time." The Administration Department initially rejected MnDOT's request for a
$125,000 contract, saying the agency had failed to meet criteria for avoiding competitive bidding. MnDOT eventually got permission to negotiate a contract with Barr after explaining that cleanup funds from a settlement with a previous owner were about to expire. The agency then put Barr to work without a binding contract and without dedicated money. MnDOT later acknowledged that it broke the law in doing so. Barr did not finish the job in time to capture the cleanup funds. A MnDOT official later downplayed the failure, explaining to Administration regulators that the most important reason for moving so quickly was to avoid delays in light-rail construction. Pickett ultimately signed the contract after much of the work was completed.

In a recent interview she said she was under intense pressure from MnDOT and was mindful that light rail was a priority for David Fisher, the administration commissioner at that time. "He directly said he was in favor of light rail and he wants to help wherever he can to get this thing on the tracks," she said. ". . . You can't fight every battle. You can only push so hard."

MnDOT says it takes risks that are legitimate. Starting work without final approvals can create liability for the state, say auditors and the state attorney general's office. Tinklenberg has said the agency weighs that against the threat of incurring financial penalties for delays or compromising public safety. In an internal memo that itemized its quarrels with Administration watchdogs, MnDOT said it does not make it common practice to violate contracting laws. "However we realize that there are high priority projects for which we must take the risk and start work to meet delivery deadlines.. . . When long established supplier relationships are in place, we trust consultants to start projects for us." Ron Gipp, MnDOT's chief auditor, called that "extraordinarily risky" for the state in a review of MnDOT's building contracts that was conducted jointly with Administration. Without a contract between the state and its consultant, the audit says, "neither party is bound to fulfilling any contractual obligation." And if disputes surface, "an increased risk of litigation may result."

MnDOT considered the risk low. It said in one internal document that if the number of violations is rising, "it may indicate that laws and policies need to change" -- not contracting practices. Not everyone at MnDOT thinks it has come to that.

Bruce Biser, assistant director of management operations, said the agency hasn't tried hard enough to live within the law. "We just blow it off, and that's not my style," he said. "We need to put emphasis on dotting our I's, crossing our T's, in a timely fashion." He added that if the regular contracting process jeopardizes the department's basic mission, then changes in the law should be considered. "But you've got to give it your best effort, and we haven't done that," he said.

Pawlenty said his administration will review the contracting rules and procedures to see whether they make sense, "because one of the things we're going to do at MnDOT is . . . ask them to try to deliver projects more effectively, more efficiently and quicker. . . . Once we're convinced that the rules are appropriate, we've got to follow them." An aborted project in Arden Hills illustrates the risk of taking shortcuts.

MnDOT was planning to help redevelop the abandoned Army Ammunition Plant there, working with the city, the National Guard and Ramsey County.

Two years ago, a MnDOT project manager broke the law by telling Short Elliott Hendrickson to start design work on the project even though the $60,000 contract wasn't signed. The firm finished the job, but the city pulled out of the arrangement.

Here's how MnDOT explained the situation in a memo to Administration: "In a nut shell, Mn/DOT was going to participate in this project, the vendor started work and as the contract progressed, partners changed their minds on participation. Mn/DOT backed out of the project and now we have this contract to cover the work that was done that we agreed to fund, prior to our backing out. Messy."