Network entrepreneurs turned water service and municipal challenges into a far-reaching business
The network: How government, politics and enterprise intersect in this region. Today, the last of the three-part series: Expansion
September 14, 2010 4:00 AM
By Rich Lord Pittsburgh Post-Gazette
The appearance of a $5 line warranty charge on most Pittsburgh Water and Sewer Authority bills in January, and every month since, came after longtime friends and sometime business partners took a competitively bid contract and rewrote it rather than rebidding it.
The warranty contract, which became the subject of lawsuits and the attorney general's scrutiny, went to Utility Line Security, LLC. ULS is one of a group of firms created by government veterans who are no strangers to politics and often operate in spaces where strict competitive bidding isn't required. Praised for their professionalism by clients and others in government, the firms sometimes draw criticism for the ways in which they win the work.
Also born from relationships, rather than a competitive process, is the contract under which Wilkinsburg-based Resource Development and Management runs the Municipal Authority of Westmoreland County. The contracts under which Braddock and Rankin get RDM's advice on their distressed finances, meanwhile, are products of an abbreviated competitive process permitted under state law.
Some of the professionals running those firms left government service and promptly gained roles as government consultants. Their most longstanding business, RDM, is a cornerstone of an informal network of lawyers, developers, managers and financiers who do business with government, and who have been involved in politics. Some of RDM's principals have created other firms, including ULS, which contracts with utilities to provide water and sewer line warranties to households.
How government, politics and enterprise intersect in this region
Rich Lord covers local government and politics. From 2005 through 2009, he was primarily responsible for covering city of Pittsburgh government, and he was part of a team of writers that won a Golden Quill Award for coverage in 2006 of Mayor Bob O'Connor's illness and death. Mr. Lord has been writing about Pittsburgh's civic issues since the mid-1990s, working for a variety of publications. In 2004 he wrote a book on the subprime lending industry, "American Nightmare: Predatory lending and the foreclosure of the American Dream."
Daniel Marsula has been a staff artist in the editorial art department of the Pittsburgh Post-Gazette since 1990, after working 14 years at the Pittsburgh Press. He has been recognized by the Press Club of Atlantic City, receiving the prestigious National Headliner Award eight times, and has won numerous design and illustration honors, including from the Society of News Design, Pennsylvania Newspaper Association and Golden Quill Awards.
RDM, going on 20 years old, manages the water systems for Johnstown, Sewickley, the Petrolia area, most of Westmoreland and slivers of Allegheny, Armstrong, Indiana and Fayette counties. It has gotten state contracts to advise six distressed municipalities, and to help keep 11 other local governments out of the red. It staffs the Redevelopment Authority of McKeesport and the boroughs of Whitaker and Blawnox.
Pittsburgh Councilman Doug Shields has publicly criticized the process by which ULS got the warranty contract, the year after RDM got a contract to analyze Pittsburgh Water and Sewer Authority operations.
"These folks are making a lot of money on the public," Mr. Shields said. "How is it that RDM has their finger in so many government pies?"
"I think they've done a very good job in how they've managed the municipal authority," Westmoreland County Commissioner Tom Balya said. He fought against the municipal authority's first long-term contract with RDM in the mid-1990s, but now admires the results. "We're proud that the Municipal Authority of Westmoreland County now serves people of five counties."
RDM President Joseph M. Hohman said he has heard criticisms of the ways his firm gets work. He contended that it's not the businessman's job to tell prospective client to first issue requests for proposals, or RFPs, from multiple firms. "[S]peaking from a marketing standpoint, when those opportunities present themselves, I don't say back to the municipality, 'Well, I really think you ought to RFP that.' "
The results speak for themselves, he said. "We have never lost a client, and quite frankly, I think you'd be very hard-pressed to find a client that has not felt that we have provided them with excellent service."
A steady pipeline
When the water or sewer lateral connecting a city of Pittsburgh house to the utility main fails, it is now, by and large, Utility Line Security's job to fix it. For that, the firm gets $5 a month from most Pittsburgh Water and Sewer Authority customers, the exceptions being those who live in large apartments, opt out of the program or fail to pay their bills.
That arrangement has been challenged in civil court and pilloried in Pittsburgh City Council hearings, because the charge was placed on ratepayers' bills without their prior consent. Despite that, ULS had retained, at mid-year, 69 percent of the customers it was granted at the beginning of the year. Of the remaining 31 percent, around half opted out, with the rest falling delinquent on their bills.
If that retention rate continues, it means roughly $4.7 million a year in payments for ULS, headed by Christopher H. Kerr, who is also vice president of operations for RDM.
Some praise ULS's work. At mid-year, it had covered 501 water or sewer line repairs. It also disconnected 101 storm drains from the city's sanitary sewers, taking a step toward fixing the previously unaddressed problem of illegal flows of stormwater into the wastewater system.
"In North Euclid [Avenue, in East Liberty] there was a ULS fix, and it stopped a recurring sinkhole," said Councilman Patrick Dowd, a member of the Pittsburgh Water and Sewer Authority board who has supported the controversial warranty program. A woman called to thank him after the warranty saved her from a potential $10,000 sewer repair bill. "I have yet to hear dissatisfaction with the service that's being provided."
That said, Mr. Dowd said he felt burned by disclosures of relationships that came only after the authority's Executive Director Michael Kenney worked out the details of the program with Mr. Kerr. The month after the authority's board approved the current ULS contract, board members learned that Mr. Kenney and Mr. Kerr are good friends, past colleagues, and former co-shareholders in a company called Utilishield that offers warranties similar to ULS's product. (Utilishield's customers, unlike ULS's, must opt into the warranties.) Later, Mr. Kenney disclosed that prior to coming to Pittsburgh, he had occasionally moonlighted as a paid consultant for RDM, helping to prepare reports for small water providers.
"The executive director needs to disclose more information more forthrightly, in a timely manner," said Mr. Dowd, who called for Mr. Kenney's resignation in March.
Utilishield was created in 1997 and owned primarily by RDM shareholders, including Mr. Hohman. Created June 11, 2009, ULS shares most of its shareholders with RDM, but its ownership does not include Mr. Hohman or James J. Dodaro, who is RDM's executive vice president.
A month after its creation, ULS won a competitive process against incumbent firm Linebackers Inc., for the right to offer city ratepayers the chance to opt in to water and sewer line warranties. By December, the water authority and ULS saw that just a small percentage of customers were opting in.
The authority and ULS renegotiated the contract so the ULS warranty would be assigned to all ratepayers, who could opt out and get a refund if they didn't want the coverage. Authority officials explained later that they felt that issuing new requests for proposals and weighing new bids for the opt-out warranty would take too long.
In February, a Washington's Landing resident filed a class action complaint in Allegheny County Court of Common Pleas against the authority, later adding ULS as a defendant. In May, Dominion Products and Services, which offers water and sewer line warranties, filed a civil complaint alleging illegal interference in an existing business, and violations of state laws governing authorities. State Attorney General Tom Corbett's office is reviewing whether the opt-out arrangement is consistent with consumer protection laws.
Utilishield's opt-in warranties have been offered to customers of the RDM-managed Municipal Authority of Westmoreland County since 2006, and the firm collected $110,674 in premiums from that relationship last year. The Greater Johnstown Water Authority allowed Utilishield to market to its customers starting in 2008, and last year those of its customers who opted into the warranty paid $4,537 to the firm.
Mr. Hohman said that a warranty can help get a customer's water service fixed promptly, so a stoppage that "may be days can be limited to hours."
RDM's incorporation papers are dated Dec. 3, 1991. Three weeks later, Mr. Hohman resigned from the post of Allegheny County development director, and newspapers reported that his new firm got a contract to consult for the Municipal Authority of Westmoreland County, which had previously been managed by a unit of American Water for 50 years. Three weeks after that, that pact was inked, and RDM had a three-year mission to train authority personnel to manage themselves, for $700,000 a year.
Mr. Hohman attributes that quick win to a Fall 1991 profile of him in Saint Vincent, the magazine of his alma mater, St. Vincent College. Another alumnus, Al Gaudio, who was the municipal authority's solicitor at the time, saw the article and called him to advise that the board was "seriously looking at making a change in their management," Mr. Hohman said.
Mr. Hohman lined up a team that included a former director of the Pittsburgh Water and Sewer Authority, a former Allegheny County Health Department director, and an accountant.
Mr. Dodaro's law firm shared office space with RDM from its earliest days, and he joined the consulting company later, working on what he called the "government relations component."
Mr. Dodaro was a law partner in the 1970s of Stephen A. Zappala Sr., who was elected to the state Supreme Court and was its chief justice in 2002. Justice Zappala said he never helped RDM. "Emphatically, the answer is I had nothing to do with RDM, and if you suggest otherwise, you'll be hearing from me."
In 1991, the Municipal Authority of Westmoreland County didn't request proposals from competing management firms, "but I looked around," before recommending RDM, said Mr. Gaudio.
"There was informal discussion -- one board member, another board member, not at an open meeting -- of what we could do and what our options were," said Mr. Gaudio, who was the authority solicitor throughout the 1990s but has no affiliation with it now, in a recent interview.
State law doesn't require competitive bidding for professional services, and agencies' policies vary on whether to seek and weigh multiple proposals before picking lawyers, managers, bond underwriters, architects and other white collar contractors.
"My attitude [then] was the same that it is," said Mr. Gaudio. "Whatever restrictions there are in the law, follow those restrictions. I saw nothing to gain by [requests for proposals], or advertising for professional services."
At the end of the second of two short-term contracts to train authority personnel to manage themselves, a municipal authority board majority and RDM negotiated a new pact, for 14 years, at a fee that would start at $750,000 annually. Gone was any reference to RDM training the authority to manage itself. Instead, RDM would manage. The contract required that the authority's top employee, Mr. Kerr, jump from public servant to consultant at the private firm.
Mr. Kerr "wanted to do other things," said Mr. Hohman. "He wanted to be with a company that could give him opportunities, but still in the water business." Jumping to RDM allowed Mr. Kerr to do that, while still serving in Westmoreland County, where he lives.
One authority board member, Arthur J. Boyle, objected to the long-term contract and led a group of plaintiffs that sued to nix it. The lawsuit alleged that Mr. Kerr, while still a municipal authority employee, negotiated an authority contract in which he had an interest. It also argued that extending RDM's role for 14 years -- far beyond the terms of any board members or county commissioners -- was illegal.
Backed initially by Commissioner Balya, the plaintiffs won in Common Pleas Court, but lost on appeal to the Commonwealth Court. The state Supreme Court in 2002, acting per curiam, or as a whole, declined to hear the case.
Mr. Balya is now a fan of RDM's work.
"They are fairly innovative in trying to make sure the technology in our treatment plant is as up-to-date as possible," he said. "Rates are reasonable."
The authority's rates fall roughly in the middle of those charged by utilities statewide, higher than Monroeville's or West View's, but lower than Pittsburgh's or Pennsylvania American Water's charges.
There's drought on one side of the hill, and Flood City on the other..
That's the sales pitch for a proposed 16.5 mile pipeline between Ligonier Borough and Johnstown, one that would link two water systems managed by RDM, and potentially open up new markets. The catch is that the state or federal governments could be asked to pay around two-thirds of the estimated $9.82 million cost of the pipeline, as envisioned in a funding application made to the state Department of Community and Economic Development in April.
The public policy logic for the pipeline: Johnstown's loss of population and industry has left its water plant with 8 million gallons a day of excess capacity. Ligonier Borough's water system, by contrast, "is in decline and is becoming inadequate," according to the state application.
The business logic: If RDM could pump some of Johnstown's extra water to the top of Laurel Hill, gravity could carry it down to the Stahlstown and Donegal areas, Latrobe and a proposed South Huntingdon Township power plant that would demand 6 million gallons per day. "[I]t's just a very strategically key infrastructure project that we'll, over time, be able to move in a number of directions," Mr. Hohman said.
That would give RDM the opportunity to sell more of its clients' water, and possibly win more water system management contracts, as it has since been doing since 2002.
That year, the Greater Johnstown Water Authority decided to seek competing proposals after its system had been run for nearly four decades by Laurel Management Co. "We thought we were being short-changed" by Laurel Management, said authority board chair Ed Cernic Sr., a Johnstown-area businessman and friend of Gov. Ed Rendell whose son is the Cambria County controller.
The authority got proposals from three firms: RDM, Laurel and American Water Services. American Water came in cheapest, at $18 million over five years, with RDM at $19.5 million and Laurel at $27.6 million. In raucous public hearings, employees urged the authority board to stick with Laurel, while a few board members argued for taking the lowest bid. But based on a rating system that took into account a range of factors, a board majority voted for RDM.
Unlike its Municipal Authority of Westmoreland County role, in which it handles only upper management, in Johnstown RDM is the employer for the entire water system staff.
"It's working out beautifully," Mr. Cernic said. "The manager we had before wasn't aggressive, like RDM is. ... Now we're reaching out in different directions, getting new customers."
In November, the authority did not see the need to conduct another competitive process before giving RDM a renewal that will pay it $4.3 million this year.
The Sewickley Water Authority did not seek competing proposals before choosing RDM to provide management services, starting Sept. 1, 2009. RDM's staff "met with a small group of our board members, and they were very, very professional in the way they presented themselves to us," said authority Chairman Donald J. Kipke. "We really felt comfortable with them."
The resulting contract pays $90,000 a year, plus inflation-based increases. Management is handled mostly by Brian Hohman, an RDM project manager who is Joseph's son.
The Petrolia-based Petroleum Valley Regional Water Authority heard about RDM from Latrobe-based Gibson-Thomas Engineering Co., which is the consulting engineer for the Municipal Authority of Westmoreland County. It is set to pay RDM $147,519 to manage its authority this year.
"We interviewed [RDM], and talked to them and everything, and they came highly recommended," said Jeff Shumaker, the authority's board chairman. "Also, RDM runs so many other water things, and they're affiliated with enough other water companies, that if we need a generator or a pump, they can get one really quickly."
Mr. Kenney left the assistant manager's post at the Municipal Authority of Westmoreland County for the top job at the Pittsburgh Water and Sewer Authority in 2008. In doing so, he left a job working under the supervision of his former colleague and business partner, Mr. Kerr, a vice president at RDM.
Five months later, after reviewing the credentials of several consulting firms, Mr. Kenney hired RDM to review his new employer's operations and suggest improvements. That assignment gave RDM an inside look at the Pittsburgh water system -- an asset that could soon be the subject of privatization and contracted management.
"Certainly, there's been a lot of talk about the sale," of the Pittsburgh water system, Mr. Hohman said. RDM wouldn't want to buy the authority, he said, but might want to run it. "Would I look for opportunities on the management side, on the contract operations side? Absolutely."
RDM's 83-page report on the Pittsburgh authority, for which it billed $85,000, includes politically sensitive suggestions like eliminating the requirement that authority employees reside in the city, and shifting engineering work from big engineering firms to in-house professionals.
The report takes on politically involved engineering firm Chester Engineers, which counts as its representatives the former campaign manager for Allegheny County Executive Dan Onorato and former Pittsburgh Councilman Joe Cusick. Chester Engineers got $12.5 million from the authority from 2006 through 2008, according to RDM's report, and "a great deal of activity" done by Chester and other firms "could be handled in-house."
"I will not tell people, in reports that we do, what they want to hear," said Mr. Hohman. "I will tell them what they need to hear."
RDM has gotten contracts to help boroughs, small cities and rural counties to avoid fiscal distress. Though some weighed different firms' proposals before picking RDM, state law doesn't require that governments seeking "early intervention" consulting conduct a competitive process first.
For such projects, RDM has shored up its staff by hiring, as paid consultants, local officials. It has brought on as consultants Mt. Lebanon police and fire officials, an Allegheny County personnel manager, and a former administrator from the city of McKeesport.
Sometimes the firm offers to governments the consulting wisdom of familiar faces, as it did in a 2005 pitch to Lawrence County that included on the proposed team Robert T. Callen, formerly of the Lawrence County Economic Development Corp. It later hired Mr. Callen as a senior project manager, and he now runs the Redevelopment Authority of the City of McKeesport, for which RDM is paid $54,996 a year.
RDM has been picked by the state to coordinate the recoveries of six distressed municipalities: Braddock, Rankin, Greenville, Homestead, East Pittsburgh and North Braddock. Those last three it led out of distress. The state shifted Greenville's oversight contract to another consultant in 2006, and Braddock and Rankin remain under RDM's guidance.
From 2005 through 2009, the state contracted to pay RDM $423,865 to consult and oversee distressed municipalities. For the fiscal year that ended June 30, the state agreed to pay RDM $53,600 to oversee both Braddock and Rankin.
Doug Marguriet, manager of North Braddock Borough, called RDM "very professional. ... They prepared an action plan and helped the borough implement the action plan.
"It was a combination of reductions in expenditures and aggressively collecting delinquent taxes and fees, and that combination worked and enabled the borough to exit distress."
Under state Act 47, which governs efforts to restore distressed municipalities, the process of choosing a coordinator is exempt from normal procurement rules. Fred Reddig, executive director of the Governor's Center for Local Government Services at the Department of Community and Economic Development, said that's because when a municipality is in distress, the choice of a coordinator must occur on "a very tight time frame."
Mr. Reddig said the state will often give competing consulting firms 10 to 14 days to submit proposals to coordinate a newly distressed municipality, and the requests generally draw around a half dozen firms. "We'll review them," he said. The department will then pick a firm based on experience, capacity, and "unique issues that we've identified with respect to that community."
RDM doesn't win them all, even in its home region. The firm put in a proposal in 2003 to be the city of Pittsburgh's Act 47 coordinator, but lost out to a combination of law firm Eckert Seamans and finance firm Public Financial Management Inc. Eckert Seamans also won the job of coordinating Johnstown's recovery.
"Politics does not play a role" in the choice of a recovery coordinator, said Mr. Reddig. "It's the skill set that they can bring to the table."