The network: How government, politics and enterprise intersect in this region
First of a three-part series
September 12, 2010 4:00 AM
Consultant John Verbanac, left, talks with Jim Hassinger and Charlie Camp before a meeting of the Southwestern Pennsylvania Commission.
By Rich Lord Pittsburgh Post-Gazette
If you paid taxes in Allegheny County in the last 20 years, a sliver of the bill went to members of an informal network of people whose businesses make millions providing services to government, while some simultaneously play roles in politics.
Stop at one of Pittsburgh's new, energy-efficient traffic lights, and you're looking at the work of a company co-founded by a member of that network, built significantly on tax dollars, and then sold for millions to an out-of-town corporation.
Pay a water bill in Pittsburgh, Greensburg, Johnstown or Sewickley, and a portion trickles down to members of that same network, building to a multimillion-dollar flow. A contract that produces a stream of that flow is under scrutiny by the state attorney general for possible consumer protection law violations by the Pittsburgh Water and Sewer Authority, and is the subject of two civil lawsuits.
The Pittsburgh Post-Gazette, for six months, has explored an informal network of managers, lawyers, consultants, financiers and other professionals that has evolved over 20 years and affects how your government operates, and what it costs. The newspaper's findings will be published over three days, and illustrate the way government, politics and enterprise intersect in this region.
While not the only such network in the region, the one including former Turnpike Commissioner James J. Dodaro, businessman Charles R. Zappala, consultant John J. Verbanac and others is notable for its endurance, evolution and impact on the region's governance.
How government, politics and enterprise intersect in this region
PART I / EVOLUTION A disparate group of Allegheny County government veterans and business people comes together
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.
Mike Dawida, a former Allegheny County commissioner who teaches at California University of Pennsylvania, said some of the network's members supported his successful campaign in 1995, and "were always pitching something" during his four-year term. "They didn't ever do anything illegal," he added, and government is "what they know better than anybody else."
"They're amiable. They're charming. They live lifestyles that are enviable," he said. "These weren't bad guys, but they weren't necessarily in it for the good of the people."
The network emerged from the late Allegheny County Commissioner Tom Foerster's 1980s administration, evolving into a collection of professionals linked by family, business, lawyer-client, political and industry affiliations.
"That governmental network was something that led to the genesis of a lot of the things that we've been able to do," said Mr. Dodaro, whose firms have been involved with many regional developments, from the construction of schools and the management of water authorities to the emergence of North Braddock, Homestead and East Pittsburgh from fiscal distress.
He added that people who have served in government sometimes face a perception issue when they leave. "When relationships assist them in developing business contacts, it's called political. When it occurs in business, it's called networks."
Network interactions with government continued through changes in control of Allegheny and Westmoreland county governments, the elections of Allegheny County Executive Dan Onorato in 2003 and Pittsburgh Mayor Bob O'Connor in 2005, and the 2006 ascent of Mayor Luke Ravenstahl upon Mr. O'Connor's death.
Pittsburgh Controller Michael Lamb has clashed with members of the network. That happened most recently in March, when he wrote to Southwestern Pennsylvania Commission leadership in regard to an $84,000-a-year contract that agency has with Mr. Verbanac, and then received a critical e-mail from Mr. Zappala, a former SPC commissioner.
"The problem is," said Mr. Lamb, "when you've got individuals who portend to have some special relationship or some influence over public process, or some special relationship to a public entity, that hurts the entity's credibility."
Some laud their work, saying they bring invaluable expertise to governments that are strapped for expertise and money.
"I view them as sharp businessmen trying to do business," said Rowan Miranda, who served as budget director for the city of Pittsburgh and, later, Allegheny County in the 1990s, and now is associate vice president of finance at University of Michigan. "I don't view these folks as people out to subvert the public interest."
Deep roots in the county
The Post-Gazette obtained contracts, examined business and court records, tracked campaign contributions, and conducted interviews in an effort to understand, map out and describe the network.
The Post-Gazette documented $32 million in payments to network-related businesses by Western Pennsylvania municipalities or agencies, or by the state on behalf of area governments, from 2005 through 2009. The biggest contract was one held by Wilkinsburg-based Resource Development and Management, which was paid $19.53 million during that period to handle all operations of the Greater Johnstown Water Authority. Other pacts that paid seven figures over that period were RDM's contract to provide upper management to the Municipal Authority of Westmoreland County, and CLT Efficient Technologies Group's agreements to help governments including the city of Pittsburgh and the West Mifflin Area School District to shave their energy costs. CLT, co-founded by Mr. Zappala, was bought by Baltimore-based Constellation Energy last year for $20.8 million.
The Post-Gazette also identified 31 local bond deals with which network financiers were involved since 2001. Some brought in six-figure underwriting fees. Network members have since left the bond underwriting business.
Some of the involved individuals resist any suggestion that they are a network that has had an impact on the region.
"Define for me who would be involved out of the Foerster era," said former state Supreme Court Chief Justice Stephen A. Zappala Sr., whose brother, Charles, has been involved with finance, development and energy savings companies. "I was part of [the Foerster administration], but I left the administration, and went on the Supreme Court in 1982. ... I'm kind of lost. I don't know what you would mean as far as impact."
With origins in Allegheny County's bureaucracy, the network's involvement with the region's largest government has ebbed and flowed, and manifested itself in many ways. Network members or related businesses have invested county pension money, underwritten bond debt, counseled county council on legal matters, taken seats on authority boards, and obtained fees from sheriff's office bank deposits.
Asked about network business with the county under his watch, Mr. Onorato said that no one has gotten special treatment. "Anybody wanting county business, you've got to go bid, you've got to win it on the merits, and don't call this office," he said.
One hard-fought contest on Mr. Onorato's watch, for the job of auditing energy use at the Allegheny County Airport Authority, went not to network-related CLT, but to a competitor.
Mr. Onorato said his insistence on bidding has sometimes angered some who have sought county contracts, whom he would not name. "Did I have examples over my six and a half years where people complained? Yes," he said. "I've had that happen more than once."
The network's many interactions with Allegheny County government reflect its roots in the middle period of Mr. Foerster's seven terms as a commissioner, when two friends ran county development efforts.
Mr. Dodaro said in a recent interview that he was a young man when he was introduced to Stephen A. Zappala Sr. by a mutual friend. They became close enough that Frank Zappala, the justice's father, sponsored Mr. Dodaro's application to Duquesne University School of Law.
"Throughout law school, I remained in contact with Steve Zappala Sr.," Mr. Dodaro said, and in 1969 he joined the law firm Zappala & Zappala. "Law and government was kind of my interest and ... the direction I really wanted to take."
Mr. Dodaro and Stephen A. Zappala Sr. became law partners starting in 1978 in a new firm specializing in municipal solicitorships, along with John F. Cambest. Mr. Zappala and, later, Mr. Dodaro worked their ways up to the top development post in Allegheny County, followed by Joseph M. Hohman.
Mr. Zappala left the county to follow his father, a state representative and then district judge, into the judiciary, reaching the Supreme Court in 1983 and serving as its chief justice for one year, 1992, before retiring.
Mr. Dodaro was promoted to director of development in 1979. Five years later, he was elevated by Mr. Foerster to county solicitor, and appointed by state officials to the Turnpike Commission.
Mr. Zappala said in a 1998 interview with the Post-Gazette that his recommendation helped get Mr. Dodaro a seat on the Turnpike Commission, but in a recent interview the justice said he had no recollection of that. Asked whether he viewed it as appropriate to help advance friends or family while in public office, Mr. Zappala said, "I have no public thoughts on that."
Mr. Dodaro said that the justice's role in the nomination may have been informal, springing from the Senate confirmation process. "There are individuals in the Senate, who obviously, at the time when my name came up, did not know me, who may have known the chief justice, and may have known of my relationship to him, and may have called him" for insights, Mr. Dodaro said.
Outside of government, Charles Zappala co-founded the finance firm Russell Rea Zappala & Gomulka in 1982, one of numerous businesses -- including several with names including the initials RRZ -- with which he would be involved.
Charles Zappala declined to be interviewed, saying reporting on a network and its history "makes no sense to me." He asked for written questions, and the Post-Gazette posed 34 questions about his views on local governance, involvement in businesses that worked for public entities, appointments to public boards, participation in electoral politics, interactions with administrations, and business relationships with other network members. His attorney, Richard A. Sprague of Philadelphia, responded that the questions "go into personal matters" and that Mr. Zappala would not discuss personal matters.
RRZ Public Markets Inc., a bond underwriting firm, built a strong local base. An Internal Revenue Service document listing 82 governmental debt deals done by RRZ from 1989 through 1997 includes 63 done for Western Pennsylvania agencies, including the Municipal Authority of Westmoreland County, Allegheny County Sanitary Authority and Allegheny County Institution District. Among other clients listed was the Turnpike Commission.
By 1990, Mr. Dodaro, Mr. Hohman and development department administrator Joseph G. Brimmeier were, as veterans of the county politics of the time put it, "the up-and-coming young Democrats." In 1991, after a contentious race for county prothonotary split Foerster administration insiders, Mr. Dodaro and Mr. Hohman left, as solicitor and development director, respectively.
"Mr. Foerster and I had a long conversation prior to my leaving, and he in essence said, 'Joe, as long as you want to be here, you can be here,' " Mr. Hohman said in a recent interview. He said he and Mr. Foerster "were probably not interfacing as much as we [had previously] on a daily basis ... It just felt like the right time to make a move."
Mr. Hohman formed RDM on Dec. 3, 1991. Mr. Dodaro later became a shareholder and is now its executive vice president. Completing the incorporation paperwork was William G. Brucker, who then was the law partner of Stephen A. Zappala Jr., now the Allegheny County district attorney.
Six weeks later, RDM won its first contract, which paid $700,000 a year to manage the Municipal Authority of Westmoreland County. RDM's client list would subsequently grow to include numerous water authorities, municipalities and counties -- though not Allegheny County.
County changes, network adjusts
Years of relative calm in county government gave way in 1995 to a decade of turbulence. Even as Allegheny County's leadership and structure changed, shifting arrays of network members continued to do business with it.
In 1995, Mr. Dawida beat Mr. Foerster in the Democratic primary, with, he said, some help from the network. "They were for me, I think, but not in such a gigantic way that anybody would notice," Mr. Dawida said, "but mostly because they were against Foerster."
That year, Republicans won the majority on the three-seat commission. After 19 months of Republican control, Mr. Dawida in 1997 teamed with Republican Bob Cranmer to form a bipartisan commission majority.
Mr. Dawida said he doesn't think his backers got much back for their support during his tenure. "They probably wanted more than I was willing to give," he said. "They didn't ask me anything illegal."
Greg Zappala took from his uncle, Charles, a lead role in RRZ Public Markets during that period, and the firm gained a role in county bond deals in 1996 and 1999.
Mr. Brucker became outside legal counsel to the office of the district attorney, who is his former partner, Stephen A. Zappala Jr. Mr. Brucker's firm has earned between $44,900 and $69,600 advising the district attorney's office in recent years. Mr. Brucker also is the district attorney's longtime campaign treasurer.
Mr. Brucker would not comment on his role with the district attorney's office, other than to say it is a matter of public record. Asked about his role in incorporating network-related businesses, he would not comment, other than to say, "I ask you as a private citizen, why you are invading my privacy as a private citizen?"
Mr. Cambest -- the third partner in the 1970s law firm Zappala Dodaro & Cambest, and now with Dodaro Matta & Cambest -- became the solicitor for Democrat-dominated county council. In recent years, Mr. Cambest has earned between $38,500 and $82,500 a year for his work for county council, one of dozens of governmental clients his firm serves.
Mr. Cambest's roles as lawyer for the bipartisan council and, separately, for the Allegheny County Democratic Committee is a combination deemed "unseemly" by former Councilman Dave Fawcett, an attorney who served as a Republican but has since become a Democrat. "The general citizen would think that something's not right with that picture."
Mr. Cambest said there is no conflict between the roles.
"I've not been involved, to my recollection, with any election disputes or contests between county council people," he said. "Normally, those are done with independent counsel."
His committee role is "purely inside Democratic Party politics."
Such a dual role typically "makes people uncomfortable," but isn't necessarily a conflict of interest, said Professor Geoffrey C. Hazard Jr., a legal ethics specialist at the University of Pennsylvania Law School. "There could be conflict between the fiduciary responsibility of the county council and the more partisan interest of the party. But if the lawyer stays out of [that matter], that would be a normal practice."
Mr. Cambest also earned around $15,000 a year doing legal work for former Clerk of Courts George Matta, before the clerk's office was eliminated in a round of row office reductions.
Mr. Cambest "was a personal friend [whose] firm has high qualifications within the legal community" with "ability to understand county government," Mr. Matta said in a recent interview.
Asked whether he was part of a political-business network, Mr. Matta said, "I'm not sure whether I was or not."
Mr. Matta is now development director for the Rivers Casino, one of three slots businesses that have formed the Pennsylvania Casino Association. That association previously counted former Justice Zappala as its chairman and director, and he said he continues to assist it on an as-needed basis. Mr. Matta's brother, Gary, is Mr. Dodaro's and Mr. Cambest's current law partner, just as Mr. Zappala was in the 1970s.
Retirement fund losses
The county's Retirement Board governs its pension investments, and in 2000, its seven members included four elected officials: the Republican County Executive Jim Roddey, and Democrats George Matta, Treasurer John Weinstein, and then-Controller Onorato.
That year, the board decided to diversify its portfolio. Two firms with ties to the network joined six others in winning management of county pension investments.
Charged with investing a $75 million chunk of the fund was RRZ Investment Management, one of Charles Zappala's business interests. RRZ's negotiated annual fee -- initially $300,000 based on a $75 million balance -- was not the highest of the fees, which were negotiated based in part on the type of investments each manager would make.
Trusted with a $31 million share was MDL Capital Management. Its different annual fee entitled it to $66,500 a year based on that initial balance. Disclosures filed by MDL with the Securities and Exchange Commission show that a non-controlling stake in the firm was held first by Charles Zappala, and later by Janus-St. George Group Ltd., for which state records list Mr. Zappala as president.
The Retirement Board took its funds away from RRZ in 2002, in part because of the retirement of a firm manager. RRZ's county portfolio had dwindled to $43 million, roughly mirroring overall stock market declines.
"We canceled their contract, for performance," Mr. Roddey said recently. Among his many civic roles, Mr. Roddey is the paid alternate arbitrator for the close corporation agreement governing Block Communications Inc., which owns the Post-Gazette.
Mr. Onorato, then still controller, was the lone vote against dismissing RRZ. He said recently that his vote was driven by a sense of fairness.
"Everybody lost money at the time," Mr. Onorato said. "I had questions about how they were reviewing the performance of all of the money managers ... When do you pull the trigger? Why not [withdraw from] everyone who was losing money?"
MDL, run by Mark D. Lay, from Aliquippa, also won investment contracts from the Port Authority, several state agencies, the University of Pittsburgh and the Ohio Bureau of Workers' Compensation. But his firm lost hundreds of millions of dollars in Ohio tax dollars through risky investments outside of agreed-upon guidelines.
MDL in 2005 was earning quarterly fees of around $13,000 on a Retirement Board portfolio that had wilted to $22.5 million. Mr. Onorato was in his second year as county executive, and said he joined other Retirement Board members in deciding to pull the funds out of concern that MDL's problems in Ohio would sink the entire firm.
Indeed, they did. Mr. Lay was charged with fraud, found guilty in 2007, and sentenced to 12 years in federal prison.
A rising star
Dan Onorato was a city councilman from Brighton Heights in 1998 when West Deer businessman Rock Ferrone first heard about him from Charles Zappala and Edward J. Grattan, with whom Mr. Ferrone was negotiating a possible business venture.
"Grattan called me," Mr. Ferrone recently recounted, "and said that Charlie Zappala had this rising star named Dan Onorato whom he was supporting for [county] controller and who he thought was going to be governor some day."
Mr. Ferrone never consummated the partnership, nor did he become a fan of Mr. Onorato. He has an ongoing lawsuit alleging county sabotage of his development efforts.
Charles Zappala donated $10,000 to Mr. Onorato's 2003 campaign for county executive. There are no limits in Pennsylvania to contributions to county or state campaigns. Under campaign finance limits Mr. Onorato proposed in 2009, but which county council hasn't acted on, an individual would be allowed to donate no more than $2,000 to a countywide candidate in a primary, and then again in the general election.
In the first month of Mr. Onorato's first term, in a rare double appointment, the new executive nominated Charles Zappala to seats on the Regional Asset District board and Southwestern Pennsylvania Commission.
"For RAD, I was trying to bring in some business people," said Mr. Onorato. "Charlie had an interest there."
Regarding SPC, which plans regional transportation improvements, Mr. Onorato said there was "good synergy" between the agency and Mr. Zappala, who has long been interested in development.
Mr. Zappala in 2005 co-founded Summa Development, where he works with Mr. Verbanac, who has since 2000 been a communications consultant to the SPC. Mr. Zappala resigned from both boards when he became involved in an ultimately unsuccessful bid to win a slots license.
Also in January 2004, Mr. Onorato nominated Mr. Dodaro to the Port Authority board, a seat he still holds. Mr. Onorato noted recently that Mr. Dodaro has transportation experience from his years on the Turnpike Commission, and his knowledge has proved useful in the Port Authority's effort to forge public-private partnerships to develop park-n-ride lots.
Mr. Roddey said that those two nominees share a history of turning board appointments into fundraising clout. "Their modus operandi has been to get business from the county, or to serve on boards where they can have access to companies that can donate ... to board member causes," said Mr. Roddey. "I'm not saying that they're not good board members, or that they've done anything wrong."
Mr. Onorato said his hundreds of appointments should be judged as a whole, not based on a handful of picks. He said he has bolstered boards' gender, race, age and economic diversity. In 2006, he ordered the administration to track the age, gender, race, disability status and ZIP code of all board members.
Some of his appointments have drawn fire from county council Republicans, though some reluctantly voted for them.
"It seems like it's the same pattern of people who are connected," said Councilman Vince Gastgeb, R-Bethel Park. "I think you might be better served by appointing people who aren't politically tied."
Ties and bonds
As Mr. Onorato was campaigning for executive in 2003, Greg Zappala sold home-grown RRZ Public Markets to New York-based J.P. Morgan Securities, where he became the local managing director with an office in Cranberry.
In 2004, as Mr. Onorato's administration prepared for its first major bond borrowing, a $170.8 million debt package, it asked for bond underwriting proposals from 20 investment banks. Sixteen responded.
The administration gave the senior underwriting role to J.P. Morgan Securities, granting subordinate roles to six other firms. Getting the lead role gave J.P. Morgan the largest share of the $683,340 in underwriters fees paid from the proceeds. At 0.4 percent of the proceeds, the underwriters' share was the largest, as a proportion of the amount borrowed, of any comparable debt deal the county did from 2003 through 2008. It is smaller, though, than the share that underwriters got on a Goldman Sachs-led debt deal done for the county last year.
County Finance Director Amy Griser said the administration chose J.P. Morgan to lead the effort because it wanted a Wall Street firm with a lot of capacity. The county, she said, was guided by its one-page underwriter selection policy requiring that it invite all known underwriting firms to submit proposals, then pick one based on price, experience, and the type and size of the borrowing.
Ms. Griser said the county could have set the underwriter's fee lower -- probably at 0.35 percent or 0.375 percent of the proceeds -- but decided that would not provide enough motivation to the firms, which are tasked with trying to sell the bonds at the lowest possible interest rate. She said the market was full of refinance deals at that time, and if the county's fee had been too low, the underwriters might have focused their efforts elsewhere.
Branches of J.P. Morgan served as underwriter and letter of credit issuer for a $30 million county borrowing in 2006. But the firm won no role in subsequent county borrowings. Ms. Griser said the firm submitted proposals to underwrite the other borrowings, but the administration decided to use Merrill Lynch, and then Goldman Sachs, as its Wall Street underwriters.
Greg Zappala, who has left the municipal finance business, declined comment.
"The one thing that I was adamant about," said Mr. Onorato, "was, keep it competitive, and make sure that one firm doesn't get to do it [all]."