Part of the network assumed an important role in city of Pittsburgh government and politics
The network: How government, politics and enterprise intersect in this region
September 13, 2010 4:00 AM
Cleveland developer John Ferchill has worked on several projects in Pittsburgh.
By Rich Lord Pittsburgh Post-Gazette
Second in a three-part series.
Luke Ravenstahl had never been at the center of a large-scale campaign, hadn't raised much political money, lacked seasoned advisers, and had modest experience with city management when he became Pittsburgh's mayor upon Bob O'Connor's death in September 2006.
Within months, some of those gaps were filled by members of an informal network of professionals who have played prominent roles in the region's politics and governance.
Charles R. Zappala offered advice on development, and an energy efficiency firm he co-founded sold the city its services. Allegheny County Democratic Committee Co-Finance Chair Edward J. Grattan, with whom Mr. Zappala has done business, became a central figure in the mayor's campaigns, eventually getting involved in fundraising. John J. Verbanac, who works with Mr. Zappala at Downtown-based consultancy Summa Development, served as political mentor to the mayor, unofficial personnel adviser to the administration, and liaison to some developers.
Mr. O'Connor's inauguration at the beginning of 2006, and then Mr. Ravenstahl's ascent, came while the fiscally distressed city faced many challenges, some of which created opportunities for network-connected businesses to serve -- and make money. Some of those businesses lowered city energy bills, underwrote debt packages, and advised the Pittsburgh Water and Sewer Authority. A firm for which Mr. Grattan sought opportunities won infrastructure engineering contracts.
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.
Mr. Verbanac served several roles.
In April 2007, for instance, he set up a legal evaluation of proposed terminations at the city's Urban Redevelopment Authority, monitored URA deliberations regarding a South Oakland development, and in an e-mail urged the mayor to reorganize administration staff "in one swoop." Recently, he has been involved in the mayor's efforts to resolve a pension crisis.
Mr. Verbanac is an $84,000-a-year communications consultant to the 10-county Southwestern Pennsylvania Commission, a member of Mr. Ravenstahl's fiscal roundtable, and a University of Pittsburgh trustee. His political experience includes stints as an aide to the late U.S. Sen. John Heinz, and later to former Sen. Rick Santorum, and his media savvy stems from time at Ketchum Public Relations, consultancy Brabender Cox, and a biweekly Harrisburg political publication called The Insider.
Asked about Mr. Verbanac's role with his administration, Mr. Ravenstahl said the reporter was "confused, and I'm not going to participate in your pursuit of something that doesn't exist. I'm insulted by it, to be honest with you.
"So I'm not going to respond to something like that. And if you want to quote that, feel free to. That's all I've got to say."
They 'have to go'
In February 2007, Mr. Ravenstahl predicted that the planned Bridgeside Point II biomedical building would epitomize "how we're going to revitalize this city." A product of Cleveland developer John Ferchill, its five floors of labs and offices are now almost fully leased out.
In some ways, discussions leading to the construction of the glassy box on the north bank of the Monongahela River have proved to be a pivot point in the city's redevelopment. They came at the beginning of a period of turnover among top development staff -- a leadership change in which Mr. Verbanac was closely involved.
The process that led to Bridgeside Point II started during Mayor Tom Murphy's administration in 2005, when the URA agreed to give a Pittsburgh developer, Madison Acquisition Co., a shot at building bio lab space in South Oakland's Pittsburgh Technology Center.
Madison Acquisition planned to spend $17 million building a shell to accommodate biotechnology labs, and then fit out the interior for millions more according to the needs of tenants expected to be linked to the university and medical community in Oakland. "I had a Pittsburgh architect, a Pittsburgh contractor and a Pittsburgh developer," said Blaise V. Larkin, president of Madison Acquisition, in a recent interview. "We didn't have any public money [in the financing plan]. Not one penny."
Two months into Mr. O'Connor's administration, URA officials disclosed in a city council hearing that Mr. Ferchill had similar hopes. Mr. Ferchill had proved himself locally during Mr. Murphy's administration, turning part of the old H.J. Heinz plant into housing, and building the first Bridgeside Point bio building in South Oakland.
The URA in early 2006 declined a plan submitted by Madison Acquisition, citing insufficient evidence of financing, and did not extend the firm's option to buy the site. "I objected vehemently," said Mr. Larkin, claiming that a term sheet he presented from a bank should have won URA acceptance. "There were some political rumblings that I didn't understand."
The URA instead worked with Mr. Ferchill's companies to redevelop the site, with Mr. Verbanac emerging as a liaison.
He was a key informal member of Mr. O'Connor's campaign and transition teams, according to several campaign officials and former city directors. Mr. Verbanac's attorney, William Pietragallo, wrote in a broad response to 21 questions from the Post-Gazette that Mr. O'Connor during his mayoral candidacy sought Mr. Verbanac's advice "on various matters and their friendship blossomed."
In 2006, with Mr. O'Connor in office, Mr. Verbanac denied to the Post-Gazette any "business interest whatsoever" with Mr. Ferchill, though he and the developer acknowledged knowing each other. In July of this year, Mr. Verbanac declined to be interviewed for this story, and Mr. Pietragallo's response did not directly answer three questions about Mr. Verbanac's relationship with Mr. Ferchill's companies and involvement in decisions leading to Bridgeside Point II.
Mr. Ferchill said he could not remember Mr. Verbanac's role in Bridgeside Point II.
In April 2007, Mr. Verbanac received URA communications written by then-Executive Director Jerome Dettore and Business Development Director Robert Rubinstein. In them, Mr. Dettore said a problem with an emerging financing package was "the collateralization [of loans] which Ferchill refuses to do," adding that the URA's goal was "to make Ferchills [sic] deal happen." Mr. Rubinstein called Mr. Ferchill's proposal not to fully collateralize parts of a proposed loan package "highly unusual, but not legislatively prohibited."
Mr. Verbanac wrote back: "Is Ferchill's position odd? ... Because if his position is odd, I'll push him hard." He closed by writing that "Tim Judson of the Ferchill Group will summarize the discussion. It will be coming to your tomorrow." Mr. Judson is the developer's chief investment officer.
In the days that followed, Mr. Dettore and URA General Counsel Don Kortlandt balked at an administration request that they fire several staff members, including Mr. Rubinstein, and declined to hire a community developer named Rob Stephany. Mr. Verbanac, in an e-mail, called those stances "incredible" and "insubordinate," and suggested that Mr. Stephany might be willing to wait a little while for a job offer.
"Jerry and [D]on have to go," Mr. Verbanac wrote in one e-mail.
Separately, he urged Mr. Ravenstahl, in an e-mail, to conduct "a reorganization, not a political purge. ... Those in power play dirty. You, the mayor, have the power now, but you must excercise [sic] it smartly. And that mean's [sic] measuring twice and cutting once."
Mr. Verbanac then helped to arrange for the administration to get a legal opinion from San Francisco-based law firm Littler Mendelson on the status of various URA staff members, including Mr. Dettore, Mr. Kortlandt and Mr. Rubinstein. "Littler is set up for you," he wrote to an administration official. "Once I make the introductions for you and I will be on the phone to help you with the first call, I'll step back so that no conflict develops."
Dated nine days after that e-mail, a draft opinion by Littler Mendelson, obtained by the Post-Gazette, said that the mayor could, without "any legal limitations ... terminate Dettore, Kortlandt, Rubinstein" and one other employee. The firm also approved legally of bringing in Mr. Stephany "to assist in the reorganization of the URA."
In the end, no one was fired, but leadership at the URA soon changed.
That June, Mr. Ravenstahl asked for the resignations of 11 city and authority directors, including Mr. Dettore, simultaneously inviting them to reapply for their jobs. The next month Mr. Dettore resigned, but didn't reapply.
Mr. Kortlandt resigned in December 2008. Mr. Rubinstein remains with the URA. After a brief interlude during which Pat Ford was the URA's executive director, Mr. Stephany assumed that post in 2008.
In October 2007, the URA finalized with Mr. Ferchill's companies a $46.5 million financing plan for the Bridgeside Point II site, including a $510,000 URA loan. The URA simultaneously agreed to finance, with federal grants and loans, the $12.3 million cost of a 723-space garage to accommodate Bridgeside Point II and potential future buildings.
Mr. Ferchill in a recent interview raved about the administration, calling Pittsburgh "the best town we've ever been in."
Changing of the guard
Network members did not always have the ear of city hall.
Mr. Murphy said he was never close to anyone in the network during his years as a state legislator. Nonetheless, when he became mayor in 1994, some network members "wanted to run the city's finances," he said. "The sense of entitlement was breathtaking."
"I said, 'Great, we're going to bid all of that out,'" Mr. Murphy said.
Mr. Murphy's first budget director, Rowan Miranda, now associate vice president of finance at the University of Michigan, was also committed to bidding out financial professional roles, even though state law does not require a competitive process. He said that local bond underwriters generally opposed that stance.
"The academic studies on competitive versus negotiated are unequivocal. Competitive yields lower costs," said Mr. Miranda, adding that some of the administration's smaller-dollar, more specialized financing work was awarded without competitive bidding.
The administration got pitches, Mr. Miranda said, from many financiers, including "Charlie [Zappala] and Greg [Zappala] and those folks, and I used to meet with them regularly.
"I think Charlie was a big supporter of [then-city Councilman] Bob [O'Connor]," Mr. Miranda said. "And Bob would sometimes make me a call and say, 'Rowan, these are good people, I want you to meet with them.'" So he did.
The Murphy administration's big bond underwriting jobs, though, went to other firms, including Smith Barney Inc., Lehman Brothers and Merrill Lynch. Sometimes the administration opted not to pick an underwriter, instead selling bonds over the Internet. That won an award for governmental innovation in 1999, but the administration's borrowing policies have also been criticized for saddling the city with debt that can't be easily refinanced.
Network members found other ways to stay involved with city affairs.
In 2000, Greg Zappala became the financial adviser to city council, getting a two-year contract totaling $36,000.
In 2003, then-23-year-old Mr. Ravenstahl challenged for a city council seat, gunning for an incumbent friend of Mr. Murphy. A political action committee funded largely by Charles Zappala, and his sometime business collaborator, insurance executive William K. Lieberman, donated a total of $1,500 to Mr. Ravenstahl's campaign. That accounted for one-tenth of the war chest the newcomer used to topple Councilwoman Barbara Burns by 10 percentage points.
At the end of 2004, Charles Zappala donated $10,000 to Mr. O'Connor's third mayoral campaign, making him one of 44 five-figure donors to the heir apparent.
After Mr. O'Connor's win, Mr. Verbanac sat in on interviews with incumbent directors, according to several of those directors.
In December 2006, Mr. Verbanac drafted the speech Mr. Ravenstahl used to announce his bid to win at the polls the office he ascended to upon Mr. O'Connor's death. "If the mayor doesn't want to read a speech," Mr. Verbanac wrote then in an e-mail to city Chief of Staff Yarone Zober, "that's his decision but I would encourage him not to freelance."
'Something McTish could do?'
Copied on the campaign kickoff speech and other campaign-related e-mail from Mr. Verbanac was Mr. Grattan.
Mr. Grattan did not respond to 13 questions posed by the Post-Gazette in July, and declined in April to discuss with the newspaper his business and political dealings. In a 1999 deposition in a state court defamation suit filed against him he said he "was in the waste business" before moving on to "business consulting" with a firm that became PrimeSolutions Capital Corp. He and Charles Zappala created separate companies that jointly owned an Illinois landfill in the early 1990s, according to an affidavit Mr. Grattan filed in a federal civil court case filed against him by a former partner.
In January 2008, Mr. Grattan wrote an e-mail to a URA official, who has since left that agency, referencing an emerging project to widen Carson Street. "So I don't forget would Carson Street project be something McTish could do??? " he wrote.
McTish, Kunkel & Associates, a Wilkins-based engineering firm, didn't get the job of managing part of the widening of East Carson Street. Consideration of the project was delayed until later that year, and another firm got the job of engineering it.
In the meantime, though, the URA board voted in March 2008 to hire McTish, Kunkel, for $525,000 to manage site preparation for the Pittsburgh Technology Center infrastructure improvements, near the site Mr. Ferchill was developing. Trumbull Corp. had submitted a lower bid, at $510,000. But construction management is a professional service, and state law does not require that such jobs be awarded to the lowest bidder.
Mr. Stephany said that the URA was trying to widen the pool of contractors it used, and allowed McTish, Kunkel to pare down a proposal that was "overkill." The firm lowered its price to $425,000, the amount appearing in the May 12, 2008, contract it inked with the URA.
That process spurred City Controller Michael Lamb's office to launch an as-yet-incomplete audit of contracting processes at the URA.
Construction engineering firms tend to be big political donors.
Trumbull Corp.'s political committee contributed $3,000 to the mayor's campaign coffers in 2007, and $5,000 in December 2008.
McTish, Kunkel President Matthew McTish donated $10,000 donation to Mr. Ravenstahl's campaign at a May 8, 2008, fundraiser, according to reports filed with the county Elections Division. Mr. McTish previously made a $10,000 contribution to Mr. Ravenstahl's campaign in late 2006. He could not be reached for comment.
In March 2008, an official who has since left the city sent Mr. Grattan a list of more than four dozen people who had done business with, or sought to do business with, or asked for help from the city or its agencies. Among them were Mr. Ferchill, several other developers, engineers, architects, contractors, and sports team executives.
Asked whether he was aware of the transmission of the list, Mr. Ravenstahl said, "I don't know what you're talking about, so I don't know."
The mayor held several political fundraisers in 2008, including one in May and a November event headlined by former President Bill Clinton. Two days before the latter event, the mayor's campaign paid Mr. Grattan $9,500, according to its filings with the Allegheny County Elections Division, for "travel & event deposit." Filings indicate that Mr. Grattan later reimbursed the campaign $6,300.
Between the date the list was sent to Mr. Grattan, and 2008's end, the mayor's campaign got checks tied to 30 of the people on the list -- usually directly from them, other times from their business associates, businesses, or political action committees to which they were connected. Members of Mr. Ferchill's firm, for instance, donated $5,000 to Mr. Ravenstahl's campaign at a May 2008 fundraiser, adding to the $8,000 that firm members gave his campaign in 2006.
The mayor's receipt of contributions from more than half of the people on the list is "a very powerful statement of the power of campaign contributions," said Barry Kauffman, executive director of Common Cause PA, a watchdog group which has pushed for years for statewide campaign contribution limits. "In an ideal world, that should never occur."
"It shouldn't surprise anyone," said Pittsburgh City Council Finance Chairman William Peduto, who championed campaign contribution limits that council passed, and the mayor signed, last year. "It's the 21st century version of the political machine."
Mr. Peduto lost the 2005 Democratic mayoral primary to Mr. O'Connor, and in 2007 filed to run, but withdrew from the primary, leaving Mr. Ravenstahl alone on that ballot.
"Decisions aren't made to benefit Pittsburgh," Mr. Peduto said, "but instead [based on] how to make contractors into contributors, and contributors into contractors."
The city's ordinance does not bar its contractors from making campaign contributions.
Mr. Ravenstahl has repeatedly said that there is no connection between city contracting and political contributions. "I would argue that the time frames of when these contributions are being made, if they would happen to be around the same time [as contracts], are coincidence rather than something that is planned," he said last year.
Bonds and watts
After Mr. O'Connor's inauguration, network-related businesses quickly became more involved in the city's efforts to address its budget problems.
J.P. Morgan Securities, for which Greg Zappala managed the Cranberry office, became the city's main financier.
J.P. Morgan shared with PNC Capital Markets a $1.176 million underwriting fee on a $242 million debt package issued by the city in 2006, under Mr. O'Connor. City Finance Director Scott Kunka said then that no competitive process was required, explaining that the new mayor "had a long-term, pre-existing relationship with J.P. Morgan."
The following year, with Mr. Ravenstahl as mayor, J.P. Morgan got $242,345 to co-underwrite a $159 million debt package at the Pittsburgh Water and Sewer Authority.
In 2008, the firm was one of three underwriters who shared a $316,932 fee for a city bond sale.
That same year, J.P. Morgan shared with two other firms $1.27 million in fees on a complex, $414 million borrowing by the water authority. The authority debt became an election issue in 2009, when Councilman Patrick Dowd, a mayoral challenger and water authority board member, called it "a perfect example of reckless decision-making." Wild gyrations in global financial markets caused its cost to temporarily skyrocket, and spurred the cancellation of debt guarantees that were replaced at an additional cost of around $700,000 a year.
Greg Zappala left the finance world last year, choosing to focus on his other businesses.
CLT Efficient Technologies Group, a firm co-founded by Charles Zappala, in 2007 got a $2.2 million contract to replace city traffic lights with models that use less electricity. The city's holiday-season request for proposals to do that job drew two submissions from among the 18 firms then certified to do energy savings contracting in the state. A third firm asked for an extension of the 15-day deadline to submit proposals, but the city declined. The losing bidder proposed charging the city $3 million.
Mr. Lamb said recently that the city got a good deal. CLT's final bill was only $1.87 million. That means that the anticipated energy cost savings of $542,000 per year should soon eclipse the costs.
Both Charles Zappala and Greg Zappala declined to be interviewed for this story. Through his attorney, Richard A. Sprague, Charles Zappala opted not to respond to 34 written questions on his business dealings, partnerships and political involvement, characterizing the inquiries as "personal."
Not always heeded
Later in 2007, CLT competed for, but failed to win, a $25 million energy savings consulting contract let out by the Pittsburgh Housing Authority.
In 2008, Charles Zappala sent to Mr. Zober, who is the URA's board chair, two pages of "action items" and "themes" for advancing Oakland development. Key parts of the advice, including a suggestion to hire urban design firm Calthorpe Associates to craft a plan, went unheeded.
Additionally, the network did not get the biggest development prize in the city: its lone slots casino license, awarded by the state Gaming Control Board. Mr. Zappala was part, along with Mr. Lieberman, of a group including Forest City Enterprises and Harrah's that wanted to build a casino at Station Square. Mr. Verbanac was a consultant to the effort.
In 2006, while Mr. O'Connor was mayor, the city Planning Department issued a 135-page report rating Forest City's proposal far better than two rival bids. The city submitted the report to the Gaming Control Board, which nonetheless picked a different team with a North Shore site.
The proposal that would become the Rivers Casino, though, was beset with lawsuits and financial problems. During the legal fights and construction troubles, Mr. Verbanac sent the administration occasional reports, noting problems the owners were having with financing and construction contracting.
Mr. Verbanac in 2007 wrote to city officials that he was "a joint development partner" with Forest City for the site of the former Hazelwood coke works, controlled by a group of foundations. Forest City had, since 2003, been considered a leading candidate to develop the 178-acre site, viewed as a prime spot for housing, office, research, retail and marina space, plus soccer fields or tennis courts.
Mr. Verbanac in 2008 urged Mr. Zober not to transfer state dollars away from that project to another development, writing that if the city made such a move without telling him first, it "cuts my legs totally out from underneath me with my business partners" and others. Days later, he received, by e-mail, a detailed account of administration talks with nonprofit institutions involved in that brownfield site, and responded that it "[g]ives me further confidence."
"This type of activity should be covered by the [city] lobbying law, if it's not already," said Mr. Kauffman of Common Cause. Last year city council passed an ordinance requiring registration of representatives who are paid for "attempting to influence municipal legislation on behalf of any other person," but not specifically demanding disclosure when someone advocates to the mayor's administration or authorities in regard to matters other than legislation.
Mr. Verbanac is not registered to lobby the city or state, and has said that what he does is not lobbying. "I pursue development projects as a consultant or as an equity participant, when I deem it appropriate," he said in a March interview.
"The fact of the matter is that Mr. Verbanac is a private businessman with a unique and meaningful skill set that involves expertise in government, business and politics," Mr. Pietragallo wrote on Mr. Verbanac's behalf. "His experience qualifies Mr. Verbanac to act as an advisor on multiple policy, political and business matters."
"Mr. Verbanac has acted as a trusted and respected informal advisor and friend to the Mayor's Office," Mr. Pietragallo continued. "He is not unique in this regard. ... Sometimes Mr. Verbanac's advice is followed; other times it is not."
Mr. Verbanac's success is built on governmental experience and a knack for moving conversations forward, said Charles Camp, a Beaver County commissioner who chairs the Southwestern Pennsylvania Commission, which plans transportation improvements.
"John has a lot of good information from Harrisburg and Washington," Mr. Camp said, earlier this year. "He facilitates a lot of the [commission's] discussions, because you've got a lot of egos there. ... John's really good at handling such discussions -- excellent, in fact."
Mr. Peduto, a Southwestern Pennsylvania Commission member, called Mr. Verbanac's multi-pronged involvement "just another example of why we need to reform Pittsburgh government."
"When leadership makes decisions based on politics, and not policy, they harm city residents, and create ill-conceived policy decisions," Mr. Peduto said, adding that the "political machine" is "defended by those who profit from it."
A 2008 dispute between council members, including Mr. Peduto, and the administration over city billboard permits sparked a U.S. Attorney's Office probe. A grand jury subpoena from that year, obtained by the Post-Gazette, shows that in connection with the probe the U.S. Attorney's Office sought a broad range of communications, including those between the administration and Mr. Verbanac. The probe has not resulted in any charges, and the U.S. Attorney's Office would not comment.
Mr. Ravenstahl said his administration has not fielded any federal inquiries in relation to the billboard controversy.
The network's role in the Ravenstahl administration continues.
When the mayor wrote to state Sen. Jane Orie a year ago to provide her with information on the city's pension plight, he copied Mr. Verbanac. The city's $717 million pension shortfall is driving the mayor's push to lease city parking lots and meters, and to seek tax changes.
In February, when the mayor created a panel to identify, and then advocate for, solutions to the city's pension fund shortfall, he included Mr. Verbanac. That placed him at the table with Pitt Chancellor Mark Nordenberg, Mr. Lieberman, Allegheny County Labor Council President Jack Shea, city Council President Darlene Harris and other civic leaders.
In 2008, another part of the network became involved with city business when the Pittsburgh Water and Sewer Authority hired Wilkinsburg-based consulting firm Resource Development and Management to analyze its operations, for $85,000. RDM, which brings in millions of dollars of revenue every year managing water systems, includes in its ownership group former county development director James J. Dodaro, a law partner in the 1970s of former state Supreme Court Chief Justice Stephen A. Zappala Sr., older brother of Charles.
Last year, Utility Line Security, a firm that shares some owners with RDM, got a contract with the water authority to provide every city household with water and sewer line warranties, for $5 a month, unless they opted out. That pact drew the attention of the state attorney general's office, and the ire of some council members, exposing to scrutiny a part of the network that has built a business on a foundation of water.