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Portland Public Schools on Tuesday publicly released the final version of an external bond audit that found the district bond program at heightened risk of fraud, in part thanks to its contracting with Procedeo, a Texas-based construction firm. But top district officials took issue with the audit’s scope and findings, with PPS’ senior chief of operations disputing “the tenor of the report’s narrative and frequent implication of impropriety.”
What’s more, the district signalled that it does not intend to follow key recommendations from the audit, including renegotiating the size and cost of the Procedeo contract. PPS’ contracting with Procedeo is being considered for criminal investigation by the Oregon Department of Justice, as WW first reported.
The audit itself remains largely unchanged from the draft bond audit that WW first reported on in September. Auditors found risks of bias and favoritism as it selected Procedeo for the $61.5 million contract for bond program management services, including the timely delivery of three high school construction projects and the Grice-Adair center. They warned that because PPS had terminated many of its internal staff who’d previously overseen bond projects on Procedeo’s recommendation, it was at risk of losing institutional knowledge and had grown overreliant on the external firm. And they found that PPS had, compared to market rate, overspent on the Procedeo contract.
In the final version of the audit, however, there’s open disagreement between PPS and its external auditor, Sjoberg Evashenk Consulting, a firm that has conducted routine audits like this one for the district for a number of years. The district did not concur with about 15% of the audit’s 38 recommendations—including the headlining one that it renegotiate its contract with Procedeo to bring it more in line with market rates. And while the district expressed its commitment to fiscal responsibility, it did not agree with the auditor’s characterization of its Procedeo contract and believes it followed all proper procurement processes.
In an email to SEC written by PPS senior chief of operations Dr. Jon Franco, he writes that it’s the district’s position that portions of the audit did not adequately reflect PPS’ input, and that auditors were outside their scope when they spent nearly two-thirds of their report on the Procedeo contract. (In SEC’s responses to PPS’ responses, which are attached to the audit, SEC notes that PPS asked the firm multiple times to rewrite the audit. SEC declined “due to the significant time and resources it would require and that the report conformed with the contract.”)
“The addition of this scope to the audit plan was raised because you identified a risk of fraud. As the report expressly notes, however, no fraud was found,” Franco wrote. “While PPS takes all of the audit’s observations, findings, and recommendations seriously, it does not agree with the tenor of the report’s narrative and frequent implication of impropriety.”
Auditors disputed that they were out of scope when they scrutinized the Procedeo contract, and provided their own comment on PPS’ disputing of their findings.
“The scope approved by PPS in our bond performance audit workplan included steps to consider subsequent events that impact bond status and to identify and assess any potential risks,” auditors wrote. “Thus, the identification of risks was part of the initial scope.”
While PPS concurred or partially concurred with 32 of the auditors’ recommendations, it did not concur with six of the bolder ones, including the suggestion that it renegotiate the Procedeo contract’s compensation structure. Officials noted that a district review had determined the fees it was paying Procedeo were in line with the documented range for comprehensive program management services.
SEC disagreed, writing that while the district asserted that a 3.65% to 4% base program management fee was standard, other fee percentages ranged from 0.9% to 3.65%, and PPS was paying a higher negotiated fee than most school districts SEC reviewed.
PPS also did not concur with two recommendations that suggested it require Procedeo to show a detailed staffing plan and estimate of hours for each staff member and function, and that it amend Procedeo’s contract to require monthly invoices that ask for details behind the number of staff hours worked. District officials noted that the contract was a lump-sum one with clear deliverables, making these recommendations unnecessary. “Requiring a task-by-task accounting on invoices would not affect the calculation of the contractual fee nor improve measurement of success under the contract,” reads the district’s response to recommendation 24.
And in response to a recommendation that the district implement procedures for reviewing bond contract scope of work prior to executing a contract to ensure clarity around scope of work and support for a contract’s cost estimate, PPS wrote that it “does not concur with the underlying assessment of the Procedeo contract.”
Again, SEC pushed back.
“Auditors understand that PPS’ contract with Procedeo is a lump-sum contract,” the auditors wrote. “However, this does not align with best practice and does not allow PPS to assess whether it received expected contracted time and effort.”
The district says it did concur and fully implement two audit recommendations that asked for adjustments to the Procedeo contract that came through math errors, and updated its methodology to ensure invoicing reflected contract language to reduce payments for its own in-house staff from Procedeo invoices. It also concurred with a bulk of audit recommendations around public transparency around bond spending and suggestions that it better clarify how it spends bond funds on staff. (The auditor at times disputes whether the district implemented some of the protocols it says it did.)
In one other exchange between PPS and the auditor, the district did not concur with a recommendation to strengthen its contract solicitation processes, particularly around conflict of interest practices. (Those recommendations pertain to findings that at least one evaluator who helped hire Procedeo had engaged in multiple interactions with the company ahead of scoring.) District officials wrote that auditors appeared to “misunderstand the meaning of a ‘conflict of interest’” that would be applicable to a public procurement in Oregon, citing state ethics laws that define conflict of interest as a situation in which an evaluator stands to financially gain from an association with a proposer.
“Under Oregon ethics law and applicable public procurement rules, having prior discussions with or even prolonged previously dealings with a proposer is not a basis for dismissal from the evaluation committee and does not require disclosure,” the district wrote.
Auditors responded that they had not misunderstood the meaning of a conflict of interest, and that they were referring not to the term as defined in state law, but to perceived conflicts of interest. The latter occur when “a reasonable person” might question if bias influenced the outcome of a process, auditors wrote, regardless of if there was actual bias.
“They can undermine trust and public confidence—often just as much as if a real conflict existed,” the auditors wrote. “Government entities need to take precautions to avoid situations where the public could view a public official’s actions as giving an unfair advantage to one proposer over another, even if individuals act fairly and unbiased in their decision-making and an entity followed laws and its internal policies.”
In a statement to WW, Procedeo president Brian Johnson wrote that Procedeo was aiding the district with addressing delays and cost overruns, pain points of previous external audits.
“This audit calls for stronger district oversight of the bond program, including oversight of our work. We support that,” Johnson said. “Public dollars deserve close scrutiny, and we will work with the district as it acts on these recommendations.”
