Brian Sharp

@SharpRoc

A months-long federal investigation into possible fraud in the $1.3 billion effort to modernize city schools allegedly includes bid rigging and kickbacks — and could threaten funding for the next round of projects.

The state legislative session is winding down, and local officials have yet to finalize a $447 million request to continue upgrades at city schools. The federal probe does not appear to involve current activities. Lacking a clear understanding of what might have gone wrong, however, is raising questions about how to move forward.

"We are in a Catch-22 situation," Mayor Lovely Warren said. "Do you proceed with the assumption that everything is normal, when you know there is a possibility it is not?"

One local contractor claims to have spoken with the FBI five or six times since October. The most recent meeting was two weeks ago involving the U.S. Attorney's Office.

"They (other contractors) come to me and say, 'Hey, we need to run some supplies through you,' " said Journee Construction owner Orville Dixon — whose business is demolition, insulation, cutting and patching but who was led to believe he could act as a supplier. "I said there is a 3 percent charge for doing that. And, to be honest with you, I was cheap.

"Basically, all you are doing is pushing papers."

In recent months, critical internal audits slammed oversight of the $1.3 billion, multi-phase project to rebuild the district's aging school buildings. Those audits described a rushed and disjointed undertaking with costly add-ons and shoddy record keeping, and called into question touted successes in minority contracting and hiring during the $325 million first phase of construction.

New appointees to the project board and a new compliance officer followed. Now the federal probe, neither confirmed nor denied by the FBI, has shaken confidence again.

"The one thing we have been told is that (the investigation) does not involve any of our current activities, or us. By us, I mean the board," said newly appointed board chairman and former Mayor Thomas Richards, having been briefed by the board's legal counsel. "So I am focused on getting the job done ... and done right."

For local leaders, that includes finalizing legislation for the second phase and getting approval from Albany before the Legislature's session ends on June 19.

Failing to act means a lull in construction and the jobs created. Future projects would be delayed, disrupting schools and raising questions about remaining first-phase jobs set to begin this fall. Then there is the estimated $8 million to $10 million this construction currently is pumping into the local economy each month.

The district claims it sent the city draft legislation on Jan. 21, and "numerous discussions have been taking place at the staff level," according to a district statement in response to media questions.

Warren said she has been asking Superintendent Bolgen Vargas for draft legislation since February but only received it on May 14. City and district counsel met last Friday to go through some of the city's questions, Warren said. City Corporation Counsel T. Andrew Brown briefed her on that meeting this week and she, in turn, sent him her suggested revisions. Brown said he expects to send the city's marked-up copy of the legislation back to the district in a day or two.

The district proposed "significant changes ... that were not discussed with me at all," Warren said.

Those included giving the mayor four appointees on the seven-member board, rather than both the mayor and superintendent getting three appointments each and sharing one. The city also would have received authority to choose the compliance officer for the program. Meanwhile, the superintendent would have final sign-off on school plans, budgets and related matters before the board submits those to the state.

Warren said she rejected all of the proposals, the latter because it would affect the local share of project costs and that affects the district and city.

Still, she said of the legislation: "At this point in time, there is no reason not to vote for it. You cannot operate in what-ifs."

Brown, the city's lawyer, said he was made aware of the federal investigation within the past couple of months. The mayor has been critical of the school modernization program. But Brown said "this is not an investigation instigated by the city in any way."

The FBI has not asked the city for information, he said, but "it is my understanding that subpoenas have been issued for documents and information relative to the investigation. But what is being sought is something I cannot speak to."

FBI agents first approached Dixon asking about a $600,000 order, he said, and how Journee had that kind of money. He said he didn't. Journee has a three-room, second-floor office in a small complex off Buffalo Road and no warehouse to receive or store materials. Rather, the contractor ordered and paid for supplies, and had them shipped directly. Invoices show Journee Construction as the shipping recipient, but list the contractor's address.

Some minority- and women-owned businesses have complained that they were listed as subcontractors in bid documents by construction firms needing to meet diversity goals. But they were never used, and at times, never told. It is an allegation Mary Ellen Belding, president of Structural Remediation Services Inc., has lodged. Reached Thursday, she declined comment, citing the advice of counsel.

Dixon said he was falsely listed three times on school projects. And he alleges that three separate firms, at three city schools, used his company as a pass-through from 2013 until early this year, listing Journee as a supplier though he lacked required state certification. For that, he received between $3,000 and $5,000, he said.

A top program official, similarly motivated to meet the diversity goals, OK'd the arrangements, Dixon said, telling him to apply for certification and set his fee. Not being in the supplier business, Dixon said he was unfamiliar with the process. He said he told investigators he had a "joint payment agreement," and they told him he was a pass-through.

Others implicated did not immediately respond to messages seeking comment. One has terminated Journee, and Dixon has filed a lien seeking payment.

Using minorities or women as fronts or pass-throughs to gain an advantage in securing contracts in the white male-dominated construction field is nothing new. But pressure to meet diversity goals have ramped up with major public projects — none bigger than the school modernization program — setting goals for participation.

"It is illegal, but it happens all the time in the construction business," said Ken Warner, executive director of UNICON, a partnership of unions and contractors. "I've been screaming about it for years."

BDSHARP@DemocratandChronicle.com

Twitter.com/sharproc

Includes reporting by staff writer Gary Craig.