Auditor praises city for efforts on Rock Chalk Park project

Lawrence city commissioners and their private partners on the controversial Rock Chalk Park sports complex received a glowing report from a city-hired auditor on Monday.

At their weekly meeting, commissioners were told the community had gotten a good value for the project and that expenditures and receipts for the nearly $12 million worth of no-bid infrastructure work matched up.

“My job is to come in and find problems,” Warren Hudson, an auditor with the auditing firm McDonald & Associates told commissioners. “I’m expecting issues, and I’m looking for issues. It is very rare that I get on a project and have as few of issues as this one.”

Hudson said he reviewed contracts between subcontractors and Bliss Sports II, the private development company operated by Lawrence businessman Thomas Fritzel. He said that after looking at those contracts and canceled checks, he was confident in saying that the city had not overpaid for the project, and that Fritzel and his entities were seeking reimbursement only for costs that could be documented.

Hudson recommended that the city make a final payment of $1.02 million to complete its obligations to its two private partners on the project, Bliss Sports II and a Kansas University Endowment entity, RCP, LLC.

A majority of city commissioners were thrilled with the findings.

“I feel like tonight we have crossed the finish line,” said City Commissioner Jeremy Farmer. “I feel like a 10-million-pound weight has been lifted off my shoulders.”

City Commissioner Terry Riordan said he hoped the report would help heal some division between the commission and members of the public who were critical of the city abandoning its bid process for portions of the project.

“I hope the city can say that this is the point, this is the time that we can start to build trust again,” Riordan said.

The report though is not likely to satisfy everyone. Here’s a look at some issues raised at Monday’s meeting, which was held a day earlier than usual to accommodate Tuesday’s citywide primary election:

• Documents provided to the city showed that several contractors attested to receiving payments from Bliss Sports II, but canceled checks actually showed that they were paid by Bliss Sports, a separate entity also controlled by Fritzel. The development agreement the city signed with Fritzel calls for the city to reimburse Bliss Sports II for its costs on the infrastructure project. But it does not make any provisions for reimbursing Bliss Sports or other related Fritzel entities.

Hudson said he wasn’t entirely sure why the subcontractors were paid with checks from accounts other than Bliss Sports II, but he said he didn’t find reason to withhold payment from Fritzel based on the issue.

“It is one of those things that it doesn’t matter if it comes out of your left or right pocket,” Hudson said. “The question is whether you receive economic value for the improvements. It is a question of whether we are going to hold Thomas Fritzel to some sort of accounting standard, but I don’t know what we gain by that.”

• Hudson cautioned the city about using no-bid contracts in the future. He said over the last 20 years, he had seen very few governmental entities engage in no-bid contracts of this nature.

“In this case, you ended up with a pretty decent deal, but that was the luck of the draw,” Hudson said. “I would not suggest you do it on the path forward. In this case, I just think it worked out for you.

“People are leery about no-bid contracts because they feel like there is a lack of transparency.”

• Hudson was asked whether he could ascertain whether the city would have gotten a better deal had it bid the infrastructure work. Hudson told commissioners that he did attempt to review how the cost of this project compared with other infrastructure projects that had been bid in the area. He told commissioners he was able to compare about 70 percent of the costs, and that comparison showed the Rock Chalk project was about $1.8 million less than the projects that had been bid.

But when asked by the Journal-World about the specifics of those comparisons, Hudson acknowledged that some of the projects he used as comparisons were about three years old, and that it was difficult to account for the construction environment at the time the Rock Chalk Park project was being developed.

The city did go out for bids for the city-owned recreation center at Rock Chalk Park, and the results surprised city officials at the time. Engineers had estimated the recreation center would cost $18 million to $20 million, but all bids came in well below those numbers, with the low bid checking in at $10.5 million.

Ultimately, Hudson said “we did have a problem finding a lot of comparable projects.”

• Hudson said he reviewed the construction loan that Bliss Sports II had to build the infrastructure project. The city is contractually obligated to pay the interest costs on that loan. Hudson said there was documentation to support the amounts borrowed on that line of credit. But Hudson did acknowledge that he never saw any cancelled checks or electronic fund transfers for about $1.4 million worth of work that DFC Company did related to landscaping, construction staking and other similar tasks. DFC Company is another Fritzel-controlled entity.

But Hudson said he did verify that DFC Company had booked the $1.4 million as a receivable on its books and that Bliss Sports II had booked it as a payable on its accounting books. Hudson said he’s confident the $1.4 million was ultimately withdrawn from the construction loan and used to pay the appropriate employees and vendors of DFC.

“Did I look at his bank reconciliation, though?” Hudson said. “I did not.”

Hudson said he is not entirely sure why Bliss Sports II didn’t simply write the appropriate check to DFC Company, as it did for its other subcontractors.

“It is not the cleanest way to do it,” Hudson said. “It doesn’t lack for confusion.”

• Hudson said confusion also was in high supply when it came to how the various parties viewed the development agreement that governed the project. The city viewed the agreement as one where it would reimburse the documented costs of Bliss Sports II — plus a 2.5 percent construction management fee — up to a maximum of $22.5 million. Bliss Sports II and Kansas University Endowment viewed it as a “lump sum agreement” where the city would pay the $22.5 million, as long as Bliss Sports II could show that it had built the infrastructure according to the agreed-upon plans.

The difference in how the agreement was viewed likely played a role in what type of accounting records were kept on the project, Hudson said. A lump sum agreement normally does not require the contractor to keep a detailed job cost ledger that shows a line-by-line account of how funds were spent. A project that is based upon reimbursing a contractor for his costs normally does require such accounting. It was revealed during the audit process that KU Endowment and Bliss Sports II viewed the contract as a lump sum agreement, even though the contract included a provision for a 2.5 percent management fee, a provision that would be unusual in a lump sum contract. It also was revealed during the audit that Bliss Sports II had not kept a job cost ledger.

Hudson recommended that the city be more specific in the future about what type of accounting practices it expects from its contractors. Hudson said that because he is not a lawyer he did not want to render an opinion on what type of contract the development agreement actually is. He said ultimately he viewed the disagreement as not being an issue because there was enough documentation to show that Fritzel had spent in excess of the $22.5 million that the city was obligated to pay. Hudson estimated that Fritzel paid at least $600,000 more than what was available through the line of credit with the construction loan.

But words of praise for the city were much more the theme of the night Monday. Hudson commended the city’s engineering division for the work it did to monitor the quantities and quality of the material installed as part of the project. He also noted that KU Endowment and Bliss Sports II had been cooperative in the audit.

“Honestly, the city performed more due diligence than I have ever seen on a project of this size,” Hudson said.

Four of the five city commissioners have been consistent supporters of the project. Mayor Mike Amyx has been the lone dissenter on the project. He said he still contends the city should have moved forward with a new police headquarters building before agreeing to build the Rock Chalk project, and he said he’s still convinced the city should have followed its bid process.

“I think there always will be a lot of question around this,” Amyx said. “But we have gotten a lot of good information. It probably is time to move on.”