Business practices by SANDAG questioned in lawsuit
Fired finance director sues, says she was let go after raising audit issues
By Jeff McDonald
The firing of a senior finance officer at the San Diego Association of Governments has drawn fresh attention to troubling and persistent business practices within the $1.2 billion regional planning agency, deficiencies that have been previously pointed out by auditors.
Top executives of the sprawling bureaucracy known as SANDAG terminated finance director Lauren Warrem early last month without stating a reason, according to a retaliation lawsuit she filed just 10 days later.
Warrem says she was let go after raising questions about an audit into why SANDAG paid millions of dollars to a vendor and sub-vendor for technology that her lawsuit says not only does not work but wrongly charged up to 45,000 drivers for a toll road they did not use.
“Defendant’s motivating reason for terminating her employment was based on her opposition to misrepresenting and/or omitting material financial information in an audit, as well as her subsequent disclosure of that information,” her complaint alleges.
The firing came months after SANDAG’s independent auditor issued scathing findings about how the planning agency has been managed in recent years. It also comes weeks before longtime chief executive Hasan Ikhrata departs the organization.
Warrem is a career public-finance professional who had previously worked at SANDAG for more than a decade, her lawsuit says. She returned this summer as director of accounting and finance under the expectation she would eventually take over as the chief financial officer.
According to the San Diego Superior Court claim, Warrem spoke up during a meeting about the flawed technology that governs the tolls charged for using a 10-mile section of state Route 125, the privately constructed bypass known as the South Bay Expressway that SANDAG leased in 2011.
Warrem and others had previously identified bugs in the technology that wrongly credited some drivers with deposits to their accounts that they had not made and charged others for using the expressway when they did not pass through, the suit said.
During one October meeting, an outgoing SANDAG accounting director recommended they not alert auditors to the inaccurate toll-road records, the lawsuit asserts. But Warrem said she refused and was excluded from subsequent email threads and other meetings.
Later, in a meeting related to the problematic software, she was shouted down by her supervisor after questioning whether the billing inaccuracies could be resolved, the legal complaint says.
She says the next time she heard from her supervisor, chief financial officer Andre Douzdjian, nearly a week later, it was via a text message directing her to a meeting at which she was summarily dismissed.
The lawsuit accuses SANDAG of wrongful termination and retaliation. SANDAG officials said they could not comment on the pending litigation.
But many of the business practices raised by the lawsuit previously have been singled out by auditors in a pair of sweeping reports issued late last year and earlier this year.
In the formal response to several audit findings, SANDAG managers defended their work, saying they followed standard procurement practices.
They also pointed out that missing paperwork cited by auditors eventually was located.
But in other cases, such as the deficiencies spelled out in the analysis of the toll-collection program serving the South Bay Expressway, they agreed with the findings and said they were in the process of fixing the problems.
All the while, however, the agency continued to pay software developer ETAN Tolling Technology and the HNTB support consultancy millions of dollars, auditors said. SANDAG also extended their contracts even though they knew the system they had provided was broken.
In a statement last week, Douzdjian said the planning agency “has proactively taken measures to ensure accountability for both HNTB and ETAN by temporarily withholding payment from ETAN in response to performance-related concerns.”
But SANDAG declined to say when the suspension was implemented, how much was being withheld or whether it planned to terminate either of the agreements for non-performance.
‘Staff did not perform’
The San Diego Association of Governments was created in 1980 as a special district charged with developing and implementing plans to address regional issues such as transportation, air quality and economic development.
The association board is made up of local elected officials from across San Diego County. Its current-year budget is $1.2 billion, but in October, the SANDAG board added $640 million to the spending plan over the next five years based on previously unanticipated revenue.
The piles of taxpayer money flowing through the regional planning body make it one of the biggest-spending public agencies in the county.
In the initial days following the Warrem lawsuit, El Cajon mayor and SANDAG board member Bill Wells called for an independent review of the claims made by the departed finance officer.
“The primary objective of this investigation is to comprehensively understand and disclose the root cause of the challenges facing the toll operations,” Wells wrote in a letter to SANDAG board chair Nora Vargas, who also chairs the county Board of Supervisors.
But the failed tolling software, now scheduled to be discussed publicly at the agency’s meeting this Friday, already has been disclosed in audits released over the past year. So have a host of other questionable business practices.
According to the Contracts and Procurement Operational and System Control Audit — part 1 of which was released in October 2022 and part 2 this past May — SANDAG managers engaged in lax contracting and oversight practices that far exceeded the HNTB and ETAN performances.
“SANDAG utilizes outside consultants to perform project management duties instead of internal staff to perform project management and oversight functions,” states the report, which examined all contracts signed or in effect during the four years between July 2017 and June 2021.
“Staff did not perform performance evaluations upon completion or termination of task orders,” the agency’s Office of Independent Performance Auditor found.
The policy is problematic, the audit said, because allowing contractors to monitor other contractors can lead to overspending and delays and leave staff unable to gain the technical knowledge and experience required to monitor contracts properly.
Even worse, the practice allows for the possibility that vendors could collude to delay projects in order to generate additional work and revenue, the audit said.
In the case of the South Bay Expressway tolling system, the report notes, SANDAG continued to award contract extensions to HNTB, which had been hired to monitor the tolling project, and ETAN, which had developed the flawed software, even though both companies had failed to perform.
Neither HNTB or ETAN responded to requests for comment on the SANDAG audit findings.
HNTB is referred to as Vendor AA in the reports; ETAN was called Vendor EE. But both companies are named in the Warrem lawsuit, and The San Diego Union-Tribune independently confirmed that the audits were referencing the two firms.
“Vendor AA’s current contract has been amended five times and three times on the previously awarded task order/contract for a total of eight amendments relating to the management of Vendor EE’s contract,” auditors wrote.
SANDAG officials did not dispute the findings in their formal response to the findings.
“Management agrees that the delivery of services for toll operations systems were delayed and that oversight of the project was lacking in many respects allowing the delay to continue leading to multiple contract extensions with the project management consultant,” they wrote.
No-bid contracts
The failures with the South Bay Expressway tollway project are not the only troubling findings cited by SANDAG auditors.
The reports examining four years of contracting practices at the planning agency noted dozens of other deficiencies — and recommendations that could help prevent problems in the future.
In reviewing more than 200 solicitations, contracts, task orders and amendments, for example, the auditors found many evaluation score sheets and bid notes were missing or insufficient, in violation of federal standards and SANDAG policies.
Auditors also found that SANDAG regularly failed to meet its own competitive bidding rules and issued sole-source contracts without properly demonstrating why it needed to avoid putting work out to bid.
“During the review, auditors identified 36 out of 46 task orders that required competition were not properly competed,” the report said. “These 36 task orders also did not include any required sole source justification documents to authorize the task order as a sole source awarded procurement.”
Also, SANDAG managers regularly extended task orders worth more than $100,000 without informing the board, the audit found. The review showed 44 of 122 cases where the limit was exceeded, or 36 percent of the files reviewed.
In some other cases — 17 of 201 contracts — SANDAG officials retroactively approved outside work in violation of their own policies, auditors said.
“Amendments were inappropriately dated retroactively to authorize the changes after the contract and/or task order had already expired, making them invalid when considering their execution date,” the review said.
The auditors also found that SANDAG officials approved “excessive and repeated amendments for the same reasons” and authorized “amendments that are unjustified,” reviewers wrote.
The procedural violations almost certainly raised costs for the planning agency, auditors said.
More specifically, SANDAG paid outside lawyers more than $35 million and human resources consultants $5.6 million, they said. Much of that work could have been performed by agency employees, auditors said.
“Auditors identified overlap in the services from contracts awarded to consultants and the expected duties and qualifications identified in the job descriptions of internal staff,” part 2 of the procurement audit said.
In other cases, vendors that were awarded modest contracts had their original agreements amended and extended so many times that they were paid millions of dollars more than called for under the initial agreements, the audit found.
One contractor identified as Vendor Z was awarded $140 million in contracts, the report said, but add-ons pushed the total amount paid past $200 million.
HNTB, or Vendor AA, was reported to have secured $57 million in contracts during the review period, but extensions and amendments drove those payments to nearly $85 million, the audit noted.
In one formal audit response, management said it appreciated the auditors’ findings and was working to implement improvements across the board.
“SANDAG is actively responding to the monumental shift in the external business environment that has occurred in recent years coupled with the increased expectation for rapid advancement of regional programs and projects,” the response said.
“Management recognizes the extent to which procurement and contract administration are essential to SANDAG’s success.”
Resignation looming
Ikhrata, who has run the troubled planning agency since 2018, announced his resignation earlier this year. He last day is scheduled for Dec. 29.
Ikhrata was not universally popular across the agency, or even its board of directors.
His showcase plan to impose a per-mile fee on drivers was sharply opposed by some elected officials and board members and eventually fizzled.
His plan to develop a mass-transit connection to the San Diego International Airport remains on the planning board.
Three years ago, Ikhrata found himself in a messy and public squabble with his former auditor, Mary Khoshmashrab, who said Ikhrata had approved hundreds of thousands of dollars in severance payments to former employees without informing the board.
He also allowed an employee to redeem more than $110,000 in unused sick time even though the worker was not entitled to the money and authorized a $60,000 severance to a senior aide after the official voluntarily resigned, the 2020 audit said.
“The material findings disclosed within the report were a result of significant weaknesses in SANDAG governance and system of internal controls,” wrote Khoshmashrab, who has since left the organization.
“Specifically … SANDAG has not formalized key policies and procedures to ensure best practices and adherence to federal and state laws, and regulations that govern public agencies.”
The audit findings in 2020 did not undermine the SANDAG board majority’s confidence in their chief executive. The following year, Ikhrata was awarded a three-year contract extension on a 12-7 vote.
But by July 2023, five years into his SANDAG leadership, Ikhrata had seen enough. He began contacting board members privately to alert them to his decision to resign and confirmed to the Union-Tribune days later that he would leave at the end of the year.
“I will admit my relations with the board haven’t been the best but we managed to do all these amazing things regardless of this relationship,” Ikhrata told the paper this summer
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The search for a successor is expected to take eight months or longer.
In the meantime, the Warrem case is proceeding in San Diego Court, although the SANDAG legal team has yet to respond to the initial complaint.
The case has been assigned to Judge Loren G. Freestone. A conference is scheduled for April.
jeff.mcdonald@sduniontribune.com