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Dirty Secrets

Scene of the Grime: After purchasing the lot bounded by San Fernando and Paseo de San Antonio, between Third and Fourth streets, the San Jose Redevelopment Agency had to move 25,000 tons of contaminated soil in order for a condominium project to be built on the site.

Photo by Christopher Gardner

A quarter-million-dollar cleanup mushroomed into a $4.3 million money pit. But Redevelopment officials won't explain the unusual transactions that concealed the runaway project from public view, in violation of the city's rules.

Investigation by Will Harper

AT THE SOUTH END of the ochre-stuccoed Paseo Plaza luxury condos, old-fashioned lampposts line a pleasant walkway, and palm trees rustle in the near distance above the terra-cotta roofs of San Jose State University. A neighborhood is taking shape in a once-forsaken part of downtown, orchestrated by the city's Redevelopment Agency.

On the project's north side, hard hatted workers assemble on a vacant 1.7-acre dirt lot. A teetering blue plywood wall conceals the gravel littered patch of earth where the stylish Paseo Arcade Condominiums will soon rise. An investigation of public records reveals that much more has been hidden from citizens' view.

Eight years ago, officials started negotiating to build luxury condos on the centrally located block between San Fernando Street and Paseo de San Antonio, between Third and Fourth streets. It was part of a plan to gentrify the city's inner core, the lowest income zip code in Silicon Valley, by building expensive housing--to create what urban planners called a "24-hour downtown," where people could sleep as well as work or shop or drink or pick up their social security cards.

Redevelopment Agency experts suspected the site would have some toxic surprises--a series of auto-repair shops and gas stations operated there for years. They originally thought they could clean up the block for $250,000. But shortly after they started digging, crews discovered more than just waste oil and gasoline. Below the surface lay thousands of tons of soil contaminated with lampblack, a carcinogenic relic of the city's 19th-century industrial heritage.

Over the next six years, at least 1,250 truckloads of contaminated soil were hauled off to toxic dumps in Stockton, Kettleman City and Utah. The more crews dug, the more toxic crud they uncovered. Cleanup costs steadily mounted. The project budget swelled to $375,000, then to $775,000 and then up to $1.8 million. Some 18 "change orders," or authorized contract increases, were fast-tracked through the City Council.

By the time it was over, cleanup costs had exploded to $4.3 million. Then the agency turned around and gave the land to a private developer.

In the process, the agency ignored procedures and policies established to provide financial oversight of the tax funded public works organization. On one occasion, agency Executive Director Frank Taylor approved a $325,000 change order during a council recess without reporting the details of the contract hike to the City Council, as he's specifically required to by council resolution.

As the agency prepares to break ground on the 104-unit Paseo Arcade project on its "Block 4" site, questions persist about how the cleanup got out of hand, and whether appropriate controls exist to keep it from happening again.


Toxic surprises found at city project sites routinely
take public to the cleaners.


Back to the Future

Thomas Edison had yet to invent the incandescent lightbulb when James Hagan and his partners formed the San Jose Gas Company in 1861. Street lighting was still done the old-fashioned way: torch or bonfire. Hagan and his associates came up with a plan to use a process called coal-gassification, burning coal to produce gas and then running pipes to gas lamps in streets and homes. They imported the coal from Australia, then transported it by mule from Alviso. On Jan. 21, 1861, Hagan's power plant lit up all seven streetlights in town, plus the homes of 84 customers. The coal-gas operation ran until 1888, when Pacific Gas & Electric's predecessor took over Hagan's company and closed the plant.

PG&E left the lampblack behind.

Nearly a century later, the Redevelopment Agency bought several dilapidated downtown blocks. Buildings that once held businesses such as Andre's Chevron Station and Brehm Bros. Auto Repair crumbled underneath the wrecking ball. At the time, environmental regulation was in its infancy, and no one voiced concerns that below the ground lay a toxic sponge. As late as the 1970s, a housing project could probably have been built there with little thought or money applied toward cleaning up the toxic black mess under the foundation.

For 18 years, the agency operated a parking lot on Block 4 while building proposals surfaced with a bang and then fell through with a whimper. Then in 1989 the agency struck a deal with Kimball Small, developer of the Fairmont Hotel, to build a condo project reminiscent of Georgetown, the swank Washington, D.C., suburb. The nearly 20-year delay in getting anything built on the block cost the agency in more ways than one. New environmental regulations forced the agency to assume responsibility for cleaning up the site. Besides, the best real estate agent in the world would be hard pressed to sell homes built on a known toxic dump. The agency agreed to spring for the $250,000 toxic cleanup tab.

By the time Paseo Arcade goes up, taxpayers will have forked out approximately $26.2 million on developer subsidies, loans and toxic remediation to rebuild Block 4--not including land concessions. That's about $83,500 per condo to woo monied homebuyers to live in the heart of modern San Jose.

Whistleblowing in the Dark

Steve Nickerson remembers how agency construction manager Mike Archer responded when he started asking questions about the escalating costs on the invoices that crossed his desk.

"Why don't you mind your own fucking business?" Nickerson says Archer advised.

Archer was in charge of the North Block 4 cleanup. Nickerson, a senior project analyst, pulled in $70,000 a year to review and track contracts for the agency. He didn't like the looks of a last-minute $325,000 cost increase.

For one thing, the agency's lawyers hadn't signed off on the internally approved contract hike, or "change order"--a clear deviation from policy.

Furthermore, the change order had been hustled through the bureaucracy in one day, Jan. 6, 1995. Putting pen to paper, Taylor exercised his emergency powers to authorize the payout.

However, less than a week later, the City Council was due to return from winter recess and could have reviewed the transaction itself. (Project management chief Bob Ryan says the dirt-digging contractor, Golden West Environmental Services, was "champing at the bit" to get paid and couldn't wait until the next available council meeting. In spite of their hurry, the agency didn't actually cut the check to Golden West until Jan. 17, records show.)

One more detail didn't add up to Nickerson: On paper it looked like the agency had bought too much clean soil, or "backfill"--tons of it--to fill the holes left where contaminated dirt had been removed. He compared the invoices. The agency had hauled off about 22,500 cubic yards of soil and toxic material. Then it purchased 26,800 yards of clean dirt--about $50,000 worth of backfill that wasn't needed, by Nickerson's calculations. Where did the dirt disappear?

Taylor refused to be interviewed for this article. Archer didn't return phone calls. Agency finance director Mike Eshoff also wouldn't comment.

Nickerson says he eventually took his concerns to Eshoff. According to Nickerson, Eshoff told him to put something in writing so he could take the matter up with Taylor. A couple of months later, Nickerson recalls, Eshoff passed down the word from the chief: "Frank wants you to settle this with project management."

The following month, Nickerson, along with several other agency staffers, received their walking papers.

Since being laid off by the agency two years ago, the 51-year-old UC-Berkeley grad has gone unemployed, except for a job delivering pizza that he took to help pay the bills. When he speaks about the agency--where he worked for eight years--he still uses words like "our" and "we." He often wonders whether his meddling cost him his job.

Nickerson reluctantly agreed to speak on the record, fearing he may scuttle his chances of getting a good reference from his former employer. He admits that his motivation for going public sounds corny. "I believe public employment is a public trust. There comes a time when you have to go to bat for your constituents."

Disgruntled ex-employee or not, Nickerson produced a ream of public records providing a rare peek into how the billion-dollar agency and its powerful boss conduct the public's business behind closed doors.

Nickerson unearthed another administrative sleight of hand on the Block 4 project. When the engineering contract with Ogden Environmental and Energy Services expired in April 1994, agency staff simply diverted $112,500 from a master contract with a geotechnical firm called Wahler Associates to pay Ogden. The agency also "corrected" the Wahler contract to allow the company to charge a 15 percent mark-up for work done by Ogden. In other words, Wahler made money simply by allowing its bank account to be used as a conduit.

A few years earlier, the agency paid Wahler to audit the Block 4 cleanup to make sure taxpayers weren't being bilked on the project. Wahler concluded that they weren't.

Secrecy Rewarded

Months after being handed a pink slip by the agency, Nickerson took his story and information to City Auditor Gerald Silva.

In 1992 Silva had written a critical report that took Taylor and his staff to task for keeping vital financial information from elected officials. Silva concluded that the City Council was making multimillion-dollar decisions with public money based on bad or incomplete information from agency staff.

One nugget Silva uncovered involved the agency's circumvention of an earlier council policy requiring Taylor to get approval from elected officials for any contracts or change orders for more than $20,000. Silva found that the agency was contracting the same firms over and over again in amounts just under the $20,000 threshhold. The report mentioned, coincidentally, eight below-the-radar contracts totaling $110,000 to Wahler Associates over 2 1/2 years.

Few reforms resulted from the audit. With the exception of forming a new redevelopment finance committee, politicians pretty much chose to leave the agency and its boss alone.

After briefly looking into Nickerson's recent allegations, the auditor handed the matter over to City Attorney Joan Gallo's office for further investigation.

Nickerson never heard from a city investigator, and neither did anyone else. Assistant City Attorney Bill Hughes admits he never interviewed anybody connected to the project--not Taylor, not Archer, not project management chief Bob Ryan, not environmental regulators, neither contractors nor subcontractors. Hughes explains that he didn't think interviews would shed any light on the situation.

Regarding Nickerson's suspicion about the apparent purchase of too much backfill soil--a complicated and technical matter--Hughes never contacted engineers at Ogden or any experts to check the numbers.

Industry experts say the discrepancy isn't so straightforward because of soil compaction, density and other variables. A 20 percent to 25 percent difference between the amount of "take-out" soil and backfill isn't unusual, experts say. Still, Ryan recalls that the agency did indeed buy extra clean fill, though he didn't specify how much. He explains that the agency, through its contract with Golden West, was getting a great price and wanted to take advantage of the situation and prepare the site for the next development, which it would eventually have to do, anyway.

Hughes never checked to see if the agency reported the $325,000 emergency change order to the City Council.

"If they didn't go to the [council], then [the agency] made a mistake." Hughes says. "I don't think they were trying to hide anything," he adds.

If Hughes had queried anyone, he might have heard officials from Ogden contradict project chief Bob Ryan's explanation for why the agency played the accounting shell game with the Ogden and Wahler contracts.

Ryan told Metro that Wahler had bought out Ogden near the end of the project, so when more work had to be done, the agency made Ogden a subcontractor on its parent company's contract. But when Metro contacted officials from Ogden, including an attorney in the international corporation's New York headquarters, they said they had never even heard of Wahler.

From what Hughes did examine--including the mound of paperwork passed over from the auditor--he found no significant wrongdoing on the agency's part. "We did find procedural errors," he says. "We didn't find anything illegal or fraudulent."

The Czar's New Clothes

San Jose's politicians, dependent on the agency to build their pet projects, have carefully honored Taylor's stated need for "flexibility," letting him make deals behind the scenes. True to form, one City Council aide applauded the agency's shell game with the engineering contracts for the Block 4 cleanup as "creative accounting."

In fact, the City Council responded to Silva's 1992 audit by rewarding Taylor with more discretion and more power. Taylor now can approve change orders up to $75,000 without council approval. By contrast, San Francisco's redevelopment agency generally requires approval from its board for any transaction more than $20,000, and Los Angeles has a $25,000 threshold.

During council recesses, Taylor can go beyond his $75,000 limit if he determines the situation is an emergency that poses a "detriment" to the agency. The only caveat is that the redevelopment director must tell elected officials what he did while they were away, something Taylor did not do with the $325,000 change order he authorized on Jan. 6 for the Block 4 cleanup.

Big deal, groans Joe Guerra, chief of staff to Councilman Frank Fiscalini.

"It's a nonissue because the council would have approved [the change order], anyway," he says.

Still, if the council would have happily OKed the change order--something even tightwad Councilman David Pandori predicts would have happened--that begs the question: Why did the agency keep the financial details from elected officials?

The matter is academic, Guerra argues. The city and the agency had a responsibility to eliminate toxics from the site. "The reality is the council clearly said, 'Clean up the site.' "

There are other mitigating factors. Using the federal Superfund law, City Attorney Joan Gallo and her colleagues sued PG&E for the toxic materials left by the company's predecessor on the site. PG&E later agreed to pay a $1.175 million settlement. And when the council approved the second $1.024 million construction contract with Golden West, it budgeted an extra $410,000 "contingency" in case more work had to be done. Still, a contingency doesn't give agency staff members carte blanche to do what they want without informing the public, officials acknowledge.

As Ryan observes, soil remediation isn't an exact science. John West of the Regional Water Quality Control Board says that initial tests, like the ones done on Block 4, don't always tell what is really underground. "Once they start digging, you're not sure where it's going to go," he says.

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From the June 12-18, 1997 issue of Metro.

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