HISD audit: Inflation, 'nonexistent policies,' and lack of oversight led to $211M shortfall

Thursday, August 25, 2016
Ted Oberg Investigates
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Outside experts looking at HISD's 2012 bond suggest the district has plenty of homework to get the bond program on track.

HOUSTON (KTRK) -- An audit looking at the reasons why HISD's $1.9 billion bond program designed to rebuild or renovate 40 schools faced shortfall found that inflation was a chief reason behind why a $211 million taxpayer-funded bailout was needed, but also pointed to "incomplete project assumptions and "weak or nonexistent policies."

"HISD's polices and procedure for capital projects are not sufficiently developed," the audit read. "The program is lacking an effective and efficient organizational structure."

In addition, the audit cited problems with the Houston Independent School District's bond bosses are not providing "sufficient oversight into subcontractor bidding activities" and did a poor job estimating construction costs.

HISD trustees ordered up the audit Nov. 12, 2015 when they voted unanimously to hire outside auditors KPMG to examine the bond spending and to zero in on the reasons why the $1.9 billion bond program faced that $211 million shortfall.

Grier blamed "rising inflation and construction costs" when he told the public in September that the additional money was needed.

An HISD internal audit released Oct. 21, 2015 though, said that blaming inflation solely was a red herring.

Indeed, an underlying theme in the KPMG audit is this; HISD was woefully unprepared to carefully spend nearly $2 billion in money that taxpayers entrusted to the school district.

"Although we agree that the main driver of the higher than anticipated construction cost resulted from the increased construction activity in the Houston market, there were a number of limitations and constraints in HISD's budgeting processes that contributed to the pricing variances," the audit reads.

RELATED: Months after blowing whistle on cause of $211M shortfall, HISD auditor suspended

Read the full audit here.

Some findings include:

  • HISD used project costs from the 2007 bond program as the basis for the original budgets in the 2012 program.
  • At the time the initial program budget was established, very little was known about the details of the program including specific concepts for each school.
  • The initial budget did not take into consideration project specific requirements.

That internal audit -- ordered up by HISD board members -- pointed to a lack of competitive bidding and points to "scope creep by agreeing to work that was not in the original plan" as reasons for the shortfall.

This outside audit -- dated Aug. 11 and made public Wednesday -- certainly pointed to inflation as a key cause.

"I've read the KPMG performance audit of the 2012 bond program," a HISD spokesman said Wednesday. "I've also read the Office of Internal Audit's review of the administration's request for additional funding for the 2012 Bond Program. While both documents identify recommendations for improving management of the program, they reached strikingly different conclusions about the primary reason for the need for additional funds."

RELATED: Lawsuit: HISD's auditor booted after talking to cops, feds

Still the audit lists many other causes for the cost overruns, as well.

Other audit findings:

  • HISD's own procedures in spending the bond money "do not provide the necessary level of detail or completeness required" for a $2 billion bond rollout -- the largest in Texas history.
  • There is too much bureaucracy in building out the schools. "Additionally, employees expressed concerns with many unnecessary layers within the organization..."
  • In some cases, paperwork was a mess. "Documenting the reason for the bid overrun was not always possible."

While waiting for this outside audit, HISD suspended its in-house auditor -- Richard Patton -- months after he questioned the district administration's rationale behind the massive bond shortfall and days after he said he spoke to the FBI about concerns he had that went to the highest reaches of the district.

This recent audit is strikingly similar to Patton's findings in October's internal audit.

From the internal audit 10 months ago:

"We agree that excessive supply and demand can create tight market conditions that cause higher than normal prices such as those experienced with other local school districts and Houston area construction projects, but other factors such as an ineffective (management) process, cost creep from excessive architectural designs, inadequate project cost controls, and the overall effectiveness of bond program monitoring are critical components, the effects of which could be easily misinterpreted as inflation due to market conditions."

Patton is now back on the job, but with curtailed duties.