High-Speed Rail Authority CEO Jeff Morales sits down with Sam Brock to discuss the qualifications of its lead contractor, Tutor Perini, which has come under recent scrutiny.
No higher-ups in state government ever assured Californians it would be instant gratification when it comes to the well-publicized high-speed rail project.
More than four years after voters approved a package that launched the funding for high-speed rail in 2008, the state has been given the green light to start construction.
Yet the project has miles to go, both literally and figuratively, before gaining real traction.
California High-Speed Rail Authority CEO Jeff Morales says he’s encouraged by the developments of the last year, citing “huge amounts of progress” for high-speed rail in the areas of environmental approval, crafting a new business plan and even the injection of a new management team and board of directors.
“With almost any project, you’re going to have a spectrum of people and people along that spectrum,” Morales said. “You’re going to have people who support it fervently and just want to see it go forward no matter what, and you’re going to have some people who don’t want to see it happen at any cost.”
For all parties involved, Morales said it’s imperative the Authority “answer questions when they come up, make sure we’re providing answers and that we’re as transparent as we can be.”
Nonetheless, the Authority has been dogged by accusations of a lack of transparency, first for changing the bidding criteria mid-process for the first contract, and then selecting a winning bid team led by Tutor Perini, a construction company with some purported scars on its resume.
“They set in place all of the red flags to make sure that there was no risk that they were going to hire somebody that would be financially stressed, or even go bankrupt,” said Elizabeth Alexis, an advocate for transparent government and a former Wall Street executive, referring to the initial bid process.
“Tutor Perini triggered three of the red flags that the Authority had specifically put into their bid process,” she exclaimed.
“The only way to be sure that these guys are financially sound is to do your own homework, and the Authority has not produced a single page of documentation showing the work that they did to account for these changes,” Alexis said.
The “triggers” Alexis is referring to are changes affecting Tutor Perini’s financial status that don’t appear to have been included in the bidder’s evaluation. They consist of a Moody’s credit downgrade to junk bond status in the fall of 2012, a $377 million tax write-off in 2012 and a change in terms for a company bank covenant because Tutor could not maintain the proper ratios.
All of those developments were specifically cited in the ground rules for the bidding process, called the RFP (short for Request for Proposal), as an alarm bell for greater scrutiny.
We asked Morales if the Authority should be worried about the financial health of its lead contractor.
“No,” Morales responded, “we had five world class teams submit proposals to us and every one of them went through a very rigorous review process, including their qualifications and their standing as companies.
“After the initial determination was made we do a second review, including of all of the financials. And everything says that we’ve got a team that is technically capable of delivering [the project] and has the resources to do it.”
Morales also pointed out that Tutor Perini is not being examined exclusively on its own merit, but also as part of a consortium that includes Zachry Construction and Parsons Corporation.
“Among the three of them, there are multi-billions of dollars of resources available to them,” he continued, “and that’s who we’re working with as an entity here, so there really should not be any concern.”
Moreover, Morales said all the bidding teams were required to secure surety bonds from private sector companies, essentially ensuring the state would not lose its investment if the winning team could not complete the project.
Neither explanation satisfied Alexis, who helped found the group ‘Californians Advocating Responsible Rail Design.’
“It’s not [intended to be] that they can complete the project IF an insurer steps in and finishes for them,” Alexis remarked. “It’s is there going to be a problem with Tutor Perini? And it is a mess if your lead contractor goes bankrupt or even if they’re on the verge of bankruptcy, you just don’t want it to happen. Insurance is there as a backup.”
Ron Tutor, Chairman and CEO of Tutor Perini, told NBC Bay Area that the company has met all the financial requirements for performing the high-speed rail package. He says his firm has been profitable, completing billion-dollar projects throughout the country and currently carrying a working capital of more than $500 million.
Alexis, who says she’s poured over the company’s financial documents, isn’t buying that explanation, either.
“Tutor Perini went from having a lot of money, $300 or $400 million sitting around that they could use, to having $35 million that’s available for them now,” said Alexis. “They went from having no debt to having $800 million of debt over the last couple of years.
“They have been losing money on a cash basis for not just one quarter or one year now, but continuously for the past four years.”
The company’s Investors Report does show free cash flow at negative levels for at least the past seven quarters.
Tutor expressed incredulity when asked if the company had seen depressed levels of available money.
“Negative cash flow? We had one bad quarter when Hurricane Sandy hit,” Tutor said.
He attributed the rest of the lower cash figures to multiple acquisitions the company made for hundreds of millions of dollars.
Whether Tutor Perini’s financial health is an issue or not, however, the company irrefutably experienced several developments that would have qualified it for extra scrutiny under the ‘material changes’ section of the rules.
We asked Morales when the Authority knew of Tutor’s material changes, and how it responded.
“That whole question of material changes has been raised by someone who left out half a sentence,” Morales said, “which talked about material changes that affect [the company’s] ability to carry out responsibilities. You can’t separate the parts of the sentence the way they wanted to.”
Mr. Morales never answered when the Authority learned of the changes, nor how they were used in the evaluative process.
He did underscore that all bidders were put through a rigorous, multi-step evaluation, and required to secure surety bonds.