'Pay-to-Play' taints political scene: scandals Rock City, imperil Mayor's bid.

Call it the year of the quake.

No matter bow the various investigations, political maneuverings and campaigns play out, 2004 will be remembered as the year that shook the foundations of L.A.'s political establishment.

Just one year ago, Airport Commissioner Ted Stein, Deputy Mayor Troy Edwards and Port Director Larry Keller were among the most powerful city officials in Los Angeles, cutting or scuttling deals on behalf of Mayor James Hahn.

Hahn himself appeared on his way to a relatively smooth re-election, having appointed a popular police chief, presided over a drop in violent crime and defeated an attempt to split up the city.

But Stein, Edwards and Keller are all gone, caught up in probes involving the city's contracting policies. So is Doug Dowie, the politically connected manager of the L.A. office of public relations giant Fleishman-Hillard Inc., which has been accused of padding its bills to the Department of Water & Power and using DWP funds to prop up Hahn's image.

Meanwhile, Hahn is locked in a tough re-election battle, as challengers seize upon the vulnerability that the scandals have exposed. Allegations of corruption within the Hahn administration dominated the debate earlier this month among the five major contenders.

Among other things, the revelations have brought to light the longstanding practice of contractors making contributions to elected officials in the belief they will be given favorable treatment. They have also exposed weaknesses in the city's structure of citizen commissions and shown the lack of oversight over multi-million dollar contracts, and have led to investigations by both county and federal law enforcement agencies.

"When the perception exists that you can't get business from the city unless you're a significant contributor to City Hall campaigns, that affects the entire city," said City Controller Laura Chick, whose audits of the airport and harbor departments and of the DWP helped spur the law enforcement investigations. "There's less competitive bidding, more expensive contracts and little attention to the quality of work that's done."

Institutional changes

Perhaps it's no coincidence that the scandals erupted in the first administration since the city charter was changed to increase the power of the mayor.

All it took were a few high-stakes issues--an $11 billion plan to renovate Los Angeles International Airport and, even more importantly, the threat of secession in the San Fernando Valley--for the mayor to pull out the stops.

Trailing in the polls on secession and behind in fundraising, the campaign led by Hahn turned to contractors to pony up the millions of dollars needed for an ad blitz.

"This is where the 'pay-to-play' environment got out of control," said Bob Stern, president of the Center for Governmental Studies in Los Angeles. "They had to raise huge sums of money very quickly, there were no contribution caps because it was an issue campaign, and there was a great fear that secession would succeed and the city would be ripped apart. As a result, people appeared to get too aggressive in raising money and there was a climate of, 'You had to give to get.'"

But the new charter also elevated the formerly toothless position of city controller to become the mayor's biggest institutional watchdog and antagonist.

Charter reform gave the city controller's office more power to audit money flows and contracts at city departments, a power that Chick, a former city councilwoman, has exploited to the fullest.

"A big priority of mine when I got elected was to make city government more transparent," Chick said. "I also want to change the rules of the game. I want the rule to go away that if you want to access City Hall and get contracts, you have to be a significant contributor to City Hall campaigns."

Former Mayor Richard Riordan, who pushed hard for charter reform, Said this was part of his attempt to make City Hall more accountable.

"The changes in the charter helped bring all this out into the light of day," said Riordan, now the state's education secretary. "Before, everything was so diffuse, nobody could be held accountable. Now, the mayor is responsible for commissioners and department heads and the controller has the responsibility for holding the mayor accountable."

Chick said she focused first on the three so-called proprietary departments--airport, harbor and DWP--because "eight years of experience on the City Council taught me that these departments award huge amounts of contracts to the private sector. Also, because they have their own sources of revenue and their own budgets, they have the least scrutiny from the Council and from the public."

Chick first made headlines with her audits of the DWP's "green power" programs and lavish spending on parties and other perks. But it was her decision to turn over results of her audit of contracting practices at Los Angeles World Airports to the L.A. County district attorney's office in October 2003 that took the "pay-to-play" investigation to a new level.

Earlier this year, investigators with the U.S. Attorney's office and the office of District Attorney Steve Cooley joined forces. Since then, they have issued subpoenas for dozens of witnesses and thousands of e-mails, including those from Hahn's office. But so far, despite periodic buzzes of activity, there have been no indictments or other enforcement actions.

"We take our time, we're thorough and we are careful about our facts and we make sure the law will support whatever charges we may bring," Cooley said last week.

Whatever the prospect for indictments, it's clear that an unprecedented confluence of events and personalities helped trigger the climate for the alleged "pay-to-play" practices to flourish.

The landmark charter reform package approved by L.A. voters five years ago gave more power to the mayor to appoint city commissioners and department heads, thereby making them more accountable to him. It also cemented a political patronage system among city commissioners that had been developing for 20 years.

When Hahn took office in 2001, he put two of his best fundraisers--Stein and Edwards--into key posts. He made Stein--a powerful attorney and commissioner under Riordan--president of the commission in charge of setting policy and doling out contracts at one of the nation's busiest airports. The appointment coincided with the planning for a massive overhaul of LAX, one of the largest public works projects in the nation.

Even before Hahn appointed him, Stein had already alienated many colleagues with his unyielding and authoritative style.

"He really enjoys being a power broker, a mover and shaker," said former Councilwoman Ruth Galanter.

After his appointment, Stein took the lead in the mayor's planned makeover of LAX. But his practice of sitting on the panels that selected airport contractors began to infuriate his critics. "Ted, as a commissioner, was overstepping the line and essentially trying to manage the airport instead of having the manager manage the airport," Galanter said.

Meanwhile, Hahn had named the young Edwards, who had volunteered on his mayoral campaign, deputy mayor in charge of overseeing the three proprietary departments.

Edwards quickly earned a reputation at City Hall as the go-to person for anyone wanting to do business with those three massive operations. He was also relentless in the pressure he applied to key interest groups to go along with Hahn's policies. One such effort aimed at the Economic Development Corp. of Los Angeles County backfired, prompting the influential group to oppose Hahn's original airport plan last year.

Secession fight

All this could be considered part of normal hardball politics in a big city. What changed everything was the fight against a powerful secession movement in the San Fernando Valley.

In the early spring of 2002, secession was gathering steam. Despite repeated efforts by various city officials to block it, a measure to break apart the city qualified for the ballot and early polling indicated it stood a good chance of passing. City officials were slow to react and had to hurriedly assemble a campaign to defeat it. That's when Hahn turned to a fast and reliable source of money: city contractors.

"It was a fundraising activity outside the normal cycle of council races, and then there was the magnitude of the amount," said City Councilwoman Cindy Miscikowski. "It wasn't, 'You're going to be asked to contribute $500 or $1,000.' There were no caps on the amounts that could be raised. That magnification may have also magnified the feelings, concerns and unease."

In her airport audit, Chick found that when commissioners, including Stein, sat in on airport staff meetings the contracts had poor documentation. She stopped short of alleging any illegal activity had occurred but noted in a press conference that she began looking at the airport because of allegations of pay-to-play.

"I was hearing from people receiving phone calls and making contributions, as well as people who felt the door had been shut on them," Chick said last week.

Stein and his defenders maintained he was only sitting in on staff discussions to ensure there was no favoritism in awarding contracts. Nonetheless, Stein, who did not return calls for this report, became a focus of the investigation. Edwards, who was also under scrutiny for his activities at the port, was summoned by the grand jury at the District Attorney's Office.

Allegations surfaced that Edwards, along with Tim McOsker, Hahn's chief of staff, were pressuring the Board of Harbor Commissioners and Keller to favor one lease deal at the Port of Los Angeles over another.

The port had been under scrutiny since June 2003 when an audit released by Chick's office criticized its top officials for conducting business in secret and without proper documentation or input from the community.

After pay-to-play allegations began surfacing at LAX in late 2003, sources told the Business Journal that McOsker stepped in to undo a port lease deal that had been engineered by Edwards over the objections of port staffers. The staff had recommended granting the lease on the former Matson Navigation Co. terminal to P&O Nedlloyd, but after Edwards became involved, that process was halted. He began taking steps that would have allowed the lease to go to a bidder Hahn's office apparently favored, Evergreen America Corp.

"At the time I was being directed by the commission, it seems Larry (Keller) was being directed by the mayor's office on the Matson site," said Al Fierstine, former business development director at the Port of Los Angeles. "Every time they went into closed session with either Troy Edwards or McOsker, the direction of the board seemed to change."

With scrutiny mounting over the administration's involvement, the lease was put out for re-bid, and last week the Board of Harbor Commissioners voted to grant it to P&O Nedlloyd. (Nedlloyd, meanwhile, had filed a lawsuit alleging port favoritism toward Evergreen.)

Edwards and McOsker did not return calls.

Doane Liu, who replaced Edwards as Hahn's deputy mayor in charge of 13 city departments, including the port, said McOsker pushed for the RFP as part of the mayor's no-net-increase goal, not due to the "pay-to-play" allegations.

"The port had never done an RFP before," said Liu. "Tim said this is a good time to do it."

Port spokesman Arley Baker said the Board of Harbor Commissioners' unanimous decision Dec. 15 to direct port staff to enter into negotiations exclusively with P&O Nedlloyd is proof of a change in the way the port does business.

"We are confident the changes we have made in the past year are going to be met with optimism by (Chick's) office," Baker said. "We're making great strides toward more transparent procedures."

Resignations

Hahn stood by Stein and Edwards for nearly six months after allegations first surfaced, saying they had not been found to have committed any wrongdoing. The two finally resigned last spring, amid a raft of other staff departures that appeared unrelated to the pay-to-play inquiries.

Ironically, Stein's departure helped clear the way for Hahn's airport plan to win City Council approval. Prior to his leaving, Hahn's plan appeared dead in the water as Stein remained steadfast in his "all-or-nothing" approach.

But with Stein gone, Miscikowski, who represents the airport area, felt freer to propose her own compromise. She bifurcated the original proposal into $3 billion worth of "consensus" projects that would get started first, including widening runways and setting up a consolidated car-rental facility; put off were $7 billion to $9 billion in "yellow-lighted" projects, such as the controversial check-in complex in Manchester Square. Once she persuaded Hahn to sign on, the way was cleared for council approval last month. The plan still needs federal approval and faces a lawsuit from the county.

At the harbor, Chick's audit landed at a time when environmental activists and the surrounding residential communities were becoming increasingly critical of the port, which they believed was ignoring community concerns.

L.A. City Councilwoman Janice Hahn, who represents the harbor area and is the mayor's sister, called for Keller's ouster. After months of pressure, Keller resigned in October, only to create another firestorm by negotiating a $540,000, three-year consulting contract with port officials. After a public outcry, the City Council rejected the contract; Keller is currently in negotiations with successor Bruce Seaton on a revised contract with tighter controls.

Chick has opened another audit looking at the Keller contract and the controversial negotiations over the former Matson terminal. Keller could not be reached for comment.

Fleishman troubles

Meanwhile, Chick was examining a $9 million, three-year contract extension that Fleishman-Hillard secured in 2002 with the DWP. The contract had been started under Riordan's tenure as a way to help the utility prepare for electricity deregulation. But it grew over time to encompass all of the DWP's public outreach, despite the agency having its own public relations staff.

The extension, granted internally at the DWP without any City Council review, gave carte blanche to the public relations giant to bill the agency at exorbitant rates, according to an audit Chick's office conducted on the contract.

Chick launched her audit of the Fleishman contract about a year ago, after she refused to pay bills for exorbitant charges racked up by agency employees on the DWP's account.

Even before its completion, the audit had major consequences for the DWP and for Fleishman. At the time it surfaced, the DWP was proposing an 18 percent hike in water rates to cover the costs of maintaining the water system and for security upgrades. The investigation helped fuel a backlash against the DWP that eventually forced the City Council to pare back the hike to 11 percent.

Dowie, the top FIeishman executive in L.A., was removed from his post and placed on indefinite paid leave, pending the outcome of the local and federal investigations. Also, Fleishman officials ordered work halted on all its contracts with the city, while Hahn ordered all outside public relations contracts with the city terminated.

Dowie had made no secret of his support for Hahn and aggressively sought to expand Fleishman's influence at City Hall. Within the last 18 months, Deputy Mayor Matt Middlebrook left Hahn's office to join Fleishman's San Francisco office and Fleishman executive Shannon Murphy joined Hahn's staff as his communications manager. (Middlebrook has since returned to L.A. as government relations manager for real estate developer Caruso Affiliated.)

In October, Chick released her audit of the Fleishman contract, alleging that Fleishman overbilled the DWP by at least $4.2 million, including several hundred dollars each for phone calls. This audit also called attention to numerous examples of Fleishman using DWP funds to promote Hahn's image, going so far as to write press releases that supposedly emanated from the mayor's own office.

The release of the audit came just weeks before the first debate in the mayoral campaign, ensuring that the pay-to-play controversy would stay on the radar screen, at least through the March 8 city primary election.

To date, there have been only minor reforms. Commissioners have been banned from fundraising and from sitting in on staff meetings. Outside public relations contracts have been abolished citywide.

Other reforms, such as a ban on any companies that have a contract of $100,000 or more with the city from raising money or contributing to city campaigns, have stalled.

Hahn has tried to distance himself from the spreading ethics problems and only reluctantly put forward sweeping reforms despite pressure from Chick, the city Ethics Commission and the City Council. A request to interview Hahn was declined. Hahn spokeswoman Sahar Moridani said that the mayor has not been slow to respond to the call to reform. Moridani also denied that the mayor ever tolerated a climate of pay-to-play within his administration.

Hahn's reforms would ban city contractors and lobbyists from fund-raising for candidates and elected officials. Campaign consultants would be banned from lobbying city officials.

Chick last week blasted Hahn's response to the pay-to-play questions, calling his proposals for reform a "phony effort that doesn't include things like subcontractors and the whole area of land use and development agreements."

Meanwhile, Chick is going forward with audits of the Recreation and Parks Department, the Planning Department and the Building and Safety Department, all now in progress.

The upcoming election, though, is likely to slow implementation of broader reforms.

"Contracts have been the Achilles' heel of good government in L.A.," said Raphael Sonensbein, a professor of political science at California State University Fullerton who served as executive director of one of the two L.A. charter reform commissions. "It's not clear that the city has come up with a foolproof way to make sure that contracts go to the best qualified people."

Last March, Hahn set up a blue-ribbon commission chaired by then-USC Professor Erwin Chemerinsky to look at reforming the contracting process. The commission was initially scheduled to release its recommendations in June, but various delays have pushed that date back several times. Chemerinsky, now a law professor at Duke University, last week said the panel is now set to release its recommendations next month.

Sonenshein said another major area that needs attention is the role of city commissions. One path to reform could focus on reducing the ability of commissioners to influence the doling out of contracts.

Meanwhile, the city doesn't even have a citywide contract database that would make it easier to track the awarding of contracts and enforce any changes to the way contracts are awarded. Hahn officials promised the database months ago, but there has been no timeline given to the Ethics Commission for when it would be ready.

"Even the strongest reforms that we can come up with would be ineffective without a computerized database of contracts," said Ethics Commissioner Bill Boyarsky.

Hahn, who faces challenges from city councilmen Antonio Villaraigosa and Bernard Parks, along with former Assembly Speaker Robert Hertzberg and state Sen. Richard Afarcon, may yet ride out the storm. Much now hinges on whether the investigations yield any indictments against current or former officials in his administration.

"If indictments or other law enforcement actions do come down before the election, that could have a dramatic impact on the mayor's race," said Stern. "It would also increase the pressure to enact reforms."