Firm awarded no-bid contract to fix SFUSD payroll has troubling history

For nearly 10 months, the San Francisco Unified School District couldn’t assess the scope of its payroll fiasco. Now, at last, some numbers are in: A whopping 3,337 employees have opened help tickets with recent activity related to a payroll crisis that has left them unpaid or underpaid, according Alvarez & Marsal, the firm recently hired to assess and fix the EmPowerSF payroll system.

Alvarez & Marsal Managing Director Erin Covington delivered a grim two-week assessment of the crisis at the Board of Education’s Oct. 11 meeting: Those 3,337 employees submitted 6,492 tickets that have had “activity” in the past 90 days — and there are an additional 2,047 open tickets without recent activity.

The assessment concluded there is “a growing backlog of payroll-related incidents” and “due to a lack of capacity, no formal closed loop process exists to identify root causes, develop workarounds and long-term fixes, and identify potentially impacted employees.”

It seems unlikely, to say the least, that the firm’s contract with the district, in which it is paid $175,000 a week, will wrap up anytime soon. 

The district, notably, opted to award Alvarez & Marsal the contract for up to $2.8 million on Sept. 14, without putting the matter up to bid. The decision to skip public bidding, doing away with the process meant to ensure the most qualified and affordable contractor lands the job, has drawn scrutiny from multiple community members with extensive expertise in public contracting within the school district. 

And, while new Superintendent Dr. Matt Wayne only had positive things to say about Alvarez & Marsal before the Board of Education approved its contract, an examination of the company’s history revealed a more contentious past.  Perhaps its most pertinent controversy occurred in Guam, in 2016, when the firm played legal hardball with the U.S. territory’s Department of Education and was accused of stalling as a deadline approached, in order to undermine the public bidding process and elicit more money from the public client. 

At the Sept. 14 special meeting to approve SFUSD’s contract with Alvarez & Marsal, Wayne cited time pressure and a lack of staff and professional expertise as reasons for forgoing the bidding process. Time is of the essence; educators and staffers were already struggling to live in the Bay Area on a salary in public education before the payroll fiasco made things worse.  

But community members also saw carelessness in a financially strapped school district paying millions to a private contractor to fix an issue created by another private contractor, Infosys,  that didn’t do its job right, while skipping a process meant to ensure that the fixer’s job is done right. 

The contract extends through Jan. 31, 2023, unless either party gives 30 days’ notice to pull out. There is also a deadline: If the parties cannot agree on deliverables for the second phase of the contract, either may end it on 48 hours’ notice before the four-week triage phase ends. 

“It is unusual for a bid of this magnitude, for millions of dollars, not to go through sort of a public bidding process,” said former San Francisco Supervisor Sandra Lee Fewer, who served as the vice-president and president of the Board of Education between 2009 and 2017. “If there were issues that would limit the [payroll technology] company’s liability for mishaps in the original contract, that is even more reason to be much more diligent around contracting with another company to solve this problem, because you’re going to lose the faith of employees and the families of SFUSD if this doesn’t go right.”

Skipping public bidding for a $2.8 million contract

Rafael Picazo, SFUSD’s chapter president for the staff union, SEIU 1021, which oversees the district’s lowest-paid employees, agreed that it was unwise to skip the  public bidding process. 

“I think they needed to do a bidding process of finding the best qualified consulting firm to come in and fix the problem — not just anybody who says, ‘I can solve it,’ and then there’s no record or proof or references of the individual,” said Picazo, who has 30 years of experience reviewing public contracts.

Fewer and Picazo are not alone. Mission Local spoke to other former members of the Board of Education and a former teacher’s union president — and most said that skipping the bidding process to save time was not a legitimate excuse. 

Fewer said that the district’s financial crisis, and the need to regain public trust following the payroll debacle, made it especially important to hold a public bid.

“You gain trust through transparency,” she said.

Eric Mar, who served on the Board of Education from 2000 to 2008, said that he “absolutely” believes that there should have been a bid.

“There should have been some sort of process to vet a firm, for large contracts of that size especially, when you’re under so much scrutiny,” he said. “There are times when there’s a serious emergency, where a no-bid contract is valid, but it doesn’t sound like one of those emergency situations to me. But I’m not in the middle of what the board and superintendent are doing.”

Jane Kim, who served on the Board of Education from 2007 to 2010, didn’t pass judgment, adding that she didn’t have as much information about the matter as the current board members. She did say, however, that skipping a public bid should be done sparingly. 

“It is public taxpayer dollars, and you want to ensure that you’re getting the lowest cost for the highest quality service. So generally, an open bid contract is more likely to ensure that type of outcome,” she said.

Former commissioner Norman Yee, who served on the Board from 2005 to 2012, was the one interviewee who said he could see the time pressure as a good reason to skip the bid.

“You could question it, but to me, it’s not a black and white situation; it’s more grayish, where there’s a lot of reasoning, it seems, to do what they did.”

Dennis Kelly, the SFUSD teachers’ union president from 2003 to 2015, called the situation an absolute emergency, but he still thinks it was inappropriate to bring in the firm without public bidding.

“It should have been an expedited process,” he said. “People cannot be left out there hanging. People cannot carry on when they have no confidence in the system that’s employed them. But it should not have been a long process. It should have been a very quick process.”

Superintendent Wayne, who took over for Vincent Matthews in July, has said that the district spent August looking for a fixer. How much time a public bid would have taken instead largely depends on how long is allotted for the advertising period, a public agency contracting specialist told Mission Local, and he concluded that an expedited public bid could be done within two to six weeks. 

That estimate for an expedited process was in line with those of the other interviewees: Fewer estimated two weeks. Kim estimated six to eight weeks. Kelly, who said he has “a good 20 years reviewing public contracts,” said he could see it “easily being done in two weeks to a month.” 

Because most contractors and public agencies use templates, defining the scope of work to put out an advertisement can take as few as one or two days, the contracting specialist said. Two weeks, he said, was “the generally accepted amount of time” to wait for bidders to submit proposals, and reviewing bids and negotiating contracts can each take one to two weeks.

Kevine Boggess, vice president of the Board of Education, said that when he voted to approve the Alvarez & Marsal contract, he wanted to give the superintendent the benefit of the doubt about how to resolve the issue how he saw fit without micromanaging him.

“I would typically say that I’m opposed to skipping the bidding process. I think that it’s better for all parties involved if there’s a bidding process that allows for both the mix of price and service of product,” he said. “But I feel like, in this instance, I’m okay with less of a competitive bid process, so that we can prioritize getting staff paid and getting the issue resolved. As a board member, I really felt that we had taken steps to resolve this previously, and it seems like those things have fallen short.”

He added, “If this isn’t a solution, the superintendent is going to be held accountable. He’s responsible for fixing this issue. We’re hiring the consultant to support the superintendent and district to solve this issue, and he’s accountable.”

The superintendent said the school district had “looked to see what firms exist that have helped districts in times like this when they are facing a crisis, have systems issues and quickly come in and help someone get results and get a district in the right direction.” 

A cursory Google search of Alvarez & Marsal, with the top results coming from its own website, tells of a turnaround management firm that has been instrumental in lifting school districts out of their crises.

But a deeper look shows a more controversial record. Perhaps the most clear case, with a legal record to back it up, happened in Guam.

Pressuring the Guam Department of Education

The Guam Department of Education entered a contract with Alvarez & Marsal in 2010, when the U.S. Department of Education assigned it “high-risk” status for being unable to properly manage and account for around $55 million in federal grant funding. Alvarez & Marsal was tasked with providing fiduciary oversight and management that included, but wasn’t limited to, that federal funding. 

When Alvarez & Marsal’s two-year contract of about $4 million per year — renewed at more than $2 million annually until 2016 — was seven months from expiring, the Guam Department of Education put the successor contract out to bid on March 21, 2016. Alvarez & Marsal finished second and lost, but that was not the end of the matter.

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Instead, the consulting company challenged the department’s decision by filing an appeal with the Guam Office of Public Accountability on Aug. 19, 2016. In a move that circumvented the public bidding process and appeared to effectively force the Guam Department of Education to extend its contract with Alvarez & Marsal, the firm’s appeal became a months-long morass that prevented Guam from hiring the actual winning bidder and threatened to compromise $55 million in federal funding.

The Guam Department of Education was required to have a third-party fiduciary agent by its Oct. 31 contract expiration with Alvarez & Marsal, lest it risk losing $55 million in federal grants that funded salaries for more than 850 employees, according to a declaration filed for the department by Taling M. Taitano, at the time Guam’s Deputy Superintendent of Finance and Administrative Services. 

With those employees’ jobs on the line and the very real possibility of $55 million evaporating, Alvarez & Marsal left Guam’s Department of Education a scant 10 weeks to resolve the appeal and hire a contractor — and, at every turn it could, Alvarez & Marsal took steps to prolong the process.

When Guam Department of Education legal counsel James Stake requested an expedited appeal, citing the time crunch in Taitano’s declaration, Alvarez & Marsal filed a document opposing the request, arguing that the department should have held a public bid earlier.

And, with its initial appeal document mentioning that a public records request was filed for bidding documents, Alvarez & Marsal threatened to take the public records request to the Superior Court of Guam, “resulting in further delay of this appeal and potential fines against the public officials who refuse disclosure and award of attorneys’ fees and costs against [the Guam department].”

The firm’s lawyer, Tim Meaghan, stated that there was no need for the Guam Department of Education to lose service or federal funding.

“None of the [U.S. Department of Education] grant funds, employee salaries, and other services are in jeopardy if [the Guam Department of Education] obtains an extension and amendment of the [contract] for as long as is necessary,” she stated.

Eventually, the two parties had a pre-conference hearing set for Sept. 16, just six weeks before the deadline.

Then, Alvarez & Marsal requested delaying it to Sept. 23, stating that its counsel would not be on the island at that date.

At this point, it appeared that the Guam Department of Education would run out of time. It usually takes between six to eight weeks between the pre-hearing and the hearing, said Jerrick Hernandez, an auditor at the Guam Office of Public Accountability. 

In the final argument from the Guam Department of Education’s Sept. 6 agency report, Stake, the department’s legal counsel, accused Alvarez & Marsal of intentionally trying to run out the clock. 

“Appellant’s motive for a drawn-out battle is quite clear; to keep the procurement stay in place for (the bid) as long as possible because it would leave GDOE with no other options but to extend the incumbent contract (which is with the appellant),” Stake argued. 

Alvarez & Marsal got its way: On the same day, the parties agreed to dismiss the appeal. Despite losing a public bid, the firm got its contract extension shortly after, followed by one renewal after another.

After 12 years in Guam, and six years after it lost out in a public bidding process, the firm continues to manage the same annual funding in Guam today. 

Mission Local reached out to administrators and board members of the Guam Department of Education, some of whom initially appeared eager to reply, but then did not respond or refused to be interviewed. One stakeholder in Guam cited an ongoing procurement with Alvarez & Marsal as a reason for not speaking to the press. 

Alvarez & Marsal and its lawyer for the Guam appeal did not respond to multiple requests for interviews. Alvarez & Marsal Managing Director Erin Covington, the firm’s education practice leader who’s leading the firm’s work with SFUSD, declined to talk to a Mission Local reporter at the Oct. 11 meeting.

Hearing a summary of the appeal from Mission Local, Fewer, the former vice-president and president of the Board of Education, said, “What happened in Guam and the tactic that this company used … would be a red flag for me.” 

Boggess, the current Board of Education vice president, said in response to Mission Local’s summary of the appeal that, had he been aware of this matter before approving the contract, he “would have asked a question about it, at least to give them the opportunity to explain what would be kind of perceived as a bureaucratic strongarming of a public process.”