Steakhouse deal: How Port allegedly broke laws, hid costs from public

Mic Dinsmore had a problem.

The Port of Seattle had received just one bid for one of the largest contracts to build a new runway at Seattle-Tacoma International Airport. And it was 36 percent higher than the Port's $92 million estimate.

The solution?

Two days before Christmas 2005, then-Port CEO Dinsmore and airport director Mark Reis met with contractor Gary Merlino at a steakhouse near Sea-Tac.

Over a drink, they reportedly discussed cutting Merlino's bid by $9.4 million — just enough to keep it below a threshold that would trigger scrutiny from elected Port commissioners and the public.

The episode — and how in the end Merlino's company was paid the full amount of the original bid — is laid out in one of the most detailed findings of a scorching 334-page state audit of the Port released last month.

It offers a look at Dinsmore's conduct and the Port culture of cutting corners on construction projects, violating contracting procedures and misleading Port commissioners. The sweeping audit, which found the Port wasted $97 million in public money, led the U.S. Justice Department to announce a criminal investigation into possible fraud.

The auditors found: The Port's deal with Merlino's company, TTI Constructors, broke state contracting laws; Port staff hid important information about the contract from the Port Commission; and most of the purported contract savings were, in fact, "cosmetic" and never materialized, with the Port paying Merlino's company $124.8 million — the same amount as its original bid.

David Cotton, the lead auditor, said he believes the actions by Dinsmore and the Port staff were aimed at keeping the contract out of the public spotlight.

Former commissioner Alec Fisken agreed. "It was an effort to avoid a frank explanation of the status of the contract," Fisken said.

Port officials now admit the contract negotiations were "ill-advised" but argue that any shortcuts were intended only to get an important project completed.

Dinsmore and Merlino did not respond to requests for comment on this story.

A huge pile of dirt

The contract called for building a huge mound of dirt.

The Port, which runs Sea-Tac as well as Seattle's seaport, needed a 130-foot-tall dirt embankment to make its new 1.6-mile runway level with the two existing runways. It would take 500,000 truckloads of dirt to finish the job.

The work was split into two contracts, both awarded to TTI, "The Three Italians," a partnership of local construction firms Gary Merlino Construction, Scarsella Brothers and Tri-State Construction.

TTI worked on the first embankment contract in 2004 and 2005. Bids for the second contract were due Dec. 20, 2005.

In the weeks before the bid deadline, a Port engineer predicted the work would cost $92 million.

But based on what they were hearing from subcontractors, Port officials suspected they would receive only one bid, from TTI. They feared it would exceed the engineer's estimate by more than 10 percent, which would have required them to notify the five-member elected Port commission.

That meant commissioners might discuss the contract in a public meeting, and the media or third-runway opponents might raise a ruckus about cost overruns.

Just before the bid deadline the Port engineer revised the estimate upward to $105 million.

But TTI's bid came in even higher: At $124.8 million, the bid was 36 percent above the initial engineer's estimate and 19 percent above the revised one.

Port managers considered their options: Award the contract; rebid; or negotiate reductions.

Dinsmore intervened, according to the audit: On the afternoon of Dec. 23, he, airport director Reis and contractor Merlino met at Spencer's for Steak and Chops, known for its dark wood and gleaming martinis.

Afterward, Dinsmore ordered staff to negotiate a $9.4 million cut in the contract price, auditors reported.

Most of those supposed reductions were never realized, including a $4 million price cut based on the curious assumption that fuel prices would drop to $2 a gallon.

Broke law, audit says

From the start, the Port's negotiations with Merlino and TTI were illegal, according to the audit. State law prohibits negotiating with a bidder before a contract is awarded. The law is aimed at keeping public agencies from favoring a particular contractor by getting the contractor to drop its price after bids have been received, allowing it to appear the low bidder when it was not.

A Port manager, whom auditors would not name, told them the Port's top lawyer, Craig Watson, had approved the negotiations as legal because TTI was the only bidder for the embankment contract.

Watson disputed that, telling auditors "as far as I know I did not authorize negotiating prior to award and do not believe that would be appropriate."

Later, Watson sought to defend the Port's actions.

"Clearly this was an unusual process applied to an unusual situation," he told auditors. Because there was only one bidder, Watson reasoned, the law barring pre-award negotiations need not apply.

So while the Port's approach was "unconventional" and "not one that I am particularly comfortable with," he said, he was not sure it was "necessarily improper."

Brian Kittleson, a former Merlino vice president and TTI's project manager on the runway work until April 2006, said the talks didn't harm anyone.

"There was no one that was going to be hurt. If they had a second bidder, they couldn't have done that," Kittleson said in an interview.

Kittleson said other potential bidders likely were discouraged by stringent environmental requirements placed on the project by the state Department of Ecology.

The Port Commission was kept in the dark about the deal over the TTI contract.

On Dec. 27, 2005, the Port's chief engineer, Ray Rawe, notified the commission of the Port's intent to award the embankment contract to TTI.

But auditors said Rawe's one-page memo was misleading — "at best" — because it did not reveal that the contract award was 19 percent higher than the engineer's estimate. Auditors also said the memo contained a false statement about how the TTI bid was reduced.

Essentially, the auditors said, the Port and TTI made it look like less dirt would be needed for the runway just so the bid price would appear lower. Further, most of the $9.4 million in reductions would turn out to be a charade.

True, the Port did save $2 million by challenging TTI on its "mobilization" costs because TTI was already geared up for the job from its 2004-2005 contract.

But the remaining $7.4 million was "largely" or "purely" cosmetic, according to auditors.

The biggest chunk of nonexistent savings came from a negotiated adjustment in TTI's estimated fuel costs.

TTI's initial bid assumed diesel fuel for its trucks would cost $3 per gallon in 2006. But Port staff told auditors that Dinsmore believed fuel wouldn't cost that much because he had seen a federal government projection that prices would drop to $2 per gallon in 2006.

So the parties agreed that TTI would lower its bid by $4 million to match the $2-per-gallon assumption. When the job was completed, TTI would be compensated if the actual cost turned out to be higher.

At the time, the price of diesel was $2.52. By June 2006, it was up to $3.16, making it clear, auditors said, that TTI would get the $4 million back, rendering the Port's fuel negotiations "meaningless."

Cotton searched but couldn't find credible forecasts to support the notion that diesel prices would drop. Instead he found just the opposite — projections from the federal government that prices would remain high.

When auditors asked Dinsmore why he thought fuel prices would drop, the former CEO denied making such a claim and said he had not been involved in details of the negotiation.

The remaining $3.4 million in unrealized reductions, auditors said, came when the Port and TTI lowered the estimate of how much dirt was needed for the runway embankment. Cotton said that was deceptive and "only done to try and create the appearance the contractor was lowering its price."

In its official response to the audit — approved by new CEO Tay Yoshitani — the Port says the steakhouse meeting and subsequent negotiations were "ill-advised." The Port also admits it could have been "clearer" in its memo about the contract to the commission.

But, troubled by the audit, Port commissioners took the step this week of creating a special committee to investigate the Port's contracting procedures.

The audit's critique of the TTI contract helped spur the investigation, said Commissioner Gael Tarleton, who will serve on the committee with Bill Bryant, another new commissioner.

"It will definitely send a message to all Port employees that we don't have to choose between efficiency and openness," Bryant said. "And that, from this point forward, this commission expects both."

Bob Young: 206-464-2174 or byoung@seattletimes.com. Jim Brunner: 206-515-5628 or jbrunner@seattletimes.com

The information in this story, originally published January 25, 2008, was corrected January 27, 2008. A dirt embankment needed to build the third runway at Seattle-Tacoma International Airport cost $124.8 million. Previously, due to an editing error, a photo caption incorrectly said the third runway ended up costing $124.8 million. That was not the cost of the entire runway; it was the cost of just one contract for the runway.