The Big Sleazy

Elizabeth MacDonald and
Megha Bahree, 06.05.06

Nine months after Hurricane Katrina the recovery effort has been slow, expensive--and riddled with fraud.

The chaos following Katrina gave an interesting opportunity to a contractor working for AshBritt of Pompano Beach, Fla. According to the U.S. Army Corps of Engineers, this fellow, assigned a trash-hauling job, loaded up his truck from a dump site in Jackson County, Miss., then pulled around to the entrance tower to the same dump site in order to earn a fee. He got caught after playing this game twice. Others broke the rules repeatedly. Subcontractors working for Phillips & Jordan of Knoxville, Tenn., says the Corps, took advantage of extra payments for trash carried more than 15 miles to a dump by routinely overstating mileage. Other haulers, say the auditors, found various ways to overcharge the government by exceeding or violating their contracts. One contractor and a Corps inspector pleaded guilty to conspiracy to commit bribery in a scheme to charge for 19 false trips to the dump.

A few stolen bucks per haul doesn't seem like a lot. But multiply it many thousandfold within the $2 billion awarded to four garbage contractors and it starts to pile up. Throw in other varieties of mischief in the $15.3 billion spent so far in the recovery (of $62 billion earmarked and another $20 billion or so on the way)--and you have the makings of an epic scam. The government was in such a hurry that it created an open invitation to cheat. No-bid contracts were often the rule. The system of layering subcontractor on top of subcontractor, which accounts for 70% or so of the work done so far, according to Congressional investigators, invariably drives up costs. There has been little oversight: In at least one case the Corps agreed in advance not to scrutinize contractor bills if they exceeded initial estimates by 50% or less. "This is not Corps policy," says an inspector for internal review, who says the Corps stopped the practice. "These were lower-level [people]."

Government watchdogs are now starting to howl, unleashing 97 separate investigations at 21 U.S. agencies. At the Department of Homeland Security, which oversees the Federal Emergency Management Agency, up to 150 investigators are crawling over the contracts. Democrats are calling for hearings. "I still think we'll keep paying too much--three to four times as much as taxpayers should for Katrina contracts--because we have no one on the ground who's watching," says Senator Tom Coburn (R--Okla.). He is cosponsoring, with Senator Barack Obama (D--Ill.), an amendment to the emergency supplemental bill requiring that relief contracts of $500,000 or more be subject to open bids.

So far the probes have focused on penny-ante stuff--like using the $2,000 debit cards distributed by FEMA for food and shelter to buy adult entertainment and handguns. To date 261 people have been criminally charged with hurricane-related con games, resulting in 44 convictions, says the Justice Department. Two FEMA officials pleaded guilty to taking $20,000 in bribes for inflating the head count for a $1 million meal service contract. But there's more to come, lots more. Among the areas under investigation:

Transportation. Landstar System, a trucking company in Jacksonville, Fla., won a $500 million, five-year contract in 2002 from the Department of Transportation to shuttle people during national emergencies. Government auditors contend that Landstar waited 18 hours after Katrina made landfall to order 300 buses to evacuate residents--from a subcontractor, Carey Limousine. Carey then palmed the job off on yet another sub. Hurricane victims had to wait six days to be rescued, at a $137 million cost to taxpayers and a $32 million overcharge. Landstar insists it got four buses to New Orleans by 6 a.m. two days after the storm, but just four hours after it got its government marching orders. It also disputes the claim that it overcharged, claiming the money in question was part of an advance to support subcontractors.

Roofing. Contractors, who received $300 million in limited-bid deals from the Corps, charged an average of $2,480 per home to nail blue tarpaulins on top of damaged homes. The job typically takes less than two hours and costs only $300, says a Congressional report. Overruns at the three main roofing contractors--LJC Defense Contracting of Dothan, Ala., Simon Roofing & Sheet Metal of Boardman, Ohio and the Shaw Group of Baton Rouge--were inevitable, given the chain of handoffs to subcontractors and the negligence of authorities. (Simon insists it did more than just lay tarps.) Instead of inspecting the work, the Corps allowed prime contractors to sign off on their own work before submitting bills. In some cases the Corps visited sites for which bills had been submitted--and discovered that the roofing work had not been done.

Housing. FEMA paid $3 million to an unnamed contractor for 4,000 camp beds on behalf of evacuees; they were never used, according to the Government Accountability Office. "The camp beds are available for future disasters," says a FEMA spokesman. The GAO says FEMA paid another unnamed company $10 million to renovate military barracks that were supposed to serve as temporary housing but were used by only six occupants.

Congress has called for investigations into FEMA's award of a $236 million contract to Carnival Cruise Lines to lease three ships for six months to provide temporary housing for hurricane evacuees and emergency personnel. That cost amounted to more than $50,000 per person, nearly $300 a night. Why so high? Because the contract allowed Carnival to charge for lost revenues it would expect under normal operations (including gambling and liquor sales on board), plus any additional expenses incurred in emergency conditions. "The net effect was profit neutrality," says a Carnival spokeswoman. "Our objective was to make only what we would've made on a normal basis." FEMA says the ships provided "comfortable, safe, temporary homes to disaster victims and relief workers."

A no-bid $154 million contract to Bechtel Corp., to install and maintain 35,000 travel trailers in the storm-damaged states, has also come under scrutiny. Government auditors nixed one-third of this sum after they caught Bechtel billing twice for the same maintenance work. Bechtel says it never double-billed. It claims the $154 million was an estimate and that it never put in for that amount.

FEMA's most expensive flop: blowing $860 million on 25,000 modular homes. Government investigators charge that just 100 have been put into service and none in the worst-hit parts of Louisiana and Mississippi because the agency's own rules prohibit their use in a floodplain. (FEMA disputes this, claiming that more than 6,000 mobile homes have been leased to hurricane evacuees.) About 9% of the shelters can't be used anywhere since FEMA didn't tell contractors to build to the required length of less than 60 feet. All told, the agency spent $1.8 billion on temporary homes; $1 billion went to companies without full and open competition.

Schools. The Corps upped an existing contract with Akima Site Operations by $39.5 million to install 450 portable classrooms in Mississippi . The GAO says that Akima's price quote was 34% more than the company itself had offered to charge just one day before the contract was signed; it was also nearly double what Mississippi businesses said they would bid. Akima says the charge increase was due to feds' stepped-up delivery date.

Scariest of all is the job of rebuilding New Orleans' levees. Estimates have tripled to $6 billion; completion has been pushed up to 2010. To date, the government has disbursed $800 million. How good is the work? The U.S. Army Corps of Engineers says it has inspected the entire system. Which makes folks like Senator Coburn nervous. "Why pay the Corps to fix problems [with the levees] it's been working on for 46 years and didn't get right in the first place?" he asks.

Hurricane season starts June 1.