The St. Louis County school district had been losing hundreds of students as jobs disappeared on northern Minnesota's Iron Range when it asked Johnson Controls in 2008 to begin analyzing how the district could sustain itself.
A year later, as the future looked even more bleak for the district, it considered its options. If it didn't shrink within a few years, it would be more than $4.1 million in the red and would need to begin dissolving. But if the school board adopted Johnson Controls' plan, the district would be $1 million in the black.
So, on a summer evening in 2009, more than two dozen St. Louis County residents, some too emotional to speak, stood before the school board as it weighed whether to close four K-12 schools along with the high school in Tower and build two new schools to replace them. The majority reluctantly told the board it should do whatever's necessary to keep the school district alive, even if it meant closing schools and raising taxes. The board agreed.
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Today, thanks to a voter-approved bond referendum, construction of two new schools and upgrades to three others are nearly complete. The $78 million reconstruction project was directed by the very same company that pitched the consolidation — Johnson Controls.
But the pride shared by residents over shiny new gym floors and modern light fixtures has given way to regret and, in some cases, anger at the consultants with whom leaders had entrusted the district's future.
Instead of the promised cost savings, the school district last week said it is facing a $650,000 gap in its $21 million budget, which might need to be closed using staff and program cuts.
"There is reason to believe we'll never see the savings," said Zelda Bruns, who has served on the board since the '80s and is currently its vice chair. And Bruns said going back to the voters for more help would be a tough sell.
Along with the financial jolt, community members — especially those who opposed the project to begin with — have questioned the role Johnson Controls played in the process, saying the company exploited the school district's trust and created a conflict of interest. They are questioning the ethics of the deal: Should the same company that recommended reconstruction also profit from the subsequent work?
"[District officials] told us we were going to go into dissolution. ... It scared everyone," said Troy Swanson, a Tower resident who joined the school board last year. "It was a perfect situation for [Johnson Controls] to come in and basically make it a crisis, and they're going to get paid by how large the bond referendum is."
Swanson said closing the high school in Tower "ripped the heart of our community out." But as the project winds down, St. Louis County residents will have to accept the reorganized school district and its financial uncertainties.
"There are some things we just can't change at this point," Bruns said.
FROM CONSULTANT TO PROJECT MANAGER
Johnson Controls is a multinational engineering company based in Milwaukee that produces car batteries, vehicle interiors and building control systems. Roughly a third of its $40 billion in sales last year came from its building efficiency unit, a part of which includes working with school districts.
Johnson Controls opened an office in Duluth in the 1950s and has worked with more than 60 Minnesota school districts on improvement projects. St. Louis County district officials already knew Johnson Controls from its work on some of their schools' mechanical systems. When the district needed help deciding how to overcome previous failed property tax levy attempts and continue operating, Johnson Controls was a natural choice, and the district didn't formally look at anyone else.
The district signed several contracts with the company starting in 2008 and agreed to pay it and its subcontractors more than $400,000 to do work ranging from assessing buildings and analyzing demographics and finances to recommending survival scenarios and communicating plans to constituents.
Later, Johnson Controls was hired to oversee the consolidation from start to finish and update the board on its progress. Through a "professional services" contract, the district is paying the company nearly $12 million for soft costs like engineering, design, project management and commissioning services.
The question of a possible conflict of interest wasn't foremost on the minds of board members as they looked to solve the district's budget woes.
Besides projecting a $4 million budget deficit by the 2011-2012 school year if the district failed to act, Johnson Controls said the district would instead have a $1 million surplus under the consolidation plan. Savings would come through staff reductions and operating fewer schools.
Andy Larson was the lone board member to vote against the consolidation plan. Larson, who's no longer on the board, said he didn't see how the savings could be so substantial, and he questioned some of the numbers at the time. But he said the board should have dissected the company's work more than it did.
"The board really needed to sit down, calculators in hand, and thoroughly vet the proposals that are given," he said. "I don't know that we did that."
Instead, he said, board members were focused on the big picture — what option would be best in the long run to ensure the district's continued existence?
Superintendent Teresa Strong declined to be interviewed for this story. Strong became superintendent after the district started working with Johnson Controls. In an e-mail to MPR News, Strong said the district is satisfied with the restructuring project and believes students are receiving a better education and improved access to extracurricular activities under consolidation. She said Johnson Controls has provided "valuable services" to the district but declined to answer specific questions about the company's projections.
Charles Rick, the former superintendent, did not return repeated phone messages seeking comment. Rick was hired in 2005. When he announced his resignation, he told board members he planned to retire.
TOO SOON TO JUDGE?
Johnson Controls has defended its projections. Larry Schmidt, Johnson Controls' regional sales manager for K-12, described them as a "snapshot in time" that wasn't able to take into account the closing of a lumber plant in Cook that left more than 100 workers without jobs, or new census figures that were released last year that showed a decline in the pool of K-12 students living within the district.
"They're based on information that was provided by the district. At the time and we still do believe those projections to be accurate," he said.
Other things have also affected the district's finances, Johnson Controls and district officials said. The consolidation project is expected to come in at budget, but not without unanticipated costs, such as dealing with asbestos that was discovered after crews started doing work. The district also had to defend against lawsuits associated with the restructuring plan.
In an e-mail to MPR News, district business manager Kim Johnson acknowledged the district's projected budget deficit but pointed out other investments the district has made: more early childhood family education classes, new technology such as iPads, and extra professional development opportunities for teachers.
School board member Bob Larson said people shouldn't be drawing conclusions about the validity of those earlier projections before the plan has been fully implemented. One of the new schools won't open to students until this fall.
"It's pretty early to try to evaluate it," he said. "After we've had another year with the new North Woods School building open and all the other buildings running, then we'll get a chance to look at our finances."
Others point out that the cost savings data will never tell the whole story. The new and upgraded schools are better than the old ones, and students have access to more course offerings under consolidation, said former board member Tom Beaudry. "We tried to get kids a better education and the facilities to support that. We've done it," Beaudry said.
Bruns, who voted in favor of the consolidation, is also proud of the new schools and says the district's students are better off now. But she's concerned about what it will take to keep it that way — revenues will go down if enrollment declines, and the district will still have transportation and maintenance costs even if the new buildings are more efficient.
"I don't see how we're going to get more revenue, and it doesn't look very promising from the state," she said.
CONFLICT OF INTEREST?
One reason those earlier projections have been scrutinized throughout the process is that a large contingent of residents, mostly in the district's northern communities, fought the consolidation plan. They argued that closing so many schools wasn't the best way to serve the district's 2,000-some students spread over more than 4,000 square miles, and the long bus rides would continue for many students.
The other reason for the scrutiny surrounds Johnson Controls' dual role. The company was hired for planning and then for implementing, as well as for some of the work itself — such as an $89,000 bid the district accepted from the company for a ventilation system at one of the new schools and $123,000 to commission the district's new security systems.
Bruns said the St. Louis County Schools should have avoided that, and she hopes other school districts anticipating major projects will consider such decisions carefully. "Hire a company to do the feasibility study and the projections, but they would have nothing to do with being able to make any money off of the construction or remodel of the building," she said.
Some have asked why the district trusted the savings projections issued by a company that had a financial interest in a construction-intensive solution, but Bruns stopped short of accusing the company of manipulating the numbers.
"I'm not saying it was a deliberate thing — that'd certainly be hard to prove," she said.
State law allows school districts to enter professional services contracts with companies without a bidding process. Schmidt of Johnson Controls pointed out that the company had separate contracts with the district, meaning the district wasn't locked in.
"They didn't have to use us," he said.
Schmidt said performing both functions for a school district isn't a new concept. Through experience, the company is able to share lessons learned from past projects with school officials so that costly mistakes are avoided, he said.
"You're able to bring that value to the district," Schmidt said, adding that the company's fees to the district are fixed. "They don't have to manage sub consultants, they don't have to manage architects and engineers and all the people that have to pull this together."
Schmidt acknowledged that Johnson Controls' subcontract with the architectural firm that worked on the project hasn't been made available to the public. He said the company believes it's important to protect its subcontractors and the proprietary nature of agreements between two private companies. An administrative law judge sided with Johnson Controls after a local newspaper tried to get access to the subcontracts.
But Schmidt said the construction work itself is done through a public bidding process.
Still, some said the school board should have hired someone independent to represent the district throughout the process. Troy Swanson, who joined the board last year, said the district wasn't in a position to adequately oversee Johnson Controls. "We're not experts," Swanson said. "You're letting the people who are making profit on this make decisions about it, and it is our job to watch what they're doing. But you can get lost in the details — there's a lot of them."
Some community leaders say they trusted Johnson Controls. Beaudry noted that several of the Johnson Controls consultants live in St. Louis County and told community members it wouldn't make sense to try to cheat the district.
"Everything I've seen from Johnson Controls has been straightforward," he said.
Longtime board member Chet Larson last week traveled to St. Paul to watch the school district's attorney defend before the Minnesota Supreme Court the way the district, with help from Johnson Controls, presented information about the bond referendum to voters. Larson said Johnson Controls was an easy target for those who opposed the consolidation plan.
"People don't want to lose a school and they'll fight to the death to get around that," Larson said.