VDOT had loads of warning that wetlands could kill the U.S. 460 project but the state charged ahead with a design-build contract that everyone knew could explode. The state has spent $300 million it may never recoup.by James A. Bacon

Weeks after the release of the “Special Review of the U.S. Route 460 Corridor Improvements Project,” submitted last month to Transportation Secretary Aubrey Layne, important questions remain about how the Commonwealth could have paid $250 million to US Mobility Partners, the design-build contractor on the $1.4 billion project, and run up another $50 million in expenses without turning a single spade of dirt. The Special Review is a dense and tangled document but one important theme comes through loud and clear: The wetlands controversy that caused the McAuliffe administration to suspend the project this March was bubbling on the front burner when the McDonnell administration put the project into overdrive two years ago. VDOT and the McDonnell transportation team had ample warning of the project’s problems and took no effective action to defuse them.

The Army Corps of Engineers (USACE) had been expressing reservations for years about the route preferred by the Virginia Department of Transportation (VDOT) for the 55-mile highway project, and it reiterated those warnings repeatedly as McDonnell’s transportation team lined up funding for the project and signed a contract with US Mobility Partners to design and build the highway. The inability of VDOT to obtain a USACE wetlands permit on a timely basis prompted the McAuliffe administration to put the project on ice in March until the differences could be resolved.

The question before the public is how did VDOT find itself paying tens of millions of dollars monthly to US Mobility Partners to mobilize for a massive construction project while knowing that the USACE was unlikely to issue the necessary wetlands permits — indeed, without even having submitted the documentation to begin a formal USACE review! Unless we know what went wrong and take appropriate corrective measures, citizens and taxpayers have no assurance that comparable fiascos will not occur again in future mega-projects.

The Special Review, prepared by VDOT and the State Inspector General’s Office, is extremely cautious in drawing conclusions. But the report does provide a wealth of documentation, primarily in the form of emails involving senior VDOT employees and members of the Office of Transportation Public Private Partnership (OTP3) staff who structured the public-private partnership and negotiated the contract. As I noted in a past post, deciphering what transpired is like peeling back the layers of an onion. For now, I am focusing upon the onion peel documenting the wetlands controversy between VDOT and the Army Corps of Engineers.

A long running disagreement. The origins of the wetlands controversy predate the McDonnell administration. VDOT had been noodling the proposed Interstate-grade highway for years, and it had identified a preferred route, one that would swing north of the existing U.S. 460 highway, a four-lane highway with top speeds of 55 miles per hour interrupted by numerous stoplights and plagued with local traffic. VDOT argued that only a limited access highway could provide the mobility that was needed for trucks serving the Virginia ports and in the event of a hurricane evacuation, and that the existing route would be impractical to upgrade. But that was not a decision it could render on its own. VDOT’s appraisal had to pass muster with the USACE, which is tasked with ensuring that any route chosen is the “Least Environmentally Damaging Practical Alternative.” The USACE preferred a route with a lower environmental impact, preferably one grafted onto the existing U.S. 460 with bypasses around the hamlets along the highway.

The Special Review correspondence between VDOT and USACE details the disagreement as far back as 2003. As the authors conclude from their review of the documentation:

The correspondence … indicates an ongoing, decade long, discussion between VDOT and the Corps over whether CBA-1 (VDOT’s preferred alternative) or CBA-2 (the Corps’ preference) was the best location for the 460 project. Although VDOT employees have indicated nothing unusual about this discussion, the length of the ongoing discussion seems unusual to us, particularly since no resolution as to an accepted route was reached.

The discussions were ongoing in 2012 when the McDonnell administration was moving heaven and earth to move the project forward. As various emails cited in the review make clear, Governor McDonnell regarded the Route 460 corridor as his “number 1 transportation priority,” and Transportation Secretary Sean Connaughton rode herd on the VDOT bureaucracy to meet the goal of closing the deal by the end of the year.

By mid-2012, Connaughton and VDOT were closing in on a deal structure for the public-private partnership but had not resolved the environmental issues. In a letter dated May 30, 2013, Kimberly Prisco-Baggett, chief of USACE’s Eastern Virginia regulatory section, wrote the following to VDOT’s environmental project manager:

We are concerned that the project has moved ahead with CBA 1 (VDOT’s preferred route alignment) as the alternative, and that although seven years have passed since we indicated that CBA 2 appears to be the [Least Environmentally Damaging Practical Alternative], neither FHWA (the Federal Highway Administration) nor VDOT has requested to meet with us to discuss this apparent conflict. It is not helpful to the public, or any potential private-public partners, not to address this critical matter before incurring additional expense and delays associated with pursuing a project that may not be permittable.

In an email chain between June 7 and July 13, 2o12, Morteza Farajian, program manager with OTP3 (the public-private partnership office) warned senior VDOT officials that the three construction consortia bidding for the project were getting nervous about the unresolved permitting issue:

I have received serious concerns from our Offerors in regard to the Comments from the Corps of Engineers on the Route 460 reevaluation. They would like to know where we stand today and how we will resolve the issue with the Corps of Engineers and FHWA. They emphasized that this is a huge risk to the procurement and they might stop working on this procurement if the issue between VDOT and COE is not resolved.

And in an emailed dated June 12, Farajian said: “VDOT will have to assume all cost risk for a change like this to the project after financial close and make it clear in the [Comprehensive Agreement] and financing documents.”

In its own internal risk assessment, OTP3 listed a 50% probability that VDOT and/or the contractor would fail to obtain a permit in a timely manner. By way of explanation, the assessment said, “Letter from Army Corps said they continued to disagree with FHWA that they had selected the least damaging practical alternative. This increases the likelihood the concessionaire will have to provide additional information regarding impacts/compensation.”

On August 16, OTP3 received a warning from an attorney with the Allen & Overy LLP law firm that two private-sector consortia “have indicated that a 30-month trigger for the [USACE] permit does not provide them with enough time to perform construction work. … At least one Offeror also expressed concern about the possibility that a permit is never issued. They have asked for a cut-off date. … Depending on the response from [USACE] progressing to financial could result in significant risk being assumed by VDOT.” These and other risks were reiterated in an OTP3 memo to Charlie Kilpatrick and  John Lawson, VDOT’s chief deputy commissioner and CFO.

Later that month, VDOT got more discouraging news. HDR Engineering, hired to take a more detailed look at the proposed 460 route found that previous estimates of wetlands impact had been under-estimated: “On average there are about 65% more wetlands within the study area than are mapped.” The findings suggested that the actual wetlands impact would not be 129 acres, as previously believed, but 213 acres.

The drive to close the deal. As the time neared for VDOT to pick one of the three groups vying for the design-build contract, US 460 Mobility Partners (which would end up winning the contract) clearly delineated the wetlands risks in its Technical Proposal. “The wetlands impacts estimated to date may be underestimated. … The risk remains that obtaining a permit from [USACE] will be extremely challenging and could require more work than anticipated for a project of similar magnitude.”

By early October, according to the Special Review, VDOT was discussing the purchase of wetland credits from private mitigation banks. In an October 5 email, William Walker, chief of USACE’s regulatory branch, said that such credits might be an acceptable offset but warned that they might not. “Recent information indicates a potentially sizable increase in impacts to waters of the US over those addressed” in a years-old Environmental Impact Statement.

That was the state of affairs on October 17 when Charlie Kilpatrick, deputy highway commissioner, made a presentation to the Commonwealth Transportation Board summing up the business terms of the agreement that VDOT was consummating with US 460 Mobility Partners. While he disclosed everything he was statutorily required to, he said nothing about the ongoing permitting issues. Both Transportation Secretary Sean Connaughton and Virginia Highway Commissioner Gregory Whirley attended the meeting but neither saw fit to say anything either. The board proceeded to vote to issue up to $425 million in tax-free bonds to help underwrite the cost of constructing the highway. US 460 Mobility Partners was selected the same day as the project’s design-build contractor.

But the wetlands issue didn’t go away. John Lawson, VDOT’s CFO, was involved with the task of compiling information for submission to bond buyers. In a November 14 email to Connaughton and others, Lawson wrote, “As we move to closing the Rt. 460 deal and continue to work with the Corps on the permitting issue, I am providing the detailed Funding Corporation bond issuance schedule as prepared by the underwriters. … As discussed, obtaining written commitment from the Corps of Engineers that the project is permittable is critical to the project and the schedule.”

Connaughton’s response: “Close the deal!”

Meanwhile, Kilpatrick still was pressing VDOT’s case with the Army Corps. In a letter dated November 20, he argued that VDOT’s preferred route swinging north of the existing 460 was the best route for improving safety, accommodating freight and reducing travel delays. The northern route would allow for wider lane and shoulder widths appropriate for large vehicles and high-speed traffic. “We hereby request that the Corps concur in this determination and withdraw and earlier determination otherwise.”

The next day, William Walker, chief-regulatory branch with the Army Corps, responded with a wishy-washy statement to the effect that the routes preferred by both VDOT and the Army Corps would result in “substantial and similar impacts” to U.S. waters. Based on a comparison of recently provided highway designs, “It does not appear that the [USACE-preferred] alignment would necessarily produce a lesser environmentally damaging practicable alternative.” In other words, there was no way of knowing at that point which design would have the least environmental impact.

However, that equivocal statement came with a big caveat. VDOT would have to submit an application for a permit, which would have to undergo a public interest review. “We have not initiated the required public interest review nor do we have sufficient information to complete the required [Clean Water Act] analysis,” Walker wrote. “Should plans change or new details come to light during the permit review process, VDOT and/or its contractor may be required to provide additional information and assessment.”

Kilpatrick forwarded Walker’s letter to Connaughton with the comment, “I hope this satisfies bond counsel.”

Connaughton’s response: “Let’s get to close!”

On December 20, VDOT formally executed the Comprehensive Agreement with US 460 Mobility Partners. It is not clear from the Special Review how much exposure to an adverse permitting outcome the Commonwealth took on in order to close the deal.

Connaughton emailed key members of the VDOT and OTP3 teams: “Great work on getting the 460 deal done! Congratulations and thanks. … This was one of the Governor’s top priorities and it wouldn’t have been accomplished without your hard work and dedication.”

Things fall apart. At that point, US 460 Mobility Partners began submitting periodic invoices to VDOT for payment. The first invoice, payable Feb. 8, 2013, was for $36.7 million. Over the course of the next year or so, the contractor would submit 15 applications for payment and VDOT would deem $250 million eligible for payment. None of the money went to actual construction work. It went instead to cover “insurance, bonds, pre-execution, mobilization, and general construction management.” Mobilization work covered preparatory operations such as moving personnel and equipment to the project site, paying bonds and insurance premiums, and setting up the contractor’s offices, buildings and other facilities. The Special Review found the project expenditures “reasonable,” as defined by the terms of the contract.

While US 460 Mobility Partners was mobilizing its construction team, VDOT was making little progress with the Army Corps. Tom Walker, with the USACE regulatory branch, wrote another letter on Feb. 13, 2013:

Recent information suggests that design and acquisition for this project is moving ahead rapidly. As you know we have yet to receive an application requesting authorization for discharges of fill associated with this project. Therefore, I find it important to reiterate some of our key concerns.

In addition to the old concerns, Walker raised a new one.

In November 2012, VDOT presented a new eight-lane design for [upgrading the existing 460 alignment], stating this design, not the design included in the EIS (Environmental Impact Statement), would be the minimum necessary for [the alternative] to adequately address the purpose and need. This design had not previously been discussed and was not reviewed in the EIS. … To complete the necessary evaluation VDOT and/or its contractor must provide information sufficient for the Corps to determine whether this new, larger alignment would be the minimum necessary to meet the agreed upon purpose and need.

Any purchase of right-of-way, commitment of resources, or construction activities conducted prior to our permit decision is at your risk and may not be considered in our analysis.

Connaughton’s reaction? Go on a P.R. offensive. In a July 10 email to Kilpatrick, he wrote that the USACE actions and VDOT’s response likely would leak into the public domain. “We need to be prepared to respond aggressively.” He suggested blasting out a letter to Walker, scheduling a meeting with the senior regional Army Corps official, meeting with Virginia congressmen, reaching out to local officials along the proposed route, and developing a media response plan “The message must be that the [USACE] is trying to destroy southside Virginia along the existing 460 and destroy the environment.”

Kilpatrick wrote a letter back to Walker complaining of the onerous nature of USACE’s requests.

VDOT reiterated that your alternative facility [along the existing 460 alignment] costs substantially more than the selected build alternative (preferred by VDOT); has equal or greater wetland and environmental impacts than the selected alternative; will have significant negative impacts of local communities, citizens and businesses; and will lead to loss of access and a reduction in traffic flow between towns.

Unfortunately, our concerns do not seem to be taken seriously, as you have requested plan layouts for the entire 55 mile corridor in order to independently evaluate the potential impacts to individuals properties (and the subsequent need for parallel secondary roadways to accommodate local traffic). … We are extremely concerned that the Corps permitting staff is attempting to make access determinations in the abstract.

On August 5, Walker wrote another letter, raising yet another concern. Wetlands mapping conducted since the beginning of the year indicated that previous projections had been off by as much as 50%. “It has become even clearer that the wetland impacts may be substantially higher than the substantial impacts previously projected.”

As emails make clear, Connaughton’s focus around this time was to apply political pressure to avoid the necessity of a protracted and risky regulatory review, which by this point, could include a Supplementary Environmental Impact Statement. Among other initiatives, VDOT began work on a hurricane evacuation study that would support the advantages of the VDOT-preferred alternative route. At some unspecified point during the fall 0f 2103, the administration also pressed VDOT to buy Right of Way and “move dirt” in areas not subject to the Army Corps permit, according to an overview of the project presented earlier this year.

Yet another problem surfaced in mid-October. HDR Engineering, the company that had performed some of the detailed wetlands work, expressed concern that US 460 Mobility Partners had made “inappropriate” use of its findings in communications during the bond tender phase.

The information was provided to the offerors during the tender phase to demonstrate that there are substantially more wetlands along both alignments than was estimated in the EIS. When the information was provided, it was noted that it was for informational purposes only. Any use of the information was solely at the risk of the offerors. In HDR’s report, the percent difference was never extrapolated out to the whole project. … This dramatic variability in what was observed in the field as opposed to what was mapped by NWI should have clearly alerted anyone with knowledge of wetlands in the region to the fact that they needed to do a serious evaluation of all readily available resources to be able to more accurately estimate the effort that would be required to delineate the wetlands along the preferred alignment.

In October, VDOT, the Army Corps and the Federal Highway Administration negotiated a scope of Supplemental Environmental Impact Statement to review alternate routes. On Oct. 29, US 460 Mobility Partners notified officials that a requirement for a Supplementary Environmental Impact Statement (SEIS) would undermine its ability to complete the project within the parameters of the design-build agreement.

Up until this point, despite lingering doubts, US 460 MP has moved forward as if the SEIS were not taking place, going so far as to request the scheduling of a public hearing that all concerned parties know will not take place. US 460 MP is being forced … to continue design effort for an alignment likely to be significantly altered as a result of the SEIS process, wasting time, resources and money. The failure of VDOT to obtain approval of [the VDOT-preferred route] … moreover, is the driving force behind all the delays that will affect this Project and indeed now is causing the USACE to perform a more stringent alternatives analysis than otherwise would have been necessary during the permit review process. It is inefficient and unproductive for US 460 MP to continue to operate as if these issues, beyond its control and outside of its contractual responsibility, are not taking place.

By that time, the McDonnell administration was drawing to a close and the project was fast unraveling.  There is no indication in the Special Review report of substantive responses to US 460 Mobility’s concerns. The project was adrift. In one email, Kilpatrick had to inform VDOT CFO Lawson that the 460 project was still alive. “Yes… We’re still moving.”

In January 2014, Governor Terry McAuliffe took office and appointed Aubrey Layne as transportation secretary. The Special Review does not document correspondence that took place when he came on board, but in March Layne effectively suspended the project until the wetlands issues could be resolved. By that point, VDOT had paid $250 million to US 460 Mobility Partners and racked up nearly $50 million in internal expenses on the project. Layne said that the state could face $100 million to $200 million in additional exposure.

Bacon’s bottom line: The Special Review provided a valuable service in assembling the correspondence but it was exceedingly timid in drawing conclusions: Regarding the disagreement between VDOT and USACE, the authors wrote, “The length of the ongoing discussion seems usual to us, particularly since no resolution as to an accepted route was reached.” They then offered some milquetoast recommendations urging VDOT to be more proactive in settling environmental controversies earlier in project life cycles.

But the report leaves many important questions unanswered.

• Why did VDOT fail to reach an agreement with the Army Corps of Engineers? It was one thing to procrastinate when the project existed on paper only, with no funding, but quite another thing once the McDonnell administration had found the money and was driving to close the public-private partnership deal. Whose job was it to shepherd the U.S. 460 project through the wetlands permitting process? Given the mission-critical nature of the wetlands permit, why weren’t senior VDOT executives more proactive?
• Was anyone at VDOT or OTP3 willing to speak truth to power? The email correspondence is unambiguous: VDOT officials, OTP3 officials and US 460 Mobility Partners officials were acutely aware that the wetlands controversy could create major complications. It is not clear how forcefully those concerns were communicated to Connaughton or McDonnell. Any such correspondence is protected as “governor’s confidential working papers.”
• Perhaps most important of all: When OTP3 negotiated the contract with US 460 Mobility Partners, knowing full well that the wetlands permit had a 50% chance of cratering, did it build in any protection from the massive liability that such an outcome would create for the Virginia taxpayers? What role, if any, did Transportation Secretary Sean Connaughton play in affecting the outcome of the negotiations?

Perhaps the Special Review contains evidence that will help provide answers. I will continue to peel layers of the onion.