Piedmont, that small, wealthy town surrounded on all sides by its hardscrabble neighbor, the city of Oakland, has taken pride over the years in its relative tranquility. But in recent months, the leafy 'burb has been embroiled in a nasty, internal squabble.
A simple effort to put utility lines underground in one neighborhood has suddenly turned into a $7 million boondoggle with $2.1 million in cost-overruns. And despite the fierce objections lodged by many residents, the Piedmont City Council recently decided that all of the town's taxpayers will have to pay for the project's overruns, even though just 144 homes will benefit from it. The reason? Those 144 homeowners might sue.
The project, which would help make a pretty section of the city known as Piedmont Hills prettier, was originally supposed to be paid by the neighborhood's residents. Those 144 homeowners had voted to contribute $4.6 million toward the project in two ways: $1.2 million in up-front cash and $3.4 million in bonds that the city co-issued in the homeowners' names and then attached to their annual tax bills.
But then late last year, the private contractor on the project, Valley Utility Services, started running into problems. The company struck unexpected bedrock, which made digging and trenching more difficult and expensive. Then, after a $1 million bailout from the city, the project ground to a halt again in early February, when crews discovered that several hundred feet of trenching plans were either missing or faulty. The new pricetag? Another $1.1 million.
At that point, the city council had three options: Cancel the project, force the 144 homeowners to come up with more cash, or dip yet again into the city's coffers. Many residents argued for the first or second options. "If the homeowners in the district value the project, they should pay for its true costs," wrote resident Robert Phelps in an e-mail to council members. "If they are unwilling to do so, then there is no reason for the city to bail them out. Remember, the district residents got to vote for the project. The rest of us, who are now being asked to pick up the skyrocketing tab, did not."
However, there was no indication that the 144 homeowners would be willing to pay the entire bill, even though some of them had come up with about $100,000 to help move the project along. "I don't think that there's any part of this that we could be responsible for now," said Piedmont Hills steering committee member Lonnie Simonson. "Homeowners didn't manage that contract, the city did. We're not asking the city to pay for our project. We're asking the city to pay for the mistakes they made with the contract."
Indeed, the city had taken the lead with the project and managed it — not the 144 homeowners — and so it was ultimately the city's responsibility that contractors ran into unexpected bedrock, the Piedmont Hills homeowners contend. Piedmont City Administrator Geoffrey Grote said the city was unprepared for what had happened because other undergrounding projects had not had these problems.
Grote also said the city had no way to force the 144 homeowners to pay more. "There is no legal mechanism to increase the assessment" on those homeowners without their approval, he said.
And so the only other viable option was to kill the project outright or at least suspend it until the 144 homeowners voluntarily agreed to pay more money. However, such a move would have meant that those homeowners would still be responsible for the $3.4 million in bond debt already spent. And if they chose to protest the council's decision by refusing to pay the debt, the city would be forced under law to pursue foreclosure against them. This would leave the city open to possible litigation from homeowners, as well as the bondholders should the city fail to cover the bond payments. In fact, staff cited the concern over lawsuits from Piedmont Hills homeowners as the major reason to approve the bailouts.
And the costs could have potentially been staggering. A recent undergrounding lawsuit in a separate district of Piedmont — initiated by a single resident — is expected to cost the city $300,000 or more, according to staff reports.
For her part, Simonson declined to comment on whether Piedmont Hills homeowners would have pursued legal action if the council had voted to cancel construction.
The city also had another problem with canceling the project. Piedmont's contract with Valley Utility demanded that it pay the contractor a $641,000 "demobilization" fee if it stopped work before the utility undergrounding was done. As a result, it would have cost the city about $1.1 million to fill up the holes in the street caused by the trenching, make them safe, and pay the demobilization penalty. And that turned out to be about the same price to complete the project. In fact, Valley Utility agreed to finish construction for a "not to exceed cost" of $1,127,013.
And so last month a divided city council voted 3-2 to go forward with the project at taxpayer expense. The city also is looking into whether it can blame the engineering firms, Robert Gray Associates and Harris and Associates, for some of the cost overruns. The council also decided to approve a moratorium on future undergrounding projects.