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State: Clout firm committed ‘theft,’ billed IDOT for bonuses, outings

Work I-90 from ElgToll PlazDes Plaines River Road is over but Illinois Tollway won't allow McDonough Associates perform back-office functions

Work on I-90 from the Elgin Toll Plaza to Des Plaines River Road is over, but the Illinois Tollway won't allow McDonough Associates to perform back-office functions to close out its contract.

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Updated: July 9, 2012 6:15AM

Concluding the company committed “theft” by overbilling taxpayers “millions” of dollars, the state has banned McDonough Associates Inc., a 45-year-old engineering giant with ties to the Daley family and dozens of other politicians, from getting any state work for three years.

Beside cutting off McDonough this week from what’s been a lucrative stream of business, the Illinois Department of Transportation has sent a bill for more than $1.9 million to the firm, demanding reimbursement for overbilling.

It also has referred its findings to “the appropriate authorities” for possible criminal prosecution, IDOT spokesman Guy Tridgell said.

The company — whose chairman is James J. McDonough, the onetime city Streets and Sanitation commissioner and CTA board chairman under the late Mayor Richard J. Daley — acknowledges it “made some honest mistakes in accounting procedures” in its billings but says it never stole any money from the state or any other government client.

The firm could challenge the penalties in court. A lawyer representing the firm would not say Thursday whether it would do so.

“The client is looking at all his options,” McDonough attorney William B. Sullivan said. “I think it’s clear that, if the decision stands, it’s going to have a dramatically adverse effect on the company.”

A lot’s at stake. Beside the work it’s gotten from the state transportation department, McDonough has millions of dollars in contracts with other government agencies, including the Illinois State Toll Highway Authority, and the city of Chicago.

After learning of IDOT’s decision to suspend McDonough, City Hall this week proposed a similar three-year ban on the firm getting any city business, said Kathleen Strand, a spokeswoman for Mayor Rahm Emanuel.

Wendy Abrams, a tollway spokeswoman, said that agency hasn’t considered giving any new business to McDonough Associates since January, when IDOT temporarily suspended the company in advance of the “final determination of suspension,” issued Tuesday. Abrams said she expects the tollway to suspend the firm “within the next several days.”

All of this could mean the end of McDonough Associates, which has given more than $452,000 to the campaigns of political candidates statewide since 1999. James McDonough and other high-ranking McDonough employees have made more than $216,000 in political contributions on top of that, for a total of more than $668,000.

If the three-year suspension survives the likely court challenge, that would be “tantamount to a death sentence” that will drive McDonough Associates into bankruptcy and eliminate 150 jobs, the firm has told state authorities. It says it already has lost more than $54 million in expected revenue since being hit with the temporary suspension in January.

Bill Grunloh, the state procurement officer who oversees transportation contracts, says McDonough has only itself to blame.

“Contractor’s mitigating factors, that it has lost business and could go bankrupt, are the natural and direct result any business may face when it chooses to overbill a client,” Grunloh wrote in his ruling suspending the firm. “These actions constitute theft.”

According to Grunloh’s report: “The overbilling took place over the majority of the last decade and ended in a multimillion-dollar overbilling balance . . . . The magnitude of the overbilling and the inability of such a business to prevent this kind of activity is . . . staggering.”

Sullivan, the McDonough attorney, disputed the findings.

“My client does not agree that any theft occurred,” Sullivan said. “The evidence does not support that.”

He noted that the suspension resulted from an internal IDOT hearing — a procedure in which the “standard of proof” is lower than it would be in court.

Sullivan also pointed out that a hearing officer — attorney Thomas R. Wetzler — had recommended only a six-month suspension. Given that the suspension initially was put in place in January, McDonough would have been in good standing with IDOT once again as of next week had the state accepted Wetzler’s recommendation.

The actions being taken against McDonough grew out of a random audit of McDonough last year in which officials examined a wide range of state engineering contracts the firm won between 2000 and 2009.

The auditors questioned why McDonough employee bonuses, payments of dividends to the firm’s shareholders and other expenses were recorded as “overhead costs” even though those expenses appeared to have little to do with the work performed. Those expenses included “dinners, golf outings, Christmas luncheons and professional baseball and basketball game excursions involving IDOT employees,” the auditors said in a July 2011 report.

According to Grunloh, “$46.5 million was improperly included by Contractor in its overhead computation” for bonuses and dividends.

Wetzler had questioned whether that figure is accurate but cited another audit finding in making his recommendation. He didn’t put a dollar figure on that, but, according to Grunloh’s report, “several million dollars in overhead charges should be disallowed” as a result.

How IDOT decided to demand that McDonough repay $1.9 million isn’t clear in the records the agency released.

Regarding employee bonuses and shareholder dividends, Grunloh wrote that “while the amount of inappropriate billing is not precisely clear from the evidence, the question of whether there was a violation is the same regardless of the amounts at issue.”

In a letter to state officials last year, Nicholas A. Ciotola, McDonough’s chief financial officer, wrote: “We do admit that [we] made some honest mistakes in accounting procedures and we will take immediate corrective action.”

Ciotola added: “We are a firm that conducts itself in a manner that is truly consistent with the professional requirements dictated by our licensing.”

McDonough has hired some of its top executives from government, including its president, Feroz Nathani, who is a former IDOT engineer, and its vice president, Brian J. McPartlin, a former Illinois tollway chief.

As of last month, McDonough had been paid $61.5 million since 2008 under deals with IDOT and the toll authority and was in line to get another $8.2 million by the end of June.

Though IDOT has terminated its nine existing contracts with the company, “We don’t anticipate this affecting any of our ongoing projects,” Tridgell said.

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