COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING BEFORE THE COUNCIL COMMITTEE ON FINANCE - - - Room 400, City Hall Philadelphia, Pennsylvania Wednesday, November 18, 1998 12:20 p.m. - - - RES. 980731 - Authorizing Finance Committee to investigate the hiring process of top officials of PGW; further, that PGW Executive Board explain executive personnel hiring policies, including compensation, that currently exist or will be implemented for all future hires; authorizing an investigation into all spending practices of PGW; and authorizing the committee, in further answer of such investigations, to issue such subpoenas as may be necessary to compel the attendance of witnesses and the production of documents to the full extent authorized under Section 2-401 of the Home Rule Charter. PRESENT: COUNCILWOMAN ANNA CIBOTTA VERNA, Chair COUNCILWOMAN JOAN L. KRAJEWSKI COUNCILMAN JAMES F. KENNEY COUNCILMAN MICHAEL A. NUTTER COUNCILWOMAN MARIAN B. TASCO COUNCILMAN FRANK DICICCO COUNCILMAN RICHARD T. MARIANO COUNCILMAN W. THACHER LONGSTRETH COUNCILMAN FRANK RIZZO - - - VINCENT VARALLO ASSOCIATES, INC. Registered Professional Reporters Eleven Penn Center, Suite 600 Philadelphia, PA 19103 (215) 561-2220 COMMITTEE ON FINANCE - RESOLUTION 980731 I N D E X Gregory Driscoll, Chairman. . . . . . . . . . Philadelphia Facilities Management Corporation Ben Hayllar . . . . . . . . . . . . . . . . . 4 Director of Finance - City of Philadelphia PFMC Board Member Acting CEO - PGW Ramon Sharbutt. . . . . . . . . . . . . . . . 6 PGW Chief Financial Officer Stephanie Franklin-Suber, Esquire . . . . . . 11 Philadelphia City Solicitor Gregory Martin. . . . . . . . . . . . . . . . 35 Philadelphia Gas Works Deborah Estrin. . . . . . . . . . . . . . . . 138 PGW Senior Vice President of Human Resources 3 FINANCE COMMITTEE - Resolution No. 980731 P R O C E E D I N G S
Good afternoon. I do apologize for the delay. This is the continued hearing on Finance Committee regarding Resolution 6 No. 980731. I would just like to make a very brief statement. I want to make it very clear at the outset so that everyone will understand my intent. When witnesses come before this committee and are asked a question, I want an answer. When we ask if there is incentive compensation being paid to employees, we don't want a "no" answer only to find out that PGW's definition of these payments are quarterly payments. I expect witnesses to be very truthful and to answer the spirit of the question, not just the letter of the question. I can promise you that members will not be so kind if we continue to get answers that engage in semantics. Is Mr. Driscoll here? Yes. I guess Mr. Hayllar and Mr. Sharbutt, maybe all of you could come up to the table so that we can save some time.
Councilwoman, did you 4 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 want Mr. Sharbutt or did you want Mr. Martin?
Both so that we can all feast. (PGW executives come forward.).
Thank you, Mr. Driscoll, for being so patient. I would like to go back to your testimony that was presented on October 28th. The City Solicitor has clarified her opinion concerning moving expenses. She clearly states in an opinion dated November 13, 1998 that all moving expenses go against the management fee cap. Given your previous testimony that the cap has been exceeded, what options does the PFMC board have to recover this money?
I would like to defer momentarily to Mr. Hallyar who has a long history in this.
Ben Hayllar, Philadelphia Director of Finance; and right now, I'm the interim CEO and President of Philadelphia Gas Works. 5 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 What was the date of that opinion, Councilwoman?
Councilwoman, it's certainly not the fault of City Council. As someone who at least believed themselves to be a client of the City Solicitor, we believe we should be privy to these opinions when they affect our business.
I apologize if you didn't receive it; I thought you had. (11/13/98 City Solicitor opinion distributed.)
Because of time. 6 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 Under date of February 13th, a draft of an expense account procedure was sent by Ray Sharbutt to Sidney Avent, Esquire, outlining revisions to expense account procedures. The first revision states that the treasury department will discontinue the practice of issuing expense advances and travellers checks to employees. Do you know how much in travelers checks used to be kept on hand? And can you also tell us how many are presently existing at PGW and who is responsible for them?
Madame Chair, I'm Ramon Sharbutt, the Chief Financial Officer. Historically, the level of travellers checks, which I might add, have been there for 17 years or so or more, have been in the 20 to 18 $30,000 range. They are kept in a locked safe, 19 which is accessible by only two people, one of 20 which is not me. They now total, I believe the last time I looked, about 2,000. We're depleting the supply of those.
The treasurer and one 7 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 supervisor in the treasury department. I might also add we've never had a security issue or any losses or any negative experiences with those.
That's typically what was required to handle the things that they were used for.
If an employee goes to a training course or if employees went on any trip for the company, they would get a travellers check in lieu of cash or some other advance. In addition, they're used for things -- if someone from the Law Department, for example, comes down to make filings with courts or others, they would use those or credit cards, if allowable, to pay fees. Just numerous uses.
According to the same draft, a minimal amount of incidental personal expenses are permissible. Can you tell us what personal expenses 8 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 would be permissible? And can you also let us know if the PFMC board approved this policy?
We have very small petty cash funds throughout the organization and in all of the offices and in the general office. They would be used for very small amounts. If individuals were to come down to the city and have a parking cost of $10 while on company business, that would be reimbursed for that. If they had filing fees or if they had miscellaneous small-dollar purchases. Generally, they're under $25, very small. The word "personal" is not meant to mean "personal"; it's all business.
I'm just telling you what's in that draft. I quoted exactly what was in there.
Well, "personal" is a word -- that is a word generally used in Internal Revenue Service regulations. And all others, for 9 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 lack of a better word, are just referred to as "personal expenses incurred." I know there may be other --
I'll accept that explanation for the time being. Mr. Hallyar, do you have a copy of the City Solicitor's opinion now?
And I asked you a question earlier, and you said you didn't see a copy the City Solicitor's opinion. We have now provided that to you. Do you want us to go on with our testimony so that you would have an opportunity to review the opinion?
The issue of the PFMC account and expenses is defined by the solicitor in this letter. The problem we have is that in preparing this document, which our clients have never seen, and we recognize this to be an open question. She did not discuss with anybody at PGW the history or how this had been applied historically. If you add up all the known expenses of the three senior officers as they applied in 1995, 10 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 they all exceed the -- I believe it was a $700,000 cap. So practically speaking, it would be very hard for the PFMC account to pay for all the known expenses.
Are we going to keep doing this indefinitely? Is that what I understand from your answer?
No. There's no question about that. In 1983, there is an opinion from the Obermayer law firm to PFMC, saying that certain expenses of the three senior officers should be and could be paid by PGW. The Solicitor, because she did not talk to anybody about it, is obviously unaware of that opinion. There is a difference of legal opinions and -- which is something we need to discuss with her because I think she's unaware of the fact that historically, certain expenses, the three senior expenses were paid by PGW.
I believe the City Solicitor just walked into the room. And perhaps 11 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 she can speak for herself.
I would welcome it. (City Solicitor Stephanie Franklin-Suber comes forward.)
Thank you. I apologize. I didn't think we were going to need you at today's session. But I don't know if you heard the question. We're talking about your opinion dated November 13th regarding the moving expenses as they go against the management fee cap.
Yes. I do understand that. I have not heard all of the testimony. But since I was paged, I thought if I could answer any questions or if I could supply any additional written information, I'd be happy to try to do that.
Mr. Hallyar, the City Solicitor is here now, do you want to ask her if she knows about the other opinion that you recovered to? The 1983 opinion.
PGW, as the client of the City Solicitor, would of course prefer to handle these matters in private, not in a public session, 12 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 but the Solicitor apparently was not aware that we made reference to a 1983 Obermayer opinion stating that certain expenses of the three senior officers were -- could appropriately be paid directly by PGW.
In rendering the more recent opinion, we did research and due diligence and consulted with the former City Solicitor, Joseph Duretsky (ph.), who was personally involved in negotiating the terms and conditions of the employment agreements. So I am comfortable that the opinion that was issued is consistent with the approach that was taken by the prior City Solicitor. So from that standpoint, to the extent that the advice he rendered came after the Obermayer opinion, I find that to be controlling from my perspective. I also made sure that once the opinion was released by you, Councilwoman Verna, that I circulated copies to the Finance Director and the Administration and spent some time talking with the members of the PFMC board to make sure that they understood that the advice was consistent with the position that the Law Department had 13 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 taken in evaluating and reviewing the terms and conditions of the employment agreement and the expense issues.
So do I understand you to say that you sent a copy of this opinion to the Finance Director?
Immediately prior to the hearing. We did have a discussion with regard to the opinion and I asked him when I arrived at the hearing if he had received the opinion, and he indicated that he had. So I'm surprised.
Mr. Hayllar, we're not going to have any personal conversations here, please.
Madame Solicitor, Madame Solicitor, before we get into the various opinions, I'm trying to get some clarity on actually the distributions of opinions and what the policy is. You serve in the precarious position of being legal counsel for a number of entities or clients. You are nominated by the Mayor, you are 14 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 confirmed by City Council. The Charter clearly requires you to at least render legal advice to the Administration and to City Council, possibly other clients. I would like you to walk me through the chain of events surrounding -- and I will use myself as an example. If I ask you for a legal opinion about a particular bill or a particular matter, do I at that point become the client in question?
If I asked you for an opinion about a bill or some other legal matter having to do with governmental business, do I at that moment become the client who made the request regarding the opinion?
At that moment, Councilman Nutter, you become the client, and you are entitled to privileged and confidential advice of counsel.
And as a result, are you allowed, or anyone in the Law Department allowed, to discuss my opinion request, the fact 15 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 that I even asked for an opinion or what the nature of the inquiry was with anyone else, including any other members of the Law Department?
At the outset, no. 7 There are circumstance, however, where the fact that you've made an opinion request will be discussed with other members of the Law Department; with other clients, no. 11
Are you allowed to discuss my request and what the nature of the request was with anyone else in the Administration?
When the opinion is given to me at my request, are you allowed to distribute it to anyone other than me?
The normal protocol -- and this was established by the prior City Solicitor -- is, we will send an opinion in draft to any client, whether it's a member of Council or the Administration. That client then has an opportunity to review the opinion, to determine, number one, 16 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 whether it responds to the question raised; number two, whether it prompts any additional questions that they would like for us to address; and number three, whether or not they understand the advice and whether or not they are satisfied with the scope of the opinion. If an opinion is issued to support a particular -- if the desire was for the opinion to support a particular position and we are not able to do that, then the client may decide that he or she does not wish the opinion to be finalized, in which case it is not. Or the client may wish to have the opinion finalized but would like to keep it confidential for whatever reason.
And so let's say that I get past the draft and the draft is okay, and I may want to use it to support my position or be against some other position or whatever, you give me the opinion, who has the discretion or makes the decision as to whether that opinion is 17 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 circulated to anyone else?
The client makes the decision as to the extent to which it is to be released and how it is to be released. Once the client decides to release the opinion, the privilege has been waived by the client so, therefore, the opinion is public.
So in this particular case, if Councilwoman Verna asked you for an opinion, which seems to be dated November 17th, which I think is yesterday, and you give it to Councilwoman Verna, once she has it in her hands, it is left to Councilwoman Verna -- and her alone -- to determine whether the opinion will be shared with other members of City Council even, or anyone else in the universe.
If Councilwoman Verna decided last night to put this opinion on the Internet, she could do that, but you can't give it to anyone; is that correct?
I do want to make 18 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 sure that, to the extent there is a misunderstanding, when I answered the question as to the opinion, my response went to the opinion that was issued prior to the last hearing. If your question relates to the November 17th opinion, this is an opinion that has not been distributed. The Finance Director has not seen this in advance. My comments went to the opinion that was issued at the prior hearing.
Okay, well, that's what elicited the comment from myself. I thought we were talking about the opinion from the last hearing.
Which I think came out that day, which I thought everyone else had. I was not aware of this opinion and the Councilwoman was not required to tell me. She made the decision to share it.
This opinion, however, is in response to a question that Councilwoman Verna raised at that hearing. 19 11/18/98 FINANCE COMMITTEE - Resolution No. 980731
And during the course of my testimony, I had not had a chance to review the agreement. It's a very straightforward opinion that deals with the exact language in the terms of the employment agreement.
And it then relates it back to the opinion that was issued previously, so there is really nothing new or different about this particular opinion.
I understand. Councilwoman has been very accommodating. Two last questions all in one. Mr. Hallyar, you have made reference to, I believe, a 1983 opinion from --
From the Obermayer law firm. 20 11/18/98 FINANCE COMMITTEE - Resolution No. 980731
Okay. Can someone explain to us what this opinion is about; and secondly, what is its relevance as it relates to an opinion from the City Solicitor. I don't know who Obermayer is in the whole legal scheme of things. I mean, can a -- not to pick out one particular law firm. Can an opinion from a law firm overrule the City Solicitor's opinion as it relates to a governmental entity?
Because I'm not sure the City Solicitor's Office was of this opinion and --
The opinion states -- 21 11/18/98 FINANCE COMMITTEE - Resolution No. 980731
If an opinion from a law firm can't overrule the City Solicitor's opinion, then what different does it make?
The Solicitor's view may have changed had she been aware of what previous -- what precedent had been on this question. And Obermayer had opined that certain expenses of the three senior executives did not have to come out of the PFMC account but could be paid out of PGW funds directly, that's the point.
Did the three senior executives know about that opinion when they negotiated their contracts? And did they make reference or benefit from that opinion when they signed their names to the contract?
I don't think they cared one way or another. They were simply interested in --
Well, what was their understanding -- did they know about the 22 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 Obermayer opinion at the time they signed their contracts in January of '96?
Well, what was their understanding of their contracts when they signed them in January of '96? Were the expenses covered by the compensation, or were they to the side of it?
Councilman Nutter, if I might interject. I would be happy to look at the Obermayer opinion. I think the real question is not whether I was aware of it, but the whether prior Solicitor was aware of it so I think --
Because there really may not be a real difference of view.
Right, right. 23 11/18/98 FINANCE COMMITTEE - Resolution No. 980731
I can't gauge that until I've had a chance to look at the opinion --
So you're saying you're going to look at the '83 opinion and --
You may or may not need to revise your November 17, 1998 opinion based on a review.
That's correct that's correct. Certainly we would be happy to look at that. And to the extent that there's some significant issue to amend, we're also prepared to do that in view of the fact that he was the one that negotiated the agreement.
And so, therefore, you know, it may be that there's an issue but it may be that there really is not one. So from that standpoint, we would be happy to look at it and 24 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 work with our clients to make sure that we all understand the extent to which certain expenses fall within different categories.
It would seem to reason, though, that if the prior solicitor was aware of the opinion, the prior solicitor or the parties to the agreement, just to cover themselves, may have made reference to the '83 opinion that that's what they were depending on in terms of inclusion or exclusion of various expenses. I mean, to some extent, all of this may be a red herring and a little bit of subterfuge to get away from the more material issue, which has to do with what were the expenses, what did people understand them to be, not a massive legal discussion of competing legal opinions. There are obviously some controls that were not in place that, opinion or no opinion, there's some realm of an inability to keep track of what people were doing and how they were doing it. And that's not going to be cured by competing legal opinions.
That is correct. 25 11/18/98 FINANCE COMMITTEE - Resolution No. 980731
Thank you, Madame Chair. I mean, you know, the ordinance that was passed in 1995, you know, maybe my memory is fading in these years, I don't ever recall anybody ever stepping to the table and making reference to a 1983 opinion about moving expenses or anything else. We set firm numbers. I was here, I was directly involved in it. The numbers are what the numbers are. Expenses, moving or anything else that's going on, those numbers were hard and fast. What people ended up negotiating in contracts is a whole separate issue, and no one ever walked in here and talked about an '83 opinion from any law firm, which, based on where I stood, is always going to be subservient to the City Solicitor's opinion, anyway.
I'm not going to -- I don't think it serves anyone's purpose to debate this longer. This is a side issue.
I'm sorry, Mr. Hallyar, you raised the issue, I think.
The point is, when PGW was paying certain relocation bills, they thought they were doing it pursuant to a practice that had gone back to 1983, as I understand it, based on that opinion from Obermayer.
We can't be talking about the three executives; they weren't here in 1983. They don't know any more about a 1983 Obermayer opinion than the man in the moon. I mean, what are we talking about here?
But the process -- the process in which expenses were paid was paid pursuant -- was done pursuant, as I understand it, to that opinion.
By whom? Who is the person? 27 11/18/98 FINANCE COMMITTEE - Resolution No. 980731
What person -- what -- you tell me the name of the person who relied on the 1983 opinion to pay all of those bills. What is that person's name?
Yes. And I believe they thought they were doing it appropriately.
The treasury function, the chief executive officer at the time, believed that they were doing it appropriately.
The chief executive -- are you talking about Mr. Hawes?
How would Mr. Hawes know about the 1983 Obermayer opinion? Who told him about it? 28 11/18/98 FINANCE COMMITTEE - Resolution No. 980731
I have no idea, and you know I don't know that, but I -- but that --
No, that was the assumption I believe that they had in terms of the process based on past practice.
Whose relocation expenses did the company pay in the past?
Between 1938 and 1996, whose relocation expenses were paid based on the Obermayer opinion from 1983?
It's expenses from the PFMC account, and whether certain expenses of the three executives could be paid directly by PGW.
I'm just asking you to tell me whose relocation expenses were paid pursuant to reliance upon the 1983 Obermayer opinion in the past practice, as you have testified, was established from '83 to '96?
No, I didn't say that, 29 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 sir.
I didn't say that. Certain expenses were -- probably benefits of various types that were paid to people who were employed at that time. I don't believe there was any relocation prior to the current three executives -- or the now two executives. But I don't believe there was any relocation.
But they believed that certain benefits could be paid directly from PGW. That's the point.
From PGW and not within the total lump sum of dollars that were allocated to the particular executives?
The PFMC account that, at that time, had a $700,000 cap to it. That was to pay for the salaries and the compensation of the three senior officers. Certain benefits, they assumed -- perhaps incorrectly -- were to be paid 30 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 directly by PGW. And I believe that the Obermayer opinion speaks to medical insurance, that kind of thing.
Fine. You say the Obermayer opinion is in your office, on your desk?
Can you have somebody fax it over here while we're in the course of this hearing?
I'd appreciate it. This will be very interesting. Thank you, Madame Chair.
Does anyone have questions of the City Solicitor while she's here? (No questions at this time.)
Are you going to remain with us? Are you going to remain with us?
I know that you don't feel very comfortable doing that, but I would appreciate it if you would. 31 11/18/98 FINANCE COMMITTEE - Resolution No. 980731
Thank you. Gentlemen, do you want to come back to the table, please, so that we could continue on with our questioning. (PGW executives return to the witness table.)
In the draft policy concerning the expense reports of February 13, 1998, a running fund balance, quote, running fund balance, end of quote, is referenced. Can someone tell me what a running fund balance is, please.
Yes, ma'am. That's a practice that, in my experience of 35 years or so in this business, is commonplace everywhere. If you have individuals who are continuously required to make small purchases or incur expenses on behalf of the company, it's customary to have them advanced $100 or whatever amount may be necessary to have that cash available on a daily basis.
It's like a petty cash 32 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 fund that is assigned to one individual, very similar. And they are generally very small amounts. And in my experience, even servicemen in the field have, on occasion, had a requirement to have those continuously held accounts. It's much cheaper if a gentleman's out fixing something to go by and pick up a part rather than incur the expense of some other option.
Certain, yes. The Chair recognizes Councilwoman Tasco.
Mr. Sharbutt, in what area -- you have one person who's in charge of the running fund account, or there are several people?
There may be sever people. There is a list of the people who have it, and it's monitored monthly and they are constantly turning in receipts and keeping whatever they have in their possession at the minimum level. I think there are probably ten 33 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 people within the organization who have that, maybe 15.
Operations, field services. Certain departments in a district office may have one. They're disbursed throughout the organization.
Is there a cap on that? Say, they're given $100 a month and then they have to be reimbursed based upon the fact that they submitted receipts for the expenditure, at what point -- are they just given a limited amount of money -- a limited account or is it a capital fund?
It's usually very small. I'm talking 100 or $50 or a couple of hundred if it requires a lot of turnover. But they're relatively small amounts, and there are caps based on the need of the individual.
Yes, ma'am. It may be stamps, or it could be just any incidental item, 34 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 and it's a very small amount of money, relatively small.
And then they are reimbursed based on the submission of receipts?
Yes, ma'am, receipts that are signed by the individual and approved by the supervisor. Even at that level, they are approved through the processing --
They're done on a monthly basis, a biweekly basis, a quarterly basis, yearly basis in terms of the submission of receipts and reimbursement?
It's done as needed. Quite often, it's on a daily basis. If someone has postage bill or something or if they pay Federal Express or something to send something, they would request reimbursement immediately for that.
You're welcome. Mr. Martin, what are your duties and duties and areas of responsibilities at PGW? And does anyone have a company credit card within your 35 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 areas of responsibility?
I'm Gregory Martin, Chief Operating Officer at PGW. And Chairwoman Verna, my responsibilities are in gas operations, materials management and contracts, information technology, customer services, and gas management. And, yes, there are people who report to me who have American Express credit cards.
Can you tell us how many do and what criteria you used to determine their need for a credit card.
Typically, Chairwoman Verna, the people would get the credit cards according to their need, whether or not that they were doing company business, they had to travel and by their position. And the people who do have them, to my knowledge, are Mr. Bud Karachiwala, who is the Vice President of Gas Management; David Lee, who is the Senior Vice President for Information Technology. And I believe those are the only two who directly report to me.
So there are three people under your supervision that have credit 36 11/18/98 FINANCE COMMITTEE - Resolution No. 980731 cards?
Two people that I know of under my supervision, subject to change.