JACKSONVILLE, Fla. — A month after the JEA board approved an employee incentive plan that would end up igniting a crisis for the utility, an attorney sent an email that raised a red flag.
Calculations used by another attorney to determine potential payouts to employees were “spitting out much larger numbers than we anticipated,” Pillsbury Winthrop Shaw Pittman attorney Jessica Lutrin wrote in an Aug. 23 email.
That email from Lutrin, who was helping JEA set up the plan, is among the hundreds of documents obtained by City Council members before a Monday meeting that will directly ask top JEA executives about the incentive plan that could have let JEA employees make a financial killing.
The JEA board will vote Tuesday to officially terminate the “performance unit” plan, but council members say it badly damaged public trust and want to know why JEA embarked on such an unusual and expensive way to reward employees.
“You don’t have to dig for what’s problematic with this performance unit plan,” City Council member Rory Diamond said. “On the face, it’s massively problematic and looks like the intent was to hide hundreds of millions of dollars from the people of Jacksonville.”
The City Council Auditor’s Office determined in November that if JEA sold 100,000 of the “performance units” to employees at $10 per unit, the employees collectively would have paid $1 million, and in return for the investment, they would have walked away with $315 million if a sale of JEA netted $4 billion for the city.
Based on emails and other documents given to City Council, JEA never put its own calculations on paper for what the incentive plan’s cost would be in the event of a sale, even though the plan explicitly said employees could cash out if the utility were sold.
“We still need to get to the bottom of how all this happened,” said City Council member Ron Salem.
He and Diamond, who are leading the review, said they expect top JEA executives, including CEO Aaron Zahn, will appear at the meeting. Zahn has pledged JEA’s full cooperation and said in a letter JEA is identifying its own “lessons learned.”
JEA has disputed portions of the City Council Auditor’s report. JEA says its board authorized an incentive plan with up to 100,000 performance units, but the board put a limit of 30,000 units for how many would be sold in the first year.
That figure of 30,000 units was part of the staff’s presentation at the July 23 board meeting when the board unanimously approved the plan. Documents turned over by JEA to the City Council members also have “only 30,000” for how many units would be available in the first round of the plan.
JEA says based on employees buying 30,000 units at $10 a piece — which would have cost a total of $300,000 — employees would have gotten about $100 million if a JEA sale netted $4 billion for the city.
In that scenario, the value of a performance unit purchased for $10 would have soared to more than $3,000.
“Even with the most conservative numbers, this plan was outrageous,” Diamond said.
Employees would have had some risk of getting nothing from their performance units. The council auditor said a JEA sale that netted $3 billion, for instance, would have created no gain in a performance unit’s value.
The emails turned over by JEA to City Council date back to January when the utility launched a months-long study of employee compensation.
Zahn strongly supported increasing the amount of incentive pay that employees could earn, according to the emails.
Pat Maillis, director of employee services for JEA, wrote in a March 27 email that back in the 1990s and early 2000s, JEA had compensation packages where appointed employees could get substantial performance-based incentives, but “constituents pushed back.”
“Aaron is willing and wants to take the risk on this,” Maillis wrote to a consultant with the Willis Towers Watson firm hired to help create the compensation plan. “He knows to go for the ideal state and if we get push back, we’ll deal with it.”
An April 29 email by Maillis said the “next step” in creating the compensation plan would be for Zahn to call Willis Towers Watson “to discuss and make the final changes.”
Maillis told Jon Kendrick, chief human resources officer for JEA, they should “put our heads together to make sure Aaron gets the product he is seeking.”
When the JEA board approved the long-term incentive plan on July 23, the staff presentation said the expected annual payout to employees would be $3.4 million.
The presentation said JEA would pay the incentives in three years based on beating financial growth targets over that time span, but if JEA were sold before then, the payouts would happen at the time of the sale. At the same meeting, the board approved seeking offers for the utility.
All JEA employees would have been eligible to purchase performance units in the voluntary plan. The documents provided to City Council do not say how many units Zahn could have purchased.
The JEA documents show that after the July 23 meeting, JEA executives and consultants focused on tackling legal issues swirling around the incentive plan while also creating documents that JEA planned to give employees. The expected start of the performance unit plan was December.
The Aug. 23 email about calculations “spitting out much larger numbers than we anticipated” did not cause JEA to apply a similar amount of time to the plan’s financial ramifications, the emails show.
Lutrin, the outside attorney working with JEA, wrote to JEA Chief Financial Officer Ryan Wannemacher that it “would be helpful to see your calculations (even rough)” to reconcile with numbers that Foley & Lardner attorney Michael Kirwan was getting when he did calculations.
The email did not show what Kirwan’s numbers were, and Wannemacher did not provide any numbers of his own. The email exchange resulted in the same day in Wannemacher agreeing to adjust the calculations by changing how JEA’s debt was factored into measuring the utility’s financial performance.
The only document prepared by JEA showing financial costs of the plan came three months later on Nov. 13 when Wannemacher sent the City Council Auditor’s Office a spreadsheet showing a $10 performance unit would increase in value to almost $168 in three years based on JEA’s projections.
That projection was based on JEA remaining city-owned and didn’t show the impact of a sale.
On Nov. 14, the council auditor emailed a spreadsheet that showed if JEA were sold at a price that netted $4 billion for the city, a $10 performance unit would be worth $3,150 in JEA’s incentive formula.
The auditor sent that spreadsheet two days after JEA emailed a letter from Zahn to General Counsel Jason Gabriel saying JEA would “indefinitely suspend” putting the plan in place. Zahn said the long-term plan wouldn’t line up with the shorter-term implications of potentially privatizing JEA.
On Nov. 29, JEA Manager of Media Relations Gina Kyle sent an email asking whether JEA Board Chairwoman April Green would make a statement at the next board meeting to “strongly refute the notion that the board didn’t understand what they were doing.”
“Yes. Probably all of them,” Chief Customer Officer Kerri Stewart replied.
Salem said he wants to find out at the Monday meeting what the JEA board knew about the plan when it approved it July 23. He said none of the documents he’s seen showed the board was educated by staff about the design of the plan and the financial implications.
Diamond said he sees two big questions that need to be answered.
“One is how did this start at all? Why are we doing something like a stock option at a public utility?” he said.
He said the second question is when did JEA know what the huge cost of the plan could be.
“I’d like to find out when that was and why they didn’t shut it down immediately when they found out,” Diamond said. “Maybe they did. I don’t know.”
Salem said the council won’t put JEA employees under oath, though that is an option for council in its oversight role.
“Depending on the candor of the JEA executives, we hope we don’t have to move in that direction,” he said.
The meeting about the incentive plan is scheduled for 1 p.m. Monday at Jacksonville City Hall, 117 W. Duval St. The Times-Union will provide live coverage of the meeting on Jacksonville.com.