McCrory brokered meeting on contract for friend and campaign donor

From News & Observer/ By Joseph Neff

Last fall, Gov. Pat McCrory personally intervened on behalf of a friend and major political donor who wanted to renew $3 million in private prison contracts over the objections of McCrory’s top prison officials, records and interviews show.

Graeme Keith Sr., a Charlotte developer and retired banker once known as “Billy Graham’s banker,” has aggressively pursued private maintenance contracts in state prisons since 1999. Keith’s contracts at two prisons were set to expire Dec. 31, 2014; a third would have ended four months later.

The governor convened an October 2014 meeting in Charlotte, where, according to a Department of Public Safety memo, Keith told prison officials and McCrory that “he had been working on this project ‘private prison maintenance’ for over ten (10) years and during that time had given a lot of money to candidates running for public office and it was now time for him to get something in return.”

After prison officials said they were uncomfortable with the tenor of the meeting, McCrory ended the meeting and referred the matter to his state budget director. Lee Roberts then worked out an 11th-hour extension that culminated in an exchange of testy text messages among the governor’s top appointees the night of Dec. 30, one day before the contract was to expire.

Roberts and Thomas Stith, McCrory’s chief of staff, pushed Secretary of Public Safety Frank Perry to extend the contract for Keith, the messages show.

Perry told Roberts and Stith he wanted to end the contract and allow state employees to resume maintenance. His staffers had been adamant that private maintenance wasn’t saving money and posed a greater security risk.

Perry protested the contract extension and said it wouldn’t save much money. But he said he would carry out the “marching order.”

“Very bad decision,” Perry texted. “Sorry, but this will soil our Gov.”

The contract has caught the attention of the Federal Bureau of Investigation. Its agents have gathered documents and interviewed at least a half-dozen state employees from the Department of Public Safety and the Office of State Budget and Management, according to several people interviewed, including Perry’s former chief operating officer, Lorrie Dollar.

McCrory, a Republican in his first term, said he did not hear Keith make a statement linking state contracts to political donations.

“Had I heard it, I would have walked out,” he said in an interview. “Secretary (Perry) has informed me that was said probably while I was in a side conversation. I did not hear it.”

McCrory said he wanted Roberts’ analysis to settle a dispute about whether private or public maintenance would be a better deal for the state. He acknowledged that he had talked with Keith by phone about the contract, but said it was not unusual for him to get involved in a dispute between a contractor and a state department.

“We did this the right way,” he said.

McCrory said he has not talked with the FBI but said: “We have nothing to hide.”

Much of the story emerges from text messages, emails and other public records, as well as interviews with Roberts and Perry.

“What’s important is whether the decision was made on a good-faith basis for legitimate reasons or whether it was made for illegitimate or political reasons,” Roberts said in an interview. “We made it on what we thought were sound, objective, reasonable bases.”

Graeme Keith issued a statement touting his company’s accomplishments and ethical standards and said the contract had saved the state money. He said the public safety memo was part of the prison department’s campaign against privatization.

“This misrepresentation is nothing more than an attempt to ascribe a nefarious purpose to what was simply a straightforward discussion of the cost savings resulting from privatizing prison maintenance services,” Keith said in the statement.

A lawyer for The Keith Corp. said Friday that the company was cooperating fully with the FBI.

Perry said his department’s memo was accurate. His text about soiling the governor referred to Keith’s comments on several occasions that “I’ve made my contributions, and I should keep this contract,” Perry said.

As the top McCrory appointees wrestled with the contract, the prison officials opposing it were concerned about two issues: apparent political interference in a contract involving one of McCrory’s key backers and friend and whether the contract could legally be extended without the administration first reporting it to a key committee of the General Assembly.

A state budget law passed in the summer of 2014 said that the Department of Public Safety could expand private maintenance contracts if it found that it would save money and not cause a security risk. The law also said that the department “shall” report to a legislative committee on both issues “prior to entering any prison maintenance contract under this section.”

Perry and his staff relied on a written staff legal opinion stating that the provision required notifying the General Assembly before extending Keith’s contract. Roberts said in the texts that it was not necessary for extending an existing contract. Perry now accepts that view.

Tension was evident at the meeting and in communication after it, according to records obtained by The N&O in the past week after a public records request.

A memo written by Deputy Commissioner Joe Prater describes Keith discussing his political contributions and his expectations. Texts sent by Perry shortly after said the meeting was “heated and useless.”

“Gov too close to Keith Corp so I said (budget director) Lee Roberts should provide his analysis,” Perry wrote to Dollar, his former chief operating officer. “I said I would not extend unless told by Gov.”

Perry said this week that McCrory never personally directed him to extend the contract.

Friends in both parties

In Charlotte, a city known for business and for faith, Graeme Keith, 82, has made a name for himself in both realms. Keith went from a high-ranking manager at First Union to president of the Georgia Railroad Bank and Trust Company in Augusta to end his career as president of Barclays America. Along the way, Keith made high-profile friends.

The Davidson College graduate met Billy Graham in 1958 and eventually became what the evangelist called his “best friend in Charlotte.”

After retirement, Keith and his son, Greg, formed a small real estate development firm in 1989, The Keith Corp. The company has grown into one of the Charlotte region’s largest commercial real estate developers.

In 1996, the Keiths launched a subsidiary now known as TKC Management Services to perform maintenance at jails and prisons. Its first contract was the Mecklenburg County jail.

In 1999, North Carolina prison officials set up a pilot project. State employees maintained a new prison in Spruce Pine, while Keith employees did the same work at an identical Stanly County prison.

Keith’s political connections were key to the project, according to Betty McGuire, a retired prison administrator who oversaw the project.

“We were told he was a politically active person and that he raised money,” McGuire said. “All the Democrats thought Graeme Keith could walk on water.”

Keith’s contributions to Democrats in power during this time included $2,700 to House Speaker Jim Black, $5,900 to Lt. Gov. Dennis Wicker, $3,250 to Gov. Bev Perdue and $1,000 each to governors Jim Hunt and Mike Easley.

Prison officials didn’t renew the contract. McGuire said they couldn’t find any savings and were worried about the security risks posed by private employees.

“They didn’t do a bad job,” McGuire said. “They weren’t a total disaster, but they are not your own people if you need to discipline them.”

Fighting for privatization

The Keith Corp. returned to state prisons for a second pilot project in 2006, when Easley was governor and Black was speaker, involving six identical prisons that opened between 2003 and 2008. Keith won the bid to maintain the three newest prisons – Maury, Bertie and Tabor – while state employees were used in Lanesboro, Alexander and Scotland prisons.

The project first became controversial at the General Assembly in 2009, according to Ardis Watkins, a lobbyist for the State Employees Association of North Carolina.

“Maintenance is the foot in the door, and opens the whole system to privatization,” Watkins said. “Prisons are big business.”

In 2010, the General Assembly voted to prohibit new or expanded contracts.

The issue reappeared in 2011, when David Guice, then a Republican state representative from Brevard, sponsored a bill to end that prohibition and to expand private maintenance to prisons in eastern and south central North Carolina.

Watkins said the muscle behind the bill was then-House Speaker Thom Tillis of Cornelius, a Republican and recipient of $5,500 in campaign contributions from Keith.

A bipartisan coalition gutted the bill on the House floor, changing it into a law that prohibited expansion until prison officials studied the costs and benefits of private prison maintenance.

The prison system renewed the contracts for three years in 2011 with one significant change: The state reclaimed maintenance of video surveillance, telephones and the Electronic Intrusion System, which detects motion along the perimeter fence.

Tribute from McCrory

In 2013, McCrory took over as governor. Keith had given a total of $12,000 to McCrory from 2008 through 2012, but their ties ran deeper than that.

A 1996 Charlotte Observer story related a conversation between McCrory and Billy Graham: “Graham listened patiently as McCrory, eager to impress and all but bubbling over, told Graham of his own spiritual life, and how he’s in a Bible study class with the son of Graham’s good friend, Graeme Keith.”

As Charlotte’s mayor, McCrory had no qualms about singing the Keiths’ praises. In a 2011 tribute to The Keith Corp., posted on a promotional slideshow about the company, he said: “I have had the unique opportunity of working with many of Charlotte’s top business leaders and Graeme and Greg Keith are at the top of that list. They have built the Keith Corporation into one of the finest real estate companies in the Southeast by adhering to the highest standards of ethical and moral integrity, service to their clients and civic leadership.”

Keith’s lobbying heated up soon after McCrory became governor, according to Doug Holbrook, then a legislative liaison for the prison system.

Graeme Keith “name-dropped the governor repeatedly,” Holbrook said. “He is what I call a retail personality. … Keith certainly made it clear to me he had been talking to ‘Pat.’ 

Soon after he entered office, McCrory appointed Guice to run the state prison system. In May 2014, Guice’s department gave the General Assembly its report comparing private versus public prison maintenance.

The conclusions were unwelcome news to Keith and other privatization boosters: Private maintenance did not lead to significant savings.

The report said that the most important considerations can’t be measured in dollars and cents: the safety and security concerns intrinsic to high-security facilities, such as smuggling contraband, control over tools and inappropriate interactions with inmates.

“The security and risk was the tipping point,” Prater, the deputy commissioner, said in an interview.

A tense meeting

In August 2014, the legislature passed a budget bill containing a new law that proved contentious.

The Secretary of Public Safety had the power to decide to expand private prison maintenance, which was good news for the Keiths. Previously the law required explicit approval of the General Assembly.

But the law also threw up an obstacle: The department was required to report to a powerful legislative committee known as Gov Ops on anticipated savings and safety concerns before entering any prison maintenance contract.

On Sept. 8, Perry told Graeme Keith by phone that he was going to let the contracts lapse. A day later, he drafted a letter telling Keith the contracts would lapse. He never sent it, he said.

Emails show shortly after that, McCrory called a meeting with Keith and top prison officials. First set at the administration building in Raleigh, then the State Capitol, the meeting finally took place on Oct. 28, 2014 at 4 p.m. in Charlotte.

Graeme and Greg Keith and two employees attended. The department was represented by Perry, Guice, Prater and Jerry Carroll, a retired Amoco engineer who runs the facility maintenance for the prison system.

According to the memo Prater later wrote for the file, McCrory made a few remarks and turned the meeting over to Graeme Keith, who noted he had been working on private prison maintenance for over a decade.

Keith discussed his political contributions, Prater’s memo states. “He further stated that he had worked during the short session of the legislature to amend legislation that gave DPS the sole authority to expand private maintenance to additional prisons and seemed very pleased that he no longer had to go through the legislature in order to expand his business.”

The memo said that Keith then put on a PowerPoint presentation that said privatization could save taxpayers more than $50 million over 10 years if the company took over maintenance at all 57 prisons. Mike Cox, a Keith official who was at the meeting, said he has never heard Keith discuss his political contributions with public officials.

Perry said Guice raised ethical concerns, including the governor’s presence and the necessity of bidding any contract that would expand maintenance to more prisons. McCrory soon ended the meeting.

The department would not allow The N&O to interview Guice.

After the meeting, the governor called on Roberts, his director of the Office of State Budget and Management, who did not attend.

In an interview, Roberts described the conversation: “He called up shortly after the meeting and said, ‘Look, these guys are talking past each other. Keith Corp. says they are cheaper, DPS says they are cheaper, it’s hard for me to tell which is which. Can you just take a look at it and make a recommendation?’ ”

Three days after the meeting, Graeme Keith wrote to Perry: “Based upon what I heard the Governor say, we are to meet with Lee Roberts so that he can listen to both sides regarding future savings that can be generated by outsourcing the remaining prisons.”

Keith also asked Perry to use his authority to extend the contracts, which would expire on Dec. 31, 2014 at two prisons and April 30, 2015 at the third.

‘Very bad decision’

As the year wound down, the governor’s office requested that Roberts schedule another meeting with The Keith Corp. An email showed that Greg Keith requested that no one from the Department of Public Safety attend.

The gathering took place in Roberts’ office on Dec. 17, attended by Graeme Keith, several of his employees and budget officials.

The argument over which cost less boiled down to how to measure the square feet of the building space maintained and the fact that The Keith Corp. employed eight fewer workers on the contracts than the prison system, which used 52 employees.

In an email the following day to Perry and McCrory Chief of Staff Stith, Roberts said he had told The Keith Corp. that the contract would be extended.

Roberts said that the budget office analysis showed the state would save $1 million a year. (Keith had said the annual savings were $413,000.)

Roberts arrived at the higher figure because he used the square-footage calculation favored by Keith and because he included factors that he said the prison system did not: rent, human resources, pensions and health care.

Roberts said prison officials were firmly opposed to the contracts.

“It was clear to me that DPS was threatened by the prospect of further privatization and was determined to fight the renewal of these contracts,” he said.

As Christmas came and went, Mike Cox peppered state budget officials with polite and persistent emails: “Our folks are on pins and needles at the project sites.”

On the evening of Dec. 30, Perry texted Stith, McCrory’s chief of staff, asking for permission to let the contracts lapse at the close of business the following day: “We are prepared to take over Keith Corp. maintenance at our two prisons. Must have in place1/1/15. As you know I see no significant saving, must get Gov Ops concurrence even if we did.”

Stith replied that the plan was to extend the contract “unless there is a compelling reason to change course from our last discussion.”

Perry then received a text from Roberts, the budget director: “I think you and I and Thomas agree that the Keith contract needs to be renewed another year given the lack of other options.”

Perry responded by citing the 2014 budget law: “We will need to get Gov Ops concurrence by statute. We are ready to take over but Thomas was to be final decider.”

Roberts wrote that he and Stith agreed to extend the contract.

At 12:19 a.m. on Dec. 31, Perry replied: “Very bad decision. Sorry, but this will soil our Gov as the legal route is to present to Gov Ops who may not meet until mid Jan. I will meet with legal and (assistant budget director Chloe Gossage) and others to get this through if that is my marching order. Again, not in our Governor’s interest or that of good governance.”

Roberts responded that his lawyers disagreed, that the contract did not need to go through the Gov Ops committee. “I suspect some within DPS might be trying to run out the clock but that would not be in the interest of taxpayers.”

Graeme Keith and the department’s purchasing officer signed the contract later on that New Year’s Eve.

But if Perry has his way, the contract will end at the close of this year. His department sent a letter to Keith’s company on Oct. 19 saying that the state will take over all maintenance on Jan. 1, 2016. The letter does not state a reason; Perry said in an interview that if privatization was really saving so much money, “they should have them all. If not, it should be zero.”