Portland School District to pay $750K to settle corporate tax dispute

Published 12:00 am Friday, December 2, 2022

Bond money dedicated for the modernization of Portland high schools will also pay for a legal settlement.

The Portland Public Schools Board of Education approved a $750,000 payout to Fortis Construction in November, as part of a settlement agreement over construction costs and tax liability related to Leodis V. McDaniel High School in Northeast Portland.

McDaniel High School was modernized as part of the school district’s 2017 bond program. PPS contracted with Fortis Construction to complete the work, but before the school was finished, Oregon adopted a new Corporate Activity Tax in 2019, after the construction contract was adopted. The tax is applied to taxable commercial income over $1 million. The tax wasn’t in place when the school construction project was initiated, but it went into effect before the project was completed.

According to PPS, the contract between the school district and Fortis was amended in 2019 to set a maximum price on the remodel project, six months before the new CAT was slated to take effect in January 2020. By that time, construction was already underway. Fortis requested the amended contract include money that would cover a portion of the company’s new corporate tax liability, but the request never made it into the finalized contract.

In July 2020, Fortis filed a legal claim against PPS, seeking $1.3 million, claiming a PPS project manager told Fortis the CAT would be covered via a change order process, outside of the contract. PPS never paid Fortis the extra money. Fortis alleged breach of contract and fraud, among six other claims in its legal filing against the school district.

“Fortis alleges that a PPS employee (who had only authority to approve expenditures under $10,000), told Fortis that PPS would add the CAT to the price paid to Fortis by a ‘change order’ after the amendment was executed,” Marina Cresswell, senior director of PPS’s Office of School Modernization, explained in a staff report. “On that basis, Fortis alleges that it relied on the PPS employee’s representation in signing the amendment that did not include the CAT and proceeding with the Project. PPS disagrees that relying on these alleged statements was reasonable.”

The settlement agreement ensures neither party can bring additional legal claims against the other over the dispute.

PPS said the settlement was the best option, to avoid costly litigation.

Since the dispute, the district has beefed up staff training on contract change approvals, added management team members at construction project meetings and increased approval requirements in its project management software used by the district and its contractors.

“Portland Public Schools has undertaken a significant school modernization program with generous support from property taxpayers and takes its responsibility to maximize and safeguard taxpayer funds very seriously,” Cresswell’s memo said, noting “considerable uncertainty” about how the new CAT applied to the McDaniel High School project. Cresswell also cited significant turnover in the Office of School Modernization in 2019, when the contract was being negotiated.