AUSTIN, Texas -- For more than a year before Texas canceled its $144 million contract with an engineering firm it had hired to handle more than $1 billion in federal hurricane disaster relief grants, state managers warned that the firm, HNTB, had radically overspent its budget and should be relieved of most of its duties.

In the end, it was some of those same supervisors at the Texas Department of Rural Affairs who were fired and HNTB that carried on "full steam ahead," in the words of one of the supervisors.

''Everyone was shocked," recalled a manager who survived the November 2010 purge but later left the department. "Everyone knew then the rumors of HNTB taking over were true."

In February, Rural Affairs Executive Director Charlie Stone laid off his disaster recovery division -- about 35 employees, almost all of them earning a fraction of the salaries the government was paying HNTB -- and outsourced their work to the contractor. According to HNTB's contracted billing rates, its 14 highest-paid employees charge between $200 and $360 an hour for their services, though the highest-paid Rural Affairs employee made $126,000 a year, or $61 an hour.

As a state Senate committee begins an inquiry this week into how the hurricane relief money has been managed, the Austin American-Statesman has learned that HNTB is positioning itself for more state work.

In September, the Department of Public Safety contracted for HNTB's services to support disaster planning and response -- a broad range of duties now carried out by the department's Division of Emergency Management.

The division coordinates the state's emergency response to hurricanes, wildfires, floods and other natural disasters and deals with homeland security. Through various programs, it disbursed $397 million in Federal Emergency Management Agency grants between September 2009 and August 2010.

State and federal records show that HNTB spent 90 percent of the money budgeted for managing infrastructure grants to communities stricken by hurricanes Ike and Dolly while seeing only 20 percent of the projects to completion. The Texas Department of Housing and Community Development, which managed the housing component of the hurricane relief program without an outside contractor, stayed within its budget.

HNTB is a Kansas City-based company with deep ties to Gov. Rick Perry's administration, having given close to a half-million dollars to the Republican Governors Association, which Perry formerly led. It was the lead consultant for Perry's proposed (and eventually abandoned) Trans-Texas Corridor highway project.

Until mid-2009, Ray Sullivan, Perry's presidential campaign communications director and his former chief of staff, was a lobbyist for HNTB. Reggie Bashur, a Perry campaign adviser, still is, according to Texas Ethics Commission reports.

HNTB's engineering contracts with the Texas Department of Transportation, whose commissioners are appointed by Perry, have earned the firm $119 million over the past four years, according to figures provided by the department.

As for the Department of Rural Affairs, Stone was dismissed as executive director in early March by the new chairman of the Rural Affairs governing board, who is also appointed by Perry. The agency was later dismantled, its remnants merged with other agencies in a long-anticipated budget-cutting move championed by Perry, who shifted responsibility for both housing and infrastructure disaster grants to Texas Land Commissioner Jerry Patterson.

''It was like a movie where everyone dies in the end," quipped a former employee. He and several former co-workers who were interviewed for this story requested anonymity, saying they feared for their job prospects in state government or those of their spouses. Stone did not respond to requests for comment.

''The governor was not pleased with the pace of the disaster recovery, and he thought putting the program under an elected official would lead to efficiencies and more accountability," said Allison Castle, a spokeswoman for Perry's office. She added that "neither the governor nor the governor's office played any role in the selection of HNTB for the contract."

Gary Hagood, deputy commissioner of financial management at the General Land Office, canceled the HNTB contract Aug. 31, four years before it was to expire, after the firm had billed about $32 million for its services. Though HNTB continues to handle the infrastructure grants under a different contract with the agency, Hagood has promised to keep a tight rein on "every dollar that goes out of here" and to push hard to get projects built by 2015.

Hagood also issued new requests for qualifications for engineering services and grant administration for the disaster program; HNTB has qualified to get work under those new General Land Office contracts as well. The first of those work orders is expected to be issued any day now, according to the land office.

The new DPS contract for HNTB's services is through an interagency agreement with the General Land Office. DPS spokeswoman Rachel Jordan-Shuss said the agency sought the agreement to enable the agency to quickly hire contractors for damage assessments in the wake of this year's disastrous wildfires.

However, DPS has long had a program that keeps contractors on call for temporary disaster work such as engineering, damage assessments and hazard mitigation -- some of the same work that HNTB performs.

On Wednesday, the Texas Senate Committee on Intergovernmental Affairs will conduct a hearing at the Capitol on the "circumstances surrounding the distribution" of hurricane disaster funds by the rural affairs agency.

Its chairman, Sen. Royce West, D-Dallas, scheduled the hearing after an American-Statesman story last month dealing with HNTB's role in disaster recovery and Lt. Gov. David Dewhurst's interim charge to the committee to find ways to make post-disaster affordable housing more available. Federal officials at the Department of Housing and Urban Development have repeatedly expressed concern about deficiencies in the state's program.

Congress appropriated $3.1 billion to help Texans recover from the back-to-back hurricanes that struck the Gulf Coast in 2008. The money -- $1.7 billion for new housing to replace that lost in the storms and $1.4 billion to fix infrastructure that was either destroyed or didn't work properly -- is being distributed in community development block grants through the U.S. Department of Housing and Urban Development.

Nonhousing projects include emergency generators, water treatment and sewer facilities in communities hit by the storms. However, some projects not related to storm damage -- including a $5 million expansion of Lufkin's civic center -- have also won funding.

When the first round of HUD funding was released in the spring of 2009, totaling $1.1 billion, the small rural affairs agency sought help in managing the anticipated deluge of 3,000 projects. HNTB, which already had an $8.6 million state contract to assess damage from Hurricane Ike, was one of five companies that responded to the request for qualifications. Based on a review by an outside panel, HNTB scored the highest and got the contract in November 2009.

In the second round of funding, a new presidential administration brought changes in federal policy. Rural and urban communities fought over their slices of the disaster pie. Housing advocates challenged the state's plans on several fronts, including a formula that HNTB developed for where disaster recovery funds should go, which was ultimately rejected by HUD.

As delays and problems mounted, the Department of Rural Affairs expanded HNTB's contract from three to five years and from $69 million to $144 million. By early 2010 the firm was spending money at the rate of more than $1 million a month, and managers were warning that initial funds allocated for grant administration and planning would be depleted long before most of the infrastructure projects had broken ground, according to memos obtained through an open records request filed by the American-Statesman.

''Assuming the current burn rate continues, we will run out of the $30 million allocated to (HNTB) by October 2011, yet we know that we have Round 1 projects such as the Galveston Wastewater Treatment Plant that will be five years plus," David Flores, the agency's director of disaster recovery operations, wrote in a memo to his boss, Stone.

The memo recommended that the state radically cut back HNTB's services and take over Round 2 grants, effectively curtailing the outsourcing arrangement.

Stone responded that the Department of Rural Affairs governing board, a citizen group appointed by Perry, would not consider the issue until after the Nov. 2 general election. (Perry easily bested his Democratic opponent, former Houston Mayor Bill White.)

When Stone presented the reduction proposal at the board's meeting on Nov. 3, members took no public action.

The next week, Stone fired five of his top executives in disaster recovery, including Flores, and personally walked them out the door, they said.

Asked if he believed his recommendation to cut HNTB's contract cost him his job, Flores, who took early retirement, said he did.

The contractor

Texas has paid Kansas City-based HNTB more than $160 million over three years -- all in no-bid contracts for professional services. The company and its executives have given $500,000 to the Republican Governors Association and Gov. Rick Perry's campaigns and have hired two Perry loyalists as lobbyists.

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The money

Congress appropriated $3.1 billion to help Texans after hurricanes Ike and Dolly. HNTB was hired to distribute more than $1 billion of it for public projects such as new water plants. But HNTB spent 90 percent of the money budgeted for managing the first round of grants while seeing only 20 percent of the projects to completion.

The oversight

After an American-Statesman investigation into HNTB's role in disaster recovery last month, the Texas Senate Committee on Intergovernmental Affairs scheduled a hearing for Wednesday on the distribution of hurricane disaster money.