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Report Number: 2016-124

Abbreviations

Department of General Services and California Department of Technology
Neither Entity Has Provided the Oversight Necessary to Ensure That State Agencies Consistently Use the Competitive Bidding Process



Summary

HIGHLIGHTS

Our audit concerning the Department of General Services’ (General Services) and the California Department of Technology’s (Technology) processes for overseeing noncompetitive contracts revealed the following:

Results in Brief

The Legislature has charged the Department of General Services (General Services) and the California Department of Technology (Technology) with overseeing the State’s procurement of goods and services on a statewide level. Specifically, General Services is responsible for overseeing the majority of the State’s procurements, while Technology is responsible for overseeing acquisitions of certain information technology (IT) and telecommunications goods and services. Nonetheless, neither entity provided adequate oversight of the billions of dollars the state agencies awarded through noncompetitive contracts during our audit period from fiscal years 2011–12 through 2015–16. Although noncompetitive contracts are appropriate in some situations, state law generally requires agencies to use the competitive bidding process when possible in order to ensure fair competition and to eliminate favoritism, fraud, and corruption. Further, economic experts agree that competition in public procurement benefits taxpayers and consumers by providing lower prices, greater innovation, and improved products and services. However, General Services and Technology failed to ensure that agencies under their oversight used competitive bidding as state law requires, potentially putting the State at risk of not receiving the best value.

Because General Services oversees most of the State’s procurements, its responsibilities include ensuring that key decision makers have complete and accurate contracting information that allows them to identify concerning trends and make informed decisions. However, although General Services created a statewide contract database so that it would have such information, it did not ensure that this database served the purposes for which it was created. Specifically, in 2002 the Governor directed a task force to review the State’s procurement procedures and make recommendations to ensure that agencies are using competitive bidding to the greatest extent possible, and that their procurements receive adequate oversight. As a result of its review, the task force recommended that General Services implement a statewide database to track agencies’ procurement transactions. In response, General Services created the State Contract and Procurement Registration System (SCPRS) in 2003. SCPRS was intended to increase the visibility and accountability of state contracting activities and to assist General Services in performing contracting oversight functions, such as identifying problematic trends in agencies’ contracting practices. However, our review of SCPRS data from July 2011 through December 2015—when the State transitioned from SCPRS to a new system—found that the data misrepresented or did not include many of the State’s contracts and their associated amendments, essentially rendering SCPRS ineffective for its intended purposes.

Many of the errors we noted in our review were the result of agencies incorrectly entering information into SCPRS, likely because of General Services’ failure to provide them with adequate guidance. For example, the database included what it identified as a competitive contract with a value of $34 million. However, this contract’s original, competitively bid value was only $3 million. The remaining $31 million was the result of nine noncompetitive contract amendments. Further, 12 of 31 contracts and amendments we reviewed were missing from SCPRS because the agencies had failed to enter them. In fact, one of these missing contracts included eight amendments and was worth $163 million. When the data do not accurately and completely represent agencies’ procurements, General Services has no way to ensure that those agencies are not avoiding or minimizing noncompetitive contracting. A section manager in General Services’ Procurement Division indicated that General Services did not issue instructions to improve the data’s integrity because a 2008 Department of Finance budget letter announced a moratorium on developing or upgrading any systems that would duplicate the planned FI$Cal project. General Services intended to retire SCPRS once a new system was implemented. The section manager stated that General Services could always obtain the data directly from the agencies if the need arose. However, this approach defeats the purpose of having a single repository for contracting data.

General Services transitioned from SCPRS to the new Financial Information System for California (FI$Cal)—a legislatively mandated system for procurement, accounting, budgeting, and cash management—as its statewide contract database in January 2016. However, whether FI$Cal’s contracting data will eventually be accurate or complete remains uncertain. On one hand, when agencies adopt FI$Cal as a means of procuring goods and services, it automatically reports their contract data, reducing the likelihood of input error. However, agencies that do not use FI$Cal to procure their goods and services generally must manually enter information into it, similar to the way that they entered data into SCPRS. This manual entry process creates the same risk that users will not enter all required information or will enter inaccurate information.

According to General Services, only 57 agencies currently use FI$Cal for their procurements which automatically reports their contract data, or about 31 percent of the total number of entities currently scheduled to use it. At this stage, it is not clear how long it will be before the remaining agencies begin using it. Further, some large agencies, such as the California Department of Corrections and Rehabilitation, do not plan to transition to FI$Cal until their own business management systems become obsolete. In the meantime, if General Services does not ensure the integrity of the data that the remaining agencies must manually enter into FI$Cal, the State may continue to lack critical information about those agencies’ contracting. This lack of information will hinder both General Services’ and Technology’s ability to oversee and manage the State’s contracting and to ensure the appropriate use of noncompetitive spending.

Furthermore, FI$Cal’s structure may currently prevent both General Services and Technology from accurately identifying the State’s spending on amendments. Although FI$Cal allows agencies to identify whether goods and services were noncompetitively procured, it does not currently allow agencies—regardless of whether they use FI$Cal to procure their goods or services—to clearly indicate that procurements were made using amendments. This lack of consistency in FI$Cal’s data will impede General Services’ and Technology’s ability to accurately analyze the State’s noncompetitive spending on amendments at an aggregate level.

Moreover, neither General Services nor Technology has established formal plans to regularly analyze the new FI$Cal data to monitor the State’s noncompetitive procurements. Such analyses are critical for identifying potentially abusive contracting activity, such as agencies directing state contracts to favored vendors. When we asked why General Services and Technology did not have plans to perform these types of analyses, the entities indicated they had prioritized other tasks such as becoming familiar with the complexities of FI$Cal. However, both General Services and Technology agreed these analyses are important and indicated they will start developing plans to perform them in the future.

Our review of 27 noncompetitively bid contract justifications (noncompetitive requests) that General Services or Technology approved demonstrates the necessity for such statewide analyses. Agencies sometimes use noncompetitive requests to enter into original contracts with specific vendors or to amend contracts with existing vendors, often extending a contract’s terms or increasing its value. According to General Services’ State Contracting Manual, state agencies can generally only use noncompetitive requests when a proposed acquisition of goods are the only goods that meet the State’s needs. For non-IT services acquisitions, state agencies fill out noncompetitive requests to explain why they are affording a single business enterprise the opportunity to provide the specified services. General Services uses this information to determine whether the noncompetitive request is in the State’s best interest. However, our review of 27 noncompetitive requests found that General Services and Technology approved nine requests—with a total value of nearly $1 billion—even though these nine instances were largely the result of insufficient planning by the agencies.

For example, General Services approved a $3 million noncompetitive request from the California High-Speed Rail Authority (High-Speed Rail) for a second contract amendment for financial consulting services, which High-Speed Rail submitted a mere 17 days before the existing contract was set to expire. When justifying its noncompetitive request, High-Speed Rail stated that the financial consulting services were critical to its mission and that the vendor’s skills were “specialized and not widely available.” However, it did not provide a valid reason why this vendor alone could meet the State’s needs, as financial consulting services are not unique. Further, this was the second time High-Speed Rail submitted a noncompetitive request to amend this particular contract, citing similar reasons. General Services asserted that it approved the noncompetitive request because the vendor’s services were crucial to ensuring that High-Speed Rail received timely delivery of funding. By approving a noncompetitive request that could have been competitively bid, General Services prevented other vendors from competing for this contract, potentially resulting in the State not receiving the best value.

Similarly, Technology approved a noncompetitive request that the agency could have competitively bid with sufficient planning. In this instance, the Employment Development Department (EDD) amended a contract three times with a vendor working on an IT project that processed unemployment insurance payments. These three amendments—two of which Technology approved and were noncompetitive—increased the total value of the contract from $600,000 to $8 million in less than a year. EDD then submitted a noncompetitive request for a fourth amendment for an additional $2 million. It justified that request in part by stating that the current vendor had experience with the project and that its own staff did not have the necessary technical skills. However, Technology noted that the vendor had not met the contract’s knowledge-transfer provision—the requirement that the vendor give EDD staff the knowledge necessary to perform its responsibilities without the vendor’s assistance. Moreover, EDD had identified this issue in the prior noncompetitive requests for the same contract. Nonetheless, Technology did not follow up to ensure that the agency took the steps necessary to avoid subsequent noncompetitive requests. Instead, Technology approved the fourth amendment for $2 million, limiting the ability of other vendors to compete for this contract. Although knowledge transfer is one of multiple reasons EDD cited for submitting the noncompetitive request, it repeatedly used this reason to justify the noncompetitive requests throughout the history of this contract. Technology staff agreed that it could strengthen its oversight by monitoring and following up with agencies that repeatedly submit inappropriate noncompetitive requests.

Although both General Services and Technology have mechanisms they can use to encourage agencies to comply with noncompetitive procurement policies, they rarely employed them during our five‑year audit period. General Services in particular has a number of mechanisms for enforcing compliance. For example, it can revoke or reduce an agency’s delegated purchasing authority, forcing the agency to submit contracts to General Services for approval, regardless of dollar amount. However, during our audit period, General Services only twice reduced or revoked an agency’s delegated purchasing authority—and neither instance related to an inappropriate noncompetitive procurement. A section manager for General Services’ Purchasing Authority unit asserted that reducing or revoking an agency’s purchasing authority does not solve poor management of a contract that was procured above an agency’s purchasing authority and therefore, already required General Services’ approval. However, increased use of this tool in appropriate situations of poor contract management could offer General Services significant leverage to hold agencies accountable. Technology told us it had never formally denied an agency’s noncompetitive request since it became responsible for procurements related to reportable IT projects and telecommunications services in July 2013.

Further, neither General Services nor Technology monitored the corrective action plans agencies submitted with their noncompetitive requests. The noncompetitive request form requires agencies to submit corrective action plans when the acquisition could have been competitively bid but was not because there was insufficient time to complete the competitive acquisition process. For example, in 2013 the Department of Health Care Services (Health Care Services) requested approval of a noncompetitive request for an $835 million amendment to its contract for administrative services for its Medi‑Cal dental program—the seventh such amendment in the contract’s history. Because Health Care Services cited insufficient time to complete the competitive acquisition process as a reason for the noncompetitive request, it included with its noncompetitive request a corrective action plan with a proposed timeline for its future competitive solicitation. However, staff at General Services did not monitor Health Care Services to determine if it followed through with this timeline. We found that although Health Care Services eventually began the process of soliciting competitive bids, it did so 18 months later than stated in the corrective action plan. We find it particularly troubling that General Services did not follow up on Health Care Services’ corrective action plan regarding an amendment worth hundreds of millions of dollars.

Because General Services and Technology did not consistently use their enforcement authority, they allowed agencies to inappropriately continue using noncompetitive requests. By applying their enforcement mechanisms more consistently, General Services and Technology could better ensure that agencies engage in competitive bidding when appropriate.

Summary of Recommendations

Legislature

To promote accountability for and transparency of the State’s noncompetitive request process, the Legislature should require General Services and Technology to submit an annual public report of all noncompetitive requests they approve with values over $1 million. Such a report should include, when applicable, the contracting agency; values for original contracts, noncompetitive requests, and amendments; and mechanisms applied to enforce compliance. The Legislature could also require agencies to publicly justify their noncompetitive requests in legislative hearings when it sees fit.

General Services

To improve its oversight of the State’s noncompetitive contracts, General Services should immediately ensure that agencies enter accurate and complete contract information into FI$Cal. General Services should modify FI$Cal to include a standard amendment indicator to identify an item as an amendment. General Services should also create plans for regularly performing statewide analyses of FI$Cal data to identify potential abuse or overuse of noncompetitive contracts.

To ensure that it holds agencies accountable for implementing the corrective action plans that they submit with noncompetitive requests, General Services should immediately begin tracking all such outstanding plans and following up to ensure that agencies complete them.

To ensure that it consistently and appropriately responds when agencies fail to competitively bid when they could have, General Services should create an escalation process outlining the order and severity of enforcement mechanisms it will use.

Technology

To improve its oversight of the State’s noncompetitive contracting related to reportable IT projects and telecommunications procurements, Technology should create plans for regularly performing statewide analyses of FI$Cal data to identify potential abuse or overuse of noncompetitive contracts.

To ensure that it holds agencies accountable for implementing the corrective action plans that they submit with noncompetitive requests, Technology should immediately begin tracking all such outstanding plans and following up to ensure that agencies complete them.

Agency Comments

General Services and Technology agreed with our findings and indicated they will implement our recommendations.




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