Founded by the Legislature in 1868 as a public, state‑supported, land‑grant institution, the University of California (university) is an extensive business enterprise. It has 10 campuses and five medical centers, and it is also involved in the management of three national laboratories and several research centers. It has more than 200,000 employees. Each year, it receives over $30 billion in revenues from a variety of public and private sources, including $3 billion in state funding and $10 billion generated from its medical centers.
The California Constitution established the university as a public trust to be administered by the University of California Board of Regents (regents). As a result, the Legislature’s oversight of the university is limited to certain circumstances, such as specifying provisions the university must meet before it can spend state appropriations. The head of the university is the president, to whom the regents have granted full authority and responsibility over the administration of all the university’s affairs and operations. The Office of the President manages the university’s fiscal and business operations. A chancellor at each campus is responsible for managing campus operations. At applicable campuses, those chancellors delegate management authority over the medical centers—which are semi‑autonomous, self‑supporting operations—to chief executive officers.
Although the campuses and medical centers must follow the university’s systemwide procurement policies, they have significant autonomy over their contracting decisions. The Office of the President reported that in fiscal year 2015–16, the university spent $8 billion through contracts on goods and services.
Contracting for Services Is a Major Component of the University’s Operations
The university’s operations require a wide variety of support services, such as janitorial services, security services, food services, landscaping services, and medical services. The university provides many of these services by using its own employees, some of whom are career employees, and others of whom are contract employees that have appointments with the university for defined periods of time. The university also contracts with outside parties for some services. Contracting for services allows the university to fill short‑term labor needs or supplement its workforce with needed skill sets.
Although the Office of the President is responsible for the university’s overall policy development, the campuses and medical centers operate their own procurement offices, which are responsible for ensuring that their contracts for services follow university policy. At the university locations we visited—the University of California, Davis, campus (Davis campus) and medical center (Davis medical center); the University of California, Riverside, campus (Riverside campus); and the University of California, San Francisco, campus (San Francisco campus) and medical center (San Francisco medical center)—each individual department is largely responsible for determining its needs for services and working with the location’s procurement office to complete the contracting process. In addition, the Office of the President has a local procurement office to support the procurement of services for its own operations.
The Office of the President also operates a systemwide procurement program to reduce costs for the university. This systemwide procurement program, also known as P200, launched in 2012 under the Office of the President’s leadership as one of 34 Working Smarter initiative projects. In response to state funding cuts the university implemented these 34 projects with the intention of streamlining university operations, ensuring operational efficiencies, and building a sustainable financial model. The Office of the President stated that as a whole, the 34 projects would generate $500 million in administrative savings and new revenue within five years and that the university would redirect these funds toward its core missions of teaching, research, and public service. The Office of the President set a goal for P200 to save the university $200 million annually by the end of fiscal year 2016–17 through the realignment of the university’s systemwide procurement organization, the implementation of procurement sourcing and spending technology, and the consolidation of campus spending.
Elements of the Public Contract Code Incorporated Into the University Contracting Manual
- The university must competitively bid service contracts of $100,000 or more in annual expenditures, except those for professional or personal services.
- The university shall award contracts to the lowest bidder in most cases, but it may use best value in certain circumstances.
- The university may use sole-source purchasing in limited circumstances.
Source: Public Contract Code, sections 10507 to 10510.
Systemwide Policies Govern University Contracting Practices
Although each campus and medical center has a degree of latitude in determining its need for services, it must follow certain systemwide policies and agreements when entering contracts. The university’s BUS‑43 Materiel Management manual (contract manual) details the process campuses and medical centers must follow when they solicit services. The university based the contract manual on a section of the State’s Public Contract Code that applies specifically to it, as the text box summarizes. However, the contract manual’s requirements for soliciting services contracts do not apply to contracts for professional services, which the university defines as infrequent, technical, and unique functions that independent contractors or partnerships, firms, or corporations perform. In addition, the university must comply with its bargaining agreements with unions when contracting for services. For instance, the university’s agreement with the American Federation of State, County and Municipal Employees has a provision restricting the university from contracting for services solely on the basis of lower contractor pay rates and benefits. However, the agreement allows services contracts in other cases, such as when the university requires special services or equipment.
The Office of the President also has guidelines outlining the circumstances under which university locations may enter into services contracts that displace existing university employees. The University Guidelines on Contracting for Services (displacement guidelines) state that before a university location can enter into a services contract that will displace university employees with services contract workers, that location must do the following:
- Take into account appropriate personnel policy and collective bargaining agreement provisions to minimize the impact on university employees.
- Justify its business decision by preparing an analysis that considers certain financial or service requirement factors.
- Submit the analysis to the Office of the President for review before entering into the services contract.
A Recent Displacement at the San Francisco Campus Generated Concern About the University’s Contracting Policies
In July 2016, the San Francisco campus entered into a services contract for information technology (IT) services with HCL America, Inc. (HCL) that had, effective February 2017, displaced 49 university career staff and 12 contract staff. The San Francisco campus’s decision to outsource these IT services was based on its analysis showing that outsourcing would save at least $30 million over five years, a conclusion it reached by comparing the cost of retaining campus employees to provide these services to the estimated cost of outsourcing the services and retaining fewer employees. The San Francisco campus estimated that it would pay HCL about $50 million over five years for IT services. According to a presentation the San Francisco campus provided to the Office of the President, it determined that outsourcing would help compensate for an expected increase in demand—and therefore costs—for IT services.
The San Francisco campus’s decision to displace university employees garnered national media attention and resulted in heightened public interest in the university’s contracting practices. In particular, elected officials, the San Francisco campus’s faculty association, and university employees objected to the replacement of employees with overseas labor for the purpose of reducing costs. In addition, some media articles stated that the HCL contract could expand to other campuses and thus lead to additional layoffs of university employees. Because the HCL contract is a master services agreement, any university location can obtain services from HCL under the terms of the agreement. Further, some employees criticized the San Francisco campus’s decision to enter into the contract because they believe it will result in inferior service. Articles have also reported that the San Francisco campus asked some of the employees to train the contractors before they were displaced from university employment.
Scope and Methodology
The Joint Legislative Audit Committee (Audit Committee) directed the California State Auditor to conduct an audit of the university’s contracting practices. The analysis the Audit Committee approved contained eight objectives. This report addresses all the objectives that relate to the university’s contracts for services. We list the objectives and the methods we used to address them in Table 1. We report on the audit objectives related to IT projects in our report number 2016‑125.2, which we will issue on August 24, 2017.
|1||Review and evaluate the laws, rules, and regulations significant to the audit objectives.||We identified relevant state law, collective bargaining agreements, university policies and procedures, and best practices that pertain to the university’s contracting and procurement services.|
|2||Determine whether the university and its campuses’ contracting policies and procedures are in compliance with applicable federal and state laws and regulations as well as with best practices for procurement.||
|3||For a selection of services contracts, determine the university’s compliance with applicable laws, regulations, policies, and procedures.||
|4||For the past five years for the Office of the President—and to the extent possible for its campuses—determine the types of contracts, procurement methods, and types of goods and services purchased by university via contracts.||
|5||For services contracts, to the extent possible, compare the compensation and benefits of university employees to those of contract employees in comparable positions and identify trends. Include an analysis of per‑employee cost based on the total contract amount.||
Analyze how the university is managing IT contracts, including the contract for University of California Payroll, Academic Personnel, Timekeeping and Human Resources (UCPath), by doing the following:
a. Determine what contract oversight exists to ensure IT projects are delivered on time and on budget.
b. For UCPath, assess the reasonableness of the project’s increased cost and schedule delays.
c. Determine if UCPath is adequately communicating project risks, costs, and delays to the regents.
|This objective is addressed in Report 2016-125.2.|
|7||To the extent possible, assess actions the university is taking to overcome contracting challenges and cost efficiencies.||We reviewed documents and interviewed staff at the Office of the President to assess the university’s efforts to implement a procurement initiative to increase savings from systemwide agreements.|
|8||Review and assess any other issues that are significant to the audit.||We did not identify any other significant issues.|
Sources: California State Auditor’s analysis of the Audit Committee’s audit request number 2016-125 and information and documentation identified in the table column titled Method.
Assessment of Data Reliability
The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information that we use to support findings, conclusions, or recommendations. In performing this audit, we obtained electronic data files from each selected university location. These files contained a list of certain services contracts that the university locations compiled in response to a legislative request for information. We obtained these services contract lists to select services contracts for testing the university’s compliance with its contract policy and displacement guidelines. We also performed completeness testing of the services contract lists by comparing these lists to extracts from contract databases of the university locations we visited and found them to be incomplete. However, we used the services contract lists to select contracts for testing and did not use them to support findings, conclusions, and recommendations.
We also obtained an electronic data file extracted from the Office of the President’s Benefit Bank System for the purpose of assessing the benefits—a term it uses to refer to cost reductions or avoidance, incentives, or revenue. We performed data‑set verification and electronic testing of key data elements and did not identify any significant issues. We were unable to perform completeness testing because the documents necessary for us to review to determine whether the Benefit Bank System is complete are maintained at the university location level, making such testing cost-prohibitive. In addition, we tested the accuracy of the amounts entered in the extract by reviewing supporting documentation for 10 entries and found significant issues with the documentation, which we discuss in detail in the Audit Results. Consequently, we determined that the university’s procurement benefits data are not sufficiently reliable for the purposes of this audit. Although these determinations may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.