Response to the Audit
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- University of California Office of the President
August 7, 2017
Ms. Elaine M. Howle
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814
State Auditor Howle:
This letter is in response to your draft audit report on contracted employees and practices for the University of California Office of the President (UCOP). We welcome the constructive input, which aligns with the University's proactive efforts to continually improve and strengthen its policies and procedures. Our specific responses to individual recommendations are attached, and for context, I would like to take this opportunity to emphasize some important aspects of UC's operations and goals.
UC's Employee Population and Use of Service Contracts
The California State Auditor (CSA) report identifies both strengths and areas for improvement with respect to oversight of service contracts and guidelines on the displacement of current employees. I appreciate your acknowledgement of the areas in which UC and its campuses have complied with policies, and will focus on your recommendations as we work diligently to further shore up our procedures.
I believe it is important that the recommendations be framed within the context of the University of California, the state's third largest employer — behind federal and State governments — with some 190,000 employees at its 10 campuses, five medical centers, three affiliated national laboratories, the division of Agriculture and National Resources (ANR), and UCOP. The University is extremely proud of its staff, who play a critical and ongoing role in carrying out UC's education, research, and public service missions. One of the greatest challenges for UC, and for all higher education institutions, is striking an optimal balance of simultaneously reducing costs, increasing access, achieving higher levels of academic excellence, and investing in its large, diverse workforce.
Rather than ignore this challenge, the University has addressed it directly. In 2015, UC unveiled its Fair Wage/Fair Work plan, which mandated that all University employees who work at least 20 hours a week be paid at least $15 an hour, to be implemented over the course of three years. The minimum increased to $13 in October 2015 and $14 in October 2016, and will increase to $15 by October 2017. As I stated at the time, this forward-thinking program is the right thing to do for UC workers and families, for our mission and values, and for furthering UC's leadership role by becoming the first university in the United States to voluntarily establish a minimum wage program that would reach $15 an hour. As an institution, we are deeply proud of this accomplishment, as it underscores a difficult balancing act for a steward of public dollars — reducing UC's operating costs while fairly compensating hardworking employees.
A similar challenge is effectively negotiating the composition of our employee population and supplementing their work with service contracts. Maintaining a balance of contract and campus-based services helps locations maximize efficiency within resource constraints, while allowing for new methods and best practices. UC and its individual locations contract out for services in cases where, among other reasons, there is a need for special expertise or experience, for short-term or temporary staffing needs, or for services and equipment not available or not regularly performed internally.
It is important to note that UC's Fair Wage/Fair Work policy also applies to employees of contractors providing services to UC. As part of the plan, the University instituted stronger oversight of its contracts and subcontracts, requiring that companies with which UC contracts pay a wage that meets or exceeds UC's new minimum wage. In addition, the University expanded its monitoring and compliance efforts related to service contractors' wages and working conditions. This includes a new phone hotline and a central online system for contract workers to report directly to the Office of the President any complaints and issues.
UC Procurement and Maximizing Benefits
Similar to the review of service contracts, I am grateful that your report identified strengths in our procurement policies and practices, as well as areas on which we will focus attention as we continue to progress and improve.
The University's department of Procurement Services has transformed the way we purchase goods and services to improve quality and service to our campuses and partners, while maximizing systemwide benefits such as cash savings, streamlined processes, and enhanced efficiencies. Launched in 2012 as part of the systemwide Working Smarter Initiative, the P200 program leveraged the purchasing power of 10 campuses to more competitively bid for goods and services, automate business processes for increased efficiency, and enhance collaboration with vendors for better transactions. It has proven to be a tremendous success. The program is on track to exceed $300 million in calculated annual benefits by the end of fiscal year 2016-17, funds that will now be available to support UC's teaching, research, and service missions.
UC’s 10 campuses are collaborating to build an integrated, sustainable and systemwide procurement framework. By developing competitive contracts, innovative supply chain strategies and robust reporting and analytics, UC will capture yet more benefits that will further support our core missions.
In summary, I appreciate CSA’s time and diligence in assessing UC’s operations and identifying areas for further improvement. We take your recommendations seriously and believe they are constructive to our goals of continued improvement, progress, and success.
Yours very truly,
Response - CSA Contracting Recommendations
Responses to CSA Contracting Recommendations
1. To ensure that campuses and medical centers adequately justify the necessity of contracts that will displace university employees, the Office of the President should do the following:
- Actively enforce compliance with the displacement guidelines by monitoring university locations for compliance, providing regular training on the displacement guidelines to university locations, and amending the displacement guidelines to state that the Office of the President Human Resources has the authority to approve or reject displacement decisions.
- Revise contracting policies to address situations in which university locations are contemplating entering into service contracts instead of hiring of new university employees to perform an activity. In these situations, the Office of the President should require university locations to perform an analysis that is similar to the one it requires when current university employees are displaced.
- Ensure that staff with the necessary business and financial skills at the Office of the President review and approve the cost analyses that university locations submit.
- Revise the cost analysis requirements in the displacement guidelines to mitigate the risk of university locations incorrectly estimating savings by requiring a threshold level of savings as part of its business and financial necessity analysis and require that the university locations periodically reevaluate the savings after the service contract takes effect to inform future contracting decisions.
UC will revise the displacement guidelines. Revisions will include language identifying the appropriate review and approval authorities. They will also include a template to document appropriate approvals and to document formal notice that complies with the requirements of the revised guidelines. The revised guidelines will require analysis and consideration of the anticipated benefits, cost, personnel, and mission implications of proposed displacement arrangements. They will also include compliance provisions.
UC campuses and medical centers utilize service contracts as an important supplement to existing resources. A balance of contract and campus-based services helps locations maximize efficiency within resource constraints. In assessing whether to contract out for services or to perform the work with UC employees, locations take into account a number of considerations on an ongoing basis, including whether the work is within the scope and capabilities of current staff; whether contracting out for services would improve the methods or practices of service delivery or facilitate the development of internal expertise; and the immediacy of the need for the services as well as the expected duration of such need. UC manages its head count on an ongoing and periodic basis to accomplish existing or anticipated work. UC will reiterate to locations that they need to more carefully determine whether it is more economical and efficient to perform the work with UC employees or with service contracts, and will work to strengthen and standardize procedures to facilitate these efforts.
UCOP will advise the locations to incorporate into existing, applicable trainings an overview of the revised displacement guidelines.
2. To ensure that the university achieves its goals of obtaining services for the lowest cost and best value and of providing vendors with fair access to contracting opportunities, the Office of the President should do the following:
- Direct university locations, including its own local procurement office, to implement controls to ensure staff better comply with the university contract manual’s requirements for using standard terms and conditions, obtaining the proper contract approvals, and awarding of sole source contracts.
- Revise the university’s contract manual to incorporate the best practices found in the State Contracting Manual for limiting the use of amendments to repeatedly extend existing contracts.
- Revise the university’s contract manual to narrow the exemption from competition to only selected professional services similar to the State Contracting Manual.
- Direct all university locations to implement controls in their online procurement systems to prevent staff from avoiding the requirement to competitively bid a contract when individual purchases of the same good or service accumulate to $100,000 or more within a fiscal year.
Over the past few years, the Procurement Policy and Legal Documents Team (“PPLDT”), a systemwide team led by UCOP, has developed a set of systemwide template documents that represent a substantial improvement over prior documents. These documents have been accompanied by buyer tools such as annotated templates that explain the risk of amending or deleting various provisions, and inform buyers who has the authority to approve such changes. UCOP has sponsored regular webinars on how to use the template documents. This effort has resulted in greater use of the template documents, and UCOP will continue to reinforce this process.
With regard to the extension of existing contracts, UC agrees that it is appropriate to establish a baseline standard on this subject, from which justifiable deviations may be granted. Accordingly, UC will initiate an analysis and benchmarking process to determine appropriate contract lengths and amendment parameters. If that analysis identifies a need for a change in the University’s contract manual and/or the issuance of a new policy, it will be disseminated to the campuses.
UC agrees that the current definition for sole sourcing in contracting policy (BUS-43) can be improved. It provides two reasons that sole sourcing is possible: 1) the existence of only one solution to a supply/service need (as does the Public Contract Code), and 2) circumstances where alternate solutions may exist but lead time does not allow for a competitive process. UC agrees that the second circumstance should not be included as a reason for permitting “sole sourcing.” More appropriately, as is the case in the Federal Acquisition Regulations (FARS), such an exception to the competitive bidding requirement should be addressed under a separate provision titled “Unusual and Compelling Urgency.” BUS-43 will be amended to eliminate the issue of urgency from the current definition of sole source, while adding a new paragraph covering the “unusual and compelling urgency” circumstance, effective November 2017.
Although UC believes the BUS-43 definition of professional services to be adequate, we agree that this policy could be clarified to encourage consideration of multiple options when contracting for professional services. Accordingly, the PPLDT will develop a systemwide training webinar that will focus on the appropriate classification of professional services and the documentation required to not pursue competitive bidding. Training delivery expected by November 2017.
All heads of procurement at the University will be instructed to implement quarterly reviews of their site’s transactions to ensure that multiple orders at the site for the same goods or services totaling $100,000 or more (in aggregate) are competitively bid, or that an exception is appropriately documented.
The Associate Vice President & Chief Procurement Officer will advise procurement heads at each location to implement quarterly reviews, as noted above, by November 2017.
3. To help ensure that the university will implement its central contract database for tracking and monitoring all university contracts in a timely manner, the Office of the President should develop a detailed project implementation plan by October 2017 that outlines a schedule of the specific activities that will need to occur to complete this effort.
UCOP began implementing its newly contracted software suite, including contracts management, on July 14, 2017. UCOP anticipates completion of a detailed project plan for contracts management by October 2017.
4. To maximize benefits from the systemwide procurement initiative and to ensure that the university uses those benefits for its academic, research, and public service missions, the Office of the President should do the following:
- Direct all university locations to provide better documentation to substantiate actual benefits they claim related to their procurement decisions.
- Revise its guidance to ensure the benefits that university locations claim results from only procurement-related activities.
- Implement a process to centrally direct these benefits to ensure that university locations use them to support the university’s core missions.
- Study ways to measure actual procurement benefits – possibly focusing this effort on benefits from larger dollar amounts – and if such measurement is not possible, it should clearly disclose to the regents and the public that the amounts it reports are based on estimates.
- If actual benefits are measurable, implement a process to monitor and report annually to the regents the estimated and actual benefits.
During the past five years, the University has invested in its procurement systems and trained staff across the system to provide better documentation and to track benefits associated with the procurement initiative. UC believes it has demonstrated $298 million of benefits associated with P200. We respectfully disagree with the audit report on this point. Going forward, when reporting savings associated with the initiative, UC will more clearly identify which benefits are realized and which are based on the best contract utilization data available, as well as provide better support of the documentation to substantiate those savings.
With regard to the tracking and potential redirection of savings achieved on a campus and within units, UC appreciates the sentiment of the recommendation and the goal of enhancing our investment in the core missions of UC. That said, implementing such a recommendation would not only place a significant administrative burden on campus units to track savings and document expenditures from those savings, but also create a dynamic that would limit the incentive for units to generate savings in the face of UC either prescribing the use of those funds or ultimately shifting them to another unit or campus altogether. In addition to the disincentives, it is not in the best interests of a campus to have UCOP direct how it spends these savings, as that determination is properly and best left to the campus.
CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM UNIVERSITY OF CALIFORNIA OFFICE OF THE PRESIDENT
To provide clarity and perspective, we are commenting on the response from the Office of the President.
The numbers below correspond to the numbers we have placed in the margin of the Office of the President’s response.
Although using services contract workers instead of university employees is justifiable under the circumstances that the university president describes, we found that the university locations entered into services contracts that resulted in the avoidance of hiring employees. As shown in Table 3, we determined that for 9 of the 31 services contracts we reviewed, university locations could have hired employees to perform the services. Therefore, we recommended that the Office of the President revise its displacement guidelines to address not only the displacement of existing employees but also the avoidance of hiring new employees. By doing so, the Office of the President could better ensure university locations make thoughtful decisions when using services contracts and also allow the Office of the President to monitor these decisions.
We noted several concerns with the accuracy of the benefits amount that the Office of the President claimed for fiscal year 2015–16. As we state, the Office of the President lacked supporting information to substantiate nine of 10 benefits we reviewed, which totaled $109 million of the $269 million of claimed benefits for fiscal year 2015–16. Further, we found that the Office of the President calculated some benefits based on estimated rather than actual usage of the contracts and that it claimed benefits in fiscal year 2015–16 even though it would not begin to receive those benefits until the following fiscal year. We did not review the benefits of $300 million that the university president claims for fiscal year 2016–17. However, we have similar concerns with the accuracy of this amount because the Office of the President used the same methodology to calculate those benefits. Further, several of the benefits that we were unable to substantiate had a multiple-year impact and would be included in the $300 million benefit claimed for fiscal year 2016–17.
Despite its claim that the Office of the President would redirect any benefits from its systemwide procurement program toward its core missions, we found the Office of the President has not developed a policy or provided direction to university locations on how to reallocate these procurements, as we indicate on that same page. Lacking measures of accountability over the uses of these benefits and its unwillingness to adopt our recommendation, the Office of the President’s assertion that university locations have redirected these benefits to the university’s core missions lacks credibility.