Tag: budget

Cities buy a lot of stuff. In Fiscal Year 2020, New York City spent almost $50 billion in what is called by its budget experts “other than personal services,” most of which is stuff: vehicles, office furniture, computers, software, pencils, envelopes, etc. In some categories, the City of New York is a likely top U.S. customer by dollar volume. We were surprised (and pleased) to find on our first day in City government, a bountiful package of office goodies on our desk; the usual stuff; pads, pens, staples, paper clips, a pair of scissors. An iPhone, iPad and MacBook, a second giant computer monitor were all centrally procured and supplied in some cases after being requested, in some cases not (the second screen, the iPad). 

Getting other stuff was not so easy. Our group’s electric vehicles all had over 100,000 miles on them. When we complained, we got banged up replacement vehicles with over 80,000 miles on them and were told that we should be delighted. Someone, we suppose got new vehicles, but it wasn’t us. The data bases our group used were over twenty years old and ran on twenty-year-old servers – which during our tenure stopped being supported. The process of replacing them took years, and persistent lobbying of both our superiors and agency budget folks. One replacement application had been in development with internal City personnel for years without progress. We eventually procured replacement software from an outside supplier, which took years to get funded, purchased and implemented. Later, another, different, data base was developed internally for our group, by a different internal team, took two years to code and another year to implement – which, by City standards, was like lightening (to its great credit, the internally coded application was excellent). 

The City’s contracting and procurement processes are designed to prevent the constant government plagues of fraud and graft. There are many historic examples of gross malfeasance in City purchasing, with William Marcy “Boss” Tweed (https://en.wikipedia.org/wiki/William_M._Tweed) and the Tweed Courthouse (https://en.wikipedia.org/wiki/Tweed_Courthouse) as, probably, the most high profile examples. Without net profit as a metric to determine efficiency as in the private sector, the City is forced to replace it with layers and layers of process to make certain that no one is being personally benefitted from City purchases and that the City is getting the best products at the best prices from its contracting and procurement processes. The system also attempts to ensure that the City has adequate remedies when products fail and services are inadequate. There are hundreds of people employed by the City to monitor this – each with his or her own narrow list of boxes to check-off as contracts go through the system.

Outside of the City’s Office of Management and Budget (which allocates resources), and Office of Citywide Administrative Services (which includes the City’s central purchasing arm) there is a large Mayor’s Office of Contract Services that oversees this system. Unfortunately, while the system may protect the City from fraud and graft, it results in its own serious inefficiencies and failures. In our judgement, the most obvious problem with the system is that too many hands are required to touch each contract and procurement: there are too many steps as a result of the many checks involved in approving each contract. We would guess that this comes from accretion. Each time a new scandal has erupted out of a city contract gone bad, the City Council has risen to the occasion, and added a new layer of protection, which has increased the amount of oversight and the number of people who review each procurement. The result is a complex and lengthy process, with a long series of hurdles and no one looking at the big picture of whether the thing being bought is actually the best thing at the best price. 

We were recently involved in the procuring of a service, which highlighted the function’s dysfunction. In order to expedite the procurement, it was decided to utilize existing contracts with providers of that kind of service. Theoretically, therefore, these contracts had already been vetted with respect to pricing by a prior solicitation process. But this was entirely theoretical, as what was being purchased was an entirely new, and a somewhat unique service. Because only companies with existing contracts could be considered, this limited the procurement to three entities. Only two of those companies bid on the contract. The two bids were in the high six and low seven figures — $500,000 apart. It seemed like a lot to us, given the service being requested. The proposal accompanying the higher bid was clearly superior. When we spoke with a colleague involved in the procurement about the magnitude of the higher bid they shrugged it off as being about what they expected, and certainly within the “available” funds. A negotiation then took place to render the vendor’s “best and final offer” (called a BAFO). The company automatically knocked ten percent off the bid price. There was no detailed discussion about the hourly fees being charged, or the number of hours the company claimed were required for the job. As the contract was being drawn up and awarded, we discovered that, in fact, there was “no money left in the contract” with this vendor, and the process for having more funds budgeted for the company would take an additional nine months. Then, all of a sudden, for reasons that were something of a mystery to us, the procurement became a priority, the funds were appropriated and approved by OMB, and the contract was able to proceed. The basis for the end run around the procurement process, turned out to be false, but a workaround was found to the problem – creating an end run around the end run. We can’t imagine that this is what the drafters of the City Charter had in mind to protect the public fisc.

We might also note that the vendor is a large, national firm, the principals of which no doubt earn at least high six figure incomes – which the City is likely supporting through this contract – probably not through the hourly rates being charged (which seemed reasonable for the services being provided), but through the inflated number of hours quoted in the proposal/contract. This is a considerable problem facing City purchasing, put in highest relief by social service contractors, the CEO’s of which often receive compensation much greater than that of civil servants, even the Mayor. At one such agency, with nearly a $100 million in government contracts and very little other revenue, the top executive is paid around $400,000. 

There are many steps to the getting of stuff in City government. After a relatively short time (less than a decade) within the bureaucracy, we are a novice at how this all works – and we are sure that there is much more detail than we are able to identify. First, funds must be secured. A request from the lower orders has to make its way up the chain of supervision to the top of an agency – generally to its Chief Financial Officer and Commissioner (this is true, no matter the size of the request). Most requests die on the way up, or at the end – being determined to be unimportant relative to other priorities. If a request survives that gauntlet, it then goes to the agency’s budget staff to package up properly and send to OMB for view. The City’s budget agency wields tremendous power. It is responsible for making sure that at the end of each fiscal year the City has only spent what has taken in in revenue. It does this, in part, by turning down most agency requests (this is, in part, in order to make room for the Mayor’s new requests, which, obviously, take priority). Given the scale and scope of City government, and its many moving parts, this is a herculean task. Requests can languish indefinitely at OMB, without actually being turned down. Those requests that are approved by OMB return to the agency’s budget staff for procurement. 

Procurement is a highly formalized process involving the announcement of the purchase in the City Record (a daily publication of the City containing its formal legal announcements of hearings, new rules and purchases), and the solicitation of bids from vendors. In general, the lowest bid from a “responsible” bidder is required to be selected. The system has tried to bleed as much discretion out of this process as possible, in order to eliminate the possibility of malfeasance. This creates its own set of problems – because the quality of the product or service of the lowest bidder is often suspect, and the definition of “responsibility” has to do mostly with prior performance on City contracts (this isn’t much of a metric since, as we’ve previously discussed, contract terms are rarely enforced, and poor performance is often excused) and involvement in the criminal justice system. In order to prevent illicit interference with the system, agency staff’s hands are very much tied. 

We experienced this problem first hand outside of government when dealing with a huge social service provider which had been selected for a homeless services contract based on a low bid. The provider’s facility had serious negative external effects on the adjacent neighborhood.  When we met with provider’s representative, they pled lack of resources as a reason for the bad situation. It was clear to us that the provider had procured low quality security services and didn’t have enough professional staff to adequately manage the facility. We were surprised to learn after doing a little research that the provider had hundreds of millions of dollars in City contracts. We assumed this was because they were the low bidder on these procurements. But for the City to consider the quality of services being offered in selecting an operator for a facility for the homeless would be to require some civil servant to exercise some level of discretion. How to avoid favoritism, ensure quality service provision, and not be overcharged for the service being offered is a conundrum. We would err on the side of permitting the injection of some amount of judgement as to the quality of the services being provided to be included in the process. 

It is interesting to note, as a side matter, that lobbyists and prospective vendors were often asking to meet with us and our superiors to promote their products and services. This is a lot of what lobbyists seem to do – secure meetings for vendors with City officials. We couldn’t figure out why this might be the case since the procurement process was so severely constrained. Did those companies know something we didn’t know? Quite possibly. But if there was some benefit to the vendors from these meetings, the substance of that benefit was above our pay grade. If more discretion were allowed in the decision making over purchases, such meetings would be problematic unless highly structured by appropriate rules. 

Once a contract has been awarded to a vendor, a contract generally has to be drawn up, and we have discussed at some length the many attorneys who get involved in contract drafting and the results from that process. We will decline the pleasure of repeating that analysis. A contract having been agreed to, then the many hands again start to touch it. The vendor must enter its information into the City’s complex PASSPort system, the purpose of which is to weed out “irresponsible” vendors. The system keeps track of companies that owe the City money (in the form of taxes or fines) or that have defaulted on prior city engagements. The contract is then reviewed by the staff at MOCS. It is their job to make sure that all the required boxes have been checked – including whether the bidding process has been done properly, whether the procurement has land use or environmental implications (requiring an additional year-long land use review) and whether PASSPort has approved the contract. Upon MOCS’ approval, the contract then goes to the Office of the City Comptroller for what is called “registration.” Registration is essential, because it is the prerequisite to a company’s actually being able to submit a bill and be paid for the product or service it is providing for the City. Generally, the Comptroller’s review is pro forma, and if thirty days go by after a contract has been sent to the Comptroller for review and the Comptroller has taken no action, the contract is deemed registered. But the Comptroller also has the right (and, perhaps, the obligation) to fully review once again whether all of the proper steps have been taken in the issuance of the contract or procurement. The entire review process generally takes six months, once a procurement has been awarded. 

Is all this process useful or necessary? In our judgement, no. A hard look is required at the many steps to attempt to eliminate as many of them as possible – particularly those that are duplicative. 

For example, the City Charter establishes an office of the Comptroller to monitor contract compliance with various processes, rules and regulations. Review by both MOCS and the Comptroller is probably duplicative. Certainly, the Mayor’s office would rather catch problems before they get to the Comptroller’s attention (the Comptroller often being a political rival of the Mayor’s), but that doesn’t seem like a valid policy reason for an additional labor intensive and time consuming process. An even more fundamental change to the system might be to push budget making authority down further into the bureaucracy – allowing operating unit heads to control their own budgets – so long as they don’t overspend them. Agencies’ have budgets, and they should be able to allocate funds within those budgets. Similarly, agency units should be given budgets and have the ability to allocate resources within them. OMB’s role should be to ensure that agencies don’t overspend those budgets – not to pre-approve every expenditure. Again, there doesn’t seem to us to be much benefit to the City for every agency expenditure to have to be individually approved by central agency budget staff. Devolving budget authority closer to those making the expenditures would like improve the quality of decision making and expedite the process. Forcing every decision through OMB and agency fiscal staff makes the existence of budgets essentially meaningless. 

Should the City bite the bullet of allowing some discretion to bureaucrats to review bids for quality, with the added risk of at best arbitrary and at worst corrupt decision making? Probably. The risk is likely worth the improvement in City functioning. We believe that the biggest obstacle to reform of this system (besides the protection of bureaucratic turf) is the fear of tabloid stories about abuse of discretion and the waste of City funds buy bureaucrats – no matter how trivial. No one wants to be accused of allowing graft of corruption occurring within their zone of responsibility. Is the system as presently structured entirely free of graft and corruption? Probably not. Would a streamlining of the process produce a material increase in malfeasance? Also, probably not. And, as we have previously mentioned, the cost of the system, is probably orders of magnitudes greater than the marginal amount that it prevents from being misspent.