April 1, 2009
Department of Education contracts routinely cost the city far more than initially estimated, according to an analysis that City Comptroller William Thompson issued just before today’s City Council hearing. The under-estimations could be costing taxpayers a fortune in the price of things like Xerox machines and cafeteria equipment, whose prices could be negotiated at much lower rates if the city could accurately predict just how much schools would end up using them.
One out of every five DOE contracts that ended in the last two years went over its estimated cost by at least 25 percent, according to Thompson’s analysis. In the most egregious overrun, a contract with Xerox Corporation to lease copy machines to schools ended up costing the taxpayers more than $67 million. It had been estimated at a cost of $1 million.
In a crossly worded letter sent to Chancellor Joel Klein today, Thompson, a mayoral candidate who has been highlighting public school issues as part of his criticism of Mayor Bloomberg, called the overruns part of a “troubling pattern of mismanagement” at the department.
Department of Education officials strongly disputed Thompson’s accusations and his figures in an interview and in testimony to the City Council today. The contracts at issue, called “requirements” contracts, can stretch above their estimated costs because they never actually set a total amount of services to be provided. Instead, they set a certain price for the service — say, renting a copy machine, or of placing a classified ad — and let the number of times the department will buy the service stay open-ended.
School officials said that spending more on these contracts than was expected is not necessarily a bad thing. “Whether it’s that more schools actually want the service, that it was actually successful, or whether we found that there was more need in the school, they required more training, say — that’s why you see those contracts,” Photo Anagnostopoulos, the department’s chief operating officer, told City Council members today.
School officials also said Thompson’s analysis overstates the difference between projected and actual costs, sometimes “wildly.” Contracting staff at the department have already found several cases where the comptroller’s figures are “wildly different” from their own records, David Ross, who runs contracting for the department, told me in an interview.
Ross said that city records show that the Xerox contract was estimated originally at $31 million, not $1 million, as Thompson reported. That means the overr-run was $36 million, not $66 million. He said another contract for copy machines, with T&G Industries, was originally estimated at a higher cost than it ended up being: $31 million, compared to an ultimate cost of about $14 million. Thompson’s report said T&G’s estimated original cost was $1 million.
In his letter to Klein, Thompson argues that under-estimating how much schools will want to use a service hurts the Department of Education’s leverage in negotiating a low price. He describes that as “contrary to sound business practice.” In an interview with reporters today, he called the practice “frightening.” “If it was a few contracts that would be one thing,” he said. “But…the over-spending continues and continues to grow.”
Ross said he agrees that under-estimating the amount of interest schools have in services could be a problem if it means giving up opportunities to negotiate a lower price. (If the school system knew it was going to buy, say, a thousand Xerox machines rather than 10, it could probably persuade Xerox to lower the price of each machine.) “I understand my responsibilities here,” he said.
But he said that the department does hunt for these kinds of opportunities. In one of the cases the comptroller’s letter to Klein highlights, a contract with Meizner Inc. for computer software, the department actually realized a few years ago that it was spending above its estimate — and negotiated a 20% price discount.
The comptroller’s report lists the estimated cost of the contract at $135,000, which then ballooned to spending of $5.6 million. Ross said his figures suggest the actual estimated cost was $1.35 million. He said the $5.6 million figure could have been even higher had officials not negotiated a price discount.
The comptroller’s letter to Klein and full press release are after the jump.
Thompson’s press release:
THOMPSON EXPOSES “RUNAWAY CONTRACTS” AT THE DEPT. OF EDUCATION
-Comptroller probe finds 1-in-5 contracts balloon past costs, including one that jumped by 6,700 percent-
New York City Comptroller William C. Thompson, Jr. today charged that the Department of Education has routinely let hundreds of contract costs balloon well past their expected costs – including one that jumped by 6,700 percent.
“It’s simply a case of runaway contracts,” Thompson said. “It’s reprehensible that the Department of Education plays by its own rules and goes on some insane spending spree. And who pays? Taxpayers, parents, children, all of us.”
Thompson aimed his harsh criticism in a harshly worded letter to Schools Chancellor Joel Klein for not containing the swollen contract costs. Thompson then submitted testimony spelling out his fiery findings to the New York City Council Committees on Education and Contracts.
“The Department of Education continues to maintain a long-held and ill-considered opinion that its contracts and other purchases do not require the same stringent safeguards as those of other local and state agencies,” Thompson said. “As a result, taxpayer money continues to be squandered through an opaque process that does not take advantage of the competitive marketplace. This is unacceptable.”
What did Thompson find?
- One out of every five – or 20 percent – of the Department’s contracts that ended in the last two fiscal years inevitably cost well over the estimated amount by 25 percent or more.
- That rate already continues to climb. So far, in the current fiscal year, 27% of the Department’s requirement contracts have swollen costs topping 125% – and there’s still three months left until the fiscal year ends.
- One contract, with the Xerox Corporation, was supposed to cost at most $1 million – but the Department spent close to $68 million – a 6,759 percent jump in costs. Another, with Ideal Restaurant Supply, jumped from $15,000 to more than $852,000 – a 5,530 percent jump.
- During those two fiscal years combined, the Department issued 372 requirement contracts, originally estimated to cost $325,236,416 but which inevitably exceeded those estimates by 25% or more. The final tab wound up at more than $1 billion.
- Additionally, many recipients of the contracts – 127 of them – got the lucrative work without any competition because the Department didn’t put the work out to bid. Those 127 contracts were supposed to cost $195 million at most. But the Department spent $525 million on them.
“The Department’s purchases exceed contract amounts by such a large margin that it raises fundamental questions about the integrity of the Department’s entire contracting process,” Thompson said. “These actions display a clear pattern of mismanagement when it comes to expenditures, and the Chancellor and the Mayor must fix this situation and rein in these costs.”
The Comptroller over the last seven years has repeatedly exposed fiscal incompetence and a lack of accountability and transparency in budgeting and contracting at the Department of Education. Key among his concerns has been a disturbing pattern of so-called no-bid contracts, which are executed without competition.
“The Department must create and follow an open and formal procurement practice and demonstrate that it will spend the public’s money in an accountable manner,” Thompson said. “I call on the Department to take immediate action to ensure that the scarce public dollars entrusted to it are used prudently. Doing so will benefit not just our schoolchildren and our school system, but our city as well.”