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Report Number: 2016-125.1
The University of California Office of the President It Has Not Adequately Ensured Compliance With Its Employee Displacement and Services Contract Policies

Audit Results

The University’s Campuses and Medical Centers Did Not Always Follow the Requirements for Justifying Employee Displacement

When we reviewed 31 services contracts at three campuses, two medical centers, and the Office of the President, we found that two contained documentation indicating that university employees were displaced. In both these instances, the university locations did not fully adhere to the Office of the President’s displacement guidelines. Specifically, when the San Francisco campus entered into a contract to outsource certain IT services, it did not provide formal written notification with its analysis of the displacement of IT employees to the Office of the President as required. Additionally, when the Davis medical center decided to displace housekeeping managers with a services contract, it did not conduct a complete analysis of the displacement and also failed to notify the Office of the President. Although we did not find evidence that the San Francisco campus or Davis medical center violated personnel policies by displacing employees, their failure to fully comply with the displacement guidelines increased the risk that they might improperly displace employees.

We also found that the Office of the President has not ensured that university locations are aware of the displacement guidelines, has not adequately overseen compliance with them, and has not fully enforced them. Further, weaknesses in the displacement guidelines make them less effective at ensuring that university locations justify their displacement decisions. For example, the displacement guidelines do not address instances in which campuses and medical centers contract for services that university employees might otherwise have provided.

In Two Instances, University Locations Displaced Employees Without Meeting All the Requirements of the Displacement Guidelines

Because the San Francisco campus and Davis medical center did not fully comply with the displacement guidelines, the Office of the President cannot be certain that these locations adequately justified their displacement of employees. As the Introduction states, the San Francisco campus’s outsourcing of certain IT functions through a services contract with HCL resulted in the displacement of 49 career and 12 contract university employees. The text box shows the status of the displaced employees as of July 2017. In addition, the San Francisco campus eliminated 18 vacant positions. The San Francisco campus estimated it would save $30 million over five years as a result of the HCL contract. Because it has not yet completed a full year of operations with HCL, it is too early to evaluate how much the San Francisco campus has actually saved. However, it has decreased its budget for the affected IT services by about $5 million for fiscal year 2017–18, the year after the displacement.

We found that the San Francisco campus followed the displacement guidelines when conducting its analysis related to the outsourcing of these IT activities. First, the displacement guidelines require university locations to justify their decisions to contract for services while taking into account relevant university personnel policies and collective bargaining agreements, among other things. As Table 2 shows, the San Francisco campus considered the relevant personnel policies and determined that the collective bargaining agreements did not apply to the affected employees. Second, although the San Francisco campus excluded annual costs of $1.6 million for facilities, equipment, and administration related to the displaced employees from its analysis, the vice president of IT explained that the IT department’s budget does not directly include these types of costs. We found that the San Francisco campus’s decision was appropriate because if it had included these costs in the analysis, its savings estimate would have increased by $1.6 million, even though the campus’s IT department did not have control of this spending.

Table 2
The San Francisco Campus and Davis Medical Center Did Not Fully Adhere to the Displacement Guidelines in Two Services Contracts

	SERVICES CONTRACT
CONTRACT INFORMATION	SAN FRANCISCO CAMPUS	DAVIS MEDICAL CENTER
Contract purpose	To outsource five IT services	To manage housekeeping services
Contract value	$50 million (5-year estimate)	$5.2 million (18-month total)
Estimated savings	$30 million (5-year estimate)	$57,000 (annually)
Positions displaced	• 49 career staff • 12 contract staff* • 18 vacant positions	12 career housekeeping managers
Contract value	$50 million (5-year estimate)	$5.2 million (18-month total)
DISPLACEMENT GUIDELINES REQUIREMENTS
If contract for services displaces university staff, do the following:
• Apply relevant staff personnel policies	✔	✔
• Apply collective bargaining agreements	Not applicable. Displaced staff were not unionized.	Not applicable. Displaced staff were not unionized.
Determine whether the reason for displacing staff is either of the following:
1. Business and financial necessity. 2. Service requirements.	Business and financial necessity	Business and financial necessity†
If a contract for services displaces university staff because of business and financial necessity, do the following:
• Calculate the actual cost of services that university staff perform and also include costs related to facilities, equipment, supervision, and payroll and benefits administration.	✔‡	✔‡
• Calculate total cost of the contract plus the costs of administering it.	✔	✔
• Compare the two above costs over the life of the contract and articulate an economic advantage resulting from contracting for the services.	✔	✔
• Describe the benefits in protecting the quality and effectiveness of university core functions.	✔	X
Contracts for services that displace university staff and exceed $100,000 per year are subject to review by the Office of the President’s human resources department as follows:
• Provide informal notification one month before issuing the request for proposal.	✔	X
• Provide formal written notification before or at the same time as issuing the request for proposal.	X	X
The formal written notification must include the following:
1. Application of personnel policies and collective bargaining agreements. 2. Analysis for business and financial necessity or assessment of service requirements.	X	X

Sources: California State Auditor's analysis of the San Francisco campus’s and Davis medical center’s analysis supporting the need for displacing university employees and related contract documents, and the displacement guidelines from the Office of the President.
✔ = Complied.
X= Did not comply.

* Contract employees have an appointment with the university for a definite period of time, and the terms and conditions of employment are defined in their appointment contracts with the San Francisco campus.

^† In July 2017, the chief operating officer at the Davis medical center notified us that the contracting decision was actually based on service requirements but was unable to provide the service analysis the displacement guidelines require. Because the Davis medical center previously provided us a cost analysis for this contract, we continued to evaluate the contract as a business and financial necessity decision.

^‡ The San Francisco campus and Davis medical center did not include all required elements. However, the missing costs were not directly part of the San Francisco campus IT budget and were immaterial at Davis medical center. We therefore marked that they had complied.

However, despite the fact that the San Francisco campus followed the displacement guidelines when conducting its analysis, it failed to provide a formal, written notification to the Office of the President’s human resources department that included its analysis justifying its outsourcing decision. The displacement guidelines require that before entering a services contract that exceeds $100,000 per year that may displace university employees, a university location must provide informal notification to the Office of the President’s human resources department one month before issuing a request for proposal and formal notification at the time it issues the request for proposal. Although the San Francisco campus outlined its conceptual plan for outsourcing IT services in a PowerPoint presentation to the Office of the President, this presentation occurred before San Francisco completed the analysis required by the displacement guidelines. Because the San Francisco campus did not submit a formal, written notification that included its complete displacement analysis—both personnel policy and business and financial—the Office of the President’s human resources department did not get an opportunity to critically review the San Francisco campus’s planned application of university personnel policies or its cost analysis.

Both the San Francisco campus’s chief information officer and the Office of the President’s vice president of human resources stated that they believed the PowerPoint presentation met the displacement guidelines’ requirements for formal, written notification. However, we disagree because the presentation did not show how the San Francisco campus planned to apply university personnel policies to displaced employees, nor did it compare university costs to contractor costs. Moreover, San Francisco gave its presentation more than eight months before it issued the request for proposal, much earlier than the displacement guidelines require.

In addition, the Davis medical center erred in its approach to outsourcing 12 housekeeping manager positions.  In 2015 the Davis medical center entered into a housekeeping services contract valued at $5.2 million over 18 months that resulted in the displacement of 12 managers in its housekeeping services department. Our review found that the medical center generally applied university personnel policies when laying off these 12 managers, and because they were nonrepresented employees, it did not need to consider provisions of collective bargaining agreements. The Davis medical center estimated that the cost of retaining its housekeeping managers would have been $3.5 million annually, just $57,000 more than the cost of using its chosen vendor. Thus, the displacement was only marginally cost‑effective.

However, as Table 2 shows, the Davis medical center failed to complete the remaining requirements of the displacement guidelines. Specifically, it did not analyze how the displacement of these 12 housekeeping managers would protect the core functions of the university, and it neglected to provide the required informal and formal notifications to the Office of the President’s human resources department. When asked about these requirements, the director of supply chain management for the Davis medical center—who, along with the medical center’s human resources staff, oversaw this displacement—indicated she was unaware of the displacement guidelines. As a result, the Davis medical center did not adequately analyze the displacement of the 12 housekeeping managers, and the Office of the President did not have the opportunity to provide oversight and guidance. According to the Office of the President’s vice president of human resources, he did not know that the Davis medical center displaced these managers. Further, he stated that although the Office of the President does not provide training or direction, it expects university locations to understand and follow the displacement guidelines.  We discuss later in this report our concerns about the Office of the President’s dissemination of the displacement guidelines.

In July 2017, the chief operating officer of the Davis medical center notified us that the medical center based its decision to displace the 12 housekeeping managers on service requirements rather than on business or financial necessity. He explained that the Davis medical center wanted to improve the service and quality of its housekeeping department because its patient satisfaction scores were low, particularly for cleanliness. However, he was unable to provide an assessment of the Davis medical center’s service needs to support its decision to displace the 12 managers, which the displacement guidelines require. Because the medical center provided us with a cost analysis related to the displacement, we evaluated the contract using the displacement guidelines’ business and financial necessity criteria. Regardless, the reason that the chief operating officer provided—low patient satisfaction scores—would not have been sufficient to satisfy the service requirement justification in the displacement guidelines. Rather, the Davis medical center would have needed to demonstrate why the special services, expertise, facilities, or equipment necessary to achieve the quality and quantity of service it required was not readily available internally.

The Office of the President Could Better Enforce Accountability and Address Deficiencies in the Displacement Guidelines

As the displacement guidelines acknowledge, the university’s business policies and practices must provide enough flexibility to address the campuses and medical centers’ different programmatic needs while maintaining the university’s contractual commitments to its employees. However, our review suggests that the displacement guidelines are not fully serving the purposes for which the university created them. Specifically, although the displacement guidelines stated purpose is to ensure university locations have sound business justifications when displacing employees, the Office of the President does not ensure that all university locations are aware of the guidelines. Further, the Office of the President’s process for ensuring that university locations follow the displacement guidelines is ineffective. Finally, the displacement guidelines have a number of deficiencies that undermine the Office of the President’s ability to ensure that university locations justify their decisions to contract for services.

The vice president of human resources at the Office of the President stated that he reviews about one or two displacement decisions that university locations submit a year and that the displacement guidelines are widely known and understood by university locations. Nonetheless, the lead procurement staff at both the San Francisco campus and the Davis medical center indicated being unaware of the displacement guidelines. Both the vice president of human resources and the director of strategic sourcing acknowledged that the Office of the President does not provide training relating to the displacement guidelines to university location staff responsible for human resources or procurement.

Moreover, in the two services contracts we reviewed in which university locations displaced employees, the Office of the President did not adequately ensure that the locations followed the displacement guidelines thoroughly, which put the university employees at risk of unjustified displacement. The displacement guidelines state that the Office of the President’s human resources department has a role in reviewing displacement decisions if a services contract exceeds $100,000 per year. However, as we described in the previous section, after hearing the San Francisco campus’s presentation, the Office of the President did not follow up with a request for the missing business and financial justification. Further, it was not even aware of the displacement of housekeeping managers at Davis medical center.

In addition, deficiencies in the displacement guidelines weaken their effectiveness. For example, as Figure 1 shows, the displacement guidelines do not clearly state that the Office of the President must approve university locations’ displacement analyses and has the authority to formally reject the analyses. Rather, the guidelines only state that the Office of the President must review such analyses if contracts exceed $100,000. If the Office of the President does not require university locations to support their decisions to displace employees with analyses that it must approve or disapprove, those locations may not provide employees the full protections the Office of the President intended when it adopted the displacement guidelines. The Office of the President could improve the displacement guidelines by clarifying its responsibilities for conducting reviews and requiring its formal approval before university locations can enter into services contracts that displace university employees.

Figure 1
Weaknesses in the Displacement Guidelines Undermine Their Effectiveness

Source: California State Auditor’s analysis of the university’s displacement guidelines.

* The displacement guidelines also state that a university location can demonstrate a service requirement in cases where the university location must use nonuniversity employees because of the need for external perspective or avoidance of conflict of interest.

^† The Office of the President’s human resources department review step does not apply to contracts that are $100,000 or less per year.

Moreover, the Office of the President has not ensured it meets all of its review requirements under the displacement guidelines by having staff with the appropriate skill sets review the analyses. According to the vice president of human resources, his goal is to ensure that university locations follow collective bargaining agreements and personnel policies, which includes addressing the impact of services contracts on university employees, and he works with university locations to address any deficiencies. He acknowledged, however, that human resources does not have the necessary expertise to evaluate the analysis for business and financial necessity. To address this issue, the Office of the President could assign the review of business and financial necessity to one of its units that has staff with the appropriate skills.

We also identified several other areas in which the displacement guidelines lack clarity, as Figure 1 demonstrates. For instance, our review of business literature shows that business‑process outsourcing projects, such as a displacement of university employees, carry significant risks when not managed properly and can result in less than satisfactory outcomes when the business entity’s original estimates fail to include the total cost of the process. Because the displacement guidelines require a university location to create an analysis of its business and financial necessity before signing a contract, the location may underestimate the actual cost of the contract. As a result, a university location might save less money than it anticipated from its services contract, undermining the original justification for displacing employees. The displacement guidelines could address this risk by requiring a minimal level of savings as part of the justification of business and financial necessity. Similarly, the displacement guidelines do not state whether or how a university location should reevaluate a services contract’s financial and nonfinancial costs after the contract takes effect to ensure that the location is receiving the savings it anticipated. If it determines that it did not achieve savings, the university location could terminate the contract for convenience, renegotiate it, find another vendor, or rehire former university employees.

Finally, the displacement guidelines do not cover situations in which university locations contract for services that university employees could provide but that do not result in the displacement of existing university employees. Such situations may result in the university unnecessarily soliciting outside services, as we discuss here. The Government Accountability Office recommends that public entities rely on cost data to justify the need to contract out for services. However, we found no evidence of such assessments in the procurement files of the 29 other services contracts we selected for review. Furthermore, none of the departmental staff we contacted at the university locations we visited could provide evidence showing how they determined the need to contract out for services, such as a comparison of the costs of university employees performing a service to those of a vendor doing so. Absent such assessments, the university cannot support its decision to contract out for services.

Several University Locations Entered Into Services Contracts Instead of Hiring Employees

In addition to the two services contracts in which university locations displaced university employees, we identified that nine of the 31 services contracts we reviewed may have resulted in university locations avoiding hiring university employees, a situation that the displacement guidelines do not address. Rather, the Office of the President has written the displacement guidelines to apply only to services contracts that displace university employees. As Table 3 shows, we determined that each of these nine services contracts fell into one of three situations in which university employees might have been able to perform the services in question. In the remaining 20 services contracts, the information in the contract files either warranted the use of service workers or did not clearly show whether the university locations could have hired university employees rather than services contract workers.

Table 3
University Locations Have Used Services Contracts to Minimize Their Hiring of New Employees

CAMPUS	TYPE OF SERVICE	NUMBER OF SERVICES CONTRACT WORKERS	STATUS OF CONTRACT
Transitioned from service contract workers to university employees
Davis campus	Food services	80	Terminated
San Francisco medical center	Security	50	Terminated
Office of the President	Security	13	Terminated
Office of the President	Janitorial	NR	Terminated
Solicited service contract despite providing services internally
San Francisco campus	Janitorial	5	Active
San Francisco campus	Valet parking	30	Active
San Francisco medical center	Billing coder	7	Active
Davis medical center	Billing coder	6	Active
Entered service contract rather than create a new job classification
Davis medical center	Medical scribes	49	Active

Sources: California State Auditor's analysis of services contracts, consultation with university staff, and unaudited information provided by the services contract vendors.

NR = Vendor did not provide a response.

Four of the nine contracts involved university locations entering into services contracts then subsequently transitioning to having university employees perform these services. For the first four services contracts shown, the university has demonstrated it could have provided the services internally by its decision to transition from activities that services contractors perform to performing these same activities using university employees. For instance, in 2016 the Davis campus amended its food services contract to end on June 30, 2017, so that it could transition management of its food service to campus employees. Likewise, the San Francisco medical center indicates it once used outside security guards to meet half of its security needs. This heavy reliance on services contract workers suggests that the medical center could have brought on full‑time workers to provide security services. For the two additional contracts, the Office of the President transitioned from service workers to university employees to perform security and janitorial services due to a change in a bargaining agreement.

Although one reason to enter into a services contract is that a vendor can provide a service that the university cannot provide itself, we also identified four services contracts in which university locations solicited vendors to perform services despite having employees that already performed similar services. For example, the San Francisco campus uses over 152,000 square feet of space at an off‑campus facility for research laboratories. According to the campus’s director of facilities, the San Francisco campus has contracted for janitorial services at this space since at least 1994. Given the large area covered, the long‑term use of the facility, and the routine nature of the service provided, the San Francisco campus could use university employees to perform this work.

Similarly, for the other contracts—one for parking valets and the other two for billing coders—the university locations contracted for services that their respective staff already perform. For example, the San Francisco campus provides a valet service for faculty and staff, but relies on a services contract to provide valet services to patients at two medical facilities. According to the director of transportation services, using services contract workers allows the location to adjust to demand more easily and is more cost‑effective. However, the campus has not conducted an analysis showing increased cost‑effectiveness. In addition, both the Davis and San Francisco medical centers use contracts to provide billing coding services due to what they assert are the difficulties of finding qualified people to perform this highly technical work. However, both medical centers acknowledge that their own employees already perform similar work. Thus, these two medical centers may have been better served by having their employees work overtime or by intensifying their hiring efforts.

Finally, one university location entered into a services contract rather than create a new job classification to perform an activity. In 2013 the Davis medical center contracted for services contract workers to serve as scribes to take notes for medical staff in its emergency room department. It has since expanded the use of this service, and it now uses 49 services contract workers for this purpose, each of whom work up to 32 hours a week. According to the chief administrative officer for the department of emergency medicine, the Davis medical center continues this practice because many scribes are students looking for short‑term work, resulting in high turnover. However, the medical center’s reasoning does not preclude it from hiring employees to fulfill this service, and using university workers might decrease the turnover rates.

Although using services contract workers instead of hiring employees to do the same work is justifiable under certain circumstances, we believe the Office of the President should revise the displacement guidelines and the university’s other contracting policies to address the types of situations we identified in Table 3. By doing so, the Office of the President could better ensure that university locations make careful and thoughtful decisions when using services contracts. Further, revisions to the displacement guidelines could also allow the Office of the President to monitor and provide guidance regarding the university locations’ decisions.

Services Contract Workers Generally Earned Lower Wages Than University Employees and Often Did Not Receive Benefits

Although the university locations we visited do not track services contract worker data, such as wages or benefits, our analysis shows that services contract workers who worked for the university locations we visited generally earned less than university employees who performed comparable work. The university’s Fair Wage/Fair Work Plan, which became effective October 2015, sets a minimum wage for the university’s services contract workers. That minimum hourly wage started at $13 in October 2015, is currently at $14, and will increase to $15 in October 2017. We determined that in all but four of the contracts we reviewed, the university locations included language requiring compliance with the minimum wage policy when applicable. However, as Table 4 shows, nearly all services contract workers in low‑wage contract categories earned lower hourly wages than their university‑employed counterparts, although a few contract workers in high‑wage positions earned higher hourly wages than their counterparts. For example, janitors, landscapers, and security guards hired through the services contracts we reviewed earned less per hour than university employees doing similar work at the university locations we visited. Low‑wage services contract workers received hourly wages that were on average $3.86 lower than the hourly wages comparable university employees received, with the difference in wages ranging from $1.43 to $8.50 per hour for those services contract workers who earned less than comparable university employees.

Table 4
Wages and Benefits for Most Services Contract Workers Are Less Than Those of Comparable University Employees

		SERVICES CONTRACT WORKER*					UNIVERSITY EMPLOYEE
POSITION	LOCATION	HOURLY WAGE†	HEALTH BENEFITS OFFERED	RETIREMENT BENEFITS OFFERED	NUMBER OF WORKERS UNDER CONTRACT‡		HOURLY WAGES	BENEFITS OFFERED
LOW WAGE
Landscaper	Davis campus#	$12.00	—	—	3		$18.54	All university employees working 50 percent or more of full‑time hours are eligible for medical, dental, vision, and pension benefits.
	San Francisco campus	14.00	M, D, V	Yes—401(k)	3		22.50
Parking valet	San Francisco campus#	13.00	M	—	30		16.47
Clerical	Riverside campus#	13.00	M, D, V	—	1		14.67
Food services worker	Riverside campus	14.00	—	—	8		16.47
Janitor	Davis medical center	14.00	—	—	12 (part‑time)		18.28
	San Francisco campus	14.00	M, V	—	4		17.35
	San Francisco campus	14.00	—	—	5		17.35
	San Francisco medical center	14.00	—	—	NR		17.35
	San Francisco medical center	16.50	M	—	20		21.68
Farm laborer	Davis campus	14.00	M	—	120		16.47
Driver	Office of the Presidentll	11.50	M, D, V	—	14		§
	Riverside campus	14.00	M	—	2		17.44
	Davis campus	17.00	M	Yes—401(k) after 5 years of service	4		16.72
Scribe	Davis medical center	14.00	M	Yes—401(k)	49		§
Office furniture installer	Office of the President	14.37	M	Yes—pension	9		§
Maintenance mechanic	Office of the President	16.00	M, D, V	Yes—401(k)	10		§
Mental health worker	Davis medical center	17.00	M, D, V	Yes—401(k)	21		20.61
Security guard	Office of the Presidentll	12.86	M	—	13		17.98
	Riverside campus	14.00	M, D, V	Yes—401(k)	6		16.69
	San Francisco medical center	17.30	M, V	Yes—401(k)	50		24.36
Medical assistant	Riverside campus	17.50	M	Yes—401(k)	5		18.93
Food services supervisor	Davis campus	17.75	M, D, V	Yes—401(k)	80		22.80
HIGH WAGE
Housekeeping manager	Davis medical center	$23.17	M, D, V	Yes—401(k)	13		$21.98
Linen delivery	San Francisco medical center	23.97	M, D, V	Yes—pension	6		20.37
Billing coder	Davis medical center	53.00	—	—	6		28.10
	San Francisco medical center	NR	—	—	7		44.92

Sources: California State Auditor’s analysis of university wage and benefit data and unaudited information provided by the services contract vendors.

M = Vendor contributes to medical benefits.      D = Vendor contributes to dental benefits.      V = Vendor contributes to vision benefits.

NR = Vendor did not provide a response.

* The table does not include positions from three service contracts whose vendors did not respond to our inquiries for wage and benefit information.

^† All wages are entry level and reflect what the vendor currently pays employees in that position, whether or not the vendor still has a contract with a university location.

^‡ Total of all employees under contract, not just those in the job position selected for comparison.

^# These contracts or amendments were executed prior to the implementation of the university’s Fair Wage/Fair Work Plan.

^ll This contract was executed prior to the implementation of the university’s Fair Wage/Fair Work Plan, but because the contract term is indefinite, the contract should be amended to include the provision.

^§ The university location where this contract was active did not have a comparable position.

Table 4 also shows that services contract workers either did not receive medical and retirement benefits or received benefits that were irregular or less generous than those comparable university employees received. Specifically, one‑quarter of the vendors did not provide any form of either health or retirement benefits to their workers. Further, nearly one‑third provided either health or retirement benefits, but not both. Our review found that vendor‑provided health benefits tended to be limited to medical benefits, while their retirement contributions generally consisted of 401(k) defined‑contribution plans. By comparison, all university employees who work 50 percent or more of full‑time hours for one year or longer receive a full range of health benefits—medical, vision, and dental—and can enroll in the university’s more lucrative retirement plan that offers defined benefits. In fact, the university contributes an amount equal to about 37 percent of each employee’s annual salary toward benefits costs.

The fact that the wages and benefits of services contract workers generally compare unfavorably to those of university employees is not particularly surprising. A business enterprise, such as the university, would not normally contract out for services if doing so would cost more, unless it had a special or urgent need. However, in some situations, services contract workers could cost more than university employees, depending on whether one considers all costs, such as overhead. The displacement guidelines recognize as much, as reflected in its requirement that university locations must base any decision to displace university employees on a thorough analysis of all labor cost elements and a comparison between the two options that demonstrates real cost savings.

The University Generally Adhered to Its Procurement Policy When Entering Into Services Contracts, But It Can Make Improvements in Certain Areas

Our review of 30 services contracts from the six university locations we visited found that these locations generally adhered to systemwide contracting requirements but could improve their compliance in some areas.² The university’s contract manual contains the requirements university locations must follow when procuring services, including using specified competitive bidding solicitation and evaluation methods, awarding contracts to the lowest responsible bidder, determining price reasonableness, and ensuring appropriate contract approval. As Table 5 shows, the university locations we visited generally demonstrated compliance with the contract manual for the services contracts we tested. For example, these university locations almost always followed bidding requirements for the eight services contracts in which competitive bidding was required. Specifically, the contracts reflected that the university locations sought competition through public notice, solicited bids from at least three sources, and evaluated bids appropriately. However, in one instance, the Riverside campus could not demonstrate that it awarded a contract to the lowest responsible bidder. Although the contract file showed that the Riverside campus used an appropriate bid evaluation method, campus staff were unable to provide evidence that the contract went to the vendor with the lowest bid. The remaining 22 contracts we tested were not subject to competitive bidding because their value was below the necessary thresholds, they were sole source, or they were amendments to existing contracts.

Table 5
The University Generally Complies With Services Contract Procurement Policy

UNIVERSITY LOCATION	COMPETITIVELY BID CONTRACTS*					NONCOMPETITIVE CONTRACTS*			CONTRACTS LESS THAN $100,000†		ALL CONTRACTS
	BIDS SOUGHT ACCORDING TO GUIDELINES	BIDDERS EVALUATED ACCORDING TO GUIDELINES	CONTRACT AWARDED TO LOWEST RESPONSIBLE BIDDER	REQUEST FOR BID INCLUDED KEY ELEMENTS		PRICES DETERMINED TO BE REASONABLE	SOLE SOURCE JUSTIFIED		PRICE WAS NEGOTIATED		STANDARD TERMS AND CONDITIONS UNCHANGED	PROPER AUTHORITY APPROVED CONTRACT	FAIR WAGE/ FAIR WORK PLAN PROVISION INCLUDED
Davis campus	1 of 1	1 of 1	1 of 1	1 of 1		NA	NA		0 of 3		4 of 5	4 of 5	4 of 5
Davis medical center	1 of 1	1 of 1	1 of 1	1 of 1		2 of 2	1 of 1		0 of 1		4 of 5	5 of 5	2 of 3
Riverside campus	2 of 2	2 of 2	1 of 2	2 of 2		NA	NA		1 of 1		5 of 5	5 of 5	3 of 3
San Francisco campus	3 of 3	3 of 3	3 of 3	3 of 3		2 of 2	0 of 1		NA		3 of 5	1 of 5	2 of 2
San Francisco medical center	NA	NA	NA	NA		1 of 2	1 of 2		0 of 2		5 of 5	4 of 5	1 of 2
Office of the President	1 of 1	1 of 1	1 of 1	1 of 1		NA	NA		NA		0 of 5	4 of 5	0 of 1
Exceptions Identified	0	0	1	0		1	2		6		9	7	4

Sources: California State Auditor's analysis of procurement practices at six university locations and the university’s contract manual.

■ = An attribute for which we found an exception, regardless of the number of exceptions.

NA = This attribute did not apply to the contracts tested from this location.

* Not all competitive and noncompetitive attributes in the table apply to each contract we reviewed. For example, some contracts did not require competitive bidding because their value was less than $100,000.

^† Although university policy does not require price negotiation on contracts less than $100,000, it is a best practice.

^‡ The Fair Wage/Fair Work Plan provision applies to contracts or amendments entered into on or after October 1, 2015, among other limitations.

Table 5 also shows the requirements with which the university locations most commonly did not comply. For example, nine of the 30 services contracts we reviewed did not include the university’s standard terms and conditions. The Office of the President makes these terms and conditions available on its website so university locations can easily reference them. These standard terms and conditions are meant to protect the university from potential legal pitfalls in areas that are common to nearly all goods and services contracts, as well as to promote issues that are important to the university. Some of the missing standard terms and conditions from these services contracts include provisions regarding conflicts of interest, audit requirements, and equal opportunity and affirmative action.

In one example, the Davis medical center used the vendor’s terms and conditions in a contract. However, this vendor’s terms and conditions omitted—among others—the university’s conflict‑of‑interest provision, which requires a vendor to affirm that to the best of its knowledge, that no university employee with a financial interest in the vendor participated in the decision to award the contract. This omission exposes the Davis medical center to the possibility of awarding a contract to a vendor that is aware that a university employee will financially benefit from the contract, which is a violation of university policy and could be a violation of state law. The Davis medical center explained that it occasionally uses a vendor’s terms and conditions if they appear to be fair and reasonable and if it has the ability to terminate the agreement. Nevertheless, as this example demonstrates, this practice can create risk for the university when important provisions are omitted. In addition to the Davis example, none of the five services contracts we reviewed that the Office of the President’s local procurement office entered into contained the standard terms and conditions. The Office of the President’s local procurement manager was unable to explain why the standard terms and conditions were not included.

We also noted that four services contracts that university locations executed after October 1, 2015, were missing a required provision to ensure that the vendors comply with the university Fair Wage/Fair Work Plan. Effective October 1, 2015, the university began requiring that each new services contract or services contract renewal specifies that the vendor will pay its workers the university minimum wage. This wage will eventually increase to $15 per hour on October 1, 2017, after the incremental increases already made in October 2015 and 2016. The policy requires that vendors who contract with the university pay their workers a wage that the university has determined is fair. Failure to include this provision could lead to vendors paying their contracted workers at rates that are below the university’s minimum wage.

In addition, the university locations could not demonstrate that the procurement staff who signed seven of the 30 services contracts had the proper authority to do so. Procurement staff have purchasing authority up to a specific dollar amount, depending on their job classifications. In our opinion, these authorization levels are important because they help to ensure that purchases comply with university requirements. However, the San Francisco campus did not appropriately approve four of the five contracts we reviewed. In one example, a contract valued at nearly $2.5 million required authorization from the San Francisco campus’s procurement director, but it was approved by the former procurement manager, who only had a maximum signing authority for contracts valued up to $1.5 million. The current procurement manager at the San Francisco campus could not explain why the four contracts were not properly approved. Noncompliance with this requirement puts university locations at risk of entering into legally binding contracts without the approval of authorized staff.

The University Could Better Maximize Its Use of Competitive Bidding

The university locations we reviewed did not consistently maximize competitive bidding opportunities to award contracts. Specifically, we found that several university locations avoided competitive bidding by repeatedly amending contracts; exempting broad service categories from competitive bidding requirements; using sole‑source justifications; and making high‑volume, low‑value procurements that, in the aggregate, exceeded the competitive bidding threshold. The use of competitive bidding is critical because it helps ensure the university receives the lowest cost or best value when it procures services and helps to prevent favoritism and fraud, while at the same time it allows those who wish to become suppliers to the university the opportunity to compete for contracts. The instances we identified in which the university locations avoided using competitive bidding demonstrate areas where the Office of the President could revise its contracting policy and where the Legislature could revise state law to improve the university’s use of competition.

Several University Locations We Reviewed Used Repeated Amendments to Extend Services Contracts

Several of the university locations we reviewed use amendments to extend contracts well beyond their original parameters, which prevented the locations from realizing potential cost savings from competitive bidding or fulfilling service needs by using other prospective vendors or their own staff. Unlike the Department of General Services’ State Contracting Manual, which contains specific requirements applicable to state agencies, the university’s contract manual offers only vague guidance regarding restrictions on the use of amendments to modify the terms of existing contracts. In fact, the contract manual merely states that changes in quantities or contract terms cannot violate the principle of competition.

In analyzing 30 services contracts, we found six instances in which the university’s agreements with vendors far exceeded the terms and dollar amounts set forth in the original solicitations and contracts. For example, as Table 6 shows, the Davis campus originally entered into an agreement with a food services vendor for a maximum term of seven years, and it paid the vendor $71 million over that period. It then amended this contract 24 times, increasing its length to 19 years and value to $237 million. According to the Davis campus’s director of hospitality and dining services, the campus began conducting analyses to determine how best to proceed with its food services operations in early 2015. Eventually, the Davis campus decided that it would be more cost‑effective to manage its own food services rather than continue to use a food services vendor. As a result, the Davis campus transitioned all food services operations to its own staff in June 2017. When asked why the campus had repeatedly extended the vendor’s contract rather than explore other options in the past, the director of facility services indicated that at the time of each amendment, the Davis campus believed that the contract was the appropriate delivery strategy for its food services operations.

Table 6
The University Has Used Amendments to Extend Services Contracts Far Beyond Their Original Parameters

UNIVERSITY LOCATION	DESCRIPTION OF SERVICE	YEARS AND MONTHS				IN DOLLARS
		ORIGINAL MAXIMUM TERM	BIDDERS EVALUATED ACCORDING TO GUIDELINES	PRICE WAS NEGOTIATED		STANDARD TERMS AND CONDITIONS UNCHANGED	PROPER AUTHORITY APPROVED CONTRACT	FAIR WAGE/ FAIR WORK PLAN PROVISION INCLUDED
Davis campus	Food services	7 years	19 years	12 years		$70,596,000*	$237,408,000*	$166,812,000
	Charter bus	2 months	2 years 5 months	2 years 3 months		28,000*	$785,000*	757,000
Davis medical center	Emergency room scribes†	2 years	5 years 8 months	3 years 8 months		111,000	1,600,000	1,489,000
	Billing coder†	2 years 5 months	14 years 11 months	12 years 6 months		30,000	4,130,000	4,100,000
	Supplemental emergency room nurses†	6 months	4 years 10 months	4 years 4 months		300,000	2,000,000	1,700,000
San Francisco medical center	Billing coder†	1 year	5 years 2 months	4 years 2 months		400,000	5,050,000	4,650,000

Source: California State Auditor’s analysis of the university’s services contracts and other procurement documentation.

* The contract documentation did not indicate total amounts. The amount shown is the total expenditure according to the Davis campus.

^† This contract is active.

The university’s contract manual does not explicitly prohibit such contract extensions, and the section of the Public Contract Code prescribing how the university must procure goods and services is also silent on how the university should treat contract amendments. The lack of such a restriction opens the door for potential abusive contracting practices by allowing the university to avoid the bidding process through repeated contract extensions. As Table 6 shows, we found another example in which the Davis campus initially entered into a two‑month agreement in April 2014 for charter bus services valued at $28,000. The campus extended the contract by over two years, spending $757,000 more than the original contract value. However, we believe that when the Davis campus first became aware that the contract would exceed annual expenditures of $100,000, it should have taken steps to solicit bids from other vendors or considered whether its employees could provide this service. The Davis campus explained it eventually sought competitive bids for these bus charter services, but not until the fall of 2016. When the university extends contracts with existing vendors without exploring other options, it may miss opportunities to acquire the services at lower costs. Further, it limits the ability of other vendors to bid to provide these services.

Although not subject to the requirements in the State Contracting Manual, the university should consider mirroring some of those guidelines related to contract amendments. By limiting the ability of state agencies to amend contracts to only the particular circumstances listed in the text box, the Department of General Services attempts to ensure that state agencies do not use contract amendments to circumvent the competitive bidding process. Absent such restrictions, the current university contract manual allows university locations to continue services agreements without limit and without exploring other options that could offer better value. As the Davis campus’s replacement of a food services vendor with its own employees demonstrates, university locations that explore other options may realize that hiring permanent employees to fulfill service needs can be more cost‑effective.

The University’s Broad Definition of Professional Services Limits Its Use of Competitive Bidding

The university’s overly broad definition of professional services also allowed university locations to avoid competitive bidding in some of the services contracts we reviewed. The contract manual identifies professional services as infrequent, technical, or unique services, which are often performed by licensed professionals. It identifies medical, architectural, engineering, management consultation, research, and performing arts services as examples of professional services. This definition allows the university to enter into contracts for a broad range of services without using the competitive bidding process. For example, the Davis and San Francisco medical centers classified several contracts we reviewed as professional services, including services for billing coding and supplemental emergency room nurses. One of the Davis medical center’s contracts, which began in 2001, stated that the vendor was to provide temporary coding personnel. However, the Davis medical center extended this contract for nearly 15 years, which indicates a need for a long‑term service rather than a temporary one.

When we asked about these types of contract extensions, the director of supply chain management at the Davis medical center stated that university policy does not require competitive bidding for professional services. She added that the Davis medical center has difficulty finding qualified people to hire as full‑time employees due to the specialized nature of certain positions, specifically billing coding. She stated that the Davis medical center extended the particular billing coding agreement previously described numerous times because it was satisfied with the level of service the vendor provided and that it compared the vendor’s rates to other vendors to determine if it was competitive. However, despite this assertion, the Davis medical center could not provide us with those price comparisons. The purchasing manager at the San Francisco medical center offered similar explanations. He stated that the San Francisco medical center has attempted to hire permanent billing coders. However, the medical center believes that the vendors are able to employ and retain the most experienced and qualified billing coders available. He also noted that the San Francisco medical center is satisfied with the services provided by the vendor with which it contracts.

We believe there are two ways that the Office of the President could improve the university’s contracting for professional services. The university could meet its professional service needs in a more cost‑effective manner by requiring competitive bidding for professional services contracts with a total value above $100,000 rather than using its current criteria of annual expenditures of $100,000 or more. In addition, the university could more narrowly define the professional services that are exempt from competitive bidding requirements. For example, the State Contracting Manual indicates specific types of services that are exempt from competitive bidding, including legal services and expert witness contracts. Limiting the types of contracts that are exempt from competition would help the university achieve its goal of procuring services that represent the best value.

Some University Locations Inappropriately Used Sole‑Source Contracts to Avoid Competitive Bidding

As Table 5 shows, both the San Francisco campus and the San Francisco medical center awarded contracts to vendors through a sole‑source process without proper justification. The university’s contract manual defines a sole‑source contract as one with “the only supplier capable of meeting university requirements within the time available, including emergency and other situations which preclude conventional planning and processing.” Further, the contract manual states that competition is not required when a proprietary service is unique or available only from a sole‑source contract. However, we found two instances in which university locations did not provide adequate justifications for contracts that they awarded noncompetitively through a sole‑source process. These misuses of the sole‑source process represent instances in which the university locations improperly avoided competitive bidding.

In the first instance, the San Francisco medical center entered into a sole‑source contract for hospital cleaning services, but its contract file lacked sufficient justification for its decision to forego competitive bidding. According to the director of procurement services for the San Francisco medical center, the medical center opened a hospital in early 2015, and the sole‑source contract for hospital cleaning services was the result of an emergent need that only the selected vendor was capable of meeting within the time available. He indicated that the San Francisco medical center did not discover that the staffing levels for hospital cleaning were inadequate until it opened the hospital. The contract manual allows for emergency needs as a sole‑source justification when an emergency or other situation precludes conventional planning. However, in justifying the sole‑source contract, the medical center indicated that the contract was needed for temporary staffing until the medical center’s employees could take over the cleaning and the justification did not mention an emergency. Moreover, the San Francisco medical center prepared the sole‑source justification three months after entering into the contract and indicated that the work had been ongoing, despite the requirement on the sole‑source form that a university location prepare and submit this justification for review before entering a sole‑source contract.

Similarly, in the second instance, the San Francisco campus entered into a sole‑source contract for vanpool services, but the contract file contained no rationale explaining why the selected vendor was the only vendor that could provide this service. Rather, in justifying this sole‑source contract, the campus indicated that other university locations were satisfied with the vendor’s services and that the vendor’s prices were lower than those of another vanpool vendor. The San Francisco campus also indicated it wanted to curtail the rising cost of its transportation services. The San Francisco campus’s current procurement manager speculated that the campus may have incorrectly described the contract as sole source. However, the procurement file did not show that the San Francisco campus competitively bid this contract, nor did it demonstrate why competitive bidding was not possible. By using sole‑source contracts to avoid competitive bidding, the San Francisco campus and the San Francisco medical center prevented other vendors from competing for these services, and they risked entering into contracts that were not the lowest cost or best quality.

One Campus Missed Opportunities to Use Competitive Bidding for Its Low‑Value Procurements

Our review of low‑value procurements at the Riverside campus suggests that it may have failed to identify services for which it could have used competitive bidding. Specifically, to reduce the cost of low‑value purchases, the university’s contract manual allows and encourages university locations to establish procurement programs that enable their departments to directly purchase services from vendors. These programs generally place limits on the dollar value of the procurements. The Riverside campus uses an online purchasing system called eBuy that the departments may use to make low‑value purchases. For the time period we reviewed, the purchase limit was $2,500 per eBuy transaction for nonprocurement staff, while procurement staff fulfilled requisitions over that amount.

Based on our review of the eBuy transaction history for low‑value purchases from two vendors at the Riverside campus, we found an opportunity for competitive bidding related to one of the two vendors. Specifically, for a services contract with a charter bus vendor, the total value of the Riverside campus’s purchases exceeded $100,000 in each of the five fiscal years we reviewed. In fact, for fiscal year 2015–16, the annual expenditures related to this contract totaled nearly $400,000. The contract manual states that university locations must competitively bid contracts with expenditures of more than $100,000 annually, with few exceptions. Although most transactions with the charter bus vendor were typically $2,500 or less, the total value of the purchases reflects that there was significant demand for this service and that Riverside could have sought competitive bids to possibly obtain a better price or better service.

According to the former interim procurement manager, the procurement department has the ability to track spending related to eBuy purchases but does not regularly do so. However, by not tracking and assessing the total value of purchases from a single vendor through its eBuy system, the Riverside campus is missing the opportunity to leverage the volume of its purchases through a competitive bidding process to potentially curtail its costs and receive better quality services. According to the associate vice chancellor of business and financial services, the Riverside campus hired a new procurement director in December 2016, and filled a vacant procurement manager position in May 2017. With the addition of these two individuals, the campus has begun a review of low‑value purchases to identify opportunities to increase competitive bidding.

The Office of the President Implemented a Systemwide Procurement Program But Could Do More to Create Further Process Efficiencies

As we describe in the Introduction, in 2012 the Office of the President implemented a systemwide procurement program, also known as P200, which has resulted in the execution of procurement agreements intended to benefit all university locations by leveraging the purchasing power of the university. Although P200 has led to some improvements in the university’s procurement processes, the Office of the President could do more to create further process efficiencies. For example, it implemented a contract repository for systemwide contracts that university locations can access, but it has yet to implement a central contract database to house contract information for all university locations. As a result, neither the Office of the President nor the university locations have complete and accurate information regarding all university contracts. The Office of the President also lacked adequate support to substantiate nine of the 10 benefits—the term it uses for cost reductions or avoidance, incentives, or revenue—that we reviewed related to its implementation of P200. These nine benefits totaled $109 million of the $269 million savings the university president claimed for fiscal year 2015–16. Finally, despite its public statements regarding the use of the procurement benefits it achieves, the Office of the President has not established a policy to guide campuses in reallocating the claimed benefits to the university’s core missions of teaching, research, and public service.

The Office of the President’s Implementation of P200 Increased the University’s Systemwide Agreements But Has Not Yet Resulted in a Database for Tracking Contracts

Since P200’s launch in 2012, the Office of the President has hired staff and implemented tools to analyze university spending patterns and to identify procurement savings opportunities. To implement P200, the Office of the President added 22 positions, of which it has filled 19, to its systemwide procurement staff. The purpose of these new staff—who represented an annual cost of $4 million in fiscal year 2016–17—is to allow the Office of the President to develop a greater understanding of which services best fit the university’s needs and to coordinate systemwide procurement agreements. Further, the Office of the President established a systemwide shared‑governance group composed of the systemwide chief procurement officer and campus procurement leaders, who propose, evaluate, and vote to approve procurement strategies, programs, and systemwide agreements that could benefit all university locations. The Office of the President’s records indicate that it executed 65 systemwide agreements in fiscal year 2015–16 as a result of P200. According to the Office of the President, these agreements have benefited the university by allowing the campuses and medical centers to consolidate and leverage their spending for common items they purchase to generate potential savings as a result of vendors’ discounting their rates.

Despite the benefits of P200, the Office of the President has yet to implement an aspect of the program’s plan that we consider critical. Specifically, the P200 plan stated that the Office of the President would implement a central contract database to oversee the university’s fragmented contract data. Although it implemented a contract repository for systemwide contracts that university locations can access, the Office of the President has yet to implement a central contract database to house contract information for all university locations. Instead, each university location has developed its own method of tracking its contracts, and as a result, the Office of the President is unable to report in aggregate on the nature of the university’s contracts, such as the types of contracts, procurement methods, and types of goods and services purchased.

In response to the Legislature’s request for data on the university’s contracting activities over the past five years, we contacted each campus, medical center, and the Office of the President to obtain extracts from the systems they use to track contract information. Specifically, we requested that each university location provide us with an extract of its contracts along with basic information about each contract, including whether the contract was to purchase a good or service, the contract amount, and the period it covered. However, despite the basic nature of our request, many of the campuses and medical centers, as well as the Office of the President, were unable to provide complete extracts, as Table 7 shows. For example, the University of California, Los Angeles, campus could not provide data on the procurement methods it used, such as whether contracts were competitively bid or were sole source. The university’s decentralized approach to contract management has resulted in its inability to report even the most basic contract information in the aggregate without a manual review of all of its contracts. Moreover, because the campuses, medical centers, and the Office of the President all lack complete data in their tracking systems, we were unable to respond to the Legislature’s request for information about the university’s contract activities over the past five years.

Table 7
The University’s Contract Databases Contain Fragmented and Incomplete Information

LOCATION	CONTRACT DATABASE NAME	SELECTED CONTRACT DATA
		GOOD OR SERVICE INDICATOR	GOOD OR SERVICE DESCRIPTION	DAVIS CONTRACT AMOUNT	PROCUREMENT METHOD
CAMPUS
Berkeley	BearBuy	♦	✔	✔	X
Davis	Kuali (contracts)	✔	✔	✔	✔
	Kuali (purchase orders)	✔	✔	✔	✔
	DaFIS (contracts—prior system)	✔	✔	✔	X
Irvine	Excel	X	♦	♦	X
Los Angeles	PAC	X	♦	✔	X
Merced	CatBuy	X	✔	✔	X
Riverside	eBUY	X	✔	X	X
San Diego	SciQuest	X	✔	✔	X
San Francisco	BearBuy contracts	X	X	♦	X
	BearBuy (purchase orders)	X	✔	✔	X
Santa Barbara	Filemaker (prior system)	X	♦	♦	X
	Excel	X	✔	♦	X
Santa Cruz	Contract Manager (contracts)	X	✔	✔	X
	Cruzbuy (purchase orders)	♦	✔	✔	X
MEDICAL CENTER
Davis	Microsoft Access (contracts)	X	✔	✔	♦
	Eclipsys (contracts and purchase orders)	X	X	✔	X
Irvine	AMS (contracts)	✔	✔	X	X
	AMS (purchase orders)	X	♦	✔	X
Los Angeles	Caspio (contracts)	✔	✔	X	X
	Lawson (contracts)	✔	✔	✔	♦
San Diego	Aperek (blanket purchase orders)	X	✔	✔	X
	Aperek (purchase orders)	X	✔	✔	X
	Aperek (service contracts)	♦	X	X	X
	Aperek (supply contracts)	✔	✔	✔	X
San Francisco	Meditract (contracts)	X	✔	✔	X
	Global Health Exchange (contracts)	X	✔	✔	X
	Pathways Materials Management (purchase orders)	X	✔	✔	X
OFFICE OF THE PRESIDENT*
Local procurement office	PAC	♦	♦	✔	X
		TOTALS
✔ = Data available.		7	21	21	2
♦ = Inconsistent or incomplete data.		4	5	4	2
X = Data not available.		18	3	4	25

Sources: California State Auditor’s analysis of contract data provided by university locations from their contract databases and other procurement tracking systems.

* The Office of the President also has a contract repository for systemwide contracts. We did not evaluate the contract repository because systemwide contract activity is reflected in the contract databases at the university locations.

The Office of the President attributes its delay in implementing a contract database to problems with finding the right vendor. Specifically, the Office of the President explained that in 2012 it contracted with a vendor to implement contract management software that was intended to include the capacity to store information on all university contracts, which would have addressed the university’s lack of a central contract database. However, the Office of the President’s director of information, analytics and systems (analytics director) indicated that the vendor was unable to deliver on the contract database to the university’s satisfaction. As a result, the Office of the President executed a contract with a new vendor in May 2017 to implement a contract management software tool that will include a central contract database for all of the university’s contracts.

Although the Office of the President has now found a vendor to assist in its efforts to centrally monitor the university’s contracting activities, it has yet to develop a project plan to implement the database. The analytics director anticipates implementing the contract database within two years but stated that the only plan currently available was a high‑level timeline and project approach that the Office of the President developed in April 2017. The analytics director explained that the lack of a project plan was the result of the Office of the President’s focus on evaluating the new vendor’s capabilities. She further stated that the Office of the President would develop a more detailed plan by assessing the status of current contract databases at each university location and determining the IT resources needed to assist with the project. Although the systemwide chief procurement officer indicated that planning efforts for the central contract database began in July 2017, because the Office of the President lacks a project plan, implementation of the central contract database could be delayed beyond the two years it estimates. In the meantime, the lack of a central contract database will continue to hinder the Office of the President’s ability to track contracts across the university, identify systemwide contracting opportunities, and create additional cost efficiencies.

The Office of the President Has Reported Estimated Procurement Benefits as Actual Amounts and Has Not Ensured Those Benefits Are Redirected to the University’s Core Missions

The Office of the President set a goal for P200 to deliver the university $200 million in benefits annually by the end of fiscal year 2016–17 through strategic procurement activities. Examples of these activities include the realignment of the university’s systemwide procurement organization and strategic sourcing to consolidate spending across the university. In January 2017, the university president reported to the regents that the university had achieved its goal by capturing $269 million in annual procurement savings for fiscal year 2015–16. However, the Office of the President was unable to fully substantiate nine of the 10 benefits we reviewed. These nine benefits totaled $109 million of the $269 million savings the university president claimed for fiscal year 2015–16. The Office of the President’s lack of supporting documentation to substantiate these benefits is similar to the problems we reported with the university’s other Working Smarter initiative projects in our March 2016 audit, University of California: Its Admissions and Financial Decisions Have Disadvantaged California Resident Students, Report 2015‑107.

The Office of the President developed a tracking system in July 2014 to record, verify, and track benefits that result from P200 procurement transactions at all university locations. The Office of the President requires university locations to enter benefits into the tracking system and provide contracts, quotes, negotiation records, and other documentation to support the amounts claimed. The Office of the President’s policy states it uses these documents to recalculate and verify the claimed benefits, which it then either approves or requests the university location to correct. The tracking system contains over 5,000 entries totaling $269 million for fiscal year 2015–16, which corresponds to the savings that the president reported to the regents in January 2017.

Our review of 10 entries found that nine of the benefits, which totaled $109 million, were not supported by accounting records or other appropriate documentation to substantiate the amounts. For example, we were unable to substantiate the Office of the President’s claim of $80 million in annual cost reductions for new contracts related to university health insurance programs. In May 2016, the Office of the President executed two separate agreements for vendors to provide claim administration and pharmacy benefits management services for the university’s self‑funded health insurance programs. It claimed that the two agreements together would provide $80 million in annual cost reductions for three years solely as the result of lower expected costs for medical and pharmacy insurance claims.

However, the Office of the President failed to substantiate its claimed cost reductions by documenting how its new vendors would achieve lower expected costs for medical and pharmacy insurance claims. Such documentation would have included an analysis of previous costs and a description of how the new vendors would lower the costs of expected claims. Lacking this documentation, we were unable to determine the accuracy or reasonableness of the $80 million in claimed annual cost reductions. The Office of the President also claimed that the annual cost reductions of $80 million began in fiscal year 2015–16 even though the new vendors did not begin administering the university’s self‑insured health programs until January 2017. Although the Office of the President’s methodology recognizes benefits as beginning in the same fiscal year that it signs an agreement, we believe it is more accurate to recognize the benefits when the agreement is in effect.

Further, the University of California, Irvine, campus (Irvine campus) claimed that it produced $6.7 million in cost reductions for its Student Information System IT project. However, our review found that the Irvine campus’s cost reductions were actually the result of a project management decision to reduce the scope of the IT project rather than resulting from a procurement action, such as the search for a new vendor or a renegotiation of an initial bid submission. In another example, the Office of the President reported that a multiyear, systemwide agreement for general lab supplies generated cost reductions of $13 million in fiscal year 2015–16. However, our review found that the supporting documentation in the Office of the President’s tracking system consisted of only a spreadsheet of estimated savings for all university locations. This spreadsheet lacked information to support the university’s baseline spending or the assumptions the Office of the President used to calculate the cost reductions, such as vendors’ prices for these supplies. Lacking these key pieces of information, we were unable to substantiate the cost reductions that the Office of the President reported for this contract.

The analytics director acknowledged that the Office of the President needed more and better information to substantiate some of the estimated benefit entries we reviewed. However, she stated that benefits from contracts that the shared‑governance group had approved do not require additional documentation because the committee had already reviewed the business cases and voted to approve the contracts. Nonetheless, we believe additional information is still needed to verify the systemwide procurement program’s benefits.

The analytics director also acknowledged that estimated benefits may differ from actual benefits because the factors the Office of the President uses to estimate the benefits, such as forecasted purchase volume, may not materialize over the life of a contract. For example, when the Office of the President enters into a systemwide contract, it estimates the cost reduction with the assumption that the university locations will make their procurements using that systemwide contract. However, because the Office of the President does not require the university locations to use systemwide contracts, the university locations would have to choose to participate for the university to realize the cost reductions. The analytics director stated that the Office of the President has not done any assessments to determine how much of the estimated benefits the university has actually realized. She explained that the university’s decentralized financial systems combined with the high volume of purchase transactions make it cumbersome and expensive to measure actual benefits. However, despite its lack of verification, the president continues to publicly assert having achieved these savings.

Finally, although the Office of the President stated that the university would redirect any P200 benefits toward its core missions of teaching, research, and public service, it cannot substantiate this claim. According to the director of strategic sourcing, the Office of the President has not developed a policy or provided direction to university locations on how to reallocate procurement benefits because it believes doing so could discourage them from participating in systemwide procurement agreements. Instead, the director of strategic sourcing stated that the Office of the President allows university locations to decide how they will apply any benefits they achieve. However, our March 2016 report found that the three campuses we reviewed were unable to demonstrate through financial records that they redirected any benefits to the university’s core missions. Until the Office of the President establishes measures for accountability over the uses of the benefits from P200, it is unable to assert with any assurance that the university is redirecting benefits to its teaching, research, and public service missions.

Recommendations

Legislature

To ensure that the university maximizes the use of competition, the Legislature should revise the Public Contract Code to do the following:

• Specify the conditions under which the university may amend contracts without competition.
• Narrowly define the professional and personal services that the university may exempt from competitive bidding.
  

Office of the President

To ensure that university locations 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’s human resources department has the authority to approve or reject displacement decisions.
• Revise contracting policies to address situations in which university locations are contemplating entering into services contracts instead of hiring 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 their business and financial necessity analyses and requiring that university locations periodically reevaluate the savings after the services contracts take effect to inform future contracting decisions.

To ensure that the university achieves its goals of obtaining services at the lowest cost or 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’s 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.

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.

To maximize benefits from the systemwide procurement initiative and to ensure that the university uses those benefits for its teaching, 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 result 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.

We conducted this audit under the authority vested in the California State Auditor by Section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Respectfully submitted,

ELAINE M. HOWLE, CPA
State Auditor

Date: August 22, 2017

Staff:
John Baier, CPA, Audit Principal
Sharon L. Fuller, CPA
Oswin Chan, MPP, CIA
Matthew McAuley
Christopher Purcell
Joseph S. Sheffo, MPA
Michael Tejada

Legal Counsel: 
Joseph L. Porche, Staff Counsel

For questions regarding the contents of this report, please contact
Margarita Fernández, Chief of Public Affairs, at 916.445.0255.

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Footnote(s)

² We reviewed 30 of 31 contracts for adherence with contract policy; the remaining contract we reviewed only against the displacement guidelines. Go back to text

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