California State Auditor/Bureau of State Audits
Summary of Report 2006-114 - October 2006

California Children and Families Commission:

Its Poor Contracting Practices Resulted in Questionable and Inappropriate Payments to Contractors and Violations of State Law and Policies

AUDIT HIGHLIGHTS

Our review of the California Children and Families Commission's spending practices and contracting procedures revealed that it:

* Allowed one of its media contractors to circumvent the payment

provisions of a contract by paying invoices totaling $673,000 for fees and expenses of some of the contractor's employees that were prohibited under the terms of the contract.

* Did not fully use the tools available to it to ensure its

contractors provided appropriate services.

* Could not always demonstrate it had reviewed and approved final

written subcontracts and subcontractors' conflict-of-interest certificates.

* Did not always follow state policy when it used a competitive

process to award three of the contracts valued at more than $47.7 million and failed to provide sufficient justification for awarding one $3 million contract and six amendments totaling $27.6 million using the noncompetitive process.

* Did not always ensure that its interagency agreements met the state

requirement for using subcontractors.

* Agreed to pay $1.2 million more than it should have for

administrative overhead because it did not follow state policy that limits such payments.

* Intentionally used some memorandums of understanding with counties

to avoid having to comply with state contracting requirements.

* Had clear authority to conduct its advertising campaigns relating to

preschool, these advertisements and their timing were consistent with legal restrictions on the use of public funds and did not contribute any of its public funds to campaign accounts used to support the various ballot measures.

* Its payments to three individuals who worked for the media

contractor were generally consistent with the restrictions related to the use of public funds for political purposes. However, for a period of almost four months in 2004, the state commission could not demonstrate that these payments were appropriate.

RESULTS IN BRIEF

The California Children and Families Commission (state commission) contracts with media and public relations companies to conduct mass media campaigns related to various issues involving early childhood development and school readiness. We found a number of problems with the way it awards and manages these contracts. For example, the state commission allowed one of its media contractors to circumvent the payment provisions of a contract by paying invoices totaling $673,000 between February 2002 and December 2003 for fees and expenses of some of the contractor's employees. These payments violated the terms of the contract, which stated that payment was to be based solely on commissions applied to the cost of advertising placed by the contractor and prohibited the charging of other services or fees. As a result, the state commission paid for services it had not contracted for, effectively preventing that money from being used to further the other activities allowed by the contract, namely purchasing printed ad space or broadcast media time.

Additionally, the state commission did not fully use the tools available to it to ensure that its contractors provided appropriate services. For example, it did not always include some important elements in its contracts, such as a clear description of work to be performed and detailed cost proposals. Further, it did not always ensure that its contractors submitted adequate work plans, that it received all required work plans, and that it promptly approved them. As a result, the state commission cannot ensure that the resulting contracts clearly established what was expected from the contractor, that the contracts provided the best value, and that its contractors provided the agreed-upon services within established timelines and budgets.

Moreover, the state commission could not always demonstrate that it had reviewed and approved final written subcontracts and subcontractors'

conflict-of-interest certificates. When the state commission fails to review these documents before authorizing contractors to use a subcontractor, it cannot ensure that it protects the State's interests or identifies potential conflicts of interest. Also, although the state commission's contracts typically include provisions requiring its contractors to document the expenses claimed, it did not always enforce these provisions and sometimes accepted inadequate documentation. This failure to properly develop and manage its contracts caused the state commission to make some questionable payments to contractors for items such as laptop computers valued at $10,000, food catering costs, and monthly parking fees.

In addition, the state commission did not always follow state policies during its process of competitively awarding three of the nine contracts we reviewed. For example, it failed to provide adequate justification that contract costs totaling more than $47.7 million were reasonable when it competitively awarded three contracts that received fewer than three bids.

Also, it did not consistently document its scoring of proposals received from potential contractors and was unable to demonstrate that it had advertised one contract, totaling $90 million, in the state contracts register as required.

When we looked at the state commission's use of noncompetitive contracts, we noted that it failed to follow state policies that require sufficient justification for awarding such contracts. For example, in its justifications the state commission cited insufficient staff resources or time limitations as its reasons for awarding one contract and six amendments using the noncompetitive process. We do not believe that these circumstances are compelling reasons for avoiding a competitive bidding process.

Further, the state commission did not always ensure that its interagency agreements met the requirements for using subcontractors, and the agreements regularly included budgets that allowed the payment of administrative overhead fees at amounts higher than state policy allows. Its failure to follow state policy in these instances resulted in the state commission agreeing to pay $1.2 million more for these agreements than it should have.

In addition, the state commission intentionally used some memorandums of understanding with counties to avoid having to comply with state contracting requirements.

When the state commission does not fully comply with established laws and policies designed to promote competition, fairness, and value, it cannot ensure that the State is receiving the best value for its money or that the State's interests are being protected.

Between 2000 and 2006 the state commission used four media and public relations contractors to conduct mass media campaigns related to various issues, including promoting the value of preschool. During this time, the Office of the Attorney General received three ballot proposals that either related to preschool or that, if enacted, would have affected the work of the state commission. Two of these proposals ultimately qualified for the ballot. Because of the timing of the state commission's publicly funded media campaigns and the ballot proposals, concerns arose as to whether the state commission inappropriately spent public funds on campaign activities or on political advocacy. Our review determined that the state commission had clear legal authority to conduct its public advertising campaigns related to preschool. We also found that the content of these advertisements and their timing were consistent with applicable legal restrictions related to the use of public funds for political purposes and confirmed that the state commission did not contribute any of its public funds to campaign accounts used to support the various ballot measures.

Finally, although three individuals who worked for a media contractor also worked for the campaign committees supporting certain ballot measures, we were generally able to determine that the state commission's payments to these individuals were consistent with the restrictions on the use of public funds for political purposes. However, for an almost four month period in 2004, we cannot determine whether public funds were spent appropriately to pay for the services of these three individuals because the state commission did not have adequate records. So that we might learn what services these three individuals were paid to perform during this time, we contacted each of these individuals as well as the former chair of the state commission. We were able to talk with two of the three individuals and with the former chair of the state commission. All of the individuals we talked to indicated that they did not perform any campaign activities during this period.

RECOMMENDATIONS

To ensure that it acts in the State's best interest by properly managing contracts and approving payments only for appropriate expenses, the state commission should take the following steps:

* Ensure that both it and its contractors comply with all contract

terms.

* Fully develop its contracts by including important elements such as

a clear description of the work to be performed and a reasonably detailed cost proposal.

* Consistently enforce contract provisions requiring contractors to

submit supporting documentation for all claimed expenses and ensure that it adequately reviews all documentation before approving expenses for payment.

* Establish a process to ensure that it obtains and reviews final

written subcontracts and conflict-of-interest certificates before it authorizes the use of subcontractors.

* Consistently enforce contract provisions requiring contractors to

submit complete and detailed work plans for the state commission's review, and ensure that it receives all required work plans and promptly approves them.

To ensure that it protects the State's interests and receives the best products and services at the most competitive prices, the state commission should do the following:

* Follow the State's competitive bid process for all contracts it

awards, unless it can provide reasonable and complete justification for not doing so. Further, it should plan its contracting activities to allow adequate time to use the competitive bid process.

* Fully justify the reasonableness of its contract costs when it

receives fewer than three bids or when it chooses to follow a noncompetitive bid process.

* Advertise all non exempted contracts in the state contracts register.

To ensure that it promotes fair and open competition when it awards contracts using a competitive bid process, the state commission should ensure that it fully documents its process for scoring proposals, and that it retains the documentation.

To ensure that it follows state policies that protect the State's interest when using interagency agreements and contracts with government agencies, the state commission should fully justify the use of subcontractors when required and, if it is unable to do so, deny the use of subcontractors.

AGENCY COMMENTS