Report 2004-136 Summary - January 2006

City of Los Angeles:

Outside Counsel Costs Have Increased, and Continued Improvement in the City's Selection and Monitoring Is Warranted

HIGHLIGHTS

Our review of the Office of the City Attorney's (Attorney's Office) use of outside counsel revealed:

  • The costs for outside counsel have risen from $17.5 million to $31.9 million over the six-year period ending in fiscal year 2004-05.
  • The Attorney's Office lacked documents necessary to demonstrate it followed its policies and procedures when assessing the need to retain outside counsel and when performing its role in selecting outside counsel.
  • Although its policies for monitoring the work performed by outside counsel provided sufficient direction for good case management, the Attorney's Office did not always follow them.
  • The Attorney's Office eliminated numerous charges from outside counsel invoices, but it could improve its invoice review as it paid outside counsel for some costs its policies did not allow.

RESULTS IN BRIEF

As an elected official within the City of Los Angeles (City), the city attorney serves as chief legal adviser to the mayor, the Los Angeles City Council (city council), and all city boards, officers, and entities. The city attorney controls and manages the Office of the City Attorney (Attorney's Office), which comprises more than 500 attorneys who provide the day-to-day legal services the City needs. The city charter allows the City to retain outside legal counsel to assist the Attorney's Office in meeting the City's legal needs.

Outside counsel costs for the City over the six-year period ending in fiscal year 2004-05 almost doubled, rising from $17.5 million to $31.9 million. Some of the largest increases involved the use of outside counsel by the City's proprietary departments—in particular, the Department of Water and Power (DWP) and the Los Angeles World Airports (Airports). For example, the City retained outside counsel for litigation related to the California energy crisis and a comprehensive revision to the master plan for Los Angeles International Airport. The Attorney's Office recommended outside counsel for those matters because it believed it lacked the necessary expertise and resources to handle them.

The City could improve its reporting of outside counsel costs. Our review of the outside counsel costs reported by city departments in response to a special inquiry by a member of the city council revealed several significant inaccuracies and inconsistencies. Although the Attorney's Office recently implemented a procedure for periodically reporting outside counsel costs on a citywide basis, it will need to keep in mind the inaccuracies and inconsistencies we found in data reported by various city departments as it moves forward with the new reporting procedure.

Despite the costs involved, the Attorney's Office believes that its use of outside counsel has resulted in two quantifiable benefits: reductions in amounts paid through settlements or judgments of cases (liability payouts) and significant revenue from litigation in which the City is the plaintiff. Although it is true that liability payouts from the City's General Fund have decreased, the extent to which the use of outside counsel has contributed to the decrease is unknown. Similarly, the Attorney's Office points to certain litigation for which it used outside counsel in matters that have benefited or are expected to benefit the City or its residents. However, the extent to which the City could have achieved similar results without outside counsel is also unknown.

When retaining outside counsel the Attorney's Office first assesses the need for counsel and, if necessary, conducts a competitive or noncompetitive selection process. The selection process culminates in the Attorney's Office making a recommendation to the city council or appropriate governing board, which makes the final contracting decision. Overall, we found that the Attorney's Office could not provide documents to demonstrate that it had followed the policies and procedures it has in place for making its assessment and performing its role in selecting outside counsel. For example, the Attorney's Office lacked documentation such as written evaluations and rating sheets to demonstrate that it conducted a fair and objective process when performing its role in selecting outside counsel in a competitive manner. Without adequate documentation, the Attorney's Office leaves itself vulnerable to criticisms that its recommendations on outside counsel are not fair and objective.

Although the policies it had in place at the time of our fieldwork for monitoring the work performed by outside counsel provided sufficient direction for good case management, the Attorney's Office did not always follow those policies. As a result, the Attorney's Office risked paying more to outside counsel than was necessary. For example, the Attorney's Office often did not require outside counsel to submit comprehensive budgets. Further, despite their obvious involvement in the matters for which outside counsel were retained, managing attorneys did not consistently ensure that outside counsel submitted the required quarterly reports. Instead, managing attorneys often relied on informal methods of monitoring outside counsel, through telephone, e-mail, or in-person communications.

In November 2005 the Attorney's Office changed its policy on the use of outside counsel. For example, it eliminated the requirement for outside counsel to submit quarterly reports. Instead, it plans to work with outside counsel to provide status reports when the Attorney's Office prepares for updates, at least twice a year, to the city council and others on significant legal cases. Although it is too early to tell what the long-term effects of the policy change will be, the Attorney's Office may be limiting its insight into outside counsel's activities.

The Attorney's Office has established comprehensive policies related to the invoices outside counsel submit, and our testing demonstrated that the Attorney's Office eliminated numerous charges that conflicted with its policies. However, the Attorney's Office could improve its review of invoices. We found that the Attorney's Office paid some outside counsel costs that were not allowed by its policies. Although its invoicing policies seek to establish a standard for reasonable billing practices, the Attorney's Office undermines those efforts by not consistently identifying all unallowable costs.

An opportunity exists for the Attorney's Office to more efficiently and effectively monitor outside counsel costs. It could do so by preparing budgets detailed by activity and requiring outside counsel to submit invoices with the same level of detail, allowing Attorney's Office staff to compare the invoices to the budgets. From December 2001 to November 2005, Attorney's Office policy directed managing attorneys to help outside counsel create detailed litigation budgets and to periodically compare actual costs against budgeted costs. However, in our review of selected contracts, we found no evidence that Attorney's Office staff made such comparisons. Even though the staff have ensured that total invoices do not exceed total contract costs and have reviewed outside counsel invoices, the invoice review the Attorney's Office performs is labor intensive, and its comprehensiveness and effectiveness are limited. Comparing outside counsel costs to budgeted costs by activity within a given litigation or project phase should enable the Attorney's Office to better facilitate effective communication on the progress of its cases and any deviations from budgets. In November 2005 the Attorney's Office changed its policy by eliminating the requirement to periodically compare actual costs to budgeted costs. However, we continue to believe that those comparisons are an important cost control mechanism.

When the Attorney's Office has an actual or potential conflict of interest in which it cannot ethically represent a city employee whose interests may be adverse to those of the City, it refers the matter to the attorney conflicts panel (conflicts panel), which is made up of attorneys from outside law firms. The Office of the City Administrative Officer (CAO), an entity separate from the Attorney's Office whose primary role is chief financial adviser to the mayor and the city council, is the day-to-day overseer of the conflicts panel. In performing its daily duties, the CAO adequately reviews invoices for compliance with its billing guidelines. However, although the use of budgets can help control costs, the contracts the CAO used did not require outside counsel to submit budgets in all instances.

RECOMMENDATIONS

The City should ensure that the outside counsel costs it reports are accurate and prepared consistently and that costs are adequately supported by source documentation.

To ensure that the decisions it reaches to retain outside counsel are justified in accordance with its policy and to enable it to demonstrate those justifications to interested parties, the Attorney's Office should sufficiently document the analysis used in reaching its decisions to recommend the retention of outside counsel. Also, to ensure that its recommendations for contract awards are less vulnerable to criticisms, the Attorney's Office should develop and implement comprehensive policies and procedures that specify standards for applying evaluation criteria, such as the use of rating sheets, and for retaining documents.

To help control the costs involved in using outside counsel, the Attorney's Office should ensure that outside counsel submit comprehensive budgets. It should also periodically evaluate its process of obtaining status updates to report to the city council or appropriate board on significant outside counsel cases and modify that approach if necessary. Finally, to help control the costs of outside counsel, the Attorney's Office should not allow costs that are prohibited by its policies.

To achieve a comprehensive view of how legal dollars are spent and to facilitate a comparison of budgeted costs with costs to date, the Attorney's Office should require outside counsel to prepare monthly invoices and cumulative cost reports that both sort charges by attorney within an activity and by activity within a litigation or project phase. Further, the Attorney's Office should compare cumulative charges to agreed-on budgets.

Finally, to help control the costs of outside counsel, the CAO should require budgets for all contracts with outside counsel that it manages.

AGENCY COMMENTS

The Attorney's Office expressed appreciation for the audit work and noted that improving the oversight of outside counsel is an ongoing process. The Attorney's Office states that it intends to fully explore the report's recommendations for ensuring continued improvement.

The CAO also expressed appreciation for the audit work and acknowledged the importance of budgets as a mechanism for controlling outside counsel costs. The CAO stated that it will require budgets in all cases in the future.


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