Our review of the personal services and consulting contracts for information technology (IT contracts) used by the Department of Health Care Services and the Department of Public Health (departments) revealed the following:
Actions taken by the Department of Health Care Services (Health Care Services), the Department of Public Health (Public Health), and their predecessor agency, the Department of Health Services (Health Services), in response to the disapproval of certain information technology (IT) contracts reveal flaws in the oversight of constitutional provisions protecting the civil service system in the State of California (State). The California Supreme Court has recognized that the California Constitution contains an implied civil service mandate (civil service mandate), which prohibits state agencies from contracting with private entities to perform work that the State has historically and customarily performed and that it can perform adequately and competently. State law allows state agencies to contract for these services—rather than employing civil servants—under specified conditions, and it places responsibility with the State Personnel Board (board) to review these contracts upon request by state employee representatives (unions). The Joint Legislative Audit Committee requested that the Bureau of State Audits examine the personal services and consulting contracts for IT (IT contracts) used by Health Care Services and Public Health (departments) based on concerns detailed by a union. The chief concern was that the State could be misspending millions of dollars on IT contracts because the control process for guarding against unnecessary contract spending and for enforcing the civil service mandate has become overwhelmed and because corrective action generally does not occur until after state agencies may have misspent the money.
Over the last five years, the board has disapproved 17 IT contracts executed by Health Care Services, Public Health, and Health Services.1 The board disapproved the IT contracts because the departments, upon formal challenges from a union, could not adequately demonstrate the legitimacy of their justifications for contracting under the California Government Code, Section 19130(b), which provides 10 conditions under which state agencies may contract for services rather than use civil servants to perform specified work. These conditions include such circumstances as the agencies' needing services that are sufficiently urgent, temporary, or occasional, or the civil service system's lacking the expertise necessary to perform the service.
Although the union prevailed in 17 of its 23 IT contract challenges, many of the board's decisions were moot because the contracts had already expired before the board rendered its decisions. This situation occurred primarily because the union raised challenges late in the terms of the contracts and because the board review process was lengthy. Of the six IT contracts that were active at the time of the board's decisions, only three were terminated because of board disapprovals. For each of the other three IT contracts, the departments either terminated the contract after a period of time for unrelated reasons or allowed it to expire at the end of its term. Because the board lacks a mechanism for determining whether state agencies comply with its decisions, the departments experienced no repercussions for failing to terminate these contracts. Although not prohibited by law from doing so, the departments entered into numerous subsequent contracts for the same services as those in the contracts previously disapproved by the board. In one case, the board disapproved an IT contract for the same service from the same supplier that it had already disapproved in an earlier union challenge. Without some limitation on subsequent same-service contracts, board decisions related to Section 19130(b) of the California Government Code will often affect only contracts with terms that have expired or will soon expire, and the decisions will not preclude similar contracts from immediately replacing those that the board disapproves. As a result, all the effort and resources spent reviewing challenged IT contracts would seem to be an inefficient use of state resources.
Partly in response to the disapproved contracts, the two departments have sought to replace IT contractors with state IT employees. For this purpose, in January 2009, the Department of Finance (Finance) approved the creation of an additional 28 IT positions within the information technology services division (IT division) of Health Care Services and 11 IT positions within the IT division of Public Health. Health Care Services began the process of converting IT contractor positions into state positions as early as October 2006, but it did not clearly disclose this effort in its request for additional positions. Because permanent positions had not yet been approved in the state budget, Health Care Services funded the new employees—who were hired as permanent civil servants—using temporary-help positions authorized in the budget as blanket positions, which are positions in the approved budget that an agency may use for short-term or intermittent employment needs when expressing those needs as classified positions has proven impracticable. According to the State Administrative Manual, an agency may not use temporary-help positions provided under its blanket authority to fund permanent employees. Although Health Care Services did not comply with state policy regarding the use of blanket positions and was disingenuous with budgetary oversight entities, we estimate that Health Care Services saved the State more than $1.7 million when it converted IT contracts to IT positions. Public Health stated that it will not be able to replace its IT contracts with state employees until fiscal year 2010-11, which is when it anticipates it will be able to hire and train employees who have the appropriate skill sets to make the transition successful.
The departments indicated to us that recruiting and retaining qualified IT personnel are difficult. In recent years, both departments have begun tracking vacancies in their IT positions, using delegated authority from the Department of Personnel Administration (Personnel Administration) to offer more competitive wages to IT employees and taking advantage of the board's efforts to increase the State's pool of IT applicants. The departments' vacancy and turnover rates for their IT positions have remained fairly stable over the last five years.
During our review we found other issues related to the departments' IT contracting that although not directly related to compliance with the civil service mandate, were nonetheless important. First, neither Health Care Services nor Public Health has a complete database that allows it to identify active IT contracts and purchase orders. Consequently, the departments cannot readily identify such procurements. The best source of information for the purposes of this audit was the contracts database maintained by the Department of General Services (General Services) and populated with self-reported data from state agencies. However, we found errors in the data reported by Health Care Services and Public Health indicating that the information in General Services' database is incomplete and inaccurate for these departments.
Second, the departments complied with many, but not all, state procurement requirements we reviewed. For a sample of 14 contracts, the departments obtained the requisite number of supplier responses, encouraging competition among suppliers. The departments also complied with requirements related to maximum dollar amounts and allowable types of IT personal services, except in one instance. However, the departments did not provide suppliers with selection criteria for five California Multiple Award Schedules contracts. This lack of selection criteria may inhibit suppliers' ability to produce offers that best meet the departments' needs.
Our audit also revealed that the departments did not consistently obtain required approvals and conflict-of-interest information. Specifically, the departments did not always obtain approvals from their respective agency secretary and director (or the next immediate ranking official) for procurements valued over $250,000. The departments also did not obtain the requisite annual financial interest statements from half the sampled employees responsible for evaluating the bids and offers for the 14 contracts that we reviewed, as required by state law. Thus, the departments have neglected controls designed to provide high-level purchasing oversight and to deter and expose unacceptable conflicts of interest. Finally, although it stated that its IT consultants performed activities to transfer knowledge to state employees when applicable, Health Care Services had difficulty demonstrating that it had met the knowledge-transfer provisions in its IT contracts.
To create more substantive results from the reviews conducted by the board under California Government Code, Section 19130(b), the Legislature should do the following:
To provide clarity to departments about the results of its decisions under California Government Code, Section 19130(b), the board should explicitly state at the end of its decisions if and when agencies must terminate disapproved contracts. Additionally, the board should obtain documentation from the state agencies demonstrating the terminations of disapproved contracts.
To ensure that Finance and relevant legislative budget subcommittees are able to assess its need for additional IT positions, Health Care Services should prepare budget change proposals that provide more accurate depictions of the department's existing conditions.
To comply with requirements in the State Administrative Manual, Health Care Services should refrain from funding permanent full-time employees with the State's funding mechanism for temporary-help positions.
To readily identify active IT and other contracts, Public Health should continue its efforts to develop and implement a new contract database. Additionally, Health Care Services should either revise its existing database or develop and implement a new contract database.
To ensure that reporting into General Services' contracts database is accurate and complete, both departments should establish a review-and-approval process for entering their contract information into the database.
To promote fairness and to obtain the best value for the State, the two departments should demonstrate their compliance with General Services' policies and procedures. Specifically, in their requests for offer, they should provide potential suppliers with the criteria and points that they will use to evaluate their offers.
To ensure that each contract receives the levels of approval required in state rules and in their policies and procedures, the departments should obtain approval by their agency secretary and directors on contracts over specified dollar thresholds.
To make certain that they fairly evaluate bids, offers, and supplier responses, the departments should amend their procedures to include provisions to obtain and retain annual financial interest statements from their bid and offer evaluators. Further, the departments should also ensure that they obtain annual financial interest statements from all designated employees.
To verify that its consultants comply with the knowledge-transfer provisions of its IT contracts, and to promote the development of its own IT staff, Health Care Services should require its contract managers to document the completion of knowledge-transfer activities specified in its IT contracts.
In its response, Health Care Services generally agreed with the recommendations and provided additional perspective and information related to our findings. Additionally, Public Health concurred with all of our recommendations. Finally, the board's executive officer stated that its legal counsel concluded that it is unable to implement our recommendations without a statutory amendment.
1 On July 1, 2007, Health Services became Health Care Services, and Public Health was established. All contracts disapproved by the board were originally executed by Health Services. However, the management of these contracts was performed by either Health Services, Health Care Services, or Public Health.