NEW MEXICO STATE AUDITOR

Statewide Contracting ReportSpecial Audit of State Agency Procurement

TIMOTHY KELLERState Auditor

OFFICE OF THE STATE AUDITORCombating Financial Fraud, Waste and Abuse

GOVERNMENT ACCOUNTABILITY OFFICE (GAO)Aggregating data in thousands of audits to make it more accessible to the public and useful for policymakers

Statewide office created by the New Mexico Constitution (Article V, Section 1).

“Historically and fundamentally, the Office of State Auditor was created and exists for the basic purpose of having a completely independent representative of the people, accountable to no one else, with the power, duty and authority to examine and pass upon the activities of state officers and agencies who, by law, receive and expend public moneys.” Thompson v. Legislative Audit Commission (1968)

CONSTITUTIONAL AUTHORITY OF OFFICE

STATEWIDE CONTRACTING REPORTGAO report on all audited agencies’ self-reported data contracts entered into during Fiscal Years 2015 and 2016 over $60,000, regardless of how they were procured

SPECIAL AUDIT OF STATE AGENCY PROCUREMENTSpecial audit examining an overview of Procurement Code uses and testing specific sample transactions for compliance

RISK ADVISORYAlerting agencies to need for Chief Procurement Officers

PROCUREMENT PROJECTS 2017

WHY PROCUREMENT? THE $6 BILLION QUESTION

WHERE CAN WE HAVE THE MOST IMPACT?

GAO REPORTLooks at large contractsState and local agencies

How are agencies picking vendors?In-state/out-of-state

SPECIAL AUDITLooks at spendingState agencies only

How are agencies picking vendors?Compliance issues

High Impact AreasProcurement Practices: Emergency and Sole Source

Industries: Corrections, IT, EducationRecommendations: Bridging the Gaps

“TRICKLE OUT” SPENDINGOut of State Government Contracting

OUT OF STATE SPENDING

+ Payments for government purchases+ Purchases by government vendors+ Taxes from government vendors+ Purchases by vendor employees+ Taxes from vendor employees

NEW MEXICO ECONOMY

WHY WORK WITH LOCAL BUSINESSES?

IN-STATE CONTRACTING: ALL INDUSTRIES

IN-STATE CONTRACTING excluding construction, a/e, insurance

STATEWIDE CONTRACTS (Top 10 industries excluding construction and insurance & benefits)

$221 M Out-of- State%

87%Corrections

83%IT

78%Food Services

64%Financial Services

58%Health & Medical

55%Educational

35%Equipment

31%Utilities

13%Arch. & Eng.

10%Building Maint.

$34 M

$253 M $51 M

$100 M $28 M

$63 M $36 M

$127 M $93 M

$92 M $77 M

$53 M $99 M

$30 M $68 M

$37 M $243 M

$10 M $91 M

KEY INDUSTRIES: FOOD SERVICES

• 10th largest sector; $128 million in contracts FY15-16

• Primarily competitively procured – issues have to do with scale and supply chain

• If NM keeps 100% of government spending on bakery items and coffee:

Out-of-State & National

$100,417,231, 78%

In-State $28,198,362, 22%

FOOD CONTRACT TYPES WITH IN-STATE VENDORSAll Other,

$978,127, 6% Produce, $541,999, 4%

Catering, $550,564, 4%

Baked Goods, $637,641, 4%

NM Specialty Foods,

$834,072, 5%

Fast Food, $859,008, 6%

Intergovernmental Agreement,

$2,222,316, 14%Culinary Equipment, $3,960,345,

25%

Dairy, $4,971,828, 32%

SETTING A REALISTIC GOAL AND STICKING TO IT

What if we decided as a State that we want to keep 100% of government spending on bakery items and coffee service with New Mexico vendors?

+ $1.25 million in contracts annually+ 92 jobs+ $5 million in economic impactMinimal investment by private sectors or agencies

KEY INDUSTRIES: IT

• 3rd largest sector; $304 million in contracts FY15-16

• 94% of emergency procurements with out-of-state vendors

• Pulls from nearly all agency types

• Additional layer of approvals for state agencies through DoIT

Out-of-State & National

$188,298,437, 83%

In-State $51,466,706, 17%

CAPTURING OUT OF STATE IT DOLLARSSHORT TERM: Contracts for IT goods and services which could be provided by local vendors, but are leaving the state

LONG TERM: Contracts for IT goods and services which currently cannot be provided by local vendors and are leaving the state

IT Good and Service TypeContracts Awarded Out of State, Fiscal Years 2015-16

Specialized Software - Human Resources $13,378,103Hardware $11,790,758IT Services $8,929,898Software Maintenance $6,750,791Standard Office Software $5,385,397Specialized Software – Education $4,463,026Servers and Cloud Services $3,644,128Web Design and Services $1,712,405

IT Good and Service TypeContracts Awarded Out of State, Fiscal Years 2015-16

Enterprise Resource Management $14,424,775Medical Software $10,478,211Specialized Software – Clients/Programs $4,403,113Specialized Software - Government $3,904,289Specialized Software - Accounting $3,041,472Specialized Software - Elections $1,175,053Specialized Software - Utilities $1,043,020

CAPTURING DOLLARS, CREATING JOBSJobs Created By Capturing More IT Contract Dollars in

New MexicoFiscal Year 2015

Assumption of Labor Costs in

Contracts

Amount that stays in NM for every $1 currently going out of state

$0.20 $0.40 $0.60 $0.80 $1.00

30% 77 154 231 308 385

40% 103 205 308 411 514

50% 128 257 385 514 642

60% 154 308 462 616 770

70% 180 360 539 719 899

80% 205 411 616 822 1027

90% 231 462 693 924 1156

The total $ going out of state in FY15 is about 84% of the overall $ amount used to contract for IT goods and services. The OSA finds that about 40% of that is contracts for goods and services that NM vendors could provide, so if we could capture 40 cents of every dollar leaving the state in FY15, we could feasibly create as many as 360 jobs. In FY16, about 78% of contracting for IT goods and services was done out of state, 20% of which could be done with NM vendors. So assuming labor is 70% of a contract, if we could capture about 20 cents of every dollar leaving NM in FY16, we could create as many as 241 jobs.

Jobs Created By Capturing More IT Contract Dollars in New Mexico

Fiscal Year 2016

Assumption of Labor Costs in

Contracts

Amount that stays in NM for every $1 currently going out of state

$0.20 $0.40 $0.60 $0.80 $1.00

30% 103 207 310 413 517

40% 138 276 413 551 689

50% 172 345 517 689 861

60% 207 413 620 827 1034

70% 241 482 724 965 1206

80% 276 551 827 1103 1378

90% 310 620 930 1240 1551

SOLE SOURCE PROCUREMENT

• Should only be used when:1. There is only one source for the good or service2. The good or service is unique and this uniqueness is

substantially related to the intended purpose of the contract; and 3. Other similar services, construction or items of

tangible personal property cannot meet the intended purpose of the contract.

SOLE SOURCE PROCUREMENT

• Statewide: $212,551,203 in contracts FY15-16• 66% to out-of-state and national vendors• Over $10 million in sole source contracts went to out-of-state firms in:

• IT ($79.4 million)• Corrections ($16.5 million)• Educational ($11.2 million)• Health and Medical ($10.5 million)

• Risk Factors: using in circumstances where there are competitors, inconsistent oversight

EMERGENCY PROCUREMENT

• Should only be used when:1. There is a threat to public health, safety or welfare

(earthquake, fire)2. Normal methods of procurement take too long

• Governor’s executive order says emergencies do not exist simply from a need to procure the services “now” or from time pressure to implement a new contract

EMERGENCY PROCUREMENT

• Statewide: $66,097,086 in contracts FY15-16• 90% to out-of-state and national vendors• Over $1 million in emergency contracts went to out-of-state firms in:

• Corrections ($49.7 million)• Insurance & Benefits ($7.5 million)• IT ($1.2 million)

• Risk Factors: using in circumstances where there are competitors, inconsistent oversight

KEY INDUSTRIES: EDUCATION

• 7th largest sector; $169 million in contracts FY15-16

• Blackboard, Inc. contract with PED, 3rd

largest sole source ($2.3 million)

• Pulls from state agencies, schools, RECs

• Infrastructure - Cooperative Educational Services, RECs

Out-of-State & National

$92,403,221, 55%

In-State $76,979,047,

45%

KEY INDUSTRIES: EDUCATIONAgency Total

ContractsLocation of Vendors

Cooperative Educational Services $58,446,167 In-State 5%Out-of-State/National 95%

Gadsden Independent Schools $14,873,758 In-State 88%Out-of-State/National 12%

Department of Health $ 13,079,002 In-State 96%Out-of-State/National 4%

Children, Youth & Families Department

$6,992,380 In-State 100%Out-of-State/National 0%

Public Education Department $ 6,170,921 In-State 3%

Out-of-State/National 97%

KEY INDUSTRIES: SMALLER SECTORS WITH BIG POTENTIAL

We have an existing base of vendors in certain sectors where a lot of contracts re going out-of-state and to large national firms:

Program Management and Assessment98% = $41 million

Office Supplies and Operations67% = $11 million

Professional Development82% = $1.7 million

Speech/Language/Physical/ Occupational Therapy Services100% = $485 thousand

RECOMMENDATIONS: SET & WORK TOWARDS GOALS FOR IMPROVING IN-STATE PURCHASING

Track ItImprovements to SHARE and other systems could make tracking easier

Set a GoalPer sector, per year, incremental, realistic

Increase accessibility to local vendorsAdvertising, networking

Even the Playing FieldFair scoring that accounts for local strengths

RECOMMENDATIONS: BETTER SYSTEMSGIVE BETTER RESULTS

Better DataAll agencies tracking their own in-state $More controls to reduce data errors in SHARE

Scrutiny of Exceptions Sole source and emergency justifications should be few and far between

ConsolidationConsolidating the State Purchasing Division and the DFA’s Contracts Review Bureau

Campaign Contribution DisclosuresBetter forms with enough info to allow verification

RECOMMENDATIONS: IT’S TIME TO REVISIT THE PROCUREMENTCODE

Revisit Exceptions & ExemptionsDoes it still make sense for certain agencies and transactions to be exempt from Code or oversight?

StreamliningWhere can we reduce time without compromising competitiveness?

Sole Source PostingRequire more centralization on State Purchasing site

SPD approval of ExceptionsCould result in more uniform application of exemptions and exceptions

RECOMMENDATIONS:GIVE PROCUREMENT PROFESSIONALS THE TOOLS THEY NEED

Advance PlanningGive

Support CPOs“Tone at the top” needs to align with the rules

TrainingConsolidating the State Purchasing Division and the DFA’s Contracts Review Bureau

CPO Risk AdvisoryA CPO should not be the top of the chain of command

THE BAD: OVERUSED EXCEPTIONS ARE ALSO THE LEASE FAVORABLE TO NM VENDORS

Sole source and emergency procurements are largely out-of-state

The length and complexity of the procurement process makes using these exceptions more tempting Data collection shows that few

agencies are actually tracking how much of their spending stays in New Mexico.

THE GOOD: WE ARE GETTING BETTER AT PROCUREMENT IN MANY WAYS

Construction and insurance & benefit sectors are large and mostly in-state, resulting in 68% overall in-state contracting rate

Sole source justifications have decreased dramatically

CPO Program

Strong commitment of oversight agencies

IN SUMMARY

THE UGLY: WE ARE NOT PAYING ENOUGH ATTENTION TO LOCAL SOURCING