San Diego City auditor Andy Hanau's Latest Reports Show Poor Fiscal Management and Out of Control Spending

San Diego City Auditor's Latest Reports Show Poor Fiscal Management and Out of Control Spending

This article discusses two recent audit reports by San Diego City Auditor Andy Hanau that highlight significant issues with the city's fiscal management, particularly in facility maintenance and contract approvals. Key points include:

1. The audits come at an awkward time as the city is proposing a sales tax increase to 8.75%.

2. The facility maintenance audit found that the city lacks a proper management plan for its $7.2 billion facility portfolio and is significantly underfunding maintenance.

3. The contract management audit revealed that about 11% of contract alterations ($15 million) did not receive required City Council approval over the last 7 years.

4. 19% of contract alterations ($64 million) were brought to Council for retroactive approval, reducing oversight.

5. The Ariba contract monitoring system has accuracy issues and unimplemented audit recommendations.

6. The audits make several recommendations to improve facility management and contract oversight.

7. Management agreed with all recommendations but noted that additional resources would be needed for implementation.

8. The article suggests these findings may complicate the city's push for a sales tax increase, as they reveal issues with managing existing funds and contracts.

9. The audits highlight a lack of transparency, proper planning, and adherence to approval processes in city fiscal management.

 

10. Preventive maintenance is and has been significantly underfunded resulting in defered maintenance shortening facility lifetime thus increasing Capital Investment needs.

City auditor Andy Hanau throws wrench into San Diego city council's sales tax proposal | San Diego Reader

sandiegoreader.com

Author Matt Potter

Publish Date July 31, 2024

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He shows oddities in maintenance funds and contract approvals

Have San Diego mayor Todd Gloria and the city council been getting away with fiscal murder?

Blind council 

Have San Diego mayor Todd Gloria and the city council been getting away with fiscal murder? So suggest two mid-July reports by City Auditor Andy Hanau accusing the council of being derelict in its duty to stop the mayor and a host of contractors from quietly jamming through six-figure cost increases without public attention. The news comes at an awkward time for Gloria and his fellow all-Democratic council, which is now pushing for voters to bump the city’s sales tax in November up to 8.75 percent.

But how would the loot be spent? “With or without increased funding, the City needs a facility management plan to ensure it spends its limited maintenance funds efficiently,” Hanau’s first report, entitled Performance Audit of Facility Maintenance, states. “With or without increased funding, the City needs a facility management plan to ensure it spends its limited maintenance funds efficiently.”

Exhibit 15: An Egregious Example Staff Increased a Contract Months Before Obtaining Required Council Approval to Allow Additional Spending

The second document, labeled Performance Audit of the City’s Contract Management Process, blasts the council for mismanaging public money it already lavishes on an array of costly contractors, looking the other way as major cost overruns slip by without ostensibly mandatory public scrutiny. “City Council approval provides a critical check on Mayoral power and is required to alter certain contracts as per the San Diego Municipal Code. However, due to staff confusion around Council approval requirements, about 11 percent of contract alterations we reviewed — totaling almost $15 million in changes over the last 7 years — did not receive this necessary approval.”

After-the-fact approvals are also common, the report says. “Departments brought 19 percent of contract alterations totaling nearly $64 million to Council for approval retroactively, creating risks for vendors and City services, and further reducing effective oversight.” Notes the audit: “Retroactive approval, or ‘ratification,’ is an exception that should be used as little as possible. More than one out of four contract alterations we reviewed were brought to Council for approval retroactively or with little time remaining.”

Even a costly new contract monitoring system called Ariba used by the city came under fire: “We found numerous accuracy issues with contract information in Ariba. Many past audit recommendations related to system controls and accuracy remain unimplemented, contributing to persistent issues. The absence of formal documentation and comprehensive policies in contract management has led to challenges in ensuring proper procedures are followed.”

Backers of the sales tax hike insist that it is the only way to cope with a burgeoning backlog of unfinished work. “The longer we wait to fix the building blocks of our government — our roads, our sidewalks, the libraries that need a new roof and the pools that need to be resurfaced — the more expensive these repairs become,” Marni von Wilpert, eyeing a bid for a state Senate seat, told the Union-Tribune in a July 22 write-up.

“If we don’t adequately fund this city’s infrastructure, we’ll be passing on to the next generation a deeper and deeper backlog that will be unfathomable for them to get out of.” But Hanau’s investigators discovered that von Wilpert and her colleagues are in reality blind as to what to fix first, and how much the ultimate repairs will cost. “The City does not know the condition of its facilities or their maintenance needs. The City does not have an asset management plan to maintain the condition of its $7.2 billion facility portfolio. Without an asset management plan, Facilities Services does not clearly communicate facility maintenance needs or the plan to address those needs to City Council.” In addition, “Departments have limited insight into the status of their repairs, resulting in unnecessary delays and unclear expectations.”

From Contract Management Report Appendix C - Specific Examples of Illegal Expenditures by City without Required Council Aproval

Summary of Facilities Report

Here is a summary of the key points from the performance audit report on facility maintenance for the City of San Diego:

• - The City owns over 1,600 facilities worth an estimated $7.2 billion, but does not budget enough to properly maintain them. In FY2023, the City budgeted $25.6 million for facility maintenance, far less than the recommended $143-287 million.
• - Continuously underfunding maintenance has resulted in a significant backlog, estimated to exceed $1 billion in deferred maintenance needs in FY2024.
• - Deferring maintenance leads to higher future costs and negatively impacts City services, worker morale, and public perception.
• - The City does not have updated facility condition assessments or an asset management plan for its facilities, unlike for other assets like streets.
• - Without a plan, the City cannot ensure it is spending limited funds on the most important needs. The report recommends developing a facility management plan and funding strategy.
• - Most maintenance currently goes to public-facing facilities like libraries and recreation centers, not just office buildings.
• - Departments have limited visibility into the status of their maintenance requests, leading to inefficiencies.
• - The report makes 10 recommendations, including setting funding goals, developing a long-term strategy, improving reporting and planning, and providing better status updates to departments.
• - Management agreed with all recommendations, but noted additional resources and staff would be needed to fully implement some of them.

Recommendations

The audit report makes 10 recommendations to improve the City of San Diego's facility maintenance practices. Here's a summary of the key recommendations:

1. Set a goal for the percentage of facility replacement value to be spent on maintenance, amending Council Policy 200-13 accordingly.
2. Develop a multi-year, long-term funding strategy to address both deferred and routine maintenance needs, including various funding scenarios.
3. Include estimated annual maintenance costs for facilities in the Five-Year Financial Outlook.
4. Include maintenance costs for new facilities when discussing ongoing costs in the Five-Year Financial Outlook.
5. Amend relevant Council Policies to require including anticipated ongoing maintenance costs when presenting new facility acquisitions to City Council.
6. Update the design standards manual for efficient maintenance and describe the plan to keep it updated in the facility management plan.
7. Develop a comprehensive facility management plan and present it annually to City Council or the appropriate committee, including various elements such as funding strategies, spending levels, and maintenance needs.
8. Update Council Policy 200-13 to require facility condition assessments at least every 5 years and request funding for these assessments.
9. Update standard operating procedures to require capturing all preventative maintenance plans in the Enterprise Asset Management system.
10. Provide a self-service mechanism for departments to see the status of their maintenance requests, including read-only access to the Enterprise Asset Management system for select staff.

The recommendations are prioritized, with the first two being designated as Priority 1 (highest priority). Management agreed with all recommendations, though they noted that additional resources and staff would be needed to fully implement some of them.

Management Response

Management's response to the audit recommendations was generally positive and agreeable. [Management's response seems to be "We'd like to do as you suggest, but because funds are so tight, we can't afford to plan to use what we get efficiently unless we get more money."]

 Here are the key points from their response:

1. Management agreed with all 10 recommendations.

2. They acknowledged that historically, the Facilities Services Division (FSD) has had limited resources to maintain the City's facilities due to various budgetary pressures and competing priorities.

3. Management emphasized that implementing these recommendations and increasing maintenance and service levels will require additional resources.

4. They noted that without new revenues, addressing facilities maintenance needs will be challenging unless there are service level reductions in other critical service areas.

5. For several recommendations, management indicated they would request specific additional resources, including:
   - Consultants for facility condition assessments and funding strategy advice
   - New full-time positions (e.g., Program Manager, Associate Management Analyst, Project Officers, Building Maintenance Supervisor)
   - Ongoing funding allocation for non-personnel expenses

6. Management provided specific target implementation dates for most recommendations, ranging from March 2025 to December 2026.

7. For some recommendations, they noted that implementation is contingent upon approval of requested resources and additional budget in future fiscal years.

8. They highlighted that some progress has already been made, such as creating a new Program Coordinator position to manage the Enterprise Asset Management system and implementing new preventative maintenance plans.

9. Management emphasized their commitment to working with various city departments (e.g., Department of Finance, Mayor's Office, City Council) to implement these recommendations.

Overall, while management agreed with the recommendations, their response consistently emphasized the need for additional resources and funding to fully implement the suggested improvements.

Summary of Contract Management Report

Here is a summary of the key points from the performance audit of the City of San Diego's contract management process:

Key Findings:

1. The City altered contract spending limits by at least $15 million without required City Council approval, diminishing transparency and governance.
2. Departments brought 19% of contract alterations totaling nearly $64 million to Council for approval retroactively, creating risks for vendors and City services.
3. Incomplete and inaccurate contract information and unwritten policies have led to work inefficiencies and staff errors.

Key Recommendations:

• Present any unapproved active contract alterations to City Council for retroactive approval
• Propose changes to clarify City Council approval requirements for contract alterations
• Develop procedures for ratification requests and updates to Council on contract activities  
• Establish a formalized contract alteration process
• Develop policies on contract storage/management and requiring written maximum values for all contracts
• Implement controls to integrate contract/spend information across systems

The audit found issues with contracts not receiving proper Council approval, being brought for retroactive approval, and inaccurate contract information in systems. The recommendations aim to improve policies, procedures and controls around contract management. The Purchasing & Contracting Department agreed with all 13 recommendations.

Report Exhibits

The report includes several figures and tables that illustrate key findings. Here are the main ones:

1. Exhibit 1: Shows that external contracts account for $16 out of every $100 of the City's operating budget.

2. Exhibit 2: Illustrates how staff use Ariba to manage contracts for goods and services.

3. Exhibit 3: Shows that 18 contract alterations, totaling $15 million, were not brought to Council for approval as required.

4. Exhibit 4: Demonstrates how a contract with Parkson Corporation was increased by $1.4 million without required Council approval.

5. Exhibit 5: Illustrates that staff presented over $64 million in contract alterations to Council for retroactive approval.

6. Exhibit 6: Shows a timeline of how an alteration initially approved by City Attorney's Office and P&C had to be brought for retroactive Council approval due to confusion around requirements.

7. Exhibit 7: Demonstrates that staff brought $75 million in contract alterations to Council in an untimely fashion (close to expiration).

8. Exhibit 8: Visualizes how 27 contracts were brought to Council with 90 days or less until expiration or after the contract had expired.

9. Exhibit 9: Compares the ideal contract alteration process to an actual example that diverged from procedures.

10. Exhibit 10: Shows areas where the City has room to improve in achieving contracting best practices.

11. Exhibit 11: Outlines principles and practices recommended by CAPPO to increase reliable information and transparency.

12. Exhibit 12: Illustrates how contract spend in Ariba does not always match the amount the City paid for services.

13. Exhibit 13: Shows how past OCA recommendations are connected to current audit findings.

14. Exhibit 14: Demonstrates how contract values for a specific vendor in Ariba differ from the signed contract.

15. Exhibit 15: Shows how staff increased a contract months before obtaining Council approval to allow additional spending.

These exhibits primarily illustrate issues with contract approvals, retroactive alterations, untimely presentations to Council, and discrepancies in contract information across systems.

How Could This Happen

Based on the audit report, there was no proper authority for making contract modifications without Council approval when such approval was required. The unauthorized modifications appear to have occurred due to several factors:

1. Confusion around approval requirements: The audit states that "confusion around approval requirements was the leading reason contract alterations were not presented to Council as mandated." Staff were unclear on when Council approval was necessary.
2. Unwritten policies: The report mentions that "unwritten policy permitted contract values to be increased in Ariba without formal documentation or through an established procedure." This lack of formal documentation led to inconsistent practices. [The 2015 City Attorney MOL seems to make these requirements crystal clear]
   
3. System limitations: The Ariba system, used for contract management, did not always reflect accurate contract information, making it difficult for staff to determine when Council approval was needed.
4. Lack of clear roles and responsibilities: The audit found that "contract administration roles and responsibilities are not well-defined, and the City lacks a formalized contract alteration process."
5. Misinterpretation of rules: In some cases, staff misinterpreted the rules around contract modifications, especially for contracts without specified "not-to-exceed" amounts.
6. Inadequate controls: The audit identified a lack of proper controls to prevent unauthorized modifications in the Ariba system.

It's important to note that these modifications without Council approval were not authorized and went against the San Diego Municipal Code and City Charter requirements. The audit recommends several measures to address these issues and ensure proper approvals are obtained in the future.

SAP Ariba

Ariba (also referred to as SAP Ariba) is a contract management system used by the City of San Diego. Here are the key points about Ariba from the report:

1. Implementation: The City implemented Ariba in 2017 to manage its contracts for goods and services.
2. Purpose: Ariba was implemented to address control weaknesses in contract management that were identified in previous audits conducted in 2015.
3. Functionality: The City uses Ariba to enforce and manage contract terms, including:

•    - Who can use the contract
•    - What they can buy
•    - How long the contract lasts
•    - The cost of the contract

1. Contract Information: Ariba stores information about contracts, including expiration dates and maximum values.
2. Financial Controls: Ariba is designed to restrict staff from committing additional funds when contracts reach their value or time limits, which is intended to stop further payments under that contract.
3. Integration: While Ariba integrates with SAP (the City's financial system) to some extent, the audit noted that updates made through SAP, such as invoices paid or goods receipts posted, are not shown in Ariba.
4. Limitations: The audit identified several issues with Ariba, including inaccurate or incomplete contract information, and the ability for staff to bypass some system controls by manually altering contract values in the system.

In essence, Ariba is a crucial tool in the City's contract management process, but the audit identified several areas where its use and the information it contains could be improved to enhance contract oversight and compliance.

Management Response

Management, represented by the Purchasing & Contracting Department (P&C), agreed with all 13 recommendations in the audit. Key points from their response include:

1. They acknowledged the importance of good contract management for ensuring efficient and responsible use of public funds, transparency, and accountability.
2. P&C committed to developing policies and procedures to assist City departments with contract oversight and management.
3. For each recommendation, P&C provided a specific agreement statement and a target implementation date. Most target dates ranged from December 2024 to June 2025, with one extending to December 2025.
4. For some recommendations, P&C noted that work was already underway or that the recommendation aligned with ongoing efforts. For example, they mentioned that staff is currently working on updates to the San Diego Municipal Code.
5. P&C acknowledged that some policies (like requiring written maximum values for all contracts) had been adopted verbally in 2022 but needed to be formalized in writing.
6. For more complex recommendations, P&C outlined steps they would take, such as conducting benchmarking across other agencies to review best practices on contract approval thresholds.
7. P&C expressed appreciation for the audit team's professionalism throughout the review process.

Overall, the management response was positive, with P&C agreeing to implement all recommendations and providing specific timelines for doing so.

Governing Provisions of Law

Based on the information provided in the audit report, the following sections of the San Diego City Charter and Municipal Code apply to contract modifications:

1. San Diego Municipal Code (SDMC):
   The report does not specify exact sections, but it mentions that the SDMC requires City Council to review and approve certain changes to contracts, such as larger changes in value.

2. San Diego City Charter:
   The report mentions the City Charter in relation to contract requirements, but doesn't specify particular sections.

3. Specific requirements mentioned (though not tied to particular code sections):
   - Council approval is required if the cost of the alteration increases the contract amount by more than $200,000.
   - Council approval is required if the contract exceeds five years in length.
   - Council approval is required if the cost of the alterations causes the contract to exceed the amount of the Mayor's authority to award contracts.

4. 2015 Memorandum of Law (MOL):
   While not part of the Charter or Municipal Code, this document from the City Attorney's Office provides further clarification on contract requirements. According to the MOL:
   - Contracts and contract alterations must be approved by City Council if the contract exceeds five years.
   - Goods and services contracts exceeding $3 million require Council approval if not approved and funded through the Annual Appropriation Ordinance.
   - Agency and non-profit service contracts exceeding $1 million require Council approval.
   - Contract alterations exceeding $200,000 require Council approval.

The audit report notes that there is some confusion around these requirements and recommends clarifying the Municipal Code sections relating to contract alterations. It also mentions that the City Attorney's Office stated that the relevant SDMC section has several unclear terms that make its application to goods and services contracts difficult.