Modesto spent more than agreements allowed 45 times

Modesto’s initial review of its purchasing and contracting practices has turned up 45 instances in which the city bought more goods and services than what had been authorized by the City Council or in the actual agreements.

In some cases, the city spent hundreds of thousands or even millions of dollars more than what was authorized. (And in one instance, the city paid The Modesto Bee nearly $114,000 over a little more than a year for advertising after its contract expired with the newspaper in July 2016. The council recently approved a new contract with the newspaper.)

Interim City Manager Joe Lopez said the initial review has found no evidence of fraud and that the city received the goods and services it paid for and at the agreed upon prices.

But this breakdown in purchasing and contracting practices has been an embarrassment for Modesto, with members of the public criticizing city officials and council members at council meetings.

“Fiscal responsibility is an absolute requirement for any City to earn and maintain the public trust,” Lopez said in an email. “As a Modesto resident and interim City Manager, I share (the public’s) concern and frustration with what we have discovered over the last several months.”

City officials released the results of the initial review at a Finance Committee meeting this month. Officials also talked about some of the reasons for the breakdown. According to the city, they include:

• A lack of clarity regarding administering contracts and purchasing procedures and inadequate policies, oversight and training
• A lack of communication between purchasing and city departments regarding managing contracts, such as letting departments know when contracts are expiring or spending limits are being reached
• A loss of key employees while the workload remained the same
• Employees extending contracts and agreements and increasing the amounts that could be spent without council approval (The city has said some of this was done by two former purchasing employees; Lopez declined to say whether current employees also have done this.)

This last reason points to another problem: The city’s inability in some cases to accurately forecast how many goods and services it will need as it creates contracts. And city officials have not explained why employees did not seek council or other approval to increase or amend contracts instead of changing them on their own.

Lopez said the city is taking steps to fix the breakdown.

“We have put stronger internal controls and higher levels of accountability in place throughout the organization to prevent this from occurring again,” he said in his email. “While unpleasant, the discovery of these errors gives us an opportunity for the City to reaffirm its goal to deliver great services to Modesto residents while ensuring we conform to the highest procurement accountability standards for a public agency.”

And he said the review is heading into its second phase — the use of outside experts to take a deeper look at the problem.

He said those experts include former Stockton City Manager Bob Deis — who is now with the law firm of Renne Sloan Holtzman Sakai — and Armistead Research and Investigative Services to conduct a personnel investigation. Lopez said Modesto also will hire a forensic auditor.

Lopez said Deis’ services will cost no more than $25,000. The cost for Armistead was not available. The city also recently hired the CPA firm of Hudson Henderson & Co. at a cost not to exceed $4,890 to help with the review, though Lopez said the firm may do additional work at more cost.

“I feel like we owe it to the community that we fully understand what happened,” Lopez said in an interview. “For that (to happen), we need additional resources.”

He could not estimate when the review will be completed but said the results will be made public.

Modesto started reviewing its 1,045 active contracts, agreements and what are called blanket purchase orders — which are used for the frequent purchases of inexpensive items, such as tools — several months ago and recently completed the work.

The 45 instances of overspending were found among the purchase orders, professional services contracts and what are called annual contracts.

Lopez declined to provide the list of the 45 purchase orders and contracts. He said the city still is reviewing the list and the amounts, and he said this information will be released at the council’s Jan. 23 meeting.

But Modesto already has gone public with eight of the 45 instances of overspending. They have been brought to the council since September to be fixed because they involve essential services. The council has retroactively approved the overspending and extended expired agreements until new, competitively bid agreements are in place.

The first instance in September involved Modesto paying $9.3 million to companies for asphalt repairs even though previous councils approved spending $3.7 million in 2012 and then an additional $3.1 million in 2014 for a total of $6.8 million in spending.

One of the last instances this month involved Modesto’s contract with Aramark Uniform Services for uniforms and laundry services. A previous council in August 2012 approved a five-year contract for $500,000 with Aramark.

But a city report states the purchasing division increased the contract without authorization to $800,000 about three years later because the $500,000 already had been spent. And in August the contract was increased to $850,000.

There was an added wrinkle during the council discussion of the Aramark contract.

Randy Hoover, a senior account executive with one of Aramark’s competitors, told council members there were pricing irregularities in what Aramark is charging the city, including charging different prices for the same services. Hoover said he based his conclusions after reviewing Aramark invoices.

“I estimate you are overspending about $1,000 a week,” he told council members.

The council directed Lopez to look into Hoover’s claims promptly. Lopez said in an interview the city and Aramark are doing that, and staff will report back to the council at its next meeting on Jan. 16.

This story was originally published December 24, 2017 at 1:07 PM with the headline "Modesto spent more than agreements allowed 45 times."