Modesto says it will fix culture that led to $16M in overspending

Interim City Manager Joe Lopez said Modesto will fix the culture that led to problems in its purchasing practices, in which the city spent $16 million more than what the City Council had authorized.

Lopez made his remarks at Tuesday’s council meeting. In a prepared statement, he wrote the problems were not just the result of errors made by lower-level staff. “(E)very manager, now and before, has or had an implicit role in allowing this to occur,” he wrote. “Going forward, I am imploring managers to manage, supervise and promote a culture in the organization to prevent these types of actions in all areas of the organization.”

Modesto’s review of its 1,045 current contracts and agreements turned up 45 instances in which the city spent more than authorized.

City officials say the review, which continues, has not turned up fraud so far, and the city received the goods and services it paid for. While the spending exceeded what the council authorized, officials say Modesto did not overspend its budget. That’s because the budget is created in part on what departments spend, which included the unauthorized spending.

Since September, the council had corrected eight agreements by retroactively approving the unauthorized spending, and in some cases, extending agreements for essential services until new agreements awarded through a competitive process are in place. The council corrected the remaining 37 agreements Tuesday.

Tuesday also was another long and sometimes difficult meeting for the council, which at times struggled to reach decisions. The meeting lasted about 6 1/2 hours.

A city report for the meeting identified $13.1 million in unauthorized spending. But that was for 36 of the agreements, and did not include the eight the council already had corrected and an additional contract the council took up separately Tuesday. The overspending for these agreements was more than $3 million, bringing the total for the 45 agreements to more than $16 million.

About half of the unauthorized spending was with Office Depot, which the city has used since 1993.

The meeting was in a way a referendum on Lopez. He came to Modesto in January 2012 as human resources director. He has been a deputy city manager since February 2015 and his duties include overseeing the Finance Department, which includes purchasing. He has been acting and now interim city manager since April.

Councilman Bill Zoslocki asked Bob Deis — the retired Stockton city manager and consultant Modesto hired to help with its purchasing review — whether Lopez should have known about this problem. (Modesto started reviewing its agreements because it was a recommendation of Mayor Ted Brandvold’s budget review committee.)

Deis said others did not find the problem, including a consultant brought in to look at purchasing, the CPA firms that audit the city’s financial records, and Moss Adams — the firm the city hired as its auditor — which conducted a risk assessment of the city and did not find anything amiss in purchasing. “A lot of people had a chance to look at it with more experience than (Lopez) has and did not see it,” Deis said.

The Moss Adams agreement is among those in which spending exceeded what was authorized. The city report says Modesto spent nearly $270,000 more than what the council had approved.

But Councilwoman Kristi Ah You suggested Lopez was responsible. During a discussion of hiring a CPA firm to audit the purchasing division’s internal controls, she said the council — not Lopez — should make the hiring decision.

“A lot of these instances (of overspending) happened when you were in charge,” she said. “Now you are selecting a forensic auditor. I think it would be nice if we referred this to (the council’s) Finance Committee.”

When asked, Deis said most of the agreements are from the last couple of years. But because of the time and effort it takes, the city only reviewed its active agreements. The contracts are for a range of goods and services, from asphalt repairs and the mailing of utility bills to the storage of city documents and parts for the water division.

City officials say purchasing division employees extended contract terms and increased amounts without approval. They also say the city did not have adequate oversight, training and checks and balances in place. Modesto has started addressing those shortcomings.

But in his review, Deis wrote city departments did not believe it was their job to keep track of their agreements or to question the purchasing division. He wrote that a key characteristic of a “healthy culture is the shared responsibility of good business practices.”

This story was originally published January 24, 2018 at 4:26 PM with the headline "Modesto says it will fix culture that led to $16M in overspending."