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Sunday, April 5, 2009


Comptroller probe finds 1-in-5 contracts balloon past costs, including one that jumped by 6,700 percent

New York City Comptroller William C. Thompson, Jr. speaks to reporters on April 1, 2009 about his investigation exposing how the Department of Education has routinely let hundreds of contract costs balloon well past their expected costs. Standing with Thompson is Deputy Comptroller John Graham.

View letter
View Attachment 1
View Attachment 2
View testimony
View video

New York City Comptroller William C. Thompson, Jr. today charged that the Department of Education has routinely let hundreds of contract costs balloon well past their expected costs – including one that jumped by 6,700 percent.

“It’s simply a case of runaway contracts,” Thompson said. “It’s reprehensible that the Department of Education plays by its own rules and goes on some insane spending spree. And who pays? Taxpayers, parents, children, all of us.”

Thompson aimed his harsh criticism in a harshly worded letter to Schools Chancellor Joel Klein for not containing the swollen contract costs. Thompson then submitted testimony spelling out his fiery findings to the New York City Council Committees on Education and Contracts.

“The Department of Education continues to maintain a long-held and ill-considered opinion that its contracts and other purchases do not require the same stringent safeguards as those of other local and state agencies,” Thompson said. “As a result, taxpayer money continues to be squandered through an opaque process that does not take advantage of the competitive marketplace. This is unacceptable.”

What did Thompson find?

* One out of every five – or 20 percent – of the Department’s contracts that ended in the last two fiscal years inevitably cost well over the estimated amount by 25 percent or more.

* That rate already continues to climb. So far, in the current fiscal year, 27% of the Department’s requirement contracts have swollen costs topping 125% - and there’s still three months left until the fiscal year ends.

* One contract, with the Xerox Corporation, was supposed to cost at most $1 million – but the Department spent close to $68 million – a 6,759 percent jump in costs. Another, with Ideal Restaurant Supply, jumped from $15,000 to more than $852,000 – a 5,530 percent jump.

* During those two fiscal years combined, the Department issued 372 requirement contracts, originally estimated to cost $325,236,416 but which inevitably exceeded those estimates by 25% or more. The final tab wound up at more than $1 billion.

* Additionally, many recipients of the contracts - 127 of them – got the lucrative work without any competition because the Department didn’t put the work out to bid. Those 127 contracts were supposed to cost $195 million at most. But the Department spent $525 million on them.

“The Department’s purchases exceed contract amounts by such a large margin that it raises fundamental questions about the integrity of the Department’s entire contracting process,” Thompson said. “These actions display a clear pattern of mismanagement when it comes to expenditures, and the Chancellor and the Mayor must fix this situation and rein in these costs.”

The Comptroller over the last seven years has repeatedly exposed fiscal incompetence and a lack of accountability and transparency in budgeting and contracting at the Department of Education. Key among his concerns has been a disturbing pattern of so-called no-bid contracts, which are executed without competition.

“The Department must create and follow an open and formal procurement practice and demonstrate that it will spend the public’s money in an accountable manner,” Thompson said. “I call on the Department to take immediate action to ensure that the scarce public dollars entrusted to it are used prudently. Doing so will benefit not just our schoolchildren and our school system, but our city as well.”


April 2, 2009 --
Department of Education contracts for goods and services have exceeded their cost estimates by nearly $700 million over the past two years, City Comptroller Bill Thompson charged yesterday.

These included a single $1 million contract with Xerox to lease copiers that ended up costing the DOE nearly $68 million.

Similarly, a contract for cafeteria equipment ballooned from roughly $15,000 to $850,000, and a software deal jumped from $135,000 to $5.5 million by the time it was done, the mayoral candidate said.

"It's reprehensible that the Department of Education plays by its own rules and goes on some insane spending spree," said Thompson, one of many officials at a City Council hearing who ripped what he called the department's lack of transparency.

Thompson attributed the "runaway" costs to the fact that one of every five department contracts that concluded in fiscal years 2007 and 2008 overran its original estimate by at least 25 percent.

He said that so far this fiscal year that figure had inched upward to 27 percent, taking money away vital education services.

"DOE's failure to accurately determine its expenditures prevents it from negotiating the best prices for goods and services, and is contrary to sound business practices," he wrote in a letter to Schools Chancellor Joel Klein.

Education officials disputed the figures that Thompson provided for several of the contracts.

They said the Xerox contract was originally registered for $20 million in 2002 and that it was later extended twice -- for a total of $31 million.

Even when initial estimates were off, education officials insisted, the expenses were all within the DOE's budget.

"What [the overrun] shows is that there are a lot of contracts that people thought were providing good services and they used more of it," said DOE Chief Operating Office Photeine Anagnostopoulos.

City Council members also admonished education officials for their over-reliance on no-bid contracts, for not using more local minority- or women-owned businesses as vendors, and for not making all contract meetings public.

Thompson's testimony

April 5, 2009
Hon. William C. Thompson, Jr.
Comptroller of the City of New York
1 Centre Street
New York, NY 10007

Dear Comptroller Thompson:

I am writing in response to your April 1 letter regarding the Department of Education’s use of requirements contracts. Unfortunately, your office’s analysis is marred by distortions and misrepresentations. Based on the numbers in your materials, your office failed to conduct a careful reading of the contracts and to verify basic contract information—even citing as a “particularly stunning example” of DOE “mismanagement” a contract that was entered into while you were President of the Board of Education.

I direct you to the following examples of incorrect or misleading allegations in the contracts highlighted in your letter:

§ Xerox Corporation:

The figure you give for the contract’s original amount, $1 million, is incorrect. The Xerox contract was actually registered for $31 million. We originally registered the contract for $20 million in 2002, and later extended it twice, once by $10 million and a second time by $1 million. It appears that you cite the amount of this last extension as if it were the entire registration amount. The accurate estimate is still less than the amount actually expended, but as we explain below this fact in itself is neither problematic nor atypical in a requirements contract.

For the record, a review of the original Xerox contract documents shows that the original estimate was reached through a standard process. Procurement for the Xerox and T&G Industries contracts began before the start of mayoral control (the contracts went into effect on August 1, 2002). The Board of Education provided vendors bidding on this RFP (including T&G Industries) with a comprehensive inventory of the Department’s copy machines; the number and types of machines guided the unit pricing proposed by the vendors, ultimately resulting in a contract estimate.

§ T&G Industries:

The figure you give for the contract’s original amount, $1 million, was actually registered for $31 million. Like the Xerox contract, it was originally registered at $20 million and twice extended, once by $10 million and again by $1 million. It appears that, as with the Xerox contract, you cited the amount of the last extension as if it were the entire registration amount.

§ Hewlett-Packard:

The Hewlett-Packard contract is a state contract that provides Microsoft software licenses for schools and central offices. The state, not the DOE, selected the vendor and set the rates. In other words, the DOE estimate could not have had an effect on pricing. With regard to the estimate, it should be noted that we had little basis for estimating vendor expenditures when the contract began in 2005—this was the first time we procured software licenses centrally; previously, schools paid for them on their own. A replacement contract is with your office now and has a two-year estimate of $12 million, which is in line with the roughly $6 million annual expenditures against the former contract listed in your chart.

§ Meizner:

This contract with a software reseller was first competitively bid in June 1999—when you were President of the Board of Education and prior to this administration. With renewals, the contact lasted for 10 years. At the time the contract was initially estimated, it was the agency’s practice to provide estimates based on annual spending rather than on the full term of the contract. The $135,000 estimate that appears in your table represents the expected spend for one year; the actual estimate for the entire contract is 10 times that amount, or $1.35 million. It is also worth noting that when the Department negotiated the last renewal—for three years starting in 2007—we reached terms that ensured us a minimum 20% discount off publisher’s list prices.

§ Creative Media:

This contract was bid originally in 2002. At that time, as noted above, the agency’s practice was to provide estimates for annual rather than for the full-term contract amounts. The annual estimate was $589,000, which is the number that appears in your chart. We registered each renewal (provided for in the base contract) for additional amounts that your office appears to have missed. The sum of the subsequent renewals, i.e., the contract’s actual “original amount,” is about $3 million.

Your letter also raises questions about 127 “entities” that obtained contracts with the Department with “little or no competition” on which we spent $525 million. We examined the list you compiled and found that 85 percent of the expenditures listed went to state-approved providers of services to pre-school children with disabilities. As with contracts for Supplementary Education Services, which also appear on your list and about which you have criticized us in the past, we are required by law to contract with any state-approved provider. Because the state alone has the authority to review and approve programs and sites and to set rates, the Board of Education while you were Board President sensibly determined that the city did not need to perform its customary procurement process before contracting with any state-approved provider. We arrive at these contracts after the State Education Department sets tuition rates and vendors estimate costs for their services based on the size of the student register they are contracting to provide services for. This population has been growing, so it is not uncommon that registers have gone up during the five-year duration of these contracts.

In general, your analysis mischaracterizes the Department’s requirements contracting process. Requirements contracts are structured on a per unit price basis, meaning that schools and departments only pay for the units they purchase at the unit price fixed in the contract. In some of the examples your office listed, schools decided they wanted to purchase more services and goods than we originally estimated. These expenditures are not examples of cost overruns and do not add costs to taxpayers; they simply reflect increased demand, which the schools pay for out of their budgets.

You make two further charges that I wish to respond to. First, you contend that the DOE fails to negotiate the best prices in cases where expenditures exceed estimates. In fact, we analyze and estimate the potential volume that could be associated with each contract and provide our best estimate to potential vendors. The estimates sometimes fall below actual expenditures, especially in times of dramatic budget changes; since 2002, the Department’s budget has increased by $8 billion. In the early years of such growth, it may be difficult to estimate the volume of potential purchases. There could be a few contracts—among the thousands the Department signs each year—where our best estimates proved to be low relative to the price we could have negotiated on a volume discount. But we are not aware of any suboptimal pricing, and you have not presented evidence to suggest otherwise. Additionally, given the size of our district and the competitive nature of our bidding process, we believe we already receive vendors’ lowest possible prices even on the contracts where a volume discount could have applied.

Finally, your suggestion that low estimates on contracts provide “an inaccurate picture” of our expenditures appears to misapprehend the way our budget works. The DOE does not use contract estimates, which are set in varying years, as indicators of planned expenditures. School budgets and the overall DOE budget are the comprehensive financial documents that provide a “picture” of planned expenditures for a given year. These budgets change each year depending on the amount of funding the Department receives from the city, state, and federal governments. No district, including New York City, continuously revises contract estimates based on year-to-year budget fluctuations. As budgets shift, schools and Department offices adjust spending against requirements contracts accordingly. To determine how much money the Department plans to spend on pre-kindergarten services for the current year, one should consult this year’s budget rather than the estimate made when the contract was signed, which could have been several years earlier.

These mischaracterizations and distortions add little to public understanding of DOE procurement issues. Our offices have worked closely together in the past. I hope that practice continues into the future, and that you will contact us to verify contract and purchasing information to ensure the public is properly informed.


Joel I. Klein

Who did the math? Joel Klein and William Thompson can't figure out budget spat
Saturday, November 8th 2008,

It just doesn't add up.

City Controller William Thompson got into a war of addition with Schools Chancellor Joel Klein this week, accusing him of inflating figures on education budget savings.

But Klein's rebuttal letter - which charged the controller's findings are "riddled with errors" - contained a major miscalculation.


"If someone uses 100,000 gallons of gas at a price of $3.50 and then cuts back to 900,000 gallons, that is a real savings even if the cost of gas goes up to $4," Klein wrote, figuring the price rises to $360,000, not $400,000.

The only problem is, by Klein's numbers, the price would actually go up to $3.6million.

"Perhaps we should rush a calculator over to the chancellor's office," quipped controller spokesman Jeff Simmons.


Klein's office blamed the mistake on poor proofreading, admitting the figure should have been 90,000 gallons of gas instead of 900,000.

The two offices have had a longstanding feud over reported education savings. Thompson has called for the agency to open all its books.

His latest charge is the Education Department still can't demonstrate how it saved $250 million in bureaucratic bloat five years ago.

At best, the agency saved $140 million, Thompson says. The Independent Budget Office pegged the savings at $221 million.

Klein's office also claimed it trimmed $290 million off the administration last year, but the controller's review of those numbers finds only $160 million worth of savings.

"We are very concerned about this," said Deputy Chancellor Kathleen Grimm. "We are anxious to meet with his staff to rectify this."

The chancellor, who received the letter Thursday and faxed an immediate reply, said Thompson misunderstood the numbers and doesn't account for inflation. Thompson isn't buying it.

"Exaggerated claims undermine the department's credibility and the withdrawal of critical information - such as the cessation of school-based expenditure reports - limits transparency and accountability," Thompson said.

Of course we all remember the no-bid contracts' scandal:

The "No Bid" Mess Once Again Raises It's Ugly Head


City Controller William Thompson steamed at overtime costs