State Stung By Private Contracts Lack Of Consistent Oversight Leaves Taxpayers With Bill For Waste, Fraud

The billions of dollars in tax money that state government farms out to businesses and private groups through contracts is so inconsistently monitored that no one knows how much is squandered.

Several recent cases wasted millions of dollars and exposed enough flaws in the system to make officials suspect the loss to taxpayers may be substantial.

Last year the state paid out $6.3 billion in service contracts, but no one even knows how many contracts were awarded. No single person or office within state government tracks them. Instead, contracts are handled separately by each agency or institution, some of which do a better job than others.

“The system is pervasively dysfunctional,” Deputy State Auditor Linda Long said.

In a time of budget shortfalls and calls to streamline bureaucracies after Initiative 695’s $750 million-a-year tax cut, state leaders are looking for ways to funnel even more work to the private sector - what one scholar called “the shadow of government.”

Auditors have limited authority and resources to ensure money is spent when and where it should be. What waste financial investigators do uncover is often the result of whistleblowers, and often only surfaces after the situation has gone miserably awry.

Consider:

In 1995, auditors learned that Touchstones, a now-defunct Seattle nonprofit organization, had billed the state for hundreds of thousands of dollars in services it had already been paid by someone else to perform. State record-keeping was so poor there was no way to know precisely how much taxpayers lost.

In 1996, even after learning stainless steel sprinkler systems on Puget Sound ferries caused potentially dangerous leaks, the state hired a contractor, paid it $750,000 and required installation of new sprinklers on ferries - made from stainless steel. The systems leaked, and quickly were replaced with a corrosion-resistant metal. Cost: Another $700,000.

In 1997, the Department of Social and Health Services’ Mental Health Division paid nearly $600,000 to five contractors to do training and consulting for community mental health groups - without soliciting competitive bids as required by law.

In 1999, the University of Washington blew $250,000 when an asbestos-removal contractor overcharged the school, manipulated work orders and violated state contracting rules, according to audits. Authorities claimed a coordinator who was monitoring the project instead had been scanning 16,500 Web pages from his campus computer, few of which were work-related, some of which were pornographic.

Honesty, good work assumed

While there’s little doubt that contracting government responsibilities to the private sector can save money, costs can soar when contracts go bad.

Washington State University’s feud with a contractor over design of a campuswide information system caused costly construction delays. WSU eventually forgave much of the loss rather than risk an expensive court fight.

The problem, auditors and lawmakers contend, is that state government hasn’t made contract oversight a priority.

It’s an issue across the country.

In a 1997 report, the federal General Accounting Office wrote that monitoring contractor performance is consistently the “weakest link” in privatization. Following some high-profile scandals, Colorado, Maryland and Michigan are trying to boost training for state employees overseeing contracts. Massachusetts only now is setting up uniform financial reporting.

This year, Washington state lawmakers hope to improve the way the state manages some of these business arrangements. They’re pushing bills to boost coordination among agencies, require more training for people who oversee contracts, and perform random audits of specialized contracts. One bill requires groups that win contracts to detail how much tax money goes to administrative costs such as salaries and per diem expenses. These bills have all passed the House and now await action in the Senate.

“If we do all these things, I’m convinced we will save millions,” said Rep. Mary Lou Dickerson, D-Seattle, a sponsor of one of the bills. “Millions.”

But lawmakers and financial experts admit even wholesale changes can’t catch all the gaffes.

Washington, like most states, farms out work to the private sector hundreds of thousands of times a year for everything from construction projects to accounting work to teaching work skills to low-income job seekers. The money spent on social services contracting alone rose 144 percent in 10 years - three times the growth rate of the state’s operating budget.

Contracts are administered under varying sets of rules and laws. Some must be put out for bid. Others value quality over price. Some allow for payment only after service is delivered. Others allow ongoing payments for work in progress.

State officials still assume the vast majority of contractors and state administrators are honest and doing good work, and that their arrangements are effective.

But a yearlong state study of social service contracting recently found payments aren’t consistently tracked, which in some cases left the state open to double- or triple-billing. Some contracts are written so loosely it’s impossible to measure whether work is done successfully. A few are written by people unaware of essential details.

Despite the thick batch of laws governing how contracts are to be awarded, some agencies dole out so many they’re often rubber-stamped without anyone checking whether laws were followed - or whether the task should have cost less.

“The total costs associated with the state’s current contracting practices - including legal costs, overpayments and duplication of effort - is not tracked or available,” Long told a legislative committee last month.

Even after a year of study, members of a special task force couldn’t say how many social services contracts were wasteful or fraudulent.

“Do we have problems in 2 percent or 20 percent? We just don’t know,” said Susan Johnsen, with the state’s Office of Financial Management.

Divided loyalties

Experts argue some degree of risk is inherent to contracting.

In a new book, “The True Size of Government,” Brookings Institute Scholar Paul C. Light refers to the people working indirectly for taxpayers through contracts and grants as the “shadow of government.”

By 1996, the year President Clinton declared the era of big government was over, the federal work force had dropped to 1.9 million employees - 400,000 fewer than at the height of the Vietnam War. That same year, as many as 12.7 million people were paid with federal tax dollars through contracts and grants.

Light contends that along with its benefits, contracting can divide loyalties between governments and the companies providing services - a point echoed by others.

“When a contractor is losing money, there comes a point when he starts focusing his energy and time on building a legal case against you rather than finishing the work,” said Rob Hoon, a WSU attorney.

Other times, even employees on the side of government - trying to keep a project in crisis moving forward - may overlook things rather than risk alienating a contractor and worsening the crisis.

“At the very best, the shadow weakens the accountability chain between government and producer,” Light wrote. “At the worst, it diffuses accountability beyond repair.”

In the UW case, auditors contend a coordinator who was to protect the university instead covered for the contractor when it made mistakes.

But even boosting contract oversight risks defeating government’s purpose of streamlining operations. Some of DSHS’s 60,000 social service contracts are for such small amounts, $5,000 or less, that auditing isn’t cost-effective.

“One of the dimensions is that if you are going to save a lot of money, then you spend very little on oversight and depend on the quality of the contractor,” said Nick Lovrich, a WSU public administration professor.

And it’s not that Washington isn’t doing many things right.

At the Department of Labor and Industries, one of the largest state agencies, all contracts are centralized on a database, including some 42,000 with medical providers offering services to injured workers. It provides a payment register, like a checkbook, and each morning the computer updates which contracts are in need of action.

Eight years ago, Dusty Rhodes, an agency contract manager, helped set up an association of state contract administrators, many of whom meet regularly to talk about improving what they do.

“You’ve not seen Labor and Industries’ name come up in dirty little stories over the years about contracts that went belly up,” Rhodes said. “The best way to deal with big messes is don’t make them in the first place.”