090608 seiu outsourcing_whitepaper

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A California Boom Line ReportResearch from SEIU Local 1000

The Hidden Branch

of GovernmentPulling back the curtain on State of California contract spending and performance.May 2009


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Contents

State spending on contracts exceeds $34 billion 2

Potential or annual cost savings o $350 million 3

New evidence on the huge potential or savings in IT 4

$205 million can be saved on medical registries 5

Tracking the perormance o large contract projects 6

Transparency compared to contract waste 8

Five recommendations that could save hundreds o millions each year 9

Documentation 11

Appendices 13


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A Caliornia Bottom Line Report

Research rom SEIU Local 1000 1

The fourth branch of government:hidden from legislative oversight and public review

Each year the State o Caliornia spends billions o dollars on thousands o service con-

tracts, yet the states tools or tracking contract spending and perormance are inadequate

and outdated. The value o the 13,600 personal services and consultant contracts cur-

rently in eect is $34.7 billion. Disclosure about the states contract spending, however,

is so awed that neither the legislature nor the public has any way o really understand-

ing how much money state agencies are spending on contracts in any given fscal year.

Considering the immense amount o Caliornias scarce public unds tied up in costs in

outsourced contracts, combined with the conused and ragmented system or reporting

on those contracts and their perormance, we must conclude that state government in e-ect has another branch, one that is hidden rom legislative oversight or public review.

Comprehensive information on private contracts is not available

In this paper, we propose two important reorms in how the State o Caliornia tracks

and monitors its contracting out. The frst reorm we address ocuses on the State

Contract Procurement Registration System (SCPRS) operated by the Department o

General Services (DGS) to track contract spending. The transparency requirements o

Assembly Bill 756 a detailed annual public report o contract spending by department

rest on a reormed or replaced SCPRS as a prerequisite.

No system exists to track performance on large projects

A second critical reorm is to establish a tracking and monitoring system that enables

public scrutiny o the perormance o large projects. By holding all involved in large

projects accountable to the public, private contractors are likely to improve their record

o contract compliance. Both reorms will contribute to a ull revelation o the waste in-

herent in much o state contracting out and in many cases the savings to be obtained

through bringing the work back to state employees.

These reorms, including the passage o AB 756, will pull back the curtain on this hid-den branch o government so public policy-makers can make rational decisions on behal

o the public.


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Research rom SEIU Local 10002

State spending on contracts exceeds $34 billion

A frst step toward eliminating waste in con-

tracting is an accurate tracking o spending bystate agency or each contract and fscal year.

Yet the states contract tracking system proves

completely unreliable at this level o detail.

State agencies register their contract expendi-

tures through the State Contract Procurement

Registration System (SCPRS) operated by the

Department o General Services (DGS). With

all its shortcomings, discussed later in the pa-

per, SCPRS data only provides a general idea

o the magnitude o spending on contracts.

More than 13,000 contracts

The value o 13,600 personal services and

consultant contracts currently in eect is

$34.7 billion, a fgure that includes spending

or the current, prior and uture fscal years

covered by ongoing contracts1:

748 Architectural and Engineering

contracts: ..............................$2.4 Billion

2,345 IT contracts: ................$4.1 Billion

10,507 Non-IT contracts: .....$28.2 Billion

See Appendix A or a agency and depart-

mental breakdowns o these three types o

contracts.

Navigating a broken system

Because these fgures are not presented byfscal year, obtaining an annual fgure would

require additional calcuations. (See Appendix

B or a detailed example.) For example to esti-

mate annual fgures would require smoothing

each o the thirteen thousand contracts cost

evenly over the days covered by the contract,

calculating a per diem cost. It would also re-

quire fnding the existence o contract amend-

ments or extensions; unortunately, these are

not cross-reerenced.

In order to estimate spending fgures or this

paper, many days and weeks o work were re-

quired by SEIU 1000 research analysts. When

inormation is public but this difcult to nav-

igate, eective oversight is impossible and the

legislature cannot do its job o managing the

public purse. (See Appendix B or a detailed

example.)

No comprehensive studies have been done on the use of contracting.Although many believe that contracting can save the state money becausewe can get rid of contractors quickly if funds run low or state employees

dont have the skills, there are no studies to back up these claims.Marie Harder

Senior Inormation Systems AnalystDepartment o Public Health


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Potential for annual cost savings of $350 million

Once the state has an accurate accounting

o the complete costs o contract spending ineach fscal year, the ull extent o outsourcing

waste can be identifed and measured. By

reducing its use o personal services and con-

sulting contracts, the state can save hundreds

o millions o dollars each year.

State workers can cut costs

Local 1000 estimates that the state could

save approximately $350 million annuallyby utilizing state workers to cut unnecessary

and wasteul outsourcing in just these three

areas alone:

$100 million or more annually in IT

contracts

$144-$205 million or more annually in

medical registry contracts

$50 million or more annually in

architectural and engineering contracts

Our best estimate indicates the state per-

sists in renewing contracts that cost rom 22

percent to 200 percent more than the cost to

perorm the same service using state workers.

In-sourcing reduces contract costs

Last year, SEIU Local 1000 estimated thatthe state could save $100 million each year

by in-sourcing a raction o the work currently

being perormed by IT contractors.2 Our fnd-

ings were consistent with research by the

Caliornia Research Bureau, CalSTRS and the

State Compensation Insurance Fund. These

agencies estimated that the state could realize

cost savings o between 32 percent and 84

percent by selectively eliminating IT contracts

and bringing the work in-house.3 Even the

new State CIO Teresa Takai has stated that

selective in-sourcing reduces public costs or

IT services. In-sourcing was an integral part o

the reorms she pushed through in Michigan,

saving that state nearly $100 million.4

In 2009 we have ound additional evidence

o extravagance in this area.


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New evidence on the huge potential for savings in IT

SEIU Local 1000 has ound a DGS Master

Service Agreement that authorizes the state topay contractors two to three times the amount

it would cost to hire proessionally trained

IT civil servants. Under this MSA (cover-

ing contracts 5-06070-24 through 5-06070-

141) the state currently spends $74.1 million

on 97 IT vendors providing services to 46

departments.5

Contractors excessive rates

Comparing median posted bill rates speci-

fed in the MSA or IT contract employees

to the cost o providing the services with in-

house sta underscores the potential to save

taxpayers money by selectively eliminating IT

contracts and transitioning the work to state

service. The chart below compares the me-

dian, or typical, posted contractor hourly costs

or three roughly equivalent IT positions in

state service. This data shows vendor rates tobe around two to three times the rate or the

equivalent states IT workorce. (See Appendix

C or more detail.)

$4 billion on IT contracts

I the state in-sourced all the work associat-

ed with the 97 contracts currently authorized

under just this one MSA, taxpayers could

realize savings o $37 to $49 million.

6

Giventhat there are thousands o additional IT con-

tracts with a total value o at least $4 billion,

we are confdent that the potential to realize

considerable savings is huge, ar exceeding

the estimates that we reported last year. (See

Appendix B or more detail.)

Source: IT MSA, IT Consulting Services (5-06-70-24 through 5-06-70-141),User Instructions for Contractor Contacts & Hourly Rates, Sec IV onHourly Rates, http://www.pd.dgs.ca.gov/masters/default.htm


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For years the Department o Corrections

and Rehabilitation increased its reliance oncostly medical registry contracts instead o

making eorts at recruiting and retaining civil

service primary care workers by paying com-

petitive salaries. The state currently holds

more than $723 million in such contracts.

Pro-rating contract costs to annual expendi-

tures on these costly contracts puts typical

annual costs at approximately $363 million

each year.7 Former Federal Receiver Robert

Sillen, who oversaw medical services in theCaliornia Department o Corrections and

Rehabilitation, stated that the cost o medi-

cal registry contracts is extensive and has in-

creased drastically over the past ew years.8

At a bidders conerence on September 14,

2007, Mr. Sillen stated that registry bid rates

range rom 66 percent to 130 percent above

what state workers in equivalent positions are

paid.9 Using Sillens estimates, Caliornia could

save between $144 million and $205 mil-

lion each year by in-sourcing this work.10 (See

Appendix D or more detail.)

Architectural and Engineering (A&E)contracts can be substantially cut

Budget documents rom Senate Budget

Subcommittee 4 reveal that the state pays

approximately $83,000 more, each year,or each Architecture & Engineering con-

tractor it hires in lieu o Department o

Transportation state sta. In 2007 the Dept.

o Transportation wanted to contract out

more than 500 sta positions, increasing tax-

payer costs by $50 million.11 The governor

called or the increased use o Public Private

Partnerships to do state work. These projectswould likely involve the use o A&E contrac-

tors on large scale inrastructure projects

even though legislative sta report that these

contractors cost ar more than hiring state

workers.

Transparency needed to evaluateextent of contract waste

As we have shown, examples rom IT, med-ical, architectural and engineering contracts

and other documents show a pattern o sig-

nifcantly greater costs to employ contractors

to perorm services that state worker can per-

orm. Fully accounting or the costs through

improved contract tracking is one tool or

eliminating waste. Another is improved trans-

parency and oversight on large state projects

that utilize contractors.

$205 million can be saved on medical registries


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Tracking the performance of large contract projects

The second area o reorm we see as cru-

cial to ull oversight o state contract spendingis transparency in monitoring contract peror-

mance. The public and the state Legislature

need to see clearly the status o large con-

tract implementation where cost overruns

can easily run into tens o millions o dollars.

Currently there is no way in which to track

overruns and delays without carrying out

public document requests. However, in most

cases the public has no way o even knowing

what documents it should be seeking. Thestatus quo simply does not provide a means to

get outsourcing costs under control.

Contract information provided by thestate CIO is outdated and inaccurate

We are disheartened that even the States

Chie Inormation Ofcer who we know to

be committed to reining in wasteul spend-

ing in IT outsourcing has allen victim to thesame difculties in monitoring contracts that

beset the system as a whole. This should act

as a strong signal o just how snarled contract

implementation inormation is.

The State CIO gives a complete list o 111

approved state inormation technology proj-

ects under construction worth $7.6 billion on

its website implying these projects are signi-

icantly underway.12 As an example, signifcantresearch eorts have disclosed no evidence

to support this label o being under construc-

tion or six Caltrans IT projects on the list

worth a total o $132.3 million.13 The CIOs

list indicates that three o these projects worth

$70.7 million entail procuring the services o

a systems integrator or a vendor.14 But a

Caltrans ofcial stated that there are no con-tracts or those projects as the projects are not

developed that ar yet.15

I major state IT projects have seen their

implementation delayed or they proved to be

too costly to implement, it serves no purpose

to advertize them as under construction in

notices to the public. However, i state or ed-

eral money already has been earmarked or

such projects, then the Legislature should beinormed o the causes or delays. These em-

barrassing lapses in the accuracy o the CIOs

public disclosure about IT contracts should

prompt the Legislature to ully support the reg-

ular reporting o project status reports needed

to rectiy the current situation.

To call the states current IT situation a

monumental disaster would be to insultthe words monumental disaster.

Despite a $40B state defcit, Caliorniais nevertheless planning nine strategicprojects scheduled to consume 58

years and $3.6B.

Information Week, January 2009


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Serious delays uncoveredin implementation of state contracts

The public posting o contract perormance

updates will allow the public to know whencontracts are running over budget or behind

schedule. (See Appendix E or more detail.)

Through our own public document requests,

we have discovered several recent examples

o such delays that the public is not yet aware

o. One large IT project underway at the

Employment Development Division, under-

taken to enhance the states ability to serve

the unemployed, is twelve to nineteen months

behind the current schedule.16 This project will

provide a new system that will allow the job-

less to submit address changes via the Internet

and will completely replace the EDD's cur-

rent UI call center platorm, greatly increasing

the EDD's ability to handle its call volumes.17

Delays on projects o this nature are espe-

cially worrisome as the state unemployment

surpasses 11 percent. We do not know how

those delays aect costs, but certainly the

overburdened Unemployment Insurance call

centers are experiencing large phone bills as

claims calls ood the phone lines while this

project lags.18

While systems are in place to allow depart-

ments to regularly monitor large contracts

such as this one, it is the sunshine o public

disclosure that we advocate as the necessary

incentive or vendors to meet perormance

standards. This meaningul transparency is

the best method or the public to assess the

ull cost o outsourcing.

I work at the EDD Unemployment Insurance Call Center in Los Angeles.EDD really needs to expand its capacity to handle the spike in calls comingin from the jobless. Two million Californians are jobless. Over 900,000 lost

their jobs in the last year alone. Last month there were 338,000 new claims.

Callers have been complaining for a few years about not getting through.

Now when they can get through some are saying they had been trying for

weeks and are very upset. When they call the system tells them to wait and

after a certain amount of time on hold it drops the call and they have to call

back. We have outdated technology and were understaffed. We needed the

call center upgrades to happen yesterday.Joe Chacon

Employment Program RepresentativeEmployment Development Division employee o 20 years


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Five recommendations that will save hundreds of millions

1) The state needs an improved contract

tracking systemGiven the vast sums the state spends on

inormation technology, the public and

lawmakers deserve better than SCPRS. It

should be replaced with a system that is ac-

curate, user-riendly, and discloses contract

unding by contractor and department or

each fscal year. Goods contracts should

not be lumped with services contracts. A

system or tracking progress on multi-mil-

lion dollar projects is also needed.

2) State agencies should prepare an annual

report on their use o personal services

and consulting services contracts in accor-

dance with proposed Assembly Bill 756

As outlined in this legislation, to ensure

transparency the report should list crucial

identiying inormation or each contract:

name and identifcation number o each

contractor; legal justifcation; total dollar

amount over the duration o the contract,

including all amendments; total amount

paid by the state agency during the most

recently completed fscal year.

3) State contractors should supply inorma-

tion about the numbers and types o em-

ployees they supply to the State

Contractors should be required to disclose

the costs and stafng levels or each type

o contract employee supplied to the state

or each fscal year. Stafng levels should

be reported in terms o personnel years or

ull-time equivalents. This inormation, too,

should be incorporated in annual agencyreports as required in AB 756.

4) State agencies should post updates about

major outsourcing projects to their web-

sites

The public should have easy access to in-

ormation and updates about outsourcing

projects that expend millions o taxpayer

dollars. Every state agency should post anotice on its website about progress on

major outsourcing projects and whether

they are on time and within their budgets.

Prime contractors should be clearly identi-

fed.

5) Wherever possible State workers should

be utilized to reduce contracting costs

When a ull and accurate accounting is pro-vided to Caliornias taxpayers o the mas-

sive wasteulness o much o its outsourc-

ing, we expect to see even greater cost

savings opportunities. The Union believes

the public is best served by bringing much

o the outsourced work back in-house.


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Appendices

Appendix A - State Agencies That Spend the Most or Contracts 14

Appendix B - Lost in Cyberspace: Hard to fnd S1 billion IBM contract using SCPRS 16

Appendix C - Contractor Rates 2-3 times higher than those or state workers 17

Appendix D - Medical Registry Contracts and Labor Cost Savings 19

Appendix E - UIMOD Project Schedule Slips 12 to 19 Months 20

Appendix F - Model Government Transparency Websites 21


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StateofCalifornia

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CONTRACTTERM

:July1,2006throu

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USERGUIDEISSU

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CTIVEDATE:July1

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DEPARTMENTOFG

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SCONTACT:

KAYLADANN

7073rdStreet,2

ndFloor

WestSacramento,

CA95605

Phone:916-375-44

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Fax:916-375-4663

E-mail:KAYLA.DAN

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Agency Breakdown of Expenditures for IBM CORPORATIONfor Fiscal Year 09

1 - 25 of 41

Agency Expended Encumbered

416 CENTRAL MANAGEMENT $7,757,169.43 $14,689,053.91418 CHILDREN AND FAMILY SERVICES $4,074,397.12 $2,552,092.25

494 TRANSPORTATION $2,928,456.26 $3,184,061.21

Federal Governments USASpending.gov:


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Contracts to International Business Machines Corporation(FY 2009)


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