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California
Children
and Families
Commission:
Its Poor Contracting Practices Resulted in
Questionable and Inappropriate Payments
to Contractors and Violations of State Law
and Policies
October 2006
2006-114
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C S A
ALIFORNIA TATE UDITOR
ELAINEM.HOWLE STEVENM.HENDRICKSON
STATEAUDITOR CHIEFDEPUTYSTATEAUDITOR
October 31, 2006 2006-114
The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814
Dear Governor and Legislative Leaders:
As requested by the Joint Legislative Audit Committee, the Bureau of State Audits presents its audit report
concerning the California Children and Families Commission’s (state commission) spending practices and
contracting procedures. Our review found that the state commission allowed one of its media contractors to
circumvent the payment provisions of a contract by paying invoices totaling $673,000 between February 2002
and December 2003 for fees and expenses of some of the contractor’s employees that were prohibited under the
contract, effectively preventing that money from furthering the allowable contract activities.
This report also concludes that the state commission did not fully use the tools available to it to ensure its
contractors provided appropriate services. Further, it could not always demonstrate it had reviewed and approved
final written subcontracts and subcontractors’ conflict-of-interest certificates. Additionally, the state commission
did not always follow state policy when it used a competitive process to award three contracts valued at more
than $47.7 million and failed to provide sufficient justification for awarding one $3 million contract and six
amendments totaling $27.6 million using the noncompetitive process. Moreover, it did not always ensure that its
interagency agreements met the state requirement for using subcontractors, and it failed to follow state policy
concerning these agreements that limits administrative overhead when it agreed to pay $1.2 million more than it
should have. The state commission also intentionally used some memorandums of understanding with counties
to avoid having to comply with state contracting requirements.
Finally, we found the state commission had clear authority to conduct its advertising campaigns relating to
preschool, these advertisements and their timing were consistent with legal restrictions on the use of public funds,
and did not contribute any of its public funds to campaign accounts used to support the various ballot measures.
However, the state commission could not demonstrate that payments it made for a period of almost four months in
2004 to three individuals who worked for both a media contractor and campaign committees were appropriate.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
BUREAU OF STATE AUDITS
555 Capitol Mall, Suite 300, Sacramento, California 95814 Telephone: (916) 445-0255 Fax: (916) 327-0019 www.bsa.ca.gov
ConTenTS
Summary 1
Introduction 7
Chapter 1
Poor Management of Contracts Resulted in Questionable
and Inappropriate Payments to Contractors 17
Recommendations 33
Chapter 2
The State Commission’s Inconsistent Contracting Practices
Led to Violations of State Law and Policies 35
Recommendations 57
Chapter 3
Although the State Commission’s Payments Were Generally
Consistent With the Restrictions On the Use of Public Funds,
Certain Payments During 2004 are Questionable 59
Response to the Audit
California Children and Families Commission 69
California State Auditor’s Comments on the Response
From the California Children and Families Commission 81
SuMMArY
ReSulTS in bRief
The California Children and Families Commission (state
commission) contracts with media and public relations
Audit Highlights . . .
companies to conduct mass media campaigns related
Our review of the California to various issues involving early childhood development and
Children and Families school readiness. We found a number of problems with the way
Commission’s spending
it awards and manages these contracts. For example, the state
practices and contracting
procedures revealed that it: commission allowed one of its media contractors to circumvent
the payment provisions of a contract by paying invoices
Allowed one of its media
totaling $673,000 between February 2002 and December 2003
contractors to circumvent
for fees and expenses of some of the contractor’s employees.
the payment provisions
of a contract by paying These payments violated the terms of the contract, which
invoices totaling $673,000 stated that payment was to be based solely on commissions
for fees and expenses of
applied to the cost of advertising placed by the contractor and
some of the contractor’s
employees that were prohibited the charging of other services or fees. As a result, the
prohibited under the terms state commission paid for services it had not contracted for,
of the contract.
effectively preventing that money from being used to further
Did not fully use the tools the other activities allowed by the contract, namely purchasing
available to it to ensure printed ad space or broadcast media time.
its contractors provided
appropriate services.
Additionally, the state commission did not fully use the tools
Could not always available to it to ensure that its contractors provided appropriate
demonstrate it had services. For example, it did not always include some important
reviewed and approved
elements in its contracts, such as a clear description of work
final written subcontracts
to be performed and detailed cost proposals. Further, it did
and subcontractors’
conflict-of-interest not always ensure that its contractors submitted adequate
certificates. work plans, that it received all required work plans, and that
Did not always follow it promptly approved them. As a result, the state commission
state policy when it cannot ensure that the resulting contracts clearly established
used a competitive process what was expected from the contractor, that the contracts
to award three of the
provided the best value, and that its contractors provided the
contracts valued at
agreed-upon services within established timelines and budgets.
more than $47.7 million
and failed to provide
sufficient justification Moreover, the state commission could not always demonstrate
for awarding one
that it had reviewed and approved final written subcontracts
$3 million contract and
six amendments totaling and subcontractors’ conflict-of-interest certificates. When
$27.6 million using the the state commission fails to review these documents before
noncompetitive process.
authorizing contractors to use a subcontractor, it cannot ensure
continued on next page . . . that it protects the State’s interests or identifies potential
conflicts of interest. Also, although the state commission’s
contracts typically include provisions requiring its contractors to
California State Auditor Report 2006-114 1
Did not always ensure document the expenses claimed, it did not always enforce these
that its interagency provisions and sometimes accepted inadequate documentation.
agreements met the state
This failure to properly develop and manage its contracts caused
requirement for using
the state commission to make some questionable payments
subcontractors.
to contractors for items such as laptop computers valued at
Agreed to pay $1.2 million
$10,000, food catering costs, and monthly parking fees.
more than it should
have for administrative
overhead because it did In addition, the state commission did not always follow state
not follow state policy policies during its process of competitively awarding three of
that limits such payments.
the nine contracts we reviewed. For example, it failed to provide
Intentionally used adequate justification that contract costs totaling more than
some memorandums $47.7 million were reasonable when it competitively awarded
of understanding with
three contracts that received fewer than three bids. Also, it did
counties to avoid having
not consistently document its scoring of proposals received
to comply with state
contracting requirements. from potential contractors and was unable to demonstrate that
it had advertised one contract, totaling $90 million, in the state
Had clear authority to
contracts register as required.
conduct its advertising
campaigns relating
to preschool, these When we looked at the state commission’s use of
advertisements and their noncompetitive contracts, we noted that it failed to follow
timing were consistent state policies that require sufficient justification for awarding
with legal restrictions on
such contracts. For example, in its justifications the state
the use of public funds
commission cited insufficient staff resources or time limitations
and did not contribute
as its reasons for awarding one contract and six amendments
any of its public funds to
campaign accounts used using the noncompetitive process. We do not believe that these
to support the various circumstances are compelling reasons for avoiding a competitive
ballot measures. bidding process.
Its payments to three
Further, the state commission did not always ensure that
individuals who worked for
the media contractor were its interagency agreements met the requirements for using
generally consistent with subcontractors, and the agreements regularly included budgets
the restrictions related to that allowed the payment of administrative overhead fees at
the use of public funds for
amounts higher than state policy allows. Its failure to follow
political purposes. However,
state policy in these instances resulted in the state commission
for a period of almost four
agreeing to pay $1.2 million more for these agreements than it
months in 2004, the state
commission could not should have. In addition, the state commission intentionally
demonstrate that these used some memorandums of understanding with counties to
payments were appropriate. avoid having to comply with state contracting requirements.
When the state commission does not fully comply with established
laws and policies designed to promote competition, fairness, and
value, it cannot ensure that the State is receiving the best value for
its money or that the State’s interests are being protected.
2 California State Auditor Report 2006-114
Between 2000 and 2006 the state commission used four
media and public relations contractors to conduct mass media
campaigns related to various issues, including promoting the
value of preschool. During this time, the Office of the Attorney
General received three ballot proposals that either related to
preschool or that, if enacted, would have affected the work
of the state commission. Two of these proposals ultimately
qualified for the ballot. Because of the timing of the state
commission’s publicly funded media campaigns and the ballot
proposals, concerns arose as to whether the state commission
inappropriately spent public funds on campaign activities or
on political advocacy. Our review determined that the state
commission had clear legal authority to conduct its public
advertising campaigns related to preschool. We also found
that the content of these advertisements and their timing were
consistent with applicable legal restrictions related to the use
of public funds for political purposes and confirmed that the
state commission did not contribute any of its public funds to
campaign accounts used to support the various ballot measures.
Finally, although three individuals who worked for a media
contractor also worked for the campaign committees supporting
certain ballot measures, we were generally able to determine
that the state commission’s payments to these individuals were
consistent with the restrictions on the use of public funds for
political purposes. However, for an almost four-month period
in 2004, we cannot determine whether public funds were spent
appropriately to pay for the services of these three individuals
because the state commission did not have adequate records.
So that we might learn what services these three individuals
were paid to perform during this time, we contacted each
of these individuals as well as the former chair of the state
commission. We were able to talk with two of the three
individuals and with the former chair of the state commission.
All of the individuals we talked to indicated that they did not
perform any campaign activities during this period.
ReCommendATionS
To ensure that it acts in the State’s best interest by properly
managing contracts and approving payments only for appropriate
expenses, the state commission should take the following steps:
• Ensure that both it and its contractors comply with all
contract terms.
California State Auditor Report 2006-114
• Fully develop its contracts by including important elements
such as a clear description of the work to be performed and a
reasonably detailed cost proposal.
• Consistently enforce contract provisions requiring contractors
to submit supporting documentation for all claimed expenses
and ensure that it adequately reviews all documentation
before approving expenses for payment.
• Establish a process to ensure that it obtains and reviews final
written subcontracts and conflict-of-interest certificates before
it authorizes the use of subcontractors.
• Consistently enforce contract provisions requiring contractors
to submit complete and detailed work plans for the state
commission’s review, and ensure that it receives all required
work plans and promptly approves them.
To ensure that it protects the State’s interests and receives the
best products and services at the most competitive prices,
the state commission should do the following:
• Follow the State’s competitive bid process for all contracts
it awards, unless it can provide reasonable and complete
justification for not doing so. Further, it should plan its
contracting activities to allow adequate time to use the
competitive bid process.
• Fully justify the reasonableness of its contract costs when it
receives fewer than three bids or when it chooses to follow a
noncompetitive bid process.
• Advertise all nonexempted contracts in the state contracts
register.
To ensure that it promotes fair and open competition when
it awards contracts using a competitive bid process, the state
commission should ensure that it fully documents its process for
scoring proposals, and that it retains the documentation.
To ensure that it follows state policies that protect the State’s
interest when using interagency agreements and contracts with
government agencies, the state commission should fully justify
the use of subcontractors when required and, if it is unable to do
so, deny the use of subcontractors.
4 California State Auditor Report 2006-114
AgenCy CommenTS
The state commission believes that the majority of our
recommendations regarding Chapters 1 and 2 result from the state
commission’s lack of updated training programs and procedures for
contracting. Further, the state commission states that it is deeply
committed to making itself a model for state contracting practices,
and has already begun to implement new policies and practices
and improve staff training. n
California State Auditor Report 2006-114
Blank page inserted for reproduction purposes only.
6 California State Auditor Report 2006-114
InTroduCTIon
bACkgRound
In November 1998 voters passed Proposition 10, the
California Children and Families Act of 1998 (Children
and Families Act) to create an integrated, comprehensive,
and collaborative system of information and services to
enhance optimal early childhood development and to ensure
that children are ready to start school.1 The Act established
the California Children and Families Program (Children and
Families Program) to promote, support, and improve the early
development of children, prenatal to age five. The Children
and Families Program aims to fulfill this mission by developing
standards, resources, and programs that emphasize community
awareness, education, nurturing, child and heath care, social
services, and research. To fund the Children and Families
Program, the Act added a tax of 50 cents per pack on cigarettes
and an equivalent tax on other tobacco products. It also
created the California Children and Families Commission (state
commission), also known as First 5 California,
and allowed each county to create its own
The Children and families Act requires commission (county commission) to administer
the state commission to spend its
its programs. Counties may also create joint
20 percent share of the Proposition 10 tax
revenues as follows: county commissions.
• 6 percent for mass media communication to the
general public.
The STATe CommiSSion’S Role
• 5 percent to ensure that children are ready to enter
school and for programs relating to education. Under the Children and Families Act, the state
• 3 percent to ensure that children are ready to enter commission serves as lead agency, receiving
school and for programs relating to child care.
20 percent of the Proposition 10 tax revenues
• 3 percent to ensure that children are ready to to provide technical assistance to the county
enter school and for research and development of
commissions, conduct research and evaluations,
best practices and standards for early childhood
development programs and services. manage public media campaigns, develop
• 1 percent for administrative costs. infrastructure, and administer statewide
initiatives. The county commissions receive
• 2 percent for any activity other than
administrative costs. 80 percent of the Proposition 10 tax revenues to
administer their programs. The state commission
Source: California Health and Safety Code,
must spend its 20 percent share in accordance
Section 130105(d).
with requirements imposed by the Act (see the
text box). In defining these responsibilities,
1 Since its passage, the Children and Families Act has been amended. Thus, when we
refer to the Act throughout this report, we are referring to the amended version.
California State Auditor Report 2006-114
the Act requires the state commission to adopt guidelines
for an integrated and comprehensive statewide program that
promotes, supports, and improves early childhood development.
It also requires the state commission to define the results to be
achieved by these adopted guidelines and to collect and analyze
data measuring progress toward attaining those results.
The state commission comprises seven voting members: Three
commissioners, including the chair, are appointed by the
governor; two are appointed by the speaker of the Assembly;
and two are appointed by the Senate Rules Committee. The
secretary of Education and the secretary of Health and Human
Services Agency or their designees serve as ex officio, nonvoting
members. This audit focuses entirely on the state commission’s
spending practices and contracting procedures related to the
20 percent of Proposition 10 tax revenues that are directly under
its administrative control.
The STATe CommiSSion’S goAlS And ReSouRCe
AlloCATion
According to its 2003–2006 strategic plan, the state commission
fulfills its responsibilities under Proposition 10 by focusing on
advancing its vision of school readiness through efforts that
promote the following goals:
• early childhood learning and education: Increase the
quality and access to early learning and education for children
age five and under.
• early childhood health: Promote the prevention of,
identification of, and intervention in health and developmental
issues.
• Parent and community education: Promote the importance
of quality early care and education for young children by
providing information and tools to parents, caregivers,
schools, and communities.
• Tobacco cessation: Contribute to the decrease in the use of
tobacco products and other harmful substances by pregnant
women, parents, and caregivers of young children.
• organizational effectiveness: Ensure that programs and
resources are used and managed in the most effective manner
and in accordance with state laws and regulations.
California State Auditor Report 2006-114
The state commission conducts an annual planning process that
consists of receiving input regarding its initiatives and future
plans from individual commissioners, state commission staff,
stakeholders, and county commissions. During this process,
commissioners individually have the opportunity to focus
the state commission’s efforts on areas they are particularly
interested in developing. For example, one commissioner’s focus
is on ensuring that projects address children with disabilities or
special needs, while another commissioner’s primary focus is on
providing universal preschool.
The result of this planning process is an update to the state
commission’s strategic plan, with approval by the commissioners.
The update presents the goals and objectives of the state
commission and forecasts the financial resources that will be
available for those purposes. The most recent strategic plan covers
the period 2003–2006. The state commission completed the annual
planning sessions to update its plan in 2004, 2005, and 2006.
Although Proposition 10 requires the state commission to
allocate its resources for specific purposes, the state commission
determines how the allocated money will be spent within each
category. For example, for the 6 percent of its tax revenues deposited
in the mass media communications account, the state commission
decides which media campaign is consistent with the goals of the
strategic plan and Proposition 10 and funds it accordingly.
During the last four years, the state commission has made
school readiness its primary goal. To support this goal, it has
allocated resources for a number of programs, including child
care, children’s health, training of care providers, and public
awareness of school readiness issues.
The CAlifoRniA ChildRen And fAmilieS TRuST fund
The Children and Families Act created the California Children
and Families Trust Fund (trust fund) as the repository for the tax
revenues it receives. However, not all of this revenue is available
to the programs supported by the state and county commissions.
Because additional taxes may reduce tobacco consumption and
thus the tax revenue generated, the Act requires the trust fund
to reimburse other programs funded with cigarette taxes and
established by prior legislation for their projected losses.
California State Auditor Report 2006-114
According to the state commission’s 2004–05 annual report, the
State Board of Equalization developed tobacco consumption
models that compare actual tobacco consumption levels with
levels projected to have occurred without the additional tax.
Using these models, the trust fund pays the amounts generated
by taxes imposed by the Children and Families Act to the
predecessor programs. After this reimbursement, the remaining
amount is available for the state commission and the county
commissions’ early childhood development programs. We
refer to the remaining amount as Proposition 10 tax revenues.
Figure 1 illustrates the Proposition 10 tax revenues for fiscal
years 1999–2000 through 2005–06.
figuRe 1
Proposition 10 Tax Revenues
$800
State commission
700 County commissions
600
500
400
300
200
100
0
0 1 2 3 4 5 6
0 0 0 0 0 0 0
0 – – – – – –
2 0 1 2 3 4 5
– 0 0 0 0 0 0
9 0 0 0 0 0 0
9 2 2 2 2 2 2
9
1
Fiscal Year
Sources: Generated from State Controller’s Office accounting reports.
Note: Tax revenues available to state and county commmissions after preexisting
programs funded by tobacco taxes are reimbursed for their projected losses.
10 California State Auditor Report 2006-114
snoilliM
ni
sralloD
The STATe ConTRACTing PRoCeSS
The State has established processes for departments to use when
acquiring goods and services. Competition is typically at the
core of these processes, which are designed to promote fairness,
value, and the open disclosure of public purchasing. State law
and the policies of the Department of General Services (General
Services)—the State’s contracting and procurement oversight
department—generally require departments to conduct a
competitive bidding process that gives vendors an opportunity
to submit price quotes or proposals for purchases of goods and
services valued at $5,000 or more, with certain exceptions.
California public policy strongly favors competitive bidding, and
contracts established without competitive bidding are limited by
either statute or state policy.
State law allows limited exceptions to the requirement that
departments conduct competitive bidding on contracts. First,
when the contracted good or service is needed because of an
emergency—that is, when immediate acquisition is necessary
for the protection of public health, welfare, or safety—the
department can bypass competitive bidding. In addition, on
certain occasions, a department may need to contract with a
specific vendor whose goods or services are unique in some
way. This type of contract is known as a noncompetitively bid
(noncompetitive) contract. State policy describes the conditions
under which this type of procurement is appropriate, as well
as the circumstances that require the approval of General
Services. The noncompetitive process requires departments to
explain certain information, including the unique nature of the
purchase and why it is limited to a certain contractor. They must
also provide information that is in sufficient detail to justify
the reasonableness of the contract’s cost. To ensure compliance
with competitive bidding requirements, state policy authorizes a
noncompetitive contract only when the requesting department
can adequately document that the circumstances of the contract
meet one of the two previously described exceptions.
State law also requires General Services to prescribe the
conditions under which a contract may be awarded without
competition and the methods and criteria used to determine the
reasonableness of contract costs. General Services is responsible
for exercising its authority based on what it determines is in the
“best interest” of the State.
In addition to these exceptions to competitive bidding, a
department may enter into an agreement for services with
another public entity, such as a state department, university, or
local government, without following a competitive process as
long as the public entity’s employees perform the contracted
services. State law clearly prohibits departments from using
agreements with other public entities to circumvent competitive
California State Auditor Report 2006-114 11
bidding requirements, and state policy sets specific limits on the
use of subcontractors and on the overhead charges allowed for
each subcontract.
STATe lAWS RelATed To The uSe of PubliC fundS
And ReSouRCeS foR PARTiSAn PoliTiCAl PuRPoSeS
Various additional laws govern the use of public funds. Public
officials, such as commissioners or designated employees of
the state commission, are generally prohibited from using
public funds for campaign activities.2 This, however, does
not mean that public officials are completely prohibited from
using public funds for various activities related to a proposed
ballot measure. A public official may generally use such funds
to undertake a variety of activities related to a proposal that
has not yet qualified for the ballot. The official may use public
funds to undertake studies about the value of the proposal,
to draft proposed language for the ballot measure, or even to
secure a proponent to carry the proposal forward as a ballot
measure. A public official may not, however, use public funds to
gather signatures to qualify a proposal for the ballot. Even after
the proposal has qualified as a ballot measure, a public official
may use public funds to provide the public with an impartial
presentation of the facts related to the ballot measure or to
provide the public with an analysis of how the ballot measure
would affect the agency, but the public official must stop short
of using public funds to undertake activities that constitute
political advocacy—anything that urges the support or defeat of
a ballot measure.
The Children and Families Act specifically authorizes the state
commission to spend funds for communications to the general
public using television, radio, newspapers, and other mass media
on subjects related to and furthering the goals and purposes
of the Act, including methods of nurturing and parenting
that encourage proper childhood development; the informed
selection of child care; information regarding health and social
services; the prevention and cessation of tobacco, alcohol,
and drug use by pregnant women; the detrimental effects of
secondhand smoke on early childhood development; and
children’s readiness to enter school.
2 The term “public funds” is not limited to money but includes anything of value
belonging to a public agency, such as equipment; supplies; compensated staff time;
and the use of telephones, computers, or fax machines.
12 California State Auditor Report 2006-114
Finally, state law requires each government agency to adopt
a conflict-of-interest code approved by a code-reviewing
body. The state commission’s code-reviewing body is the Fair
Political Practices Commission—the oversight body responsible
for administering and implementing the Political Reform
Act of 1974 (Political Reform Act). The Political Reform Act
generally prohibits public officials at any level of state or local
government from participating in government decisions that
the public officials know or have reason to know will affect
their economic interests. In March 2000 the state commission
adopted and obtained approval of its conflict-of-interest code,
including designating positions that must file statements of
economic interests annually and upon assuming or leaving a
designated position. The statement of economic interests filed
by designated employees must be retained and available for
public inspection.
SCoPe And meThodology
The Joint Legislative Audit Committee (audit committee)
requested that the Bureau of State Audits review the state
commission’s spending practices and contracting procedures.
Specifically, the audit committee asked us to do the following:
• Review the state commission’s planning efforts and determine
how it sets goals and allocates resources.
• Review and evaluate its policies, procedures, practices, and
internal controls for awarding contracts and expending
funds received from Proposition 10 tobacco tax revenues
and determine whether they comply with applicable laws,
regulations, and best practices. This also includes a review of
specific criteria used to award contracts and spend funds for
advertising and those pertaining to competitive bidding and
conflicts of interest.
• Determine whether the state commission’s expenses and
its recipients’ use of funds are appropriate and within the
limitations established by Proposition 10.
• Determine whether advertising firms paid by the state
commission incurred costs solely for the purposes set out in
their contracts.
California State Auditor Report 2006-114 1
• Assess the appropriateness of the state commission’s
expenditures of public funds for the preschool media
campaign and for media contracts in fiscal years 1999–2000
through 2005–06 in relation to the state commission’s
objectives and applicable laws.
• Determine, if possible, whether the state commission and
the Proposition 82 campaign or the campaigns for other
ballot measures coordinated media purchases, and if the state
commission expended other public funds for inappropriate
political purposes.
We reviewed and evaluated relevant state laws, regulations, and
policies and identified those that were applicable and significant
to the audit.
To obtain an understanding of the state commission’s planning
efforts and process for setting goals and allocating resources,
we interviewed state commission staff, reviewed the state
commission’s strategic plan, and reviewed the minutes of its
annual planning sessions.
To assess the state commission’s compliance with applicable
laws, regulations, policies, and best practices for awarding
contracts, we reviewed a sample of 45 contracts.3 After selecting
the original sample of 45 contracts, we selected an additional
five memorandums of understanding to review for certain
requirements. When we discuss contracts in this report, we
are referring collectively to contracts, interagency agreements,
contracts with other governmental entities, and memorandums
of understanding, unless we specify otherwise. Our sample
represented 97.6 percent of the total dollar amount awarded
for fiscal years 1999–2000 through 2005–06. We assessed the
state commission’s compliance with state laws, regulations, and
policies for advertising, competitive bidding, and obtaining
required approvals. We also determined if the state commission
included required language in its contracts and obtained
certification forms signed by contractors acknowledging
conflict-of-interest laws. Further, we assessed the reasonableness
of its justifications for using a noncompetitive bid method
when applicable. Finally, we reviewed the state commission’s
3 We were unable to confirm that the state commission’s database from which
we selected our sample included a complete universe of contracts. We identified
11 instances in which gaps in the sequence of contract numbers assigned occurred and
staff either could not explain the reason for the gaps or suggested that the contracts
may have been canceled; however, we could not verify their explanations.
14 California State Auditor Report 2006-114
conflict-of-interest policy for its commissioners and employees
to determine if it met the requirements of state law, and we
assessed its compliance with that policy.
To determine whether the state commission’s expenditures were
within the percentages allowed by Proposition 10, we verified the
allocation of revenues to each of the six designated categories and
confirmed that its spending was within the allocations.
To evaluate whether the state commission’s expenditures were
for allowable purposes, we reviewed a sample of 47 expenditures,
which we selected in proportion to the total expenditures
charged to each of the spending categories during fiscal years
2003–04 through 2005–06. As part of our review, we selected
an additional 15 payments the state commission made between
2000 and 2005, most of which related to its public relations and
media contracts. We evaluated whether the contractors’ invoices
were detailed enough for the state commission to determine
whether activities performed complied with contract terms
and whether costs incurred were solely for purposes outlined
in their contracts. Finally, for the 62 sampled expenditures,
including 28 related to its public relations and media contracts,
we compared the descriptions of expenditures and supporting
documentation to the state commission’s objectives and assessed
the appropriateness of those expenditures.
In reviewing the state commission’s effectiveness in monitoring
the use of funds to ensure that they are used only for allowable
purposes, we interviewed state commission staff to understand
its control processes and assessed its compliance with these
processes in conjunction with the previously mentioned sample
of payments.
To determine whether the state commission coordinated with
the Proposition 82 campaign or campaigns for other measures
in making its media purchases or other expenditures of public
funds, we interviewed key management staff at the state
commission, including the former chief deputy director, and
reviewed relevant records. Also, we obtained documentation of
selected ballot measure campaign expenditures and compared
them to the timing and nature of expenditures made by the
state commission to assess whether there was a coordinated
effort. Additionally, we requested electronic e-mail files for
California State Auditor Report 2006-114 1
17 individuals.4 Finally, to gain an understanding of the
activities and services they either directed or provided, we sent
registered letters to a former chair of the state commission and
selected individuals paid through one of the state commission’s
media contracts and interviewed those who were able to talk
with us prior to the publication of this report. n
4 Because of deficiencies the state commission identified with its information technology
processes, it provided electronic records for only seven of the 17 individuals we
requested. However, because the information technology deficiencies are outside
the scope of this audit, we plan to issue a separate management letter to the state
commission to ensure that it moves forward in taking corrective action.
16 California State Auditor Report 2006-114
ChAPTer 1
Poor Management of Contracts
Resulted in Questionable and
Inappropriate Payments to
Contractors
ChAPTeR SummARy
The California Children and Families Commission (state
commission) paid invoices submitted by one of its media
contractors totaling $673,000 between February 2002 and
December 2003 for fees and expenses of some of the contractor’s
employees, thus allowing the contractor to circumvent the
payment provisions of the contract. The contract contained
a payment provision that allowed only commission payments to
be made to the contractor based on the cost of the advertising it
placed. By ignoring this provision, the state commission paid for
services it had not contracted for, effectively preventing these
funds from being used to further the other activities that were
allowable under the terms of the contract.
Additionally, the state commission did not always include
important elements when developing some of the contracts
we reviewed. Consequently, it could not ensure that the
resulting contracts clearly established what it expected from
the contractor and provided the best value. Further, the state
commission did not always ensure that its contractors submitted
work plans that included all the required elements, that it
obtained all the required work plans, and that it promptly
approved the work plans.
Further, the state commission could not always demonstrate
that it had reviewed and approved the final written subcontracts
and subcontractors’ conflict-of-interest certificates, as required
by contract language.
Moreover, although prudent business practices and some of the
state commission’s contracts include provisions that require
its contractors to include the documentation necessary to
California State Auditor Report 2006-114 1
support the expenses claimed, our review found that the state
commission did not always adhere to these practices or enforce
contract provisions. Although the state commission generally
received documentation to support expenses for our sample
of 62 payments it made to its contractors, we found both
significant and minor instances in which this was not the case.
Finally, the state commission prepares a strategic plan, which
outlines the current progress of its initiatives and its future
plans to advance its vision of school readiness. Its plans for
the next four years, as described in the last approved strategic
plan, are aligned with the goals and objectives of Proposition 10
and are updated annually.5 However, although its annual
strategic planning process occurred in 2005 and 2006, the state
commission did not present the resulting updated plans to the
commissioners for their approval, nor were draft revisions of
the plan made available to others.
The STATe CommiSSion did noT enfoRCe
ConTRACT TeRmS foR one ConTRACToR, ReSulTing
in oveRPAymenTS ToTAling moRe ThAn $6,000
The state commission, in paying invoices totaling $623,000 in
fees and expenses submitted by one of its media contractors,
Payments totaling allowed the contractor to circumvent the payment provisions of
$673,000 violated a contract. The contractor claimed the expenses by representing
the terms of the state some of its employees as subcontractors. In addition, the state
commission’s contract commission paid the media contractor an added $50,000
with one of its media fee that was unallowable per the contract. These payments
contractors. violated the terms of the contract, which allowed for payments
based only on the contractor’s own services, in the form of
commissions applied to the cost of the advertising it placed; no
other services or fees were to be charged.
The state commission entered into a contract in 2001 with
a media contractor for $90 million to oversee a statewide
advertising campaign. The terms of the contract required the
contractor to manage all of its employees, its subcontractors,
and any vendors, as well as to manage the creative development,
production, and media placement of the advertisements. The
contract further required the contractor to submit detailed
work plans with descriptions of the services and deliverables
and specified that the contractor was not authorized to
5 Proposition 10 is the California Children and Families Act of 1998, which established the
California Children and Families Program to promote, support, and improve the early
development of children, prenatal to age five.
1 California State Auditor Report 2006-114
provide services until the state commission’s contract manager
approved the work plans. More specifically, the contractor had
no authority to begin production of any media advertisement
without the state commission’s prior approval of the print copy.
The contract also contained various provisions related to what
the contractor could charge the state commission. It stated
that the contractor could charge the actual out-of-pocket
expenses for the costs of the various materials used in the
production and development of the advertisements, with no
markup. The contract did allow the contractor to charge an
11 percent markup on the cost of purchasing printed ad space
or broadcast media time, on either television or radio, but it
prohibited the billing of any services or fees. Thus, any costs
the contractor might incur by using its employees to develop,
produce, and place the advertisements were to be borne by
the contractor, and the 11 percent markup on the purchase
of ad space and media broadcast time was intended to be the
contractor’s sole means of covering such costs and generating a
profit. Finally, the contract allowed the contractor to subcontract
for certain services, but these subcontracts had to have the state
commission’s prior approval, and the contractor could charge
the state commission only for the actual cost of the subcontract.
Rather than enforce the contract’s terms, the state commission
approved and paid its media contractor more than $623,000
for the salaries, benefits, out-of-pocket expenses for other than
material costs, and administrative fees of three individuals
employed by the media contractor between February 2002 and
December 2003. The invoices the contractor submitted for these
three individuals indicated that they were subcontractors when,
in fact, they were not. Furthermore, the state commission neither
received nor approved the subcontracts for these individuals in
Correspondence we advance, as called for in the contract. In fact, correspondence we
obtained clearly indicated obtained between the contractor and the state commission clearly
the state commission indicated that the state commission was aware that these three
was aware that three individuals were employees of the media contractor rather than
individuals represented to subcontractors. The provisions of the contract did not allow the
be subcontractors were contractor to charge the state commission directly for the services
in fact employees of the of its employees. Thus, by approving these payments, the state
media contractor. commission allowed the media contractor to circumvent the
payment provisions of the contract.
Further, the contractor did not submit work plans that
detailed what these three employees would do, nor, when
asked, did the contractor provide us with detailed documents
California State Auditor Report 2006-114 1
supporting the services they provided. When we asked the
state commission’s executive director to provide us a written
description of the services they performed, she was unable to
do so. The executive director explained that, to the extent these
three individuals worked directly with the state commission,
they worked primarily with commissioners and staff who are
no longer with the state commission, making it impossible
to provide us with an accurate description of their services.
However, we found some evidence suggesting that on a few
occasions these three contractor employees performed various
activities related to the Improving Classroom Education
Act—better known as the California Teacher’s Association
(CTA) Reiner Initiative. Although these kinds of activities were
permissible using public funds, as we discuss in greater detail in
Chapter 3, these types of payments were not allowable under
the terms of the contract.
Additionally, correspondence we obtained from the state
commission between the media contractor and one of these
employees indicated that the contractor had concerns about
whether these types of charges were appropriate under the terms
of the media contract. An e-mail from the media contractor’s
senior vice president to one of these three individuals, a copy of
which was sent to the state commission’s former chief deputy
director, stated that “running your expenses through our
contract is a favor [the media contractor] is doing for [the former
chair of the state commission].” In this same e-mail the senior
vice president acknowledged that “we are accepting liability
for every one of your expenses, many of which are very clearly
outside the terms of our agreement with the State.”
In another instance of
the state commission Further, in July 2003 the state commission paid its media
making an unallowable contractor a $50,000 fee to develop a Preschool for All
payment under its media Advocacy Plan (advocacy plan). This is another instance of
contract, it paid its the state commission making a payment that was unallowable
contractor $50,000 to under the contract provisions. When we asked for a copy of
develop a Preschool for the advocacy plan, the state commission provided us a draft
All Advocacy Plan. document, explaining that, although it never received a final
version, it believed the contractor completed all tasks that were
required of it. Nonetheless, not only did the state commission
inappropriately pay the media contractor a $50,000 fee for the
services of its employees to prepare this plan, it also failed to
obtain the final product.
20 California State Auditor Report 2006-114
Because the state commission approved and paid contractor
invoices that violated contract terms, it overpaid the contractor
by more than $673,000 and failed to protect the State’s interest.
Additionally, by making these payments, the state commission
and its contractor effectively prevented that money from being
used for the legitimate activities allowed by the contract, namely
purchasing printed ad space or broadcast media time.
The STATe CommiSSion did noT fully uSe The ToolS
AvAilAble To iT To enSuRe ThAT iTS ConTRACToRS
PRomPTly PRovided APPRoPRiATe SeRviCeS
The state commission did not always include certain important
elements when developing some of the contracts we reviewed
and thus did not clearly establish what was expected from the
contractor. Additionally, although it required its public relations
and media contractors to submit work plans that contained
detailed budgets, descriptions of services or deliverables, and
established timelines to measure progress and completion of
work, it did not always ensure that the work plans submitted
included all the required elements, that it obtained all the
required work plans, or that it promptly approved the work plans.
The State Commission did not Adequately develop
Some Contracts
Our review of 45 contracts found that the state commission did
not always include the following important elements:
• A clear description of work to be performed.
• Schedules for the progress and completion of the work.
• A reasonably detailed cost proposal.
We reviewed four contracts that the state commission awarded for
The state commission media communications, two of which it awarded in 2000. These
awarded two contracts earlier contracts did not include a detailed description of the
that did not include a work to be performed, an element essential to a well-developed
detailed description of the contract. The two contracts simply directed the contractor to
work to be performed. develop an advertising campaign aimed at ensuring that children
under the age of five live in a safe, nurturing, and stimulating
environment while increasing the state commission’s credibility
among Californians. Such vague descriptions of the scope of work
contained in these contracts puts the State at risk of not receiving
the services it intended to receive.
California State Auditor Report 2006-114 21
Further, the state commission did not develop or include a
schedule for the progress or completion of the work for another
The state commission two of its contracts and for four interagency agreements. It
entered into two entered into the two contracts in May 2003 and March 2004 for
contracts valued at services totaling almost $1.7 million and $7 million, respectively,
almost $8.7 million and it entered into the four interagency agreements between
and four interagency October 2000 and October 2003 for services totaling $5 million.
agreements totaling Neither the contracts nor the interagency agreements contained
$5 million that did not schedules for the progress and completion of work. Without
contain schedules for the a progress schedule or an expected completion date, the state
progress and completion commission had insufficient means with which to monitor its
of work. contractors to ensure that they were on track and would be able
to provide the services or products when needed.
Additionally, the state commission did not ensure that four
interagency agreements (three that were discussed previously
and one other) included reasonably detailed cost proposals.
In July 2003 the state commission entered into an agreement
with another state agency to procure and administer media
and public relations services for the state commission for a
maximum amount of $1 million. However, the interagency
agreement did not contain a detailed cost proposal showing
how the $1 million would be used. The state commission also
entered into two other interagency agreements with the same
contractor—the first in October 2000 in which the contractor
agreed to design, create, assess for appropriateness with a
focus group, and produce a parent guide in both English and
Spanish, and the second in October 2003 to revise, update,
adapt, and produce a parent guide in three Asian languages.
The contractor also agreed to be responsible for the printing,
storage, and shipping of 620,000 copies of these guides for both
agreements. We expected that, for each of these two interagency
agreements, we would see a detailed budget that outlined
the amount the contractor would spend in categories such
as personnel, translation services, travel, and expert reviews.
Instead, the budgets in these two agreements simply stated the
total cost of $1.5 million for the first agreement and just over
$1 million for the second and the total number of copies, as
well as a cost per copy. According to program staff, the state
commission had internal discussions about whether to require a
detailed budget for the agreement entered into in October 2003
but decided against it because it was a product purchase similar
to purchasing a book from a publisher. Although we agree
that the state commission was purchasing a specified number
of copies of the parent guide, it also purchased development
in the form of revisions prompted in part by the focus group
22 California State Auditor Report 2006-114
assessment, updates, and adaptations to multiple languages.
Because this was more than just a product purchase, we would
have expected a detailed breakdown of the costs in both of these
agreements. Finally, the state commission entered into a fourth
interagency agreement in January 2004 for services totaling
$3 million requiring its contractor to develop, implement,
administer, and evaluate an insurance-based oral health initiative.
However, although the cost proposal included categories for
personal services and operating expenses and equipment, it did
not provide a breakdown of these categories, such as what types
of items within the operating expenses and equipment categories
the contractor was seeking reimbursement for.
In another example of an insufficiently developed contract,
the state commission entered into a contract in June 2002 that
contained a fairly detailed cost proposal to support the award of
almost $23 million, but it left out one critical element. Although
the cost proposal indicated that the contractor planned to
apply a rate to labor costs for benefits and overhead, it did not
disclose the amount of the rate to be charged. By not ensuring
that interagency agreements and contracts contain reasonably
detailed cost proposals, the state commission cannot ensure that
it is containing costs within reasonable limits.
Additionally, some of the contracts contain language that
requires documentation for all expenses claimed, while others
do not. We believe that it is reasonable to expect all contracts
For over half of the to contain this language to facilitate an adequate review of the
45 contracts we contractor’s invoices before approving payment. We would
reviewed (56 percent), also expect the contracts to describe the types of items that
the state commission constitute allowable out-of-pocket expenses, for instance, travel
did not include contract and subsistence, communication, materials, and supplies, so
provisions requiring its that both the contractor and the contract manager are clear as to
contractors to provide what is allowable under this category. For 25 of the 45 contracts
documentation to we reviewed (56 percent), the state commission did not
support the expenses include contract provisions requiring its contractors to provide
claimed. documentation sufficient to support the expenses claimed. All
but two of these contracts were interagency agreements. When
we asked why it did not always require this language, the state
commission told us that it used standard forms created by the
Department of General Services, which did not contain this
language. However, the state commission also indicated that
it plans to incorporate this provision in the standard contract
terms it writes and will provide directions to its staff on this
provision in its contracting manual, both of which are currently
under development.
California State Auditor Report 2006-114 2
In addition, although cost proposals included in five of its
most recent contracts with its media and public relations firms
contained a line item for out-of-pocket expenses, the contracts
did not define the types of expenses that would be reimbursable
under this category. This led to some questionable items being
charged. For example, several of the invoices billed under
these contracts included out-of-pocket expenses for items such
as laptop computers totaling $10,000, as well as the costs of
catering and monthly parking fees for consultants. None of these
charges were defined by the contracts as allowable expenses.
Similarly, although one of the public relations contracts
established a limit of $50,000 per year for a line item called
account administration, it did not define what could be charged
to that item. The state commission stated that it communicated
with its contractors when issues arose regarding out-of-pocket
expenses. The state commission provided one example of
such communication. However, we still believe that without
consistent, clear written definitions as to the types of charges
that are allowable, the state commission’s ability to monitor and
control contract costs is limited.
The State Commission did not Consistently Take Advantage
of the use of Work Plans
The state commission did not always ensure that its contractors
submitted work plans that included all the required elements.
Additionally, it approved some work plans late or
could not demonstrate that it had ever approved
them, and in other instances it was unable to
The state commission’s contracts with its
public relations and media firms require a provide them at all.
work plan to include the following:
According to the terms for its public relations and
• A detailed description of the services and
deliverables to be provided during completion media contracts, work plans approved by the state
of the work plan. commission’s contract managers are incorporated
• Whether any service or deliverable will be and made part of the contract. Generally, the
provided by a subcontractor.
contract requires each work plan to include
• The target audience to which the service or the information found in the text box.
deliverable is directed.
• A timeline for the completion of the service
The state commission’s contracts with its
or deliverable.
public relations and media contractors provide
• A detailed work plan budget estimate, consistent
a broad description of services in the scope
with the contractor’s cost proposal, including
any markups or commission to be charged. of work section. For example, in one contract
• An estimate of any ongoing talent costs or with a public relations contractor, the scope of
expenses necessary to maintain the deliverable work includes a statement that the contractor
and preserve its availability for use.
is responsible for overseeing a statewide public
relations campaign targeting the general public
24 California State Auditor Report 2006-114
and diverse communities, but it does not provide the details of
how this is to be accomplished. Instead, the contract requires
one or more work plans during the course of the contract that
provide the detail of the services and deliverables. Because
the scope of the work is so broad, it is vitally important that
the contractor prepare these work plans and that the state
commission review and approve them so that it can monitor the
cost, appropriateness, and timeliness of services.
We compared a sample of 28 invoices from public relations and
media contractors to the relevant work plans and evaluated
whether the work plans contained all of the required elements.
However, the state commission was unable to provide eight of
the work plans associated with these invoices. Table 1 summarizes
the missing plans or elements in the work plans related to the 28
invoices from its public relations and media contractors.
TAble 1
Public Relations and media Contractors’ Work Plans
That did not Comply With Contract Specifications
Public Relations Contract media Contract
missing Work Plan element #1 #2 # #1 #2 # #4
A detailed description of the services and deliverables 1
The target audience served 1 2
A detailed work plan budget consistent with the
contractor’s cost proposal, including any markups or
commission to be charged 1 6 2 2
A work plan 1 2 1 1 3
Sources: Contract files at the California Children and Families Commission (state commission)–A sample of 22 work plans prepared
by the state commission’s current public relations and media contractors during the period October 1999 through October 2005.
Note: Numbers represent the number of work plans for each contract with the identified deficiency. A work plan could have one
or more missing elements.
When the state commission does not ensure that contractors
submit detailed work plans that include all of the required
elements outlined in the contract, it cannot ensure that the
services and deliverables provided are consistent with its goals
and objectives.
Further, we found problems with the approvals for the work
plans associated with some of the invoices in our sample.
For example, the state commission approved and paid nine
California State Auditor Report 2006-114 2
invoices for services totaling more than $28 million under
nine different work plans that showed approvals dated after
the contractor had completed some or all of the work. In fact,
the state commission approved one work plan in October 2002
for services the contractor had provided during July 2002,
and it approved a second work plan in January 2004 for
services the contractor had provided during the quarter ending
December 2003. Additionally, although the state commission
approved and paid 10 invoices for services totaling $5 million,
it did not date the associated work plans, making it impossible
to determine whether it had approved them promptly. Three
work plans we reviewed did not contain any evidence that they
The state commission had ever been approved. In addition, as we mentioned earlier,
was unable to locate the state commission was unable to locate approved work plans
approved work plans for for eight invoices totaling more than $2.8 million. When the
eight invoices totaling state commission does not approve the required contractor
more than $2.8 million. work plans in advance or fails to obtain or approve work
plans, it limits its ability to direct and monitor its contractors’
performance and budgets to ensure that it receives the services
and deliverables expected within established budgets.
The STATe CommiSSion did noT doCumenT iTS
oveRSighT of SubConTRACToR AgReemenTS And
ConfliCT-of-inTeReST CeRTifiCATeS
The state commission could not demonstrate that it had
reviewed and approved the final written subcontracts and
subcontractors’ conflict-of-interest certificates as required.
Typically, its contracts include language stating, “The
[state commission’s] contract manager’s acceptance of the
subcontractor shall be contingent upon the review and approval
of the final written subcontract and the subcontractor’s
conflict-of-interest certificate.” The conflict-of-interest
compliance certificate is a form required of both the contractor
and subcontractor acknowledging their willingness to comply
with the State’s conflict-of-interest rules.
Our review of a sample of nine contracts and 28 invoices
associated with those contracts found that under each
contract, the contractors charged for services provided by
at least one and sometimes as many as six subcontractors.
When we requested these subcontracts and conflict-of-interest
certificates, the state commission had to forward our request
to its contractors because it did not maintain copies of these
documents in its files. Ultimately, it was able to obtain 19 of
a total of 22 requested subcontract agreements. Furthermore,
26 California State Auditor Report 2006-114
the state commission was able to obtain either the conflict-of-
We question whether interest certificate or the conflict-of-interest language embedded
the state commission within the subcontract for 14 of the 19 subcontracts it obtained.
reviewed and approved However, it was unable to locate the remaining five certificates.
final written subcontracts Because the state commission did not maintain these documents
and subcontractors’ in its files, we question whether it reviewed and approved
conflict-of-interest these documents as required before authorizing the use of
certificates. subcontractors.
Moreover, although the state commission obtained copies
of most of the subcontracts from its contractors, the three it
was unable to provide, along with their conflict-of-interest
certificates, were all associated with its current media contractor.
As we described in an earlier section, during the period between
February 2002 and early December 2003, the state commission
inappropriately paid $623,000 for the services and expenses of
three of its media contractor’s employees in violation of contract
terms. During that time, the contractor billed these employees
as subcontractors. During a later time period—May 2004
through mid-April 2005—when the media contractor no longer
employed these three individuals, it continued to bill for these
same three subcontractors, and the state commission paid the
contractor $191,000 for their services under its media contract.
Although paying these individuals as subcontractors under its
media contract was allowable in certain circumstances under
the contract’s terms, the contractor’s inability to provide the
subcontracts and conflict-of-interest certificates related to these
individuals as subcontractors raises questions as to whether the
state commission ever approved and reviewed these documents
or whether these documents even existed.
According to our review of its policies and procedures and
discussions with management, the state commission does not
have a specific procedure to ensure that contract managers
review subcontracts and conflict-of-interest certificates before
authorizing contractors to use a subcontractor. Thus, when it
does not obtain subcontracts and certificates, it cannot ensure
that it protects the State’s interests, nor can it identify potential
conflicts of interest.
Subcontractors may also be unaware of their obligation to preserve
records that could be the subject of future audits. The state
contracting manual requires contractors to include a provision
in any subcontract indicating that the State has the right to audit
records and interview staff in any subcontract related to the
performance of the agreement. Our review of 19 subcontractor
agreements found that five did not contain this language.
California State Auditor Report 2006-114 2
The STATe CommiSSion SomeTimeS PAid
unSuPPoRTed And inAPPRoPRiATe ConTRACToR
exPenSeS
Although prudent business practices and some of its contracts
include provisions requiring its contractors to include
documentation necessary to support the expenses claimed, our
review found that the state commission did not always enforce
these provisions. Although generally, the state commission
received documentation to support the expenses claimed in our
sample of 62 payments made to its contractors, we found both
significant and minor instances in which this was not the case.
Even when contractors included supporting documentation,
the state commission did not always adequately review it
before approving payment. Further, the state commission
inappropriately advanced funds to contractors.
The State Commission did not Always Require Contractors
to Submit Complete invoice documentation
The state commission did not consistently ensure that its
contractors submitted supporting documentation of the
propriety of expenses claimed for reimbursement even though,
in many cases, the contracts contained language requiring
contractors to do so. Following are some of the more significant
deficiencies relating to five contracts, each of which included
One invoice totaling language requiring supporting documentation for expenses.
$3.1 million under
a contract with a • One invoice dated April 2005 for $3.1 million under a
broadcasting station contract with a public broadcasting station did not contain
did not contain documentation to support any of the charges, which were for
documentation to personnel costs, legal services, Web site costs, promotional
support any of the materials, and other purposes.
charges.
• Four invoices—two from August and December 2004 and
two from October and December 2005—totaling $2.3 million
did not contain documentation to support $325,000 in
charges from one contractor who, between June 2002 and
February 2006, provided the state commission with research
and evaluation activities related to the effects of Proposition 10
on California’s children. These invoices included charges for
labor, travel and subsistence, and materials and supplies. The
state commission indicated that it had several processes in
place to monitor these invoices including monthly progress
reports and weekly conferences with the contractor. However,
these do not take the place of supporting documentation for
expenses as required by the contract.
2 California State Auditor Report 2006-114
• One $272,000 invoice dated October 2005 from a contractor
that provides services related to the state commission’s
First 5 Oral Health Education and Training Project did not
contain documentation to support charges totaling $190,283
identified as travel, equipment, supplies, and subcontractors’
costs, among others.
• One invoice dated April 2004 for $276,000 related to a
contract with a community college district did not provide
documentation to support operating expenses totaling
$73,805.
• One $600,000 invoice dated October 2005 related to a
contract with a county office of education did not contain
documentation to support any of the charges and, instead,
indicated that all supporting documentation would be on
file with the office of education. According to the state
commission, the contract manager, a former employee,
visited the contractor’s office and reviewed the back-up
documentation retained by the contractor to verify the
charges related to this invoice. Ultimately, the contract
manager approved the invoice. However, we do not believe
that sending an employee to its contractor’s office to review
supporting documentation is the most efficient use of an
employee’s time.
Further, although its current media contractor usually submitted
documentation to support charges for the invoices we reviewed,
we found certain charges without support even though the
contract required it. For example, when we reviewed one invoice
for the services of three individuals identified as subcontractors,
we found no documentation associated with the invoice,
work plan, or contract that identified what services these
subcontractors were providing, so we reviewed additional invoices
claiming reimbursement for these subcontracting costs. In total,
The state commission the state commission paid eight invoices between May 2004 and
paid $191,000 to its mid-April 2005 that included $191,000 in charges for these three
media contractor for subcontractors, but the contractor never provided any type of
three subcontractors, documentation explaining what services these three individuals
but failed to provide performed and why the services were allowable and appropriate
any documentation that under this contract. Another unrelated invoice from the same
identified what services media contractor claimed $40,000 for additional casting and
these subcontractors were overtime for commercials but contained no documentation
providing. demonstrating that these additional charges were necessary or
that the state contract manager had approved them.
California State Auditor Report 2006-114 2
Moreover, our review of 14 invoices submitted to the state
commission between April 2000 and March 2006 by its current
public relations contractor under three different contracts
found that, although the contractor generally submitted
documentation to support most of the charges included in its
invoices, when documentation was missing it involved the
earlier years. Typically, in those earlier invoices we found that
documentation was missing for charges such as telephone,
Internet, copies, and faxes, even though the contract required
such documentation. When we reviewed more recent invoices—
those occurring in late 2005 and 2006—we did not have the
same concern. We believe that this problem will no longer occur
because, according to the most recent contract with its public
relations contractor, the state commission no longer allows
the contractor to charge it directly for such items as faxes and
telephone—these charges are now covered by a surcharge.
Finally, our review of three invoices dated November 2003 and May
and August 2005 totaling $1.5 million under three interagency
agreements—one with a state agency and two with universities—
found that the contractors did not provide documentation to
support most of their charges. While the provisions of these
interagency agreements do not contain a specific requirement
for these contractors to submit documentation to support their
charges, prudent business practices call for, and we believe it is
reasonable to expect, the state commission to ensure that its
payments are for appropriate purposes.
In addition to deficient documentation, the state commission
approved and paid four invoices dated between August 2004
and December 2005 in which the contractor had inappropriately
applied a markup totaling about $129,000 to all nonlabor
The state commission expenses, which included items such as the cost of
approved and paid subcontractors, materials and supplies, report production,
four invoices where and shipping and receiving. Although the contract contained
the contractor had language allowing the contractor to apply a markup to labor
inappropriately applied categories, it did not contain language allowing it to apply a
a markup to its nonlabor markup to its nonlabor costs. This contractor applied markups
costs totaling about ranging from 8 percent to as high as 87 percent, for an average
$129,000. markup of about 12 percent. According to the contractor, it
based these percentages on an agreement it negotiated with the
federal Defense Contract Management Agency.
0 California State Auditor Report 2006-114
We discovered the markup when we reviewed these invoices
and were unable to reconcile the supporting documents with
the amounts claimed. When we asked the state commission
to explain the differences, it was unable to do so and called
the contractor, which then prepared a reconciliation schedule
that clearly identified both the costs and the markup. Thus, we
question whether the state commission appropriately reviewed
these invoices before paying them, especially in light of the fact
that the markup allowed by the contract applied only to labor
costs and, according to the contractor, its basis for the markup
percentages applied was a federal agreement, not a basis for
markup approved by the state commission.
When the state commission does not enforce provisions
requiring its contractors to submit supporting documentation
for expenses, it cannot ensure that it pays only for appropriate
and allowable expenses. It may also approve and pay for
inappropriate expenses when it does not perform adequate
reviews of the supporting documentation it does receive.
The State Commission inappropriately Advanced funds to
Three Contractors
The state commission provided advance payments to three
contractors even though it does not have the authority to do so.
According to the state contracting manual, the State is permitted
to make advance payments only when specifically authorized by
statute, and such payments are to be made only when necessary.
In addition, state laws are designed to ensure that public money
is invested in and accounted for in the state treasury. Further,
other state laws prohibit making a payment until services have
been provided under a contract.
However, one of the invoices we reviewed dated December 2003
Without legal authority was for an advance of $2.5 million to a public relations
the state commission contractor for the administration of the state commission’s
inappropriately advanced regional community-based organization program. The
$2.5 million to a public public relations contractor then disbursed the funds to the
relations contractor, selected community-based organizations. Although the state
which then took between commission disagrees that these funds were an advance, the
30 days and six months public relations contractor did not disburse $2.1 million of the
to disburse the funds funds (84 percent) until more than 30 days after it received
to selected community- the payment. Further, it disbursed more than $1.1 million to the
based organizations. grantees more than 90 days and as much as six months after
the State disbursed the funds to the public relations contractor.
Our review of 13 other invoices from the same public relations
California State Auditor Report 2006-114 1
contractor showed that the state commission advanced it funds
for the regional community-based organization program totaling
$6.8 million on three other occasions—invoices dated July 2003,
February 2004, and September 2004.
Even though the state commission’s contract requires the
contractor to administer the regional community-based
organization program, the state commission could distribute
the funds to the contractor after the contractor verified receipt
of services from the grantees. Specifically, we would expect the
state commission to require the contractor to review grantee
invoices and confirm services before requesting funds from the
state commission for payment to the grantees. This would allow
the state commission to eliminate advance payments that it
is not authorized to make as well as earn interest on the funds
until they are disbursed.
We also found that the state commission made advance
payments in December 2005 and March 2006 to two county
commissions totaling more than $91,500 under memorandums
of understanding. We discuss these types of contracts further
in Chapter 2. When the state commission makes advance
payments without the proper authority, it loses the interest it
would otherwise earn on these public funds.
AlThough iT held STRATegiC PlAnning SeSSionS
AnnuAlly, The STATe CommiSSion hAS noT
uPdATed iTS WRiTTen STRATegiC PlAn SinCe 2004
The state commission also poorly managed its process for
updating its strategic plan, which outlines the current progress
of its initiatives and future plans to advance its vision of school
readiness. The state commission has a planning horizon that
covers four years, as explained in the last updated strategic
plan, and its plan is to align with the California Children and
Families Act. According to the last version of the strategic plan,
covering 2003 through 2006, it is the product of planning
sessions, staff meetings, employee surveys, budget exercises,
and extensive analysis. The state commission also receives input
from stakeholders at its public meetings and discussions at
planning retreats with the commissioners. As stated in the plan,
such work focuses on “gaining a clear understanding of past and
current strategies, as well as developing recommendations as to
which strategies should be continued and which new initiatives
should be developed.” According to the executive director, the
state commission annually either develops a draft plan or updates
2 California State Auditor Report 2006-114
the prior year’s plan using all this input, and presents it to the
commissioners for their review and approval. However, it last
updated its strategic plan in 2004. According to the executive
According to the director, although the strategic plan was presented and discussed
executive director, with the commissioners in January 2004 and January 2005, the
although the strategic state commission did not request their formal approval.
plan was presented
and discussed with Interviews with the executive director revealed that although
the commissioners in the planning process occurred in 2005 and 2006, the state
January 2004 and commission did not present the updated plans to the
January 2005, the state commissioners for approval. When we asked about the outdated
commission did not plans, the executive director initially explained that the draft
present the updated plan revisions were not available in either paper or electronic form
to the commissioners because staff were unable to locate the updates in a former
for approval. employee’s electronic files. While determining why the strategic
plan had not been updated, the executive director uncovered a
number of problems in the information technology operations
of the state commission, which the state commission has begun
taking steps to resolve. Subsequently, in October 2006, the
executive director provided us with a paper copy of the revisions
for the 2005 plan. Further, the executive director also told us
that the state commission is taking steps to formally update its
plans. Also in October 2006, the executive director provided
us with a draft copy of a commission proceedings manual.
The manual includes an annual commission calendar that lists
recurring issues the commissioners are required to consider, such
as adopting the strategic plan. The executive director hopes to
begin using the manual in January 2007 if the commissioners
adopt it. Without a formally updated and approved strategic
plan, the state commission cannot be sure that its current vision
and direction are clear to staff, partners, and the public. Also,
without a final plan the state commission cannot ensure that
it is providing clear and appropriate guidance in planning and
developing its operations and in measuring progress toward its
stated goals.
ReCommendATionS
To ensure that it acts in the State’s best interest by properly
managing contracts and approving payments only for
appropriate expenses, the state commission should take the
following steps:
• Ensure that both it and its contractors comply with all
contract terms.
California State Auditor Report 2006-114
• Fully develop its contracts by including clear descriptions
of work, schedules for progress and completion of work,
reasonably detailed cost proposals, a requirement for adequate
supporting documentation for expenses, and clearly defined
types of allowable expenses.
• Consistently enforce contract provisions requiring contractors
to submit complete and detailed work plans before they
perform services and incur expenses. Also, ensure that it
promptly reviews and approves the work plans.
• Establish a process to ensure that it obtains and reviews final
written subcontracts and conflict-of-interest certificates before
it authorizes the use of subcontractors. Additionally, it should
ensure that its contractors include in all their subcontracts
a provision indicating that the State has the right to audit
records and interview staff in any subcontract related to the
performance of the agreement.
• Consistently enforce contract provisions requiring contractors
to submit supporting documentation for expenses claimed.
Further, it should ensure that it performs an adequate review of
such documentation before approving expenses for payment.
• Ensure that it does not make advance payments to its
contractors unless it has authority to do so.
Finally, the state commission should ensure that it updates its
strategic plan annually and presents it to the commissioners for
review and approval. n
4 California State Auditor Report 2006-114
ChAPTer 2
The State Commission’s Inconsistent
Contracting Practices Led to
Violations of State Law and Policies
ChAPTeR SummARy
The California Children and Families Commission (state
commission) did not always follow state policies during its
process of competitively awarding contracts. For instance,
it did not fully justify its reasons for awarding three contracts,
totaling more than $47.7 million, when it received fewer than
the minimum required number of three bids. It also did not
consistently document its scoring of proposals received from
potential contractors and was unable to demonstrate that it had
advertised one contract, totaling $90 million, in the California
State Contracts Register (state contracts register) as required by
state policy.
Moreover, when awarding some of its contracts and amendments
using the State’s noncompetitively bid (noncompetitive) contract
process, the state commission did not provide reasonable
and complete justifications for using the process itself or for
the costs of the contracts awarded. In fact, for two of the five
noncompetitive contracts we reviewed, as well as for six of the
eight amendments to the contracts originally awarded using
either a competitive or noncompetitive process, we found
insufficient or questionable justifications.
Further, the state commission did not always ensure that its
interagency agreements and contracts with other governmental
agencies met the requirements for using subcontractors. These
agreements regularly allowed for payment of administrative
overhead fees at amounts higher than state policy allows. As
a result, the state commission approved budgets for roughly
$1.2 million more in overhead fees than it should have.
In addition, our review of all five of its memorandums of
understanding with counties found that the state commission
appears to have used some of these agreements to avoid having
to comply with state contracting requirements. For two of these
memorandums, this intention was explicitly expressed.
California State Auditor Report 2006-114
According to state law, all contracts entered into by state
agencies, unless specifically exempted, are not in effect until
approved by the Department of General Services (General
Services). The state commission failed to obtain the required
approvals for 43 of the 45 contracts we reviewed before the
beginning of the contact term. Similarly, it did not obtain
the required approvals for 22 of the 44 amendments we
reviewed until after the related contracts or prior amendments
had ended. Although we did not review all 45 contracts for
work beginning before approval, we noted three instances in
which the contractors provided services totaling more than
$7 million before the state commission obtained final approval
of the contracts. The state commission also failed to obtain
the required approvals on three amendments altogether.
Finally, the commissioners may have improperly delegated
authority to award contracts to the state commission’s executive
director and staff. The commissioners approved the funding
for projects or contracts but were generally not involved in
the selection of contractors or in reviewing and approving
contracts. Consequently, many of the contracts were approved
outside of an open meeting where the public would have had an
opportunity to be fully informed about contractual obligations,
making the legal status of the contracts uncertain.
The STATe CommiSSion did noT AlWAyS
folloW STATe RequiRemenTS When AWARding
ComPeTiTive ConTRACTS
The state commission received fewer than the minimum
required number of bids to award three of the nine
competitively bid contracts we reviewed, totaling more than
$47.7 million. However, it did not fully justify its reasons for
awarding these three contracts in spite of the lack of bids. It also
did not consistently document its scoring of proposals received
from potential contractors, and it was unable to demonstrate
that it had advertised a $90 million contract in the state
contracts register as required by state policy.
Some of the State Commission’s Justifications for Awarding
Competitively bid Contracts That Received less Than Three
bids Were inadequate
The state commission’s contract files did not always contain
complete explanations and justifications for awarding contracts
when it received fewer than three competitive bids. State
6 California State Auditor Report 2006-114
law requires at least three competitive bids except in certain
circumstances, including when the agency has advertised
in the state contracts register and has solicited all potential
contractors it knows, or when the contract is with another
state agency, local governmental entity, or an auxiliary
organization of the California State University or a California
community college. The state contracting manual (contracting
manual) requires the agency to provide a justification of
the reasonableness of the price when there are fewer than
three bids and to retain this information in its contract
files. Although General Services approved the contracts, it
is ultimately the state commission’s responsibility to ensure
that it provides appropriate justification and to retain the
documentation.
For three of the nine competitively bid contracts we reviewed,
the state commission did not receive three responses, and
The state commission it failed to fully justify the reasonableness of the amounts
failed to fully justify the it awarded for the three contracts, totaling more than
reasonableness of the $47.7 million. The state commission indicated that it believed
amounts it awarded for the contract amounts were reasonable because they did not
three contracts, totaling exceed the amounts initially authorized by the commissioners.
more than $47.7 million. For example, for the largest contract, which was approved
in July 2001, the commissioners set the maximum amount
at $36 million, which ultimately was the amount awarded.
However, it is not surprising that the bids would be at or below
the maximum allowed, which was set in a public meeting and
likely known by all interested parties, including bidders. In two
other instances, the state commission stated that the winner’s
cost was reasonable because the two bids submitted were so
close in amount to each other.
We would have expected the state commission to take additional
steps, such as conducting a market survey of rates for similar
services, comparing the contract’s price to other contracts with
similar scopes of work and services, or some other reasonable and
documented basis for justifying the cost. For example, the state
commission reported that the cost for designing and implementing
a data collection and evaluation system was reasonable because
it would be at or below a threshold of 10 percent of the total
projected cost of the system. Although its contract file did not
contain the documentation to support its claim that the threshold
was based on an industry standard, it was able to produce several
sources indicating that professional evaluators estimate such costs
at between 10 percent and 15 percent. While we would prefer that
California State Auditor Report 2006-114
the state commission maintain this kind of documentation in its
contract files, we believe the basis for its justification of cost in this
instance is reasonable.
The documentation for the $36 million contract also stated that
although it considered cost as part of the evaluation process, the
basis for the award was the highest overall score for expertise,
ability to perform, and oral presentation skills. This award
Although it used a method—commonly referred to as the secondary method—
recognized method to focuses primarily on the quality of a contractor’s proposal
explain the qualitative and team and typically weights the cost component at only
aspects of why it chose 30 percent of the total score. Although it used this method to
one bid over the other for explain why it chose one bid over the other for this contract, the
a $36 million contract, state commission did not explain why it believed the contract
the state commission amount was reasonable.
did not explain why it
believed the contract Similarly, it did not provide complete cost justifications
amount was reasonable. for awarding the other two contracts—the first, valued at
$7 million, was approved March 2004, and the second,
valued at $4.7 million, was approved April 2004—using the
secondary method of competitive scoring. For these two
contracts, the state commission again cited the commissioners’
initial approval of the project maximums as a key factor in
the reasonableness of the cost. In each of these cases, the
state commission received only two proposals and awarded
the contracts to the one that received the higher score
using the secondary method of competitive scoring. Its
justification for the reasonableness of the amount awarded in
one contract stated that the two bids were very close and that
the winning bidder actually had the lower proposed cost. For
the other, its justification stated that the bids were very similar
and that their total costs for a program of this magnitude were
very close. The winning bid had a higher score on the overall
evaluation for quality and cost, which the state commission
used to justify the award even though the winning bid was
$540,000 more than the other bid. Once again, the state
commission did not follow state policy because, although it
explained why it chose the winning bid, it failed to explain why
the contract amount was reasonable.
When we asked the state commission how it determined the
amount of funding for each of these three projects and whether
it performed any market surveys or comparisons to determine
that the contract bids were reasonable, it provided us with
copies of the presentations staff made to the commissioners
when requesting the funding for only two of the projects. For
California State Auditor Report 2006-114
one of these two projects, it also provided a draft copy of a list of
other projects staff had reviewed. None of this documentation
provided sufficient support or any analyses describing how the
state commission determined the amount of funding requested
for these two projects.
By not taking the additional steps to justify and document the
reasonableness of the bidders’ proposed costs through other
methods, such as conducting a well-documented market survey
of rates for similar services or a comparison to other contracts
that have a similar scope of work and services, the state
commission may not be taking full advantage of the competitive
bid system.
documentation for the Scoring of Competitive Proposals Was
inconsistent
Inconsistencies in its documentation of the scoring process
Inconsistencies in its for contract bids may leave the state commission open to
documentation of the criticism and challenges to its decisions. It uses a consensus
scoring process for method to score proposals it receives on competitively bid
contract bids may leave contracts. According to contract unit staff, each evaluator
the state commission reviews the proposals individually and assigns scores using
open to criticism individual score sheets. Then the group of evaluators meets
and challenges to its to discuss the proposals and reaches a consensus on the
decisions. scores for each component of the proposals. However, after
the group determines the consensus score, the individual
score sheets typically are discarded. State law requires that all
proposals, evaluations, and scoring sheets be available for public
inspection after the scoring process is completed. For the nine
competitively bid contracts we reviewed, the state commission’s
documentation of the scoring process was inconsistent. It
retained only the consensus score sheet for each proposal
submitted in six of the competitive contracts. Without all the
individual scoring materials used in discussing and selecting
a winning proposal, it is not possible for us or others to
independently replicate the results.
For two other competitively awarded contracts, the state
commission’s files contained a scoring summary that illustrated
the individual scores and a final consensus score for the group;
however, the files did not contain the individual scoring sheets
that supported the scores on the summary sheet. For the
remaining competitively awarded contract, the files contained
all the necessary documents that allowed us to replicate the state
commission’s final score.
California State Auditor Report 2006-114
The State Commission Could not demonstrate That it
Appropriately Advertised for a large Contract
In April 2001 the state commission awarded a $90 million
Although it ultimately contract to an advertising and media consulting firm to oversee
received 13 bids for a a statewide campaign to educate the public on influences
$90 million contract, affecting young children, but it could not demonstrate that it
because it failed to advertised the contract in the state contracts register. To ensure
advertise the contract that all potential contractors are aware of state contracting
according to state policy, opportunities, the contracting manual requires departments
it may still have limited to advertise contracts of $5,000 or more, unless exempted,
the number of bids it in the state contracts register before the process begins.
received. Although the state commission may not have advertised the
availability of the contract in the state contracts register, it
provided us with documentation showing that it notified
more than 250 advertising and public relations companies of
the anticipated release of the request for proposal, inviting
companies to sign up to receive a copy of the request for
proposal when it was available. Ultimately, the state commission
received 13 bids. However, because it failed to advertise the
contract according to state policy, the state commission may
have limited the number of bids it received for this sizeable
$90 million contract.
The STATe CommiSSion PRovided inSuffiCienT
JuSTifiCATion foR AWARding TWo ConTRACTS
And Six AmendmenTS uSing The nonComPeTiTive
bid PRoCeSS
The state commission also did not provide reasonable and
complete justifications for the contract costs or for the use of
the noncompetitively bid (noncompetitive) process when it
awarded some of the noncompetitive contracts we reviewed.
Two of the five noncompetitive contracts we reviewed had
insufficient justification of the costs of the contract. For one
of these contracts, as well as for six of eight amendments to
contracts originally awarded using either a competitive bid
or the noncompetitive process, we also found insufficient or
questionable justification for using the noncompetitive process.
explanations of the Reasonableness of Contract Costs Were
at Times inadequate
According to the contracting manual, a noncompetitively
awarded contract is one for which only a single business is
afforded the opportunity to provide the specified goods or
40 California State Auditor Report 2006-114
services. The contracting manual states that a justification for a
noncompetitive contract is required unless specifically exempted
by statute or policy. Further, it also requires that departments
awarding contracts using this process provide a cost justification
that addresses the appropriateness or reasonableness of the cost
and includes the following information:
• Cost information (budget) in sufficient detail to support and
justify the cost.
• Cost information for similar services and explanations for any
differences between the proposed services and similar services.
• Special factors affecting the costs of the contract.
• Reasons why the department believes the contract costs
are appropriate.
Although these are the specific requirements of the current
contracting manual, earlier versions required similar
information in sufficient detail to support and justify the cost of
the contract.
We question the reasonableness of the state commission’s cost
We question the justifications for two of the five noncompetitive contracts we
reasonableness of the reviewed. For one contract totaling $3 million, it based its cost
state commission’s cost justification on comparisons of the current contract to previous
justifications for two similar contracts either with itself or with another agency. We
noncompetitive contracts expected to find in the file for this contract at least an analysis
we reviewed totaling describing why the state commission believed that the scope
$5.5 million. of the comparison contracts was materially equivalent to the
proposed noncompetitive contract, in addition to an analysis
describing how the costs compare.
Instead, the state commission’s explanation of its cost analysis
for the $3 million contract approved in January 2000 was
contained in the following sentences: “The [state commission]
has determined that the cost is reasonable as compared to
a similar agreement between this contractor and [another
agency]. [The other agency] contracted the service for
approximately $2.5 million for their Tobacco Control Program.
The state commission’s cost would be $3 million for focusing
on Tobacco, Drugs, and Alcohol.” Although General Services
approved the use of the noncompetitive process for this
contract, we do not believe the state commission’s explanation
California State Auditor Report 2006-114 41
provides sufficient information to show that it performed an
appropriate cost analysis to ensure that its contracted price was
either fair or reasonable.
The cost justification on the second contract was unclear. The
state commission stated that the $2.5 million cost for
the contract approved in May 2006 was based on “average
expenditures invoiced” for the period of the original contract it
replaced. Actually, its calculation used an average monthly cost
based on the original contract amount without consideration
for amendments, rather than on expenditures invoiced. In fact,
had it set the contract’s price based on the previous contract’s
average monthly invoices during the entire period of the
original contract and its amendment, the cost would have been
$1.8 million, saving it more than $700,000.
The State Commission did not Always have a good
Rationale for using the noncompetitive Process for one
Contract and Six Amendments
In addition to finding the justifications of contract costs
inadequate, for one of these two contracts we also question
Despite the fact that a the appropriateness of the state commission’s justification for
lack of time is not a basis using the noncompetitive contracting process rather than a
for forming a contract competitive process. In December 1999, shortly after the state
without competitive commission began operations, it submitted a justification for
bidding, the state one contract totaling $3 million to General Services, indicating
commission used this as that it needed to use the noncompetitive process because of
justification for executing time and resource constraints and stating that the competitive
a $3 million sole source process would require three to four months. Despite the fact
contract. that a lack of time is not a basis for forming a contract without
competitive bidding, General Services promptly approved the
request, and in January 2000 the contract was executed.
The state commission also indicated that its mandated task was
to communicate subjects relating to and furthering the goals
and purposes of Proposition 10 to the general public and that
its new and limited staff (seven individuals) and the pressing
need to communicate these messages required the use of the
noncompetitive process.6 Although we recognize that General
Services approved the use of this process, and we can understand
the challenges faced by the new state commission, we believe
its reasoning for accelerating the contracting process makes a
6 Proposition 10 is the California Children and Families Act of 1998, which established the
California Children and Families Program to promote, support, and improve the early
development of children, prenatal to age five.
42 California State Auditor Report 2006-114
better argument for slowing the process down. For instance,
for this contract, the state commission stated that “[t]hese
communications hold the success of the California Children
and Families Commission in their hands. It therefore becomes
necessary that public relations take the lead role in increasing
the identity, awareness, and credibility of Proposition 10.” We
do not find it reasonable that, given the state commission’s
views on the importance of its (and Proposition 10’s) public
image, it would choose to award this contract without a full,
competitive bidding process to ensure that it found the most
appropriate and competitive contractor for its projects.
We also reviewed two additional sole source contracts that were
entered into by the state commission in 2000. These sole source
contracts were challenged in court and the court upheld their
validity. In its decision, the court found that although there
were technical violations of state contracting laws and policies,
the contracts were nonetheless valid and reasonable under the
circumstances. Despite the court’s ruling, we believe that,
according to prudent business practices, in its future contracts
the state commission should undertake the kind of cost analysis
we described earlier.
We also question the rationale justifying six of the eight
amendments associated with the contracts we reviewed, which
were originally awarded using either a competitive bid or a
noncompetitive contracting process. One of these amendments
was approved in November 2000, while the other five were
We question the state approved between February 2004 and March 2006. All six
commission’s rationale of the state commission’s justifications focus on its lack of
justifying six of the eight time. However, these time constraints arose during routine
amendments associated circumstances, with no legitimate external factors that imposed
with the contracts we additional, unanticipated work or shortened time frames. For
reviewed. example, its justification for using the noncompetitive process
when amending its $90 million media contract in February 2004
for an additional six months and $12 million stated that it
would not be able to complete its competitive bid process
before the existing contract ended. The state commission
indicated that, due to a Department of Finance budget letter
limiting the frequency of meetings allowed for boards and
commissions, state commission staff were unable to obtain
the required approvals of commissioners in time to complete a
competitive bid process before the current contract expired in
December 2003.
California State Auditor Report 2006-114 4
This is not a compelling argument for two reasons: First, the
Department of Finance letter was issued in January 2003,
11 months before this contract was set to expire. We believe
the state commission staff reasonably could have obtained the
commissioners’ approval at a quarterly meeting and conducted a
competitive bid process in 11 months. Alternatively, if the state
commission believed that obtaining board approval and using the
competitive bid process would require more than 11 months, it
should have begun the process before the Department of Finance
issued its letter. Second, the term of the initial contract was
three years. The state commission should have known that the
expiration date was approaching. Thus, we must conclude that
the condensed time frame referred to in its justification is due to
poor planning on the part of the state commission.
The STATe CommiSSion did noT folloW
STATe ConTRACTing PoliCieS When uSing
inTeRAgenCy AgReemenTS And ConTRACTS
WiTh goveRnmenT AgenCieS
The state commission did not always ensure that its interagency
agreements met the requirements in state policy for using
subcontractors, and the agreements regularly allowed for
payment of administrative overhead fees at amounts higher
than state policy allows. As a result of the latter, it approved
budgets for $1.2 million more than it should have.
The State Commission did not Always follow State Policies
When Allowing Subcontractors under its interagency
Agreements and Contracts With government Agencies
Of the 24 interagency agreements and four contracts with other
government agencies we reviewed, 25 included the services of
subcontractors, for a total of at least $64.6 million. This represents
53.6 percent of the total of $120.6 million for these agreements
and contracts. For 17 of these 25, the state commission did
not always comply with state policies when justifying the use
of subcontractors. Three of the 17 appear to have included
subcontractors, but the amount of funds for subcontractors
is not clear. We question the justification for the remaining
14 subcontracts totaling $38.3 million. Table 2 provides a
summary of the 17 interagency agreements and contracts
with other government agencies that used subcontractors and
the amounts of the subcontracts for which we question the
justification.
44 California State Auditor Report 2006-114
TAble 2
Summary of the interagency Agreements and Contracts With other government
entities With questionable Rationales for using Subcontractors
original Contract Subcontract Amount with Percentage of
Count Contract Amount Approval date questionable Rationale Prime Contract
1 $ 1,000,000 July 2003 $ 1,000,000 100.0%
2 3,000,000 January 2004 2,850,000 95.0
3 10,000,000 November 2003 8,926,136 89.3
4 18,384,697 June 2001 11,707,385 63.7
5 10,081,505 November 2001 6,220,861 61.7
6 5,100,000 June 2001 2,944,276 57.7
7 1,300,000 February 2005 718,085 55.2
8 1,832,838 December 2003 390,856 21.3
9 4,000,000 October 2000 645,000* 16.1
10 10,000,000 November 2001 1,439,104 14.4
11 2,300,000 May 2002 203,000 8.8
12 12,950,000 September 2000 853,085 6.6
13 7,381,225 October 2000 220,850 3.0
14 6,100,000 June 2001 135,000 2.2
15 1,500,000 January 2003 Unknown† —
16 1,500,000 October 2000 Unknown† —
17 1,000,800 October 2003 Unknown† —
Totals $,41,06 $,2,6 .%
Sources: Contract files at the California Children and Families Commission (state commission). The subcontract amounts include
costs characterized by the state commission as subcontractor costs.
* This contract includes $550,000 for research and evaluation. The work plan shows that responsibility for completing these tasks
was shared by the prime contractor and subcontractors but does not provide a cost breakdown. We have included the entire
$550,000 in our calculations.
† Evidence indicates that subcontracts were probably used. However, there is insufficient information to establish the extent to
which they were used.
The contracting manual allows agencies to award service
contracts to other state agencies and government entities
without a competitive bid process provided that the contracted
entities’ staff primarily perform the services. The contracting
manual does allow subcontracting under these agreements,
but it requires the contracting agency or the prime contractor
California State Auditor Report 2006-114 4
to fulfill one of a number of conditions when the total of all
subcontracts exceeds $50,000 or 25 percent of the total contract,
whichever is less. These conditions include the following:
• Approval by the highest executive officer, attesting that the
selection of the particular subcontractor without competitive
bidding is necessary to promote program needs and is not
used to circumvent competitive bidding requirements.
• Prior written approval from General Services’ Office of Legal
Services has been received.
• Certification that the prime contractor has selected the
subcontractors through a bidding process requiring at least
three bids from responsible bidders.
• All subcontracts are with an organization listed in the contracting
manual as exempt from this provision, such as other state
agencies, University of California, or their auxiliary organizations.
For each of the 25 agreements and contracts with
The state commission’s subcontractors, the state commission used one or more of
justifications for these conditions to justify the use of subcontractors, but its
using subcontractors justifications were not always adequate.
for 17 contracts we
reviewed was not always For example, in 10 of the interagency agreements and
adequate. contracts with other government agencies we reviewed that
included subcontractors, the state commission relied on the
provision permitting subcontracting if the highest executive
officer attests that the selection of a specific subcontractor
without competitive bidding is necessary to promote the
program needs and is not done to circumvent competitive
bidding requirements. However, for four of these 10 the state
commission either provided incomplete certifications or
certifications from an unauthorized executive. For example, for
two interagency agreements totaling $12.3 million, the former
executive director completed the certifications, indicating that
the selection of subcontractors at a total cost of $6.1 million was
necessary to meet program needs. However, the certifications
addressed only the largest of several subcontractors, even
though each of the remaining subcontracts individually met
the $50,000 threshold for requiring justification. For another
two interagency agreements totaling $2.3 million, the state
commission submitted certification letters to General Services
that were signed by unauthorized state commission staff. As we
noted previously, these certifications are required to be from
46 California State Auditor Report 2006-114
the highest executive officer. For these two, representing at least
$700,000 in subcontractor costs, the certifications came from the
former chief of administration.
When we asked the state commission to demonstrate that
General Services the subcontracts in another 10 contracts were allowable, its
informed us that its justification was based on the provision of the contracting
prior written approval manual that allows subcontracting when prior written approval
of subcontractors is from General Services’ Office of Legal Services has been received.
a separate document However, the copies of the contracts containing General
from its approval of Services’ approval stamps provided as evidence of prior written
contracts. Thus, the state approval do not meet General Services’ requirements. An
commission incorrectly attorney from General Services informed us that prior written
equated the 10 final approvals from General Services are never actually part of
contract approvals the contract but are separate documents that should be part
by General Services of the contract files. Thus, the state commission incorrectly
to its approvals of equated the final contract approval by General Services to its
subcontractors. approval of subcontractors. In each of these 10 instances, the
state commission attached a copy of the approved contract but
provided no other documentation.
For one $18.4 million interagency agreement, the state
commission indicated that the agreement’s subcontracts, totaling
$11.7 million, were permissible because they had been selected
through a competitive bidding process. However, the contracting
manual calls for certification of the competitive selection, and
the contract file contained no such certification. Additionally,
in response to our request for documentation showing that the
subcontracts were allowable, the state commission merely stated
that they had been competitively bid and that we could contact
the prime contractor for proof of this. When we contacted the
prime contractor, it indicated that the subcontracts were
competitively bid. However, the prime contractor stated that it
could find no evidence that the state commission had requested
certification that the subcontracts were competitively bid. It is the
state commission’s responsibility to ensure that the certification
exists, and we believe it is reasonable to expect it to retain the
certification in its files.
For two contracts totaling $5.8 million, the state commission
again could not provide adequate justification for subcontracts
totaling $1 million. For one of these contracts the state commission
indicated that the subcontracting was allowable because the
subcontractor was one of a number of allowable government
entities listed in the contracting manual or the services to be
provided were otherwise exempted from competitive bidding.
California State Auditor Report 2006-114 4
In this case, neither of the two provisions cited by the state
commission was applicable to the nonprofit entity chosen as
the subcontractor. In the second instance, the state commission
correctly identified two of the subcontracted services as being
exempt from competitive bidding rules. However, the commission
failed to show that the remaining subcontracts were allowable.
The state commission also entered into a series of three
contracts, lasting roughly four years, with one contractor to
revise, update, and produce parents guides in various languages.
In these contracts, the budgets were so vague that we were
unable to determine whether subcontractors were employed
and, if so, to what extent. Figure 2 shows one of these budgets.
However, in a memo dated two months after the first of these
three contracts was approved, General Services told the state
commission it had been informed that the prime contractor had
“vended the entire project of half a million books” to a private
firm. Furthermore, the third contract contained a provision that
clearly shows an intent to solicit bids for the subcontracting of
printing services. The contract files for these three contracts did
not contain certifications for the use of subcontractors. Because
all three contracts were for similar services and the evidence
indicates that the contractor used subcontractors on the first
and third contracts, it seems plausible that the contractor would
subcontract at least a portion of the second contract as well.
The State Commission Agreed to Reimburse Contractors for
indirect Costs at higher Rates Than State Policy Allows
The state commission did not always comply with state policies
The state commission, limiting the amount of administrative overhead fees paid to
in its interagency contractors for each subcontract. In fact, the state commission,
agreements, approved in its interagency agreements, approved budgets to reimburse
budgets that included its contractors for over $1.2 million more than the contracting
administrative overhead manual allows.
fees of $1.2 million more
than the contracting For the 14 interagency agreements and four contracts with other
manual allows. government agencies we reviewed that used subcontractors and
had related overhead charges, the state commission agreed in
13 instances to pay its contractors administrative overhead fees
at higher rates than permitted. According to the contracting
manual, state agencies may pay contractors overhead charges
only on the first $25,000 of each subcontract awarded, and
it allows the contractor and the state agency to negotiate a
reasonable charge. However, all but one of the interagency
4 California State Auditor Report 2006-114
figuRe 2
budget for a $1 million Contract With the
university of California Regents
EXHIBIT B
(Interagency Agreement)
Attachment I
Budget
Provide 120,000 copies of the Parents Guide, consisting of 60,000 in
Chinese, 25,000 in Korean, and 35,000 in Vietnamese (the respective
amounts of each language are amendable).
Total Cost $1,000,800.00
Total Copies $120,000.00
Cost Per Copy $8.34
Total cost includes printing, storage and shipping.
Source: State commission contract file.
agreements and contracts with government agencies we reviewed
contained budgets that allowed overhead fees on the total of each
subcontract. The budget for a $10.1 million contract included
overhead charges of $480,000, apparently calculated as a flat
5 percent of the contract’s total direct costs of $9.6 million for
both the subcontract’s and primary contract’s direct activity.
As a result, the budget incorrectly included nearly $300,000
more in overhead fees than allowed. Table 3 on the following
page identifies the amounts the state commission agreed to
pay compared to what it should have agreed to pay based on
the limits established by the contracting manual. As the table
indicates, the agreement terms allowed a total of more than
$1.2 million in excess of allowable overhead reimbursements.
California State Auditor Report 2006-114 4
TAble
Comparison of budgeted and Allowable overhead Costs
Contract original Contract budgeted overhead Allowable overhead Costs for excess
Count Amount Approval date Costs for entire Contract entire Contract* overhead Costs
1 $10,081,505 November 2001 $ 480,072 $ 184,029 $ 296,043
2 7,381,225 October 2000 350,987 68,382 282,605
3 5,000,000 September 2000 238,000 98,350 139,650
4 10,000,000 November 2001 454,156 337,984 116,172
5 10,000,000 November 2003 147,680 58,016 89,664
6 2,000,000 January 2001 95,238 21,097 74,141
7 2,300,000 May 2002 109,524 57,023 52,501
8 1,300,000 February 2005 93,010 45,382 47,628
9 4,000,000 October 2000 190,476 163,976 26,500
10 1,832,838 December 2003 135,766 109,695 26,071
11 1,300,000 January 2002 75,893 51,445 24,448
12 1,000,000 August 2005 24,733 5,023 19,710
13 6,100,000 June 2001 554,544 543,546 10,998
Totals $2,0,0 $1,4,4 $1,206,11
Sources: Contract files at the California Children and Families Commission.
* Overhead cost was calculated by applying each contractors overhead rate to the contract’s personnel and operations totals. The
contract’s overhead rate was also applied to the first $25,000 of each subcontractor’s budget, as required by the contracting manual.
When we asked the state commission to explain why it used
overhead fees that exceeded the limitations of state policy, it
indicated that its staff historically misunderstood this provision
of the contracting manual. Further the state commission also
stated that it is requiring those who regularly work with state
contracting issues to attend General Services’ training with
the expectation that this topic is covered. When the state
commission’s interagency agreements contain budgets that
include administrative overhead fees greater than allowed by
state policy, it overpays contractors, reducing the funds available
for direct program services.
The STATe CommiSSion CiRCumvenTed
ConTRACTing lAW When iT uSed memoRAndumS
of undeRSTAnding To obTAin SeRviCeS
In fiscal years 2004–05 and 2005–06, the state commission
awarded five memorandums of understanding (MOUs) and two
amendments totaling more than $595,000. It appears to have
0 California State Auditor Report 2006-114
intentionally used some of these to avoid having to comply
with state contracting requirements, and for at least two MOUs
and one amendment the intention was explicit. In fact, in
a September 2005 e-mail the former chief of administration
warned that the language of an amendment required careful
wording to avoid the appearance that the state commission was
circumventing the State’s competitive bid process.
Although state contracting law allows agencies to enter into
contracts with local government entities without competitive
bidding, it strictly prohibits agencies from using these contracts
to circumvent competitive bidding requirements. Also, the
contracting manual refers to MOUs as “contracts,” suggesting that
they are subject to state contracting requirements. In addition,
an attorney from General Services has indicated that MOUs
must be treated as contracts and therefore must go through the
General Services approval process and meet all contract language
requirements. It appears that the state commission incorrectly
believed that MOUs were subject to lesser requirements.
For one MOU totaling $150,000, the state commission first
attempted to enter into a standard contract with one county
to obtain statewide training services. In November 2005 the
state commission submitted the contract to General Services
for approval. On December 6, 2005, General Services returned
the unapproved contract and requested additional information.
Specifically, General Services questioned the cost justification
and reasons for contracting out these services. It also questioned
the sufficiency of the budget and the lack of a specific
requirement that the contractor complete work by the time the
state commission was scheduled to make the last payment.
In January 2006, without evidence that it had responded to
General Services’ request for additional information, the state
The state commission commission sent an MOU totaling $150,000 to the county for
appears to have its signature. The MOU had the same budget General Services
intentionally used an had questioned, and its scope of work was nearly identical to
MOU totaling $150,000 that of the proposed contract. Further, we found the following
to avoid having to comment in the state commission’s contract database: contract
comply with state “unapproved by General Services, changed to an MOU.” Thus,
contracting requirements. the state commission appears to have intentionally used an MOU
to avoid having to comply with state contracting requirements.
For another two MOUs and two amendments totaling $300,000,
the state commission arranged for services with one county. One
MOU was to assess county commissions’ financial management
functions and identify ways to improve their existing systems.
California State Auditor Report 2006-114 1
The second was to assist the state commission in establishing a
framework to evaluate services at both the state and local levels.
The state commission did not obtain General Services’ approval
for either of these MOUs. The invoices submitted by the county
show that subcontractors, not county staff, performed all the
services. Also, neither MOU file contains any documentation
that the state commission ensured a competitive process for
selecting subcontractors.
In fact, evidence suggests that the state commission intentionally
avoided competitive bidding by entering into at least one
of these MOUs with the county to obtain the services of a
specific subcontractor. We found e-mail correspondence from
the county requesting the state commission to reimburse it
for the cost of services obtained from the subcontractors for
both MOUs on behalf of the state commission. The e-mail
correspondence between state commission staff and management
also acknowledged that the subcontractors for both MOUs were
receiving payment from the county but were taking direction
from and delivering a product to the state commission. Finally,
the minutes of a discussion at a commissioners’ meeting explicitly
indicate that the state commission would allocate funds to a
county, as a fiscal agent, and obtain the services of a certain
subcontractor for one of the MOUs.
Had the state commission contracted directly with the MOU
subcontractors, it would have needed to either competitively bid
or justify the need for a noncompetitive process, requirements
General Services is responsible for enforcing. In an e-mail
written to the state commission’s executive director and deputy
The former chief of director of research and evaluation in September 2005, the
administration warned former chief of administrative services explicitly warned of
that the language of an the potential for appearing to circumvent state contracting
amendment required policy when the state commission was preparing an amendment
careful wording to avoid to an MOU. His e-mail noted, “We need to make sure that
the appearance that the all information in the amendment refer[s] to the [county]
state commission was commission as the primary contractor and does not directly
circumventing the State’s relate to the [subcontractors] . . . Any other type of reference
competitive bid process. might be viewed as circumventing the states [sic] competitive
bid process . . . We want to make sure we are always in
compliance for any audits of our internal controls.”
In May 2006 the state commission entered into another MOU,
totaling $64,400, with a county to obtain training and transition
support for county commission staff on the state commission’s
2 California State Auditor Report 2006-114
revised statewide evaluation framework. Although the state
commission prepared the MOU in April 2006, subsequent
Notably missing was internal e-mail correspondence indicates that it later considered
General Services’ entering into a standard contract for the services. However,
approval for all five evidence suggests that it ultimately sent the MOU to the county
MOUs we reviewed for signature when the county threatened to cut off services if
even though each was the state commission did not deliver a signed agreement. The
for services totaling county signed the MOU at the end of May 2006.
more than $5,000, the
threshold requiring Notably missing was General Services’ approval on all five
General Services’ MOUs, even though each was for services totaling more than
approval. $5,000—the maximum contract amount for services the state
commission may enter into without General Services’ approval.
The STATe CommiSSion ConSiSTenTly fAiled
To obTAin AppRovAlS foR iTS ConTRACTS And
AmendmenTS on Time
According to state law, all contracts entered into by state
agencies, except those meeting criteria for exemptions, are not
in effect unless and until approved by General Services. The
state commission failed to obtain the required approvals before
the beginning of the contract term for most of the contracts we
reviewed. Similarly, it did not obtain the required approvals for
22 of the 44 amendments we reviewed until after the related
contract or prior amendment had ended. Although we did
not review all of the contracts to determine whether work
began before approval, we noted three instances in which the
contractor provided services totaling more than $7 million
before the state commission obtained final approval of the
contracts. The state commission also failed to obtain the
required approvals altogether on three amendments.
General Services’ approval for 43 of the 45 contracts executed
between January 2000 and March 2006 that we reviewed lagged
by a few days to more than a year after the contract start dates,
averaging 123 days, or roughly four months. Figure 3 on the
following page shows the range and frequency of the intervals
between the contract start date and the time that the state
commission obtained approval for these contracts. For the
remaining two contracts, it appears that final approvals were
on time only because the contract start date was “upon General
Services approval.” The state commission’s tardiness in obtaining
the required approvals may have contributed to some contractors
performing work before the contract was approved. In these
instances, the State is exposed to potential financial liability for
work performed even though the contract is not approved.
California State Auditor Report 2006-114 53
figuRe
number of days the State Commission’s
Contracts Were executed late
Lag Time
(in Days)
0 2
1–30 3
31–60 10
61–90 6
91–180 12
181–360 11
>360 1
0 2 4 6 8 10 12
Frequency
Sources: Contract files at the California Children and Families Commission.
In the worst-case example, the state commission failed to obtain
the required approval for one contract until after the term of the
contract had expired. Consequently, the contractor provided
services totaling nearly $7 million before the contract was
approved in May 2000. The former chief deputy director also
authorized work to begin before another two contracts were
executed. The first occurred in 1999, while the commission was
developing its $3 million public relations contract with a public
relations firm. In a letter to the firm’s executive vice president
at the time, the former chief deputy director wrote that the
commission was “currently in the process of developing an
official contract for your services. In the interim, this letter will
serve as our commitment to reimburse [your organization] for
all expenditures, including fees, expenses, and subcontractor
costs for all approved activities.” This letter predated the final
approval by General Services by more than two months.
In another instance, the former chief deputy director justified
the contractor’s beginning work before approval in writing to
staff in General Services’ Office of Legal Services, “Additionally,
the [state commission] is a new agency and is still not
completely staffed. Accordingly, staff was unavailable to begin
4 California State Auditor Report 2006-114
working on the approval process until late April. The contractor
began work in good faith knowing that the project had been
approved and that the funding was available.”
In addition, the state commission failed to obtain approval
for amendments before the original contract or previous
amendment’s term ended. Between July 2000 and March 2006,
for 22 of the 44 amendments we reviewed, the average approval
date was 59 days late. Figure 4 shows the range and frequency
of the intervals between the contract amendment start date and
the time that the state commission obtained approval for these
amendments. For example, it added two years and $7.1 million
to a $2.6 million child care and health services contract but did
not obtain the necessary approval until 52 days after the initial
contract had expired on June 30, 2002. In another case, it increased
the budget for a $7 million advertising contract by an additional
$7 million and extended the term of the contract by six months,
but failed to get approval from General Services for the amendment
until 56 days after the contract had expired on May 15, 2000.
figuRe 4
number of days the State Commission’s Contract
Amendments Were executed late
Lag Time
(in Days)
0 22
1–30 6
31–60 9
61–90 4
91–180 2
>180 1
0 5 10 15 20 25
Frequency
Sources: Contract files at the California Children and Families Commission.
California State Auditor Report 2006-114
In three instances, the state commission failed altogether to
obtain the required approval from General Services for its
amendments. In one of these instances, it failed to obtain
General Services’ approval for a second amendment to a contract
dated June 2002. Although the contracting manual exempts
amendments that extend the contract’s term for one year or
less, an agency can use this exemption only once. According
to the state commission’s manager of fiscal operations, state
commission analysts apparently did not notice that it was the
second amendment to extend the contract’s term. We notified
the state commission of the lack of required approvals, but it
took no action because the contract expired in 2003.
In another example that required General Services’ approval, the
state commission modified the scope of work and budget in an
amendment dated December 2005, but it did not increase the
contract funding. According to its manager of fiscal operations,
once we notified the state commission it immediately contacted
General Services and obtained a belated review and approval in
late June 2006. This same manager indicated that, to prevent
these mistakes in the future, the state commission has taken
steps to ensure that the contract analyst identifies whether a
contract or amendment requires General Services’ approval.
Although the amendment dated September 2005 for a third
contract did not include additional funds and did not change
the contract terms, it did replace the original budget with a
revised budget, again requiring General Services’ approval.
The state commission’s response to our inquiries indicated
that, when it created the amendment, it did not believe the
amendment required General Services’ approval, and thus it did
not seek such approval.
The CommiSSioneRS mAy hAve imPRoPeRly
delegATed AuThoRiTy To AWARd ConTRACTS
State law authorizes the state commissioners to enter into
Without the statutory contracts on behalf of the state commission. The commissioners
authority our legal adopted a formal resolution in May 2001 delegating their
counsel advised contracting authority to enter into and amend contracts to state
is necessary, the commission staff. In this same resolution, the commissioners
commissioners delegated took action to ratify all prior contracts. It is our understanding
their authority to enter that although the commissioners meet in public session to
and amend contracts to authorize expenditure authority and specify amounts of money
state commission staff. for particular purposes, the ultimate decision to enter into
contracts and the selection of providers of goods and services is
6 California State Auditor Report 2006-114
performed by state commission staff. Our legal counsel advised
us that it is a well-accepted principle of law that a power given
to a public official that involves the exercise of judgment or
discretion may not be delegated to others without statutory
authority.7 In this case, no statute authorizes the commissioners
to delegate their contracting authority.
Various judicial decisions in this area indicate that there are
circumstances in which a governmental body may effectively
ratify some prior action, assuming that it has lawful authority
to take that action in the first place. Our review shows that the
commissioners approved the funding for projects or contracts
but were generally not involved in selecting the contractors
or in reviewing and approving the contracts. Consequently,
many of the contracts were approved outside of an open
meeting where the public would have an opportunity to be fully
informed about contractual obligations of the state commission.
The state commission believes that its enabling statutes delegate
this authority to the executive director. Despite the high degree
of deference that must be given to an agency’s interpretation
of statute, we do not believe this is a reasonable interpretation.
We have not reached a conclusion on the legal validity of these
contracts, but we believe it would be appropriate for the state
commission to seek legal counsel on this matter.
ReCommendATionS
To ensure that it protects the State’s interests and receives the
best products and services at the most competitive prices,
the state commission should take the following actions:
• Follow the State’s competitive bid process for all contracts
it awards, unless it can provide reasonable and complete
justification for not doing so. Further, it should plan its
contracting activities to allow adequate time to use the
competitive bid process.
• Fully justify the reasonableness of its contract costs when it
receives fewer than three bids or when it chooses to follow a
noncompetitive bid process.
• Advertise all nonexempted contracts in the state contracts
register.
7 Sacramento Chamber of Commerce v. Stephens, 212 Cal. 607, 610 (1931).
California State Auditor Report 2006-114
To ensure that it promotes fair and open competition when
it awards contracts using a competitive bid process, the state
commission should ensure that it fully documents its process for
scoring proposals, and that it retains the documentation.
To ensure that it follows state policies and protects the State’s
interest when using interagency agreements and contracts
with government agencies, the state commission should do the
following:
• Obtain full justification for the use of subcontractors
when required and, if it is unable to do so, deny the use of
subcontractors.
• Limit the amount that it will reimburse its contractors for
overhead costs to the rates established in the contracting
manual.
To ensure that MOUs it awards allow for fair and competitive
contracting and protect the State’s best interests, the state
commission should follow laws and policies applying to
contracts when awarding and administering MOUs.
To ensure that it does not expose the State to potential financial
liability for work performed before the contract is approved, the
state commission should ensure that it obtains General Services’
approval of its contracts and amendments before the start of the
contract period and before contractors begin work.
To ensure that state commission staff may lawfully enter into
or amend contracts on behalf of the commissioners, the state
commission should seek appropriate legal counsel. n
California State Auditor Report 2006-114
ChAPTer 3
Although the State Commission’s
Payments Were Generally Consistent
With the Restrictions On the Use
of Public Funds, Certain Payments
During 2004 are Questionable
ChAPTeR SummARy
Between 2000 and 2006 the California Children and
Families Commission (state commission) used four media
and public relations contractors to conduct mass media
campaigns related to various issues. More than one of these
campaigns promoted the value of preschool. Within this same
period, there were three ballot proposals that either related to
preschool or that, if enacted, would have affected the work
of the state commission. Two of these proposals ultimately
qualified for the ballot.
The first proposal, Proposition 28, which would have repealed
the tobacco surtax that funds the state commission, qualified
for the ballot but was rejected by the voters in March 2000. The
second proposal—the Improving Classroom Education Act—
commonly known as the California Teacher’s Association (CTA)
Reiner Initiative, related to voluntary preschool. Its proponents
failed to gather sufficient signatures for placement on the ballot,
and it was never submitted to the voters. The third proposal,
Proposition 82, the Preschool for All Act, which also related to
voluntary preschool, qualified for the ballot but was rejected by
the voters in June 2006. The timing of the state commission’s
publicly funded media campaigns, in light of these proposals,
has raised questions about whether it inappropriately used
public funds for campaign activities or political advocacy.
We found that the state commission had clear legal authority to
conduct its public advertising campaigns related to preschool.
We also found that the content of these advertisements and
the timing of their broadcast were consistent with applicable
legal restrictions related to the use of public funds for political
California State Auditor Report 2006-114
purposes. We also confirmed that the state commission did not
contribute any of its public funds to campaign accounts used to
support the various ballot measures.
Although the same individuals who worked for the media
contractor also worked for the campaign committees supporting
the Improving Classroom Education Act and Proposition 82,
we were generally able to determine that the state commission’s
payments to these individuals were consistent with the
restrictions on the use of public funds for political purposes.
We were, however, concerned about the appropriateness of
certain payments made to these three individuals during a
period of approximately four months between May 1 and
August 18, 2004. During this period, the Improving Classroom
Education Act had begun the ballot qualification process and
the proponents were authorized to gather signatures to qualify
it for the ballot. We asked the state commission to provide
us with documentation that would show what services these
individuals were paid to perform during this period, and it was
unable to do so. So that we might learn what services these
three individuals were paid to perform during this time, we
contacted each of these individuals as well as the former chair of
the state commission. We were able to talk with two of the three
individuals and with the former chair of the state commission.8
All of the individuals we talked to indicated that they did not
perform any campaign activities during this period. Although
these individuals asserted to us that they did not engage in
campaign activities during this period, the state commission was
unable to confirm this because it did not have adequate records.
Thus, we lack documentary evidence that would allow us to
definitively determine the appropriateness of using public funds
to pay these individuals during this period.
vARiouS ReSTRiCTionS APPly To The uSe of PubliC
fundS foR PoliTiCAl PuRPoSeS
The most general principle of law governing the expenditure
of public funds is that they may be used only for an authorized
public purpose. In addition, specific restrictions apply to the
use of public funds for political purposes. A public official,
such as a commissioner or a designated employee of the state
commission, may not use public funds to support campaign
activities or make expenditures on behalf of a campaign
8 The third person was willing to speak with us, but was not able to meet with us prior to
the publication of our report.
60 California State Auditor Report 2006-114
committee. Impermissible campaign activities include making
a contribution to a campaign committee or expending public
funds for express political advocacy.
The restriction against using public funds for campaign
activities, as outlined in the Introduction, does not mean
that a public official is completely prohibited from using such
funds for activities related to a ballot measure. The judicial
decisions that have examined the circumstances under which
it is permissible to expend public funds for political purposes
draw a clear distinction between a “proposal” that has not yet
qualified for the ballot and a “ballot measure” that has qualified
for the ballot and is under public consideration. Until a proposal
becomes a ballot measure,9 a public official may generally use
public funds to undertake a wide variety of activities related
Public officials may use to that proposal. He or she may conduct research about the
public funds to undertake merits of the proposal, conduct activities to determine a need
activities related to a to undertake the proposal, draft proposed language for the
ballot proposal before it ballot measure, or even secure a proponent to carry the proposal
qualifies for the ballot. forward as a ballot measure. A public official may not, however,
use public funds to gather signatures to qualify a proposal for
the ballot. The efforts undertaken by public officials at the
proposal stage are generally not viewed as political advocacy or
campaign activities based on the rationale that there is nothing
yet before the voters to advocate for or against.
Once a proposal qualifies for the ballot, it becomes known
as a ballot measure, and the ability to spend public funds
related to that ballot measure is more limited. At this point,
the public official may not use such funds to advocate for the
passage or defeat of the measure. The official may, however, use
public funds to provide the public with a “fair and impartial
presentation of the facts” related to the measure or an analysis
of how the ballot measure, if enacted, would affect the agency
the public official represents.
9 We treated a proposal as a ballot measure as of the date that the proponents of the
measure received their official title and summary and were authorized to gather
signatures to quality the proposed measure for placement on the ballot. The law is not
explicit on this point, but various judicial decisions related to this issue suggest that this
is the appropriate point at which to draw that distinction.
California State Auditor Report 2006-114 61
The STATe CommiSSion’S uSe of A mediA
ConTRACToR To ConduCT mASS mediA CAmPAignS
WAS WiThin iTS legAl AuThoRiTy
Proposition 10, the California Children and Families Act of
1998 (Children and Families Act) expressly authorizes the state
commission to deposit 6 percent of the 20 percent share of
the revenue it received into an account for expenditures on
communications to the general public using television, radio,
newspapers, and other mass media on subjects relating to and
furthering the goals and purposes of the Act. These subjects
include methods of nurturing and parenting that encourage
proper childhood development; the informed selection of child
care; health and social services; the prevention and cessation
of tobacco, alcohol, and drug use by pregnant women; and the
detrimental effects of secondhand smoke on early childhood
and development. To achieve these goals, the state commission
has typically entered into contracts with consultants and service
providers for such activities as research, planning, and public
relations, including advertising campaigns.
Between January 2000 and August 2005 the state commission
entered into seven contracts with four media and public
relations contractors for a variety of services, including placing
educational messages on television or radio. These contractors
arranged for print, television, and cable announcements from
2000 through 2006 to educate the public about appropriate
parenting skills, the benefits of preschool, childhood health
issues, and the dangers of tobacco smoke to young children.
Our legal counsel advised us that the state commission had clear
The state commission’s legal authority to conduct public advertising campaigns related
use of public funds to these subjects. In addition, when we reviewed the timing
to develop and air and content of the advertisements produced as a result of these
educational messages media contracts, we found that nothing in the advertisements
in the mass media constituted political advocacy. The advertising campaigns clearly
was consistent with promoted the benefits of preschool, tobacco cessation, prevention
the various legal of childhood obesity, and parenting, but they made no reference
requirements related to upcoming measures that might be placed on the ballot; nor did
to the expenditure of they urge voters to take any particular position on a matter that
public funds for political might ultimately appear before them on the ballot. Accordingly,
purposes. the use of public funds to develop and air these educational
messages in the mass media was consistent with the various
legal requirements related to the expenditure of public funds for
political purposes previously described. Finally, we confirmed that
the state commission did not contribute any of its public funds to
campaign accounts used to support the various ballot measures.
62 California State Auditor Report 2006-114
We CAnnoT ConClude WheTheR The STATe
CommiSSion uSed PubliC fundS foR CAmPAign
ACTiviTieS duRing A fouR-monTh PeRiod in 2004
Although three individuals who worked for the state
commission’s media contractor were also employed by the
campaign committee for Proposition 82, we were generally able
to determine that the state commission’s payments to these
individuals were consistent with the restrictions on the use of
public funds for political purposes. However, for an almost four-
month period in 2004, we cannot determine whether public
funds were spent appropriately to pay for the services of these
three individuals because the state commission did not have
adequate records.
Between February 2002 and May 2006, the three individuals
alternately worked for the media contractor and for the
campaign committee for the Improving Classroom Education
Act and Proposition 82. We discussed the contract more fully
in Chapter 1. Their salaries and expenses were paid either
by the state commission, using tobacco tax funds provided
under the contract between the state commission and the
The state commission’s media contractor, or by the campaign committee, using
payments to three campaign committee funds. We were not able to obtain
individuals, who worked documentary information from the state commission that
for the media contractor, clearly demonstrates what activities these three individuals were
were generally consistent paid to perform at various points in time. To determine whether
with the restrictions the state commission’s payments to these individuals were
related to the use of consistent with the restrictions related to the use of public funds
public funds for political for political purposes, we examined the timing of its payments
purposes. However, for in the context of what activity was ongoing at the time related
a period of almost four to either a proposal for a ballot measure or a ballot measure. In
months in 2004, the addition, we interviewed two of the three individuals, as well as
state commission could the former chair of the state commission, so that we could ask
not demonstrate that the three individuals what services they were paid to perform
these payments were when public funds were used to pay for their services. Figure 5
appropriate. on the following page shows the time periods during which the
state commission paid these individuals through its contract
with the media contractor and also shows the dates when the
various proposals received their official title and summary from
the Office of the Attorney General (attorney general), thus
authorizing the proponents of the proposals to gather signatures
to qualify them for placement on the ballot.
California State Auditor Report 2006-114 6
64
California
State
Auditor
Report
2006-114
figuRe
California Children and families Commission–Time Periods for various Political initiatives and Propositions
All three individuals were media contractor employees included on invoices as subcontrac- All three individuals were subcontractors for the media
tors. As described in Chapter 1, the state commission* inappropriately paid fees, benefits, contractor. As described in Chapter 1, the state commission
and expenses for the three individuals totaling $623,000 using state funds. paid fees to the contractor totaling $191,000.
All three individuals were campaign All three individuals were campaign
staff. Salary and expenses paid with staff. Salary and expenses paid with
committee funds. committee funds.
Employee A
Employee B
Employee C
2002 2003 2004 2005 2006
January 12, 2004—The Office of the Attorney General (attorney April 8, 2004—Initiative sponsors issued August 18, 2004—The January 12, 2006—
general) issued the official title and summary for the Improving statement that they would discontinue their secretary of state issued The secretary of state
Classroom Education Act (Act)—CTA Reiner Initiative. † efforts to place the Act on the ballot. notification that the Act failed. certified Proposition 82.
August 15, 2005—The attorney general issued the June 6, 2006—The secretary
official title and summary for the Preschool for All Act of state issued notification
(Proposition 82).‡ that the Act failed.
Sources: The attorney general, secretary of state, and state commission contract files.
* California Children and Families Commission.
† The Act was submitted to the attorney general on November 21, 2003.
‡ Proposition 82 was submitted to the attorney general on June 15, 2005.
Based on the information we saw, the time periods for which
the state commission made payments to these individuals
generally corresponded with those periods when no campaign
activities were underway with the exception of an almost four-
month period in 2004. In other words, the state commission
generally only paid for the services of these three individuals
prior to the time a proposal for a ballot measure was submitted
to the attorney general to begin the ballot qualification
process. As described earlier, during this stage a state agency
may permissibly support many activities related to a proposal
using public funds. The presumption is that those activities will
not involve political advocacy because nothing is before the
voters for their approval or rejection. Once the proposals were
submitted to the attorney general to start the ballot qualification
process, the state commission no longer paid these individuals
to perform services for it, with the exception of the period
already mentioned.
During some or all of the period between February 2002 and
early December 2003, some of the services paid for by the state
commission, as shown in Figure 5, may have involved various
types of activities related to the Improving Classroom Education
Act, which had not yet become a ballot measure. At this point it
was permissible to use public funds to support various activities
related to what was a ballot proposal, and we do not question
payments made during this period.
We were, however, concerned about the appropriateness of
certain payments made to these three individuals during a
period of approximately four months between May 1 and
August 18, 2004. During this period, the Improving Classroom
Education Act had begun the ballot qualification process.
The attorney general had issued a ballot title and summary
and the proponents were authorized to gather signatures for
the proposal to qualify it for the ballot. The proponents had,
however, publicly announced that they were withdrawing their
support for the measure and were discontinuing efforts to place
it on the ballot. We did not find any documentary evidence
demonstrating that the three individuals were paid with
public funds to perform campaign activities during this period.
However, because of the state commission’s poor management
of the contract and lack of supporting documentation, the state
commission was unable to provide us with documentation
that showed what these individuals were paid to do during this
California State Auditor Report 2006-114 6
period or how it knew that these payments were appropriate. We
discuss the inadequacy of the state commission’s management
of this contract more fully in Chapter 1.
So that we might learn what services these individuals were paid to
perform between May 1 and August 18, 2004, we contacted each of
them as well as the former chair of the state commission. We were
able to talk with two of the three individuals and with the former
chair of the state commission. All of the individuals we talked
to indicated that they did not perform any campaign activities
between May 1 and August 18, 2004. The former chair indicated
that at this point it was their understanding that this ballot measure
was “dead” because the proponents had officially withdrawn their
support. Moreover, one of the individuals we talked to indicated
that while he had some limited involvement in the Improving
Classroom Education Act at other points in time, he had been
advised by legal counsel not to undertake any efforts related to a
ballot proposal once it was submitted to the attorney general, and
he stated that he had followed this legal advice. As stated earlier, the
state commission could not provide us with any documentation
that identified what services it paid these three individuals to
perform, so we could not confirm the assertions made to us by
these individuals. Consequently, we cannot definitively determine
whether the payments made by the state commission to the three
individuals during this period were appropriate.
Between August 19, 2004, and April 30, 2005, it is possible that
these individuals were engaged in various activities related to the
proposal that later became Proposition 82. However, at this point,
the proposal had not yet been submitted to the attorney general,
and the state commission had broad latitude in supporting
various preliminary, noncampaign, nonadvocacy activities related
to the proposal. Further, the state commission stopped paying
these three individuals for their services before the proposal
was submitted to the attorney general to begin the process of
qualifying for the ballot. As Figure 5 on page 64 shows, after this
proposal was submitted to the attorney general, the campaign
committee for Proposition 82 paid the salaries and expenses of
the three individuals. Thus, with the exception of the period
between May 1 and August 18, 2004, where we cannot definitely
conclude on the appropriateness of the payments, we found that
the state commission’s payments to these three individuals were
consistent with the various legal restrictions related to the use of
public funds for political purposes.
66 California State Auditor Report 2006-114
We conducted this review under the authority vested in the California State Auditor by
Section 8543 et seq. of the California Government Code and according to generally accepted
government auditing standards. We limited our review to those areas specified in the audit
scope section of this report.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
Date: October 31, 2006
Staff: Denise L. Vose, CPA, Audit Principal
Tammy Lozano, CPA, CGFM
Richard J. Lewis
Richard Power
Toufic Tabshouri
California State Auditor Report 2006-114 6
Blank page inserted for reproduction purposes only.
6 California State Auditor Report 2006-114
Agency Comments provided as text only.
California Children and Families Commission
501 J Street, Suite 530
Sacramento, CA 95814
October 18, 2006
Ms. Elaine M. Howle*
State Auditor
Bureau of State Audits
555 Capitol Mall, Suite 300
Sacramento, CA 95814
Re: Draft Report, 2006 BSA Audit of the California Children and Families Commission
Dear Ms. Howle:
The California Children and Families Commission (the “Commission”) has spent the past six
days carefully examining the draft audit report (the “Draft Report”) prepared by the Bureau of State
Audits (“BSA”) over the past six months. When this audit process started in March 2006, prompted
by public concerns that public funds may have been used to support the now-failed Proposition
82, the Commission committed to cooperating fully with the BSA’s efforts. We believe we have
fulfilled that commitment, as your staff has repeatedly recognized throughout the audit process. The
Commission’s efforts to cooperate with the audit manifest its commitment to public accountability.
The Political Advocacy Question
We fully agree with several of the Draft Report’s findings. For example, at the end of the
Draft Report’s review of the Commission’s activities, the BSA presents its findings regarding the
issue that began this process, i.e., public concerns about improper use of public funds for political
advocacy in the period leading up to the 2005 special election. The BSA concludes that the
Commission’s preschool ads furthered its statutorily-mandated duties; that “when we reviewed the
timing and the content …, nothing in the advertisements constituted political advocacy;” and that
the Commission “had clear legal authority to conduct its public advertising campaigns related to
preschool.” Draft Report, p. 73.
Moreover, after six months of review, the BSA concluded that:
Although the three individuals who worked for one of [the Commission’s] media contractors
were also employed by the campaign committee for Proposition 82, we were generally able
1
to determine that the state commission’s payments to these individuals were consistent with
the restrictions on the use of public funds for political purposes.
Draft Report, p. 74.
Although we fully expected these findings, we are gratified by them nonetheless.
* California State Auditor’s comments begin on page 81.
California State Auditor Report 2006-114 6
Elaine M. Howle
Page 2 of 12
The Commission’s Contracting Practices
The bulk of the Draft Report focuses on the Commission’s contracting practices. We
believe that the Draft Report lacks the context necessary to fully understand the constraints under
which the Commission has been operating. Specifically, the Draft Report does not acknowledge
2
the Commission’s history of scarce resources for administration or the Commission’s use of and
reliance on other state agencies for advice regarding contracting practices, and as a check on
those practices. When we expressed this concern to the BSA, it invited us to include such context
in our response, and we do so below. We also include some clarifications of the Commission’s
position on certain issues within the Draft Report. Finally, we turn to the BSA’s recommendations
and the Commission’s response to those recommendations.
The History and Context of the Commission’s Contracting Practices
The Draft Report’s critique of the Commission’s contracting practices is very surprising,
as throughout its short history the Commission has reached out to and relied upon multiple state
agencies to assist it in complying with all state contracting laws. We also note that in the last
year the Commission has made significant changes in its practices, in part due to the addition
in July 2005 of a new Executive Director, the appointment in March 2006 of a new Commission
chair, and the even more recent addition of a Chief Deputy Director and a Chief of Administration.
With these varied perspectives, and in combination with the Commission’s longer-term staff, the
Commission has become proactive in identifying new processes, procedures, and policies that
will formalize existing Commission practices, modify current practices as needed, and create new
procedures to help the Commission efficiently and effectively achieve its statutory objectives.
It is important to put the Commission’s administrative history in context so that the progress
it has made, particularly in the last year, is apparent. As the San Diego Superior Court observed
in 2000, the Commission began its existence in 1999 with a “skeleton” staff, and was immediately
hit by litigation, including “17 Public Records Act requests and numerous discovery requests” that
“diverted scarce resources of the Commission from performing other essential functions.” Cal.
Assoc. of Retail Tobacconists, Inc. v. California, (San Diego Superior Court, Case No. 732079 ),
Final Statement of Decision (Dec. 7, 2000), p. 40. The Commission’s resources remain scarce
due to the notable and unique statutory cap on the Commission’s administrative budget. The vast
majority of California agencies operate without any comparable constraint.
Because it was a start-up agency, the Commission deliberately sought assistance from
experienced state agencies, such as the Department of General Services, the Department of
Finance, and the Attorney General’s office, to assist it in compliance with all state laws, specifically
including contracting laws. While the Commission retains responsibility for compliance with
applicable state contracting requirements, it was reasonable for it to, and it did, rely on the input
from each of these agencies as a basis for its understanding that it was complying with state
contracting law and policy.
0 California State Auditor Report 2006-114
Elaine M. Howle
Page 3 of 12
For example, according to the State Contracting Manual (“SCM”) drafted by the Department
of General Services, Office of Legal Services (“DGS/OLS”), DGS approval of contracts “serves
to assist state agencies by … ensuring effective compliance with applicable laws and policies,”
“conserving the fiscal interests of the state and preventing improvident acts,” and “applying
contract knowledge and legal expertise prior to final approval.” SCM 4.02(c). Virtually all of the
contracts reviewed by the BSA were reviewed and approved by DGS/OLS. While the Commission
3
understands that it, too, must be responsible for its contracting practices, the DGS/OLS approval of
the vast majority of the contracts at issue indicated to the Commission that its contracting practices
complied with state laws and policies.
In another example of the safeguards the Commission relied on, the Commission retained
the Attorney General’s office to advise the Commission on legal matters, including contracting
3
laws, and attorneys from the Attorney General’s office attended every Commission meeting. The
Commission also contracted with the Department of Finance to perform annual audits of the
Commission to ensure that the Commission was engaged in appropriate fiscal management. In the
2004 and 2005 fiscal audit reports, the Department found “no instances of noncompliance” with law,
regulation, or contract that required reporting under generally accepted accounting principles and
“no matters involving the internal control and its operation that [the Department] considers to be
material weaknesses.”
Thus, based on its own efforts and the safeguards provided by three other state agencies,
the Commission historically understood that it was complying with state contracting laws and
policies. Its understanding was bolstered by the 2004 BSA audit of the Commission. As noted on
the BSA’s website, “governmental audits by the State Auditor are an important cornerstone in the
system of checks and balances expected by the people of California.” (www.bsa.ca.gov/aboutus/
4
statute.php.) At the end of its 2004 audit, which began in March and ended in July 2004, the BSA
concluded that: “The state commission consistently followed contracting rules applicable to all state
agencies….”
After validation like that, the Commission had no reason to believe that there was anything
wrong with its contracting practices. While the Commission appreciates the Draft Report’s new
guidance on contracting issues, many of its findings pertain to issues the BSA reviewed in 2004
and did not “call out.” The Commission regrets that it did not have the opportunity to understand
and address these issues previously.
4
Some of the issues the BSA reviewed in 2004 include the following matters addressed in
the Draft Report:
• The Draft Report indicates that payments of $623,000 for three employees/
subcontractors to a media contractor that occurred between February 2002 and
December 2003 were not allowed under the terms of the contract. (Draft Report,
pp. 20-23.) In 2004, the BSA reviewed the same file, which included all of the relevant
invoices, but made no findings regarding this contract. Had the issues been raised
4
in 2004, the Commission may very well have clarified the situation and proceeded
consistent with the contract’s terms.
• The BSA concludes that payment of $50,000 to a media contractor for a Preschool
for All Advocacy Plan was not contemplated in the contract and payment was
inappropriate because the Commission never obtained a finalized plan. (Draft Report,
California State Auditor Report 2006-114 1
Elaine M. Howle
Page 4 of 12
pp 23-24.) Although the plan was presented to the Commission and paid for in 2003,
4
the BSA reviewed this contract file in 2004 and made no findings regarding
this payment.
• The Draft Report cites a March 2004 contract as having no schedules for progress
and completion of work, leaving the Commission with “insufficient means with which
to monitor its contractors.” (Draft Report, pp. 25-27.) The BSA reviewed this contract
4
in 2004, but made no finding. The Commission may have been better able to address
the issue in 2004 when the contract had just begun and expectations between the
Commission and the contractor had not yet been settled by a two-year course of
dealing. The June 2002 and October 2003 contracts cited on pages 26 and 27 of the
Draft Report similarly were reviewed during the BSA’s 2004 audit, but the BSA made
no findings regarding those contracts.
• The BSA indicates that best practices would suggest that the Commission’s five “most
recent” media and public relations contracts should have contained specific clauses
defining “out-of-pocket” costs. (Draft Report, pp. 27-28.) Three of these five contracts
were in the file in 2004, and the BSA specifically reviewed two of them in 2004. The
4
BSA did not recommend, in 2004, inclusion of an “out-of-pocket” cost definition in
these types of contracts, or note the lack of such a clause as a deficiency. Both of the
most recent media and public relations contracts were executed after the BSA issued
its final 2004 audit report. Had the BSA made a recommendation in July 2004, it is
likely that these two contracts would include the “out-of-pocket” language the BSA now
identifies as a contracting best practice for state agencies.
• In the Draft Report, the BSA examines seven media and public relations contracts
dating back to 1999 and states that the Commission failed to appropriately utilize
workplans to manage these contracts. (Draft Report, pp. 28-30.) The BSA specifically
4
reviewed two of the contracts cited, “Public Relations Contract #2” and “Media
Contract #3,” in 2004. In fact, Public Relations Contract #2 is identified in the Draft
Report as having the highest incidence of workplan deficiencies of any of the
contracts examined, including six workplans without detailed budgets and two missing
workplans. Nonetheless, the BSA made no workplan deficiency findings in 2004 and
the Commission continued to administer the workplans consistent with the BSA’s 2004
conclusion that the Commission’s practices complied with contracting rules.
• The BSA cites an April 2004 invoice with insufficient documentation to support
$73,805 in charges. (Draft Report, p. 34.) That invoice was part of the contract file
4
when the BSA reviewed it in 2004. All but one of the remaining unsupported charges
cited in the Draft Report occurred during or after the 2004 BSA audit. (Draft Report,
pp. 33-36.) Had the Commission been alerted to this issue in 2004, many, if not all,
of the subsequent charges may have been handled much differently. Moreover, as to
the $191,000 in charges related to media subcontractors, the invoices from May 2004
to mid-April 2005 contain substantially equivalent information to that in the invoices
for the same subcontractors in 2002 and 2003. If the BSA had noted that in 2004 the
information in the earlier invoices was insufficient, the Commission would have taken
action to require further support for future invoices.
2 California State Auditor Report 2006-114
Elaine M. Howle
Page 5 of 12
• The BSA indicates that the Commission made advance payments to its public
relations contractor in July 2003, December 2003, February 2004, and September
2004 for purposes of paying Community Based Organizations for their efforts in
educating the public about the needs of California children in the first five years of
4
life. (Draft Report, pp 37-38.) The BSA reviewed this file in April 2004, over a year
after the first of these payments was made to the public relations contractor. The BSA
now criticizes these four payments in support of the Community Based Organization
program, three of which were in the file in April 2004, as well as one subsequent
payment. Had the Commission been made aware of this issue in connection with the
2004 audit, it is quite possible that the September 2004 payment never would have
been made or would have been structured differently.
• The BSA cites the Commission for failing to keep a copy of a state contract register
advertisement in the file with the contract that was ultimately awarded in 2001 after 13
bids were received and reviewed. (Draft Report, pp. 48-49.) The BSA reviewed this
4
contract in 2004 and made no findings of advertising problems. Regardless, this issue
appears to be a one-time problem, as the BSA found no similar problems with other
competitively-bid contracts. Moreover, it is highly likely that this contract was, in fact,
advertised, since it did receive 13 bids.
• The BSA cites a February 2004 media contract amendment as an example of
insufficient justification for a non-competitively bid contract amendment, one of six
such amendments the BSA cites in the same section. (Draft Report, pp. 52-53.) In
4
2004, the BSA reviewed the contract file for the media contract at issue and made
no finding that the amendment was insufficiently justified. Four of the five remaining
amendments were executed after the BSA issued its 2004 audit report.
• The BSA cites seventeen agreements with other California agencies (interagency
agreements) as having insufficient documentation that subcontractors were selected
by competitive bidding processes or were exempt from such processes. (Draft Report,
4
pp. 54-58.) In 2004, the BSA reviewed at least eight of the seventeen interagency
agreement files cited in the Draft Report, and made no finding of non-compliance with
subcontractor selection requirements.
• The BSA cites thirteen contracts that calculate permissible indirect costs by multiplying
an agreed percentage against the full contract amount or all of the subcontract
amounts found in the contract, rather than limiting the percentage application
to the first $25,000 of each subcontract under a single, primary contract. (Draft
Report, pp. 58-59.) To illustrate this point, the Draft Report uses a November 2001
interagency agreement that the BSA reviewed in 2004, although the BSA made no
4
findings related to incorrect calculation of indirect costs at that time. Indeed, during the
2004 audit, the BSA reviewed six of the thirteen interagency agreements it now cites
as including incorrect calculations of indirect costs. In any event, the Commission has
already addressed this issue, which appears to stem from staff’s misunderstanding
regarding how to calculate these fees.
California State Auditor Report 2006-114
Elaine M. Howle
Page 6 of 12
• The BSA cites forty-three contracts and twenty-two amendments as approved
by DGS after the date cited in the contract or amendment as the start date of the
contract period. (Draft Report, pp. 62-65.) Thirty-six of the forty-three contracts and
twelve of the twenty-two amendments were executed between 2000 and 2004. The
4
BSA specifically reviewed seventeen of these thirty-six contracts and two of the
amendments during the 2004 audit, and made no finding that the Commission had
failed to use best practices with regard to their approval. The six contracts cited by the
BSA that were executed in 2005 or 2006 would have been handled differently had the
Commission been alerted to the problem in 2004.
In sum, given the Commission’s history of working with other, more experienced and
4
knowledgeable agencies, and given the BSA’s 2004 conclusion that “[t]he state commission
consistently followed contracting rules applicable to all state agencies,” the Commission was both
concerned and surprised by many of the Draft Report’s findings. Nonetheless, the current audit
will provide a template for the Commission to identify and correct weaknesses in its practices,
policies, and procedures. This year the Commission is already a dramatically different agency
than it was last year, due to the diligent and conscientious efforts of its Commissioners and staff
to continuously improve in every area of operation. With the information we now have, we will work
very hard to ensure that next week, next month, and next year the Commission becomes a model
for state contracting. Indeed, many of the actions we outline below have already been implemented,
either formally or informally, and the change in the Commission’s operations are already apparent.
Clarifications of Specific Issues in the Draft Report
While the Commission does not dispute the Draft Report’s overall conclusion that there is
room to improve the Commission’s contracting practices, there are some limited areas of the Draft
Report that do not reflect the Commission’s position or understanding of the facts.
Media Subcontractors as Employees. The Draft Report concludes that $623,000 in
payments to media subcontractors were impermissible under the terms of the media contract.
Although determining that the retention of these subcontractors may have been permissible under
the contract if they had been treated as subcontractors (Draft Report, pp. 21, 32), the Draft Report
concludes that because they were employees of the media contractor rather than subcontractors,
5
the payments were impermissible. (Draft Report, pp. 20-23.) We believe this finding excessively
emphasizes the form of these individuals’ engagement by the media contractor over its substance.
That is, the media contractor could have engaged these individuals as subcontractors.
(Draft Report, p. 32 (“Although paying these individuals as subcontractors under its media contract
5
was allowable in certain circumstances under the contract’s terms. . . .”).) That the media contractor
or Commission staff may have called these individuals “employees” in some cases rather than
“subcontractors” does not justify the rather harsh conclusion that “the state commission allowed its
media contractor to circumvent the payment provisions of the contract.” (Draft Report, p. 22.) In
fact, whether someone is an employee or an independent contractor is a highly fact-specific inquiry
turning on many factors. S.G. Borello & Sons v. Dept. of Industrial Relations (1989) 48 Cal. 3d 341,
350-351; Empire Star Mines Co. v. California Employment Commission (1946) 28 Cal. 2d 33, 43-44.
4 California State Auditor Report 2006-114
Elaine M. Howle
Page 7 of 12
Indeed, the media contractor did not even consistently describe these subcontractors as
“employees,” and the reality appears to be that it treated them as subcontractors. While some of
the media contractor’s e-mails discuss the three subcontractors as employees or state that the
individuals are “technically” employees, other e-mails refer to them as contractors. Still other
e-mails suggest that the media contractor did not direct the subcontractors as employees, and did
not apply the same terms and conditions of employment to them that it did to its regular employees.
In addition, it is our understanding that the media contractor did not provide these individuals with
offices, e-mail accounts, computer server access, or other resources that it generally provided
to its regular employees. And perhaps the most important evidence on this issue, i.e., the media
6
contractor’s invoices to the Commission, describe the individuals as subcontractors. In short, the
weight of the evidence suggests that the media contractor actually considered these individuals
consultants rather than employees, making the Commission’s payment to them much more in line
with the terms of the contract.
In any event, this finding is directed at an isolated issue. While the Commission has
no reason to believe the situation will be repeated, it will ensure through staff training that it
understands the concerns and will clarify any future contractor/subcontractor relationships that are
unclear.
Work Within the Scope of the Media Contract. The Draft Report also indicates that
7
payment to the subcontractors was improper because, according to the BSA, the activities
performed by the individuals were outside the scope of the contract. (Draft Report, pp. 20-24.) The
Commission does not believe this is a wholly accurate depiction of the subcontractors’ activities.
We very recently learned that the subcontractors spent a good deal of time on activities like
developing media/advertisements, aligning the Commission’s media strategy with its programs,
and implementing media campaigns addressing preschool and healthcare for children. The
media contract at issue includes in its scope of work conceptualizing, developing, pre-testing,
and implementing advertising campaigns, and ensuring advertising content compliments the
Commission’s program activities. Thus, it appears that at least some of the activities performed by
these subcontractors were within the scope of the contract, although the Commission understands
that the lack of documentation in its files renders a precise understanding difficult.
8
The Draft Report also concludes that development of the Preschool for All Advocacy Plan
was outside the scope of the media contract, which the Draft Report describes as “purchasing
printed ad space or broadcast media time.” (Draft Report, pp. 23-24.) The contract specifically
states that the contractor is “responsible for, but not limited to,” a variety of activities including
developing “a plan to ensure that advertising content is consistent with and complementary
to CCFC-funded program activities,” and conducting research and market analysis to provide
information about “how to best position CCFC public education advertising messages relative to
other social marketing and advertising campaigns and the relative merit of selected strategies
and messages.” Thus, developing a Preschool for All Advocacy Plan that encompasses not only
traditional media but social marketing and advertising campaigns appears to be within the scope of
the contract.
California State Auditor Report 2006-114
Elaine M. Howle
Page 8 of 12
Draft Report Title. The Draft Report’s title reflects only the first two chapters of the report
regarding contracting. Given that the audit was prompted by public concerns that the Commission
spent tens of millions of dollars improperly on advertising the benefits of preschool, and given
that the BSA found that the Commission’s advertising was well within its statutory authority, did
not constitute political advocacy, and met the constraints on the use of public funds for political
advocacy, the Commission expressed its concern to the BSA that the Draft Report’s title did not
reflect the BSA’s findings on these critical issues. The BSA indicated that selection of the report title
was within its discretion and it chose to leave the title as reflective of only the contracting chapters.
The Commission disagrees with this exercise of the BSA’s discretion.
Chapter Two Title. The title of Chapter Two indicates that inconsistencies in the
Commission’s contracting practices resulted in “violations of state laws and policies.” The
Commission requested that the BSA specify within Chapter Two where it found violations of law as
opposed to violations of policy. The BSA indicated that it would review the chapter to ensure clarity,
9
but indicated that it had found only one instance that it believed was a violation of state law (as
opposed to policy). With this understanding, the Commission requested that the title of Chapter Two
be changed to reflect that inconsistencies in the Commission’s contracting practices resulted in
“violations of state policies and, in one case, of state law.” The BSA indicated it would consider the
request but, to the Commission’s knowledge, it has not modified the chapter title.
CTA Improving Classroom Education Proposed Ballot Measure. The BSA examined the
Commission’s payment to its subcontractors who also worked on the 2003/2004 California Teachers
Association’s (“CTA”) Improving Classroom Education proposed ballot measure, for the purpose of
determining whether the Commission improperly spent public funds on political advocacy. (Draft Report,
pp. 74-78.) The Draft Report focuses on the period between April 8, 2004, when the CTA withdrew
its support for its own proposed ballot measure (thereby rendering it a nullity), and August 18, 2004,
when the Secretary of State officially determined that the initiative had failed to qualify for the ballot.
The BSA indicates that the documents in the Commission’s files are insufficient to establish what the
subcontractors were doing when they worked for the Commission’s media contractor. The BSA therefore
0
theorizes that the subcontractors might have been working on the Improving Classroom Education
proposed ballot measure. The Commission disagrees with this theory.
As the BSA acknowledges in the Draft Report, the CTA withdrew its support on
April 8, 2004, and both the former chair of the Commission and one of the subcontractors
interviewed by the BSA indicated that the proposed ballot measure was “dead” as of that date, i.e.,
three weeks before the subcontractors resumed working with the Commission’s media contractor.
There is no evidence that anyone performed any work on the proposed ballot measure after the
CTA withdrew its support. Moreover, after six months of unrestricted access to the Commission’s
files and systems and after interviewing the former Commission chair, the former Commission
Chief Deputy Director, and the subcontractors, the BSA found no evidence that the subcontractors
performed any work on the proposed ballot measure during the period in question. In short, all the
circumstances and evidence suggest that the subcontractors did not work on the proposed ballot
0
measure while they worked with the Commission’s media contractor. As a result, the Commission
does not find any support for the theory that because Commission records are not fully developed,
these subcontractors might have been working on activities related to the initiative.
6 California State Auditor Report 2006-114
Elaine M. Howle
Page 9 of 12
Use of Subcontractors under Interagency Agreements. The Draft Report indicates that
the use of subcontractors under seventeen interagency agreements lacked sufficient justification/
documentation. (Draft Report, pp. 54-58.) Ten of the agreements, including eight reviewed
4
by the BSA in 2004, included express language that subcontractors would be used. (Some
contracts specifically identified the subcontractor(s) and provided specific budgets and task lists
for them.) These ten contracts were approved by the Department of General Services/Office of
Legal Services. Written approval by DGS/OLS is one of the ways that agencies can comply with
subcontracting requirements for interagency agreements. The Commission therefore believed it had
complied with the requirements when it obtained DGS/OLS approval of the contracts.
To support its alternative conclusion regarding these contracts, the BSA called an
attorney at DGS/OLS and obtained an oral opinion that DGS/OLS written approval is provided
in a document that is separate from the contract itself. The Commission notes that the State
Contracting Manual, drafted by DGS/OLS, makes no such distinction in whether written approval
of subcontractors is included within, or separate from, the contract itself. We have never seen any
written policy or other documentation that the official position of DGS/OLS is as reported to the
BSA. While the Commission does not dispute the DGS/OLS’s attorney’s position and will treat
these contracts differently in the future, the DGS/OLS requirement of a second document
confirming the provisions of a DGS/OLS approved contract is not apparent in the provisions of
the SCM. State agencies may appreciate more specific direction on compliance with this specific
practice of DGS/OLS.
Justification for Non-Competitively Bid Contract. The Draft Report identifies one
q
contract, let in 1999/2000, as problematic in its justification for non-competitive bidding and in its
justification of the contract amount. (Draft Report, pp. 50-52.) But as the report acknowledges
(p. 52), the Commission let two other non-competitively bid contracts in 2000 that were challenged
in litigation, in part on the basis that the justification for non-competitive bidding and the justification
of the contract amounts were insufficient. In that case, the court held that under the circumstances
then prevailing at the Commission, the Commission’s acts in non-competitively bidding those two
contracts and in setting the contract prices were reasonable. Although no one challenged the
non-competitive bid status or the cost-justification of the third contract, it was let at the same time
and under the same circumstances as the two other contracts. All three of these contracts are a
product of difficult circumstances recognized by the San Diego Superior Court in upholding the
validity of the two contracts before it. We feel confident that had the third contract been included in
the same litigation, the court would have reached the same conclusion. We also note the Superior
Court’s finding with respect to the two litigated contracts that the state received its money’s worth.
The BSA Recommendations and the Commission’s Responses
The Commission has carefully reviewed all of the BSA’s recommendations in regard to
Chapter One (Contract Management) and Chapter Two (Contracting Practices). As to Chapter 3
(Political Advocacy), the BSA had no recommendations.
California State Auditor Report 2006-114
Elaine M. Howle
Page 10 of 12
The Commission believes that the majority of BSA’s recommendations regarding Chapters
One and Two result from a lack of updated training programs and procedures for contracting. We
are addressing the recommendations as follows:
1. Policies. Since mid-2005, the Commission has been re-examining its existing administrative
structure. In mid-2006, when our new Chief Deputy Director (previously the Board of
Equalization’s Chief of Customer and Taxpayers Services Division) and new Chief of
Administration (previously the Department of Education’s Manager of Funding, Allocations,
and Administrative Services) were selected, the focus turned from larger reorganization
issues to specific needs like revised policies and procedures. We have developed an
outline for a new Administrative Policies and Procedures Manual that will include a section
on contracting generally and on contracts unique to the Commission specifically. The
policies will cover:
a. Key contract compliance standards and policies to address consultant service
contracts, interagency agreements, and contracts with local governments;
b. Guidelines for reviewing and approving subcontractors in advance, including
methods of documenting the approvals;
c. Guidelines for oversight of subcontractor usage in interagency agreements,
including required documentation of competitive bidding or other avenues for
appropriate selection of subcontractors;
d. Competitive bidding, including steps to be taken when fewer than three bids are
received, and standardized documentation requirements for scoring competitive
bids. We will also address appropriate use of non-competitive bids, including
justification requirements;
e. Advertising proposed contracts for bid;
f. Calculating indirect costs on subcontracts under interagency agreements;
g. Media and public relations contract management, addressing issues specific to
these types of contracts. Workplan requirements, review, and approval will be
included;
h. Invoice review and approval, including acceptable documentation of expenses and
other charges;
i. Documentation and filing of all contract documents; and
j. Contract life cycles, including planning for the time required to both develop the
contract and obtain approval from DGS in advance of the contract start date.
California State Auditor Report 2006-114
Elaine M. Howle
Page 11 of 12
2. Training. All staff who have responsibility for contracting will now be required to complete
specific training regarding contracts, and to renew their training periodically to ensure
that they are exposed to and retain all key contracting concepts and stay informed of
new developments in state contracting requirements. Training will be tailored to each staff
member’s level of responsibility for contracting. Training requirements will be outlined
in each staff member’s individual development plans, which form the basis for annual
evaluations. Specifically:
a. We have already sent multiple staff members to training provided by the
Department of General Services on various contracting issues, including scope
of work, documentation, non-competitive bids, and evaluation criteria. We have a
schedule of classes for staff members to ensure that all staff members complete
all required DGS classes no later than July 2007. Because DGS’s classes have
limited space, last month we requested that DGS perform on-site training with a
large group of our staff. DGS has not yet responded to our request. If DGS is able to
accommodate our request, we anticipate that all staff will complete all required DGS
training early next year.
b. We have already conducted in-house classes, developed and administered by our
new Chief of Administration, regarding contract management. We plan to continue
this program to include formal training sessions depending on need but on a
frequency of three to twelve sessions annually.
c. As noted above, we are reviewing and revising all of the Commission’s policies. As
they relate to contracting, all staff with contract-related responsibilities will receive
training on the Commission’s policies.
d. We have assigned the coordination of staff training to a staff member, who will
provide quarterly reports to senior management on the status of staff training.
3. We have already drafted a board procedures manual and will finalize and adopt it for
use by the Commission soon. We believe that a board procedures manual will assist
the Commissioners in understanding their roles and responsibilities, both at meetings
and in other interactions with staff. We believe that providing Commissioners with
tools to understand the state process will result in more informed interactions between
Commissioners and staff both at and outside of Commission meetings.
As to the remaining issues, the Commission has suspended the MOU program. No new
allocations under Health and Safety Code section 130125(i) will be made until the Commission’s
counsel can review the statutory authority previously relied on for this program and advise the
Commission whether or not the program may continue and, if so, under what circumstances. In
addition, the Commission will continue its discussion with its counsel regarding the Commission’s
authority to delegate contracting authority.
California State Auditor Report 2006-114
Elaine M. Howle
Page 12 of 12
Conclusion
In conclusion, the Commission appreciates the BSA’s hard work and its findings. We
are pleased that the BSA has confirmed that the initial basis for requesting the audit – concerns
that the Commission had misspent public monies on political advocacy and had coordinated its
spending with the proponents of Proposition 82 – was unfounded. The Commission is also pleased
with the BSA’s provision of a roadmap, through its audit report, for the Commission to make itself
a model for state contracting practices. We are deeply committed to that objective, which we have
already begun to pursue aggressively by implementing new policies and practices and by improving
staff training.
Sincerely,
(Signed by: Kris Perry)
Kris Perry
Executive Director
0 California State Auditor Report 2006-114
CoMMenTS
California State Auditor’s Comments
on the Response From the California
Children and Families Commission
To provide clarity and perspective, we are commenting on
the California Children and Families Commission’s (state
commission) response to our audit report. The numbers
below correspond to the numbers we placed in the margins of
the state commission’s response.
1
The state commission’s comments are misleading and fail to address
our entire conclusion. Although we conclude on page 63 that
we were generally able to determine that the state commission’s
payments to these individuals were consistent with the restrictions
on the use of public funds for political purposes, we also concluded
that for almost a four-month period in 2004, we could not
determine whether public funds were spent appropriately to pay for
the services of these three individuals because the state commission
did not have adequate records.
2
The state commission is being disingenuous. Beginning in fiscal
year 1999-2000, the state commission has received an average of
$6 million each year for a total of $42 million as of June 30, 2006,
to use for its own administrative functions. Further, because it
has not fully expended the funds available to it every year, as
of June 30, 2006, it has $22.6 million of the $42 million still
available for its use. Thus, its claim of a history of scarce resources
does not appear to be valid.
3
The state commission is correct in its response by recognizing
that it, and not the Department of General Services, the Attorney
General’s Office, or the Department of Finance is responsible for
its contracting practices.
4
To provide clarification, the scope of the 2004 audit primarily
focused on the county commissions’ policies and procedures
for allocating the 80 percent of the tobacco tax revenues they
received. Because the focus of the 2004 audit was mainly on the
county commissions, we selected only a small sample of the state
commission’s contracts to perform a high-level review, limited
to the contracting methods and whether the state commission
obtained certain approvals.
California State Auditor Report 2006-114 1
Additionally, because our 2004 audit was focused on allocation
procedures, we did not review a sample of invoices or deliverables.
In contrast, our current audit includes an in-depth review of
state contracting rules as well as a review of 62 payments and
selected deliverables. Many deficiencies we discuss in our current
report we identified during our review of these payments and
deliverables. Finally, the state commission incorrectly assumed
that we reviewed all 27 contracts on a list it provided to us during
our 2004 audit. We only selected eight contracts from that list
to review; thus, many of the contracts the state commission
discusses in the bullet points of its response were not, in fact,
reviewed during our 2004 audit.
5
The state commission is missing the point in its characterization
that we excessively emphasized the form of the engagement of
three of the media contractor’s employees over the substance. As
we state on page 19, the provisions of the contract did not allow
the contractor to charge the state commission directly for the
services of its employees. Further, even if we were to view these
three individuals as subcontractors, which we do not, the payments
made by the state commission would still be impermissible.
According to the contract provision that that we cite on page 19, all
subcontracts must be pre-approved by the state commission and,
as we state on page 19, the state commission neither received nor
approved subcontracts for these three individuals.
6
We are puzzled by the state commission’s assertion that “the
weight of the evidence suggests that the media contractor actually
considered these individuals [as] consultants rather than employees,
making the commission’s payment to them much more in line
with the terms of the contract.” The media contractor provided us
with payroll records, which indicated that the three individuals
were, in fact, its employees. Further, as we state on page 19,
correspondence we obtained between the media contractor
and the state commission clearly indicated that it was aware
that these individuals were employees of the media contractor
rather than subcontractors. Further, as we state on page 20, other
correspondence we obtained indicated the contractor had concerns
about whether these types of charges were appropriate under the
terms of the media contract. Thus, it does not seem plausible to us
that either the media contractor or the state commission believed
these individuals were other than employees.
7
The state commission is incorrect. We do not state that payment
to the subcontractors was improper because the activities performed
by the individuals were outside the scope of the contract. Instead,
2 California State Auditor Report 2006-114
what we do state on page 18 is that these types of payments
violated the terms of the contract, which allowed for payments
based only on the contractor’s own services, in the form of
commissions applied to the cost of the advertising it placed; no
other services or fees were to be charged.
8
The state commission is again incorrect when it states that our
report concludes that development of the Preschool for All
Advocacy Plan was outside the scope of the media contract. Our
conclusion on page 20 is that this is another instance of the state
commission making an unallowable payment under the contract
provisions that specify no fees would be charged.
9
The state commission misstates what we said. While it is true
that only one state law was violated, based on our testing, it was
violated multiple times.
0
We did not theorize. As we indicate on pages 65 and 66, because
of its poor management of the contract and lack of supporting
documentation, the state commission was unable to provide
us with evidence that showed what these individuals were paid
to do during this period or how it knew these payments were
appropriate. Further, the only evidence we have as to what these
individuals were doing during the period from May 1 through
August 18, 2004, are based on their assertions, which cannot
be corroborated by documentation from the state commission.
Thus, we stand by our statement that we cannot definitively
determine whether the payments made by the state commission
to the three individuals during this period were appropriate.
q
As we state on page 43, although the court found that these two
contracts were valid and reasonable under the circumstances,
the court also indicated it reached this conclusion despite the
fact that there were technical violations of state contracting
laws and policies. We believe we have appropriately identified
the deficiencies with this third contract that was not part of the
court’s ruling.
California State Auditor Report 2006-114
cc: Members of the Legislature
Office of the Lieutenant Governor
Milton Marks Commission on California State
Government Organization and Economy
Department of Finance
Attorney General
State Controller
State Treasurer
Legislative Analyst
Senate Office of Research
California Research Bureau
Capitol Press
4 California State Auditor Report 2006-114