Recommendations

Disabled Veteran Business Enterprise Program The Departments of General Services and Veterans Affairs Have Failed to Maximize Participation and to Accurately Measure Program Success February 2019 REPORT 2018‑114 IMAGE PENDING CALIFORNIA STATE AUDITOR 621 Capitol Mall, Suite 1200 | Sacramento | CA | 95814 916.445.0255 | TTY 916.445.0033 For complaints of state employee misconduct, contact us through the Whistleblower Hotline: 1.800.952.5665 Don’t want to miss any of our reports? Subscribe to our email list at auditor.ca.gov For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255 This report is also available online at www.auditor.ca.gov | Alternative format reports available upon request | Permission is granted to reproduce reports Elaine M. Howle State Auditor February 14, 2019 2018-114 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 the Joint Legislative Audit Committee requested, the California State Auditor presents to you this audit report regarding California’s Disabled Veteran Business Enterprise (DVBE) program. The Department of General Services (General Services) and the California Department of Veterans Affairs (CalVet) are responsible for overseeing the DVBE program, which requires that state governmental entities that award contracts for goods or services (awarding departments) strive to spend at least 3 percent of the cumulative value of all their contracts on DVBE firms (3 percent goal). This report finds that the State lacks accurate data to gauge DVBE program success and that General Services and CalVet have failed to maximize DVBE participation and to accurately measure the program’s success. One indicator that the DVBE program could be improved is that only a small percentage of currently certified DVBE firms actually benefit from the program. Of the 1,671 firms registered in the DVBE program in fiscal year 2017–18, only 133 (or 8 percent) received contracts as prime contractors directly from state agencies. Moreover, 89 percent of the total amount the State awarded directly to DVBE firms that year went to only 30 of those 133 firms. We reviewed six awarding departments to understand how they identify and contract with DVBE firms, and they explained that they often struggle to find a DVBE firm that can provide the services or products they need. The awarding departments claim that there are not enough qualified certified DVBE firms. Nevertheless, CalVet and General Services have not considered awarding departments’ needs in their outreach efforts to encourage more businesses owned by disabled veterans to participate in the DVBE program, nor have they measured the success of those outreach efforts. CalVet also lacks the necessary resources to fully meet its statutory responsibility to assist departments that struggle to meet the 3 percent goal, and we believe that General Services is better equipped to fulfill this responsibility. Finally, none of six awarding departments we reviewed could fully support the amounts that they told General Services they had spent on contracts with DVBE firms in fiscal year 2017–18. As a result, General Services may have overstated awarding departments’ successes in meeting the 3 percent goal, further highlighting the State’s need for reliable data by which to measure this program’s success. Respectfully submitted, ELAINE M. HOWLE, CPA California State Auditor 621 Capitol Mall, Suite 1200 | Sacramento, CA 95814 | 916.445.0255 | 916.327.0019 fax | www.auditor.ca.gov iv California State Auditor Report 2018-114 February 2019 Selected Abbreviations Used in This Report Audit Services General Services’ Office of Audit Services awarding departments state governmental entities that award contracts for goods and services Caltrans California Department of Transportation CalVet California Department of Veterans Affairs Corrections California Department of Corrections and Rehabilitation DMV Department of Motor Vehicles DVBE Disabled Veteran Business Enterprise DVBE firms businesses certified in the DVBE program DVBE office General Services’ Office of Small Business and Disabled Veteran Business Enterprise Services FI$Cal Financial Information System for California General Services Department of General Services LPA Leveraged Procurement Agreement Public Health California Department of Public Health California State Auditor Report 2018-114 v February 2019 CONTENTS Summary 1 Introduction 5 A Small Percentage of Firms Have Benefited From the DVBE Program 11 General Services and CalVet Have Not Adequately Overseen the DVBE Program, Hindering Its Success 19 The State Lacks Accurate Data to Fully Measure the DVBE Program’s Success 35 Appendix A Scope and Methodology 41 Appendix B Implementation of Recommendations From Our Previous Audit 45 Appendix C Selected Data Related to the 30 DVBE Firms That Received the Most Money From State Contracts 47 Responses to the Audit California State Transportation Agency 53 California Department of Transportation 55 Department of Motor Vehicles 59 California Department of Veterans Affairs 61 California State Auditor’s Comments on the Response From CalVet 63 California Department of Corrections and Rehabilitation 65 California Government Operations Agency 67 Department of General Services 68 California State Auditor’s Comments on the Response From General Services 75 California Department of Public Health 77 vi California State Auditor Report 2018-114 February 2019 Blank page inserted for reproduction purposes only. California State Auditor Report 2018-114 1 February 2019 SUMMARY The Disabled Veteran Business Enterprise (DVBE) program directs California governmental entities, such as state agencies and departments, to procure goods and services from firms that the Department of General Services (General Services) has certified as meeting the DVBE eligibility criteria required by law (DVBE firms). The DVBE program requires that state governmental entities that award contracts for goods and services (awarding departments) strive to expend not less than 3 percent of the cumulative value of all their contracts on DVBE firms (3 percent goal). In its most recent annual report on state contracting activity, General Services reported that, overall, the State achieved the 3 percent goal each year during fiscal years 2014–15 through 2016–17. However, the legislative intent of the DVBE program is to honor California’s disabled veterans by having them benefit financially from doing business with the State. A report we issued in 2014 titled Disabled Veteran Business Enterprise Program: Meaningful Performance Standards and Better Guidance by the California Departments of General Services and Veterans Affairs Would Strengthen the Program (Report 2013‑115) pointed out several shortcomings of the program. Our current review found that many of the issues we reported in 2014 still persist. A Small Percentage of Firms Have Benefited From the DVBE Program Page 11 The DVBE program continues to benefit only a small percentage of DVBE firms. Just 133 (or 8 percent) of the 1,671 certified DVBE firms received contracts directly from awarding departments during fiscal year 2017–18.1 Further, 30 of those 133 DVBE firms captured most of the revenue associated with these contracts. Awarding departments stated that they often struggle to find a DVBE firm that can provide the services or products they need, and they attribute this difficulty to a lack of qualified DVBE firms and the complexities involved in using General Services’ procurement system to identify such DVBE firms. 1 These percentages do not include DVBE firms that are subcontractors and that provide products or services on behalf of primary contractors. Specifically, as we report on page 11, although General Services believes many such firms exist, it lacks the data necessary to quantify the number of DVBE firms that are subcontractors and that financially benefit from doing business with the State. 2 California State Auditor Report 2018-114 February 2019 General Services and CalVet Have Not Adequately Overseen the Page 19 DVBE Program, Hindering Its Success The California Department of Veterans Affairs (CalVet) and General Services have not measured the success of their outreach efforts in encouraging more firms owned by disabled veterans to participate in the DVBE program. In addition, until recently neither department had considered the types of products and services that awarding departments struggle to procure from DVBE firms to help inform the two departments’ outreach activities. Without considering information from awarding departments about their contracting needs and struggles, CalVet and General Services are missing opportunities to make the DVBE program more successful by increasing the number of DVBE firms that offer those products or services. Further, CalVet lacks the necessary staffing and immediate access to data to fully meet its statutory responsibility to assist underachieving awarding departments in meeting the 3 percent goal. However, given General Services’ expertise and access to resources, we believe it is better equipped than CalVet to fulfill this responsibility. The State Lacks Accurate Data to Fully Measure the DVBE Page 35 Program’s Success The six awarding departments we reviewed could not fully support the DVBE participation data they reported for fiscal year 2017–18. Most significantly, five of these six departments overstated some DVBE participation amounts. As a result, departments’ claimed DVBE participation levels could be significantly inflated and could lead users of this information to draw incorrect conclusions about these departments’ success in meeting the 3 percent goal. Additionally, General Services does not have reliable contracting and procurement data to measure the DVBE program’s success. General Services plans to use the Financial Information System for California (FI$Cal) to generate DVBE activity reports beginning with fiscal year 2018–19, which may reduce the likelihood of input error and may alleviate some DVBE reporting issues. California State Auditor Report 2018-114 3 February 2019 Summary of Recommendations Legislature To ensure that awarding departments that fail to meet the 3 percent goal receive the assistance necessary to achieve the goal, the Legislature should amend state law to transfer the responsibility for monitoring and assisting underachieving departments from CalVet to General Services. CalVet and General Services as Oversight Entities To ensure that a greater number of DVBE firms benefit from the DVBE program, General Services should work with awarding departments to understand why only a few DVBE firms receive a large number of contract awards. Using its findings, General Services should take the necessary steps to remedy this situation. To ensure that awarding departments can effectively identify DVBE firms that provide needed products and services, General Services should work with awarding departments to make its procurement system easier to use for identifying such DVBE firms. To ensure that their outreach efforts are effective and result in a greater number of DVBE firms available to provide the necessary goods and services awarding departments are seeking, CalVet and General Services should assess the effectiveness of their past outreach efforts and work with awarding departments to target specific types of disabled veteran‑owned businesses. Until it begins generating DVBE activity reports using FI$Cal, General Services should require awarding departments to perform a secondary review of their DVBE activity reports to make sure that the data are supported by documentation. Awarding Departments To ensure that DVBE participation data are reported accurately and consistently, Caltrans, Corrections, DMV, General Services, and Public Health should implement or strengthen a secondary review process to ensure that contracts are accurately recorded in their data systems. 4 California State Auditor Report 2018-114 February 2019 Agency Comments Caltrans, CalVet, Corrections, DMV, and Public Health agreed with the recommendations we made to them and indicated that they will take steps necessary to implement all recommendations. Although General Services generally agreed with our recommendations, it overstated the effectiveness of some of its existing processes. California State Auditor Report 2018-114 5 February 2019 INTRODUCTION Background The Legislature established the Disabled Veteran Business Enterprise (DVBE) program to provide disabled veterans opportunities for entrepreneurship and to recognize the sacrifices of Californians disabled during military service. The Legislature intended for state governmental entities that award contracts for goods or services (awarding departments) to take all practical actions necessary to meet or exceed the goal of awarding at least 3 percent of the total value of their contracts during a fiscal year to firms certified by the Department of General Services (General Services) as meeting the DVBE criteria (DVBE firms), referred to as the 3 percent goal. For example, a department that awards contracts valued at a total of $100,000 for goods or services during the year must strive to award at least $3,000 of that total to DVBE firms. According to the State Contracting Manual, if an awarding department does not meet the 3 percent goal, it must develop a plan for improvement. Although state law establishes the 3 percent goal as the minimum level of expected performance, some awarding departments, such as the California Department of Veterans Affairs (CalVet) and the California Department of Transportation (Caltrans), have established their own higher goals. Both departments explained that their rationale for setting a higher goal is to ensure that their departments exceed the state goal. Awarding departments may meet the 3 percent goal by contracting directly with certified DVBE firms as prime contractors—those contractors who contract directly with the awarding department— or by contracting with non‑DVBE firms who use DVBE firms as subcontractors for a portion of the contract work. According to General Services’ annual reports on state contracting activity, overall the State achieved the 3 percent goal each year from fiscal years 2014–15 through 2016–17. Further, according to its fiscal year 2016–17 annual report, DVBE subcontractors accounted for 32 percent—or Examples of State Contracts Exempt from the $105 million—of the State’s total reported DVBE DVBE Program’s 3 Percent Goal participation of $327 million. Contracts between awarding departments and the Although the 3 percent goal applies to awarding following entities, among others, are exempt from departments’ overall awards for the year, some the 3 percent goal: contracts are exempt from DVBE participation • Federal, state, and local government agencies requirements. Departments also have the discretion • Public colleges and universities to waive the requirements for an individual contract under certain circumstances. The text box shows • Joint powers authorities examples of contracts that are exempt from the Source: State regulations and the State Contracting Manual. 3 percent goal. 6 California State Auditor Report 2018-114 February 2019 General Services Is Responsible for Administering the DVBE Program State law establishes General Services as the administering agency for the DVBE program, and in this capacity it is responsible for performing several functions. One such function is assessing applicant firms’ eligibility to become DVBEs and certifying those firms that meet the requirements. According to General Services’ records, as of December 2018, 1,671 firms were certified as DVBEs. General Services’ Office of Small Business and Disabled Veteran Key State Disabled Veteran Business Enterprise Certification and Eligibility Requirements Business Enterprise Services (DVBE office) evaluates applications for certification. The State law generally defines a disabled veteran business text box summarizes the key state DVBE enterprise as a business which General Services has certified eligibility requirements. As part of its review of as meeting all of the following requirements: applications for certification, the DVBE office • At least 51 percent of the business is owned by one or requires new applicants to supply proof from more disabled veterans. the U.S. Department of Veterans Affairs or the U.S. Department of Defense that the business • The daily business operations are managed and owner has a service‑connected disability of at controlled by one or more disabled veterans. least 10 percent. Furthermore, state law requires • The business is not a subsidiary of a foreign corporation. the disabled veteran business owner to submit tax The term disabled veteran is defined in state law as a veteran returns so that the DVBE office can substantiate who meets all of the following: that one or more disabled veterans actually own the business. As of January 2019, a certified DVBE • Is a veteran of the U.S. military, naval, or air service. must reapply every two years to maintain its • Has a military, naval, or air service‑connected disability of certification status. at least 10 percent. • Permanently resides in California. In addition to requiring that General Services certify DVBE firms, state law requires that it Source: Military and Veterans Code. prepare an annual public report indicating whether each awarding department has met the 3 percent goal. State law further requires General Services to categorize this information by type of contract, such as contracts for construction, professional services, supplies, and information technology procurements. To enable it to develop this report, the DVBE office requires awarding departments, by August 1 each year, to use a standardized reporting form (DVBE activity report) to report information on the value of all contracts they awarded during the previous fiscal year and the value of contracts they awarded to certified DVBE firms as either prime contractors or subcontractors. To increase the likelihood that the DVBE participation data can be substantiated and are reported properly, General Services requires awarding departments to maintain supporting documentation for their DVBE activity reports. The DVBE office provides training opportunities to awarding departments on how to properly report their DVBE contracting activity. California State Auditor Report 2018-114 7 February 2019 General Services also has an Office of Audit Services (Audit Services), which, among other functions, reviews awarding departments’ business and management practices, including reviewing their DVBE reporting. This review entails determining whether a department has maintained support for its reported DVBE participation data and whether it counted only contracts awarded to certified DVBE firms. Audit Services’ 2018 audit plan identified a selection of 40 state departments and agencies that it intends to audit within three years. Further, state law requires General Services to provide centralized state purchasing and acquisition services. General Services uses the Financial Information System for California (FI$Cal) to help it meet these responsibilities. FI$Cal is an integrated financial management system that combines accounting, budgeting, cash management, and procurement operations; and it is used by most state entities. In 2016 General Services transitioned to FI$Cal as its statewide contracts database. General Services also has a role in promoting the DVBE program within state government, and it facilitates periodic meetings to which it invites each of the awarding departments’ DVBE advocates. State law requires each awarding department to appoint its own DVBE advocate, who in turn is required to assist DVBE firms participating in the contracting process as well as to assist the awarding department in seeking DVBE participation in its contract activities. The periodic meetings General Services hosts address DVBE policies and related matters, such as questions from the advocates themselves and updates related to the DVBE program. The DVBE office has seven staff members who perform outreach activities by attending events to promote the DVBE program. According to General Services, in fiscal year 2017–18, DVBE office staff attended nearly 200 events held at chambers of commerce, state departments, and other organizations for promotional purposes. Moreover, General Services is responsible for overseeing complaints related to potential abuse of the DVBE program. State law requires awarding departments to report allegations of program abuse to General Services, which must monitor the status of the resolution of these potential violations. State regulations require the awarding departments to investigate each allegation and provide a written report, including recommended actions to take against the program abuser, to General Services within 60 days of the notification or discovery of the alleged violation. General Services is responsible for reviewing the recommendations and for taking further action, if necessary. 8 California State Auditor Report 2018-114 February 2019 CalVet Is Responsible for Outreach and for CalVet’s Responsibilities Assisting Awarding Departments Under the DVBE Program State law generally establishes two key CalVet’s responsibilities include the following: responsibilities for CalVet with respect to the • Promoting the DVBE program to the fullest extent possible DVBE program. First, state law requires CalVet and maintaining complete records of its promotional to monitor awarding departments’ performance efforts. toward meeting the 3 percent goal. Second, state • Establishing a system to track the effectiveness of its law makes CalVet responsible for promoting the promotional efforts. DVBE program. The text box lists these and other CalVet program responsibilities identified in the • Establishing a method of monitoring adherence to the Military and Veterans Code. CalVet received participation goal. nearly $270,000 in funding from General Services • Appointing a statewide DVBE advocate responsible to do in fiscal year 2017–18 through an interagency the following: agreement to support its outreach efforts in – Oversee, promote, and coordinate efforts to increasing the pool of certified DVBEs. However, implement the program. as of fiscal year 2018–19, that interagency agreement is no longer in effect. – Coordinate with administering agencies to achieve the participation goal. – Coordinate with awarding departments and their State Law Encourages the Awarding of Contracts to respective DVBE advocates. DVBE Firms Source: Military and Veterans Code. State procurement rules encourage awarding departments to contract with DVBE firms by simplifying the competitive bidding process through a provision referred to as the DVBE option. Under state law, the DVBE option provides a streamlined contracting process in which an awarding department can award a contract greater than $5,000 and less than $250,000 to a DVBE firm outside of the State’s competitive bidding process, as long as it obtains bids from at least two certified DVBE firms. The State Contracting Manual explains that when using the DVBE option, an awarding department does not need to advertise the contract opportunity in the California State Contracts Register, does not need to secure at least three competitive bids, and does not need to select the DVBE firm with the lowest quote so long as it documents its business reasons for selecting the chosen vendor. Because the DVBE option does not require them to satisfy these requirements, awarding departments may view it as a streamlined and relatively easy approach to contracting while also working toward meeting the State’s 3 percent goal. State procurement rules also encourage DVBE firms to bid on state contracting opportunities by providing them with an advantage, referred to as the DVBE incentive, when awarding departments evaluate their bids. According to state regulations, awarding departments have two options when applying the DVBE incentive. If contracts are to be awarded to the lowest bid, California State Auditor Report 2018-114 9 February 2019 awarding departments can reduce a DVBE’s proposed price by up to 5 percent when determining the lowest bid. Similarly, if contracts are awarded on a scoring system in which the bid with the highest score wins the contract, DVBE vendors can receive up to 5 percent in additional points to make their proposals more likely to be selected. The preferential treatment called for under the DVBE incentive applies only during an awarding department’s evaluation of bids and does not reduce the value of the contract awarded to the DVBE firm if it is selected. However, during our review period an awarding department could waive the DVBE incentive from its competitive solicitations if it met or exceeded the 3 percent goal in two of the three previous years as published in General Services’ most current annual reports.2 Our Prior Review of the DVBE Program Found Significant Issues In 2014 our office issued a report on the DVBE program noting that General Services and CalVet, as oversight departments, needed to establish meaningful performance standards and provide better guidance to strengthen the program and ensure that it meets the legislative intent of providing financial benefit to DVBE firms.3 Specifically, the report noted that 30 DVBE firms received more than 80 percent of the contract dollars awarded to DVBE prime contractors in fiscal year 2012–13. Moreover, the report identified weaknesses in the process meant to verify that DVBE subcontractors listed in the contract bid actually performed and were paid for the work. The report highlighted awarding departments’ inability to support the DVBE participation data they reported and the lack of accurate contract data maintained by General Services. We present a summary of recommendations included in the 2014 report and the current status of their implementation in Appendix B on page 45. 2 Effective January 1, 2019, state regulations eliminate the need for a department to have met or exceeded the 3 percent goal in two of the three previous years in order to waive the DVBE incentive. State regulations now provide that the highest ranking official may waive the DVBE incentive with a full and complete written justification as long as such exemption does not prevent achievement of a department’s DVBE participation goal. 3 The Disabled Veteran Business Enterprise Program: Meaningful Performance Standards and Guidance by the California Departments of General Services and Veterans Affairs Would Strengthen the Program, Report 2013‑115. 10 California State Auditor Report 2018-114 February 2019 Blank page inserted for reproduction purposes only. California State Auditor Report 2018-114 11 February 2019 A Small Percentage of Firms Have Benefited From the DVBE Program Key Points • With only 8 percent of the 1,671 certified DVBE firms receiving contracts as prime contractors from awarding departments during fiscal year 2017–18, the DVBE program continues to benefit only a small proportion of DVBE firms. Further, of the $146 million in contract awards made to 133 DVBE firms as prime contractors during that fiscal year, a total of $130 million went to only 30 firms, indicating that an even smaller number of firms are receiving the most revenue. • Some awarding departments indicated that they often exempt contracts or procurements from DVBE participation because of a lack of qualified DVBE firms. In addition, several departments cited the complexities involved in using General Services’ system—Cal eProcure—to search for and identify DVBE firms that provide the services or products they need. Only Some Businesses Have Benefited From Contracting Activity Under the DVBE Program A small percentage of certified DVBE firms have financially benefited from doing business with the State. According to contracting data published on General Services’ website, only 133 (or 8 percent) of the 1,671 certified DVBE firms contracted with awarding departments as prime contractors during fiscal year 2017–18. Although General Services believes that a number of DVBE firms also benefited from subcontracting, it cannot quantify the number that did so. Specifically, before fiscal year 2018–19, FI$Cal recorded only prime contractor information and did not consistently record information on subcontractors. General Services stated that it has made modifications to FI$Cal to start capturing all subcontractor information beginning in fiscal year 2018–19, and it expects to have more robust data on DVBE subcontracting activities by the following fiscal year. Therefore, given the lack of subcontracting information for previous fiscal years, we focused our analysis on DVBE prime contractors. A December 2018 report (DVBE Program Review report) prepared by an external consulting group and published by General Services further supports our findings. Specifically, the external consulting group reviewed the DVBE program at 10 awarding departments by conducting an analysis of a selection of 298 contracts that included DVBE participation. These contracts included 321 awards to DVBE prime contractors or commitments to DVBE subcontractors, with some contracts having multiple DVBE subcontractors. The report determined that of the 298 contracts reviewed, 256 (or 86 percent) were awarded to DVBE firms serving as prime contractors. These findings suggest that the number of DVBE firms serving as subcontractors is not large. 12 California State Auditor Report 2018-114 February 2019 Further, a handful of DVBE firms have been awarded a disproportionate amount of funds through state contracts. As Figure 1 shows, 30 DVBE firms received 89 percent of the total dollars awarded to DVBE prime contractors during fiscal year 2017–18, with two DVBE firms capturing nearly 30 percent of the total amount. We present the complete list of these 30 DVBE firms in Appendix C starting on page 47. Several of the top 30 DVBE firms in fiscal year 2017–18 have been among the top DVBE firms for multiple years. Specifically, 12 of the top 30 DVBE firms during fiscal year 2017–18 were also among the top 30 DVBE firms in fiscal year 2012–13, the fiscal year we reviewed as part of our 2014 audit report. Moreover, the DVBE firm that was awarded the highest amount as a prime contractor during fiscal year 2017–18 also had the highest amount in fiscal year 2009–10 and the second highest amount in fiscal year 2012–13. Figure 1 The Top 30 DVBE Firms Received 89 Percent of the Contract Amounts Awarded to DVBE Prime Contractors During Fiscal Year 2017–18 $15.8 million AWARDED TO 103 DVBE FIRMS (cid:28)(cid:28)(cid:29) Contract Amounts (cid:31)(cid:30)(cid:29) $130.2 million Awarded to DVBE Firms AWARDED TO 30 DVBE FIRMS $24.3 million—16% Awarded to the Highest-earning DVBE Firm $15.7 million—11% Awarded to the Second Highest-Earning DVBE Firm $90.2 million—62% Awarded to 28 DVBE Firms Source: General Services’ contracting data for fiscal year 2017–18, as published on its website. California State Auditor Report 2018-114 13 February 2019 Thirty‑six percent of the 133 DVBE prime contractors that did business with the State during fiscal year 2017–18 received very small amounts. As Table 1 shows, 48 of the 133 firms were awarded less than $50,000 each by awarding departments. Combined, the awards for these 48 DVBE firms accounted for less than $1 million of the $146 million awarded to all DVBE prime contractors. Given that the legislative intent of the program is to honor California’s disabled veterans, it seems reasonable to expect that the program would aim to benefit as many businesses owned by disabled veterans as possible. The fact that 30 businesses captured nearly 90 percent of the total funds awarded to DVBE firms serving as prime contractors calls into question whether the program is achieving its purpose. Table 1 Awarding Departments Awarded Less Than $50,000 Each to 36 Percent of DVBE Prime Contractors during Fiscal Year 2017–18 TOTAL CONTRACT NUMBER OF DVBE TOTAL NUMBER OF COMBINED TOTAL DOLLAR AWARD RANGE PRIME CONTRACTORS CONTRACTS AWARDED VALUE OF CONTRACTS Up to $50,000 48 244 $920,000 $50,001 to $200,000 27 839 2,705,000 $200,001 to $1,000,000 26 475 10,026,000 $1,000,001 to $5,000,000 26 4,383 60,877,000 Greater than $5,000,000 6 3,318 71,476,000 Totals 133 9,259 $146,004,000 Source: Cal eProcure data available on General Services’ website. To understand why relatively few DVBE firms are contracting with the State, we interviewed officials at the six awarding departments we visited: General Services, CalVet, Caltrans, the California Department of Public Health (Public Health), the Department of Motor Vehicles (DMV), and the California Department of Corrections and Rehabilitation (Corrections). These awarding departments provided a variety of explanations for the low number of DVBE firms receiving contracts, including that the departments do not control which businesses win contracts. Our review of contracts awarded by these departments to 10 of the top 30 DVBE firms found that they followed the appropriate contracting procedures. In fact, solicitations for several contracts we reviewed received bids from more than one DVBE firm and the lowest bidder generally won the contract. Some awarding departments indicated that they require a significant amount of specialized goods or services that few DVBEs, if any, can provide. Further, some departments stated that many DVBEs do not have the capacity to fulfill large or multiregional contracts, such as by being able to deliver goods or services to different parts of California. 14 California State Auditor Report 2018-114 February 2019 Moreover, the leveraged procurement agreement (LPA) program may limit a department’s ability to use DVBE firms. Contracting requirements sometimes mandate that awarding departments award contracts to specific vendors under the State’s LPA program. LPAs allow departments to buy directly from vendors through existing contracts and agreements, thus enabling General Services to streamline state purchases by removing repetitive, costly, and time‑consuming bid processes. General Services maintains a list of available LPAs and the vendors that provide services or products for them. Further, the State Contracting Manual directs awarding departments to refer to the user guide instructions specific to each LPA. When procuring certain types of goods and services, and depending on the type of LPA used, the LPAs’ user guide instructions may require that awarding departments use specific vendors. When the list of vendors for an LPA does not include any DVBE firms, these firms do not have an opportunity to participate in contracts awarded under that LPA. The DVBE Program Review report concluded that LPAs offer a significant opportunity for DVBE firms to establish an ongoing relationship with the State because awarding departments will direct their purchases to DVBE firms when they are included as vendors in the user guide instructions for LPAs. However, according to General Services, of the almost 3,500 LPAs available, only 137 list DVBE firms as vendors. Given that the LPA program offers an opportunity for DVBE firms to benefit from contracting with the State and that there is currently limited opportunity for awarding departments to contract with DVBE firms under the LPA program, increasing the number of DVBE firms that participate in LPAs could make the DVBE program more successful. General Services and CalVet have known for years that relatively few DVBEs benefit from the DVBE program. General Services and CalVet have known for years that relatively few DVBEs benefit from the DVBE program. For example, our 2014 report found that in fiscal year 2012–13 that there were roughly 1,400 DVBE firms, yet only 256 (less than 19 percent) did business with the State and only 30 DVBE firms accounted for 83 percent of the total amounts the State awarded to DVBE firms as prime contractors. As a result, for our current audit we expected to find that General Services and CalVet had conducted some analysis to assess why this is the case. However, they California State Auditor Report 2018-114 15 February 2019 had not done so. General Services stated that it has received anecdotal information from DVBE firms that some firms seek DVBE certification only so that they can conduct business with non‑state governmental entities, such as cities and counties, and this possibility could influence the actual number of DVBE firms actively seeking business with the State. However, General Services has not conducted an analysis to determine how many DVBE firms choose to use their certification only to conduct business with non‑state governmental entities. Further, neither General Services nor CalVet has taken the needed steps since our 2014 report to determine what actions are necessary to increase the number of DVBE firms that receive contracts from awarding departments. Without assessing the reasons for this concentration of contract dollars in relatively few firms, General Services and CalVet are hindered from ensuring that the DVBE program provides its intended benefits. Awarding Departments Say It Can Be Difficult to Find DVBE Firms That Meet Their Contract Needs Although the six awarding departments we reviewed reported that they exceeded the 3 percent goal for fiscal year 2017–18, some of them explained that they sometimes exempt contracts or procurements from DVBE participation because they cannot always identify DVBE firms to meet their contracting needs. According to state regulations, awarding departments may exempt a contract solicitation from DVBE participation requirements, but they must document the exemption in the contract file if they do so. Even if awarding departments exempt certain contracts from DVBE participation requirements, they are still expected to meet the overall DVBE participation goal each year. Our review of 10 contracts with DVBE participation exemptions awarded by four of the awarding departments we visited—Caltrans, Corrections, DMV, and Public Health—found that the departments had appropriately documented the reasons for the exemptions. The justifications for exempting these contracts from DVBE participation requirements varied. For example, DMV exempted a printing services contract valued at more than $650,000 from DVBE participation requirements. In its justification for the exemption, DMV stated that it was not feasible for a printing service contractor to hire a DVBE subcontractor to provide equipment and labor, since these printing service contractors own and use specialized equipment that only their trained technicians operate. When we asked DMV why it did not consider any DVBE firms as the prime contractor to provide these services, it explained that it was not aware of any DVBE firm that could be the prime contractor and that was capable of printing the volume of 16 California State Auditor Report 2018-114 February 2019 envelopes—more than 51 million—the contract required. Further, DMV asserted that it was not aware of any DVBE contractor that could have directly provided the necessary materials for this type of contract, and that it requires prime contractors on printing contracts to print the requested products to ensure they are in compliance with certain requirements. In fact, when DMV competitively bid the contract, it did not receive any bids from DVBE firms. Some awarding departments indicated that the State needs to increase the number of DVBE firms that can provide the types of services and products that the awarding departments need. We describe the additional efforts General Services and CalVet could undertake to address this issue beginning on page 19. Some awarding departments also explained that searching for DVBE firms on General Services’ procurement website—Cal eProcure—is difficult and does not always yield useful results. Each of the six awarding departments we visited use Cal eProcure’s search engine as their primary source for finding qualified DVBE firms to meet their contract and procurement needs. The Cal eProcure profiles of DVBE firms contain self‑selected business classification codes and keywords. General Services explained that when applying for certification, a DVBE firm can select from a list of roughly 55,000 codes to describe the services or products it provides. Cal eProcure uses the United Nations Standard Products and Services Code for this purpose, which includes a five‑level hierarchical classification code set. However, the sheer volume of options may inhibit DVBE firms from selecting all of the correct codes for their profiles. When applying for certification, a DVBE firm can select from a list of roughly 55,000 codes to describe the services or products it provides. For example, if a DVBE firm sells receipts or receipt books, it would need to filter through multiple levels of the code sets for paper materials and products before finding the precise code for its product. Further, the DVBE firm can also create free‑form keywords to help awarding departments search for it in Cal eProcure. However, the firm derives these keywords at its own discretion without any parameters, which could contribute to the difficulties some departments experience when trying to identify qualified DVBE firms. California State Auditor Report 2018-114 17 February 2019 Three of our reviewed departments indicated that DVBE firms might not appear in search results unless the codes or keywords the department uses match exactly with those selected by DVBE firms. General Services’ own contracting division stated that it sometimes had trouble finding qualified DVBE firms through Cal eProcure because DVBE firms may not select the appropriate codes. Additionally, CalVet’s Office of Procurement and Contracts told us that the keyword searches are not always intuitive as there are thousands of keywords and the keywords used in searches are not always the keywords in a firm’s profile. DMV described a hypothetical example in which an analyst searching for a janitor might search Cal eProcure for the keyword “custodial” but might not find a qualified DVBE firm that had selected “janitorial” to describe its business, or a firm may have misspelled the keyword. General Services acknowledged that it hears from awarding departments that they find Cal eProcure difficult to use for several reasons, including problems with DVBE firms using codes and keywords that are inconsistent with DVBE firms’ respective products or services. General Services is developing lists of all the codes commonly used by awarding departments to more precisely identify what the State purchases. It plans to make these lists available online for both DVBE firms and awarding departments to reference. In addition, General Services explained that it advises DVBE firms on how they can update their certification profiles with the most effective codes and keywords. General Services stated that its outreach unit advises DVBE firms to include a variety of keywords that accurately depict the services they provide or the products they sell. For example, it would advise a DVBE firm selling environmentally friendly disposable paper goods to use keywords such as napkin, plate, cup, sustainable, and biodegradable. Further, FI$Cal offers online training and information on using the Cal eProcure system, which includes a course on how to search for DVBE firms. Finally, General Services stated that in October 2018 it reached out to each awarding department’s DVBE advocate and asked him or her to identify the department’s contracting needs for the next six to 12 months and to post this information prominently on the department’s website to inform DVBE firms of opportunities. However, as of early January 2019, General Services knew of only two DVBE advocates who had posted this information on their respective department’s website. General Services also told us that it is working with awarding departments to identify additional solutions to streamlining their searches in Cal eProcure. Until General Services does streamline its search criteria in Cal eProcure, some awarding departments will continue to face difficulties in using the system to identify qualified DVBE firms that meet their needs. 18 California State Auditor Report 2018-114 February 2019 Recommendations To increase the number of DVBE firms that awarding departments can contract with when required to use LPAs, General Services should develop and implement a plan to encourage DVBE firms to participate in LPAs. To ensure that a greater number of DVBE firms benefit from the DVBE program, General Services should work with awarding departments to understand why only a few DVBE firms receive a large number of contract awards. Based on its findings, General Services should take the necessary steps to remedy this situation. To ensure that awarding departments can effectively identify DVBE firms that provide needed products and services, General Services should do the following: • Work with these departments to continue to narrow the codes available to those commonly used by awarding departments to more precisely identify what the State purchases and streamline search criteria in Cal eProcure. • Ensure that by October 2019 departments identify their contracting needs and then post these needs prominently on their websites as a resource for DVBE firms. • Continue to provide outreach services to DVBE firms on how to create effective keywords and choose appropriate codes. • Explore other options for making the Cal eProcure search engine more effective for awarding departments. California State Auditor Report 2018-114 19 February 2019 General Services and CalVet Have Not Adequately Overseen the DVBE Program, Hindering Its Success Key Points • CalVet and General Services do not know whether their outreach efforts are effective in encouraging more businesses owned by disabled veterans to participate in the DVBE program. Further, until recently neither department had attempted to identify the types of products and services that awarding departments need so as to help inform the two departments’ outreach activities. • CalVet has not met its statutory responsibility to assist underachieving awarding departments in meeting the required 3 percent goal. General Services is better equipped than CalVet to fulfill this responsibility because it oversees policies and procedures used by all departments in their purchasing and contracting activities. • General Services has provided minimal guidance to awarding departments on how to process complaints regarding abuse of the DVBE program and on how to prevent abuse from occurring. As a result, it cannot be certain that it is receiving all complaints regarding program abuse. CalVet and General Services Have Not Assessed the Effectiveness of Their Outreach Efforts CalVet has still not adequately addressed the recommendation from our 2014 audit report that it develop stronger measures to evaluate its outreach efforts. CalVet’s responsibilities include promoting the DVBE program, which it does by encouraging businesses owned by disabled veterans to apply for certification in the program. In our 2014 report, we found that CalVet conducted outreach to the veteran community to promote the DVBE program and that it recorded some data on the outcomes of these visits—such as the number of interactions with people where DVBE certification was discussed. However, the collected data did not inform CalVet whether the individuals it interacted with subsequently sought and obtained a DVBE certification for their businesses. Without such information, we concluded that CalVet could not demonstrate that it knows whether its promotional efforts have led to an increase in DVBE certifications or if it is maximizing the return on its investment in outreach activities. CalVet claimed to have fully implemented our recommendation from the 2014 audit; however, we found that the measures it said it had taken do not address the underlying conditions we identified. Specifically, in its six‑month response to the 2014 audit, CalVet stated that it interprets and reports quarterly the results of its survey of DVBE firms to evaluate and improve its DVBE outreach efforts. CalVet also explained that it tracks more metrics on promotional efforts in these quarterly reports than it did previously. Further, it stated that it used its fiscal year 2013–14 annual report to develop and improve the outreach plan for the subsequent fiscal year. However, neither the quarterly report nor the annual report includes an assessment of the effectiveness of CalVet’s outreach activities. 20 California State Auditor Report 2018-114 February 2019 Although state law requires CalVet to establish a system to assess the effectiveness of its efforts to promote the DVBE program, it has not effectively done so. The quarterly reports CalVet produced during fiscal year 2015–16 lacked meaningful analysis or conclusions, and its survey efforts did not focus on evaluating the effectiveness of its outreach activities. Specifically, the quarterly reports CalVet developed regarding its outreach activities generally just presented information, such as the number of welcome packets CalVet sent to newly certified DVBEs, some of the results of its survey of newly certified DVBEs, and a description of the outreach events staff attended, but it did not provide any meaningful analysis regarding the quality, efficiency, and effectiveness of such activities. For example, these reports identified the number of outreach events CalVet attended but did not describe any correlation between a specific outreach event and the resulting DVBE applications that General Services received; thus, CalVet could not determine whether the outreach effort resulted in more businesses owned by disabled veterans participating in the DVBE program. CalVet’s reports lack meaningful analysis and conclusions about the effectiveness of its outreach efforts. Similarly, although CalVet’s annual report for fiscal year 2013–14 provided information on its outreach efforts and the data it tracked related to DVBE certification, that report too lacked meaningful analysis and conclusions. For example, CalVet’s annual report identified two recommendations related to how it could improve its outreach efforts by increasing its participation at certain conferences and meetings in the upcoming fiscal year. However, it did not explain how the recommendations, if implemented, would be effective in increasing DVBE participation. CalVet also provided a spreadsheet showing that it conducted telephone interviews of nearly 110 DVBE firms in fiscal year 2017–18. When we asked CalVet for documentation of the results of these interviews, it provided high‑level summaries of these conversations indicating that the interviews focused on the DVBE firms’ overall experience with the DVBE program and not necessarily on CalVet’s outreach efforts. Thus, CalVet missed an opportunity to ascertain ways in which it could improve its efforts to increase participation in the program. CalVet also conducted a web‑based survey of more than 300 DVBE firms in 2016; however, almost all of the 32 questions also focused on the DVBE firms’ overall experience California State Auditor Report 2018-114 21 February 2019 with the program after being certified. In fact, only one question, which we describe later in this section, related to CalVet’s outreach. Because it is not assessing the effectiveness of its outreach activities, CalVet has little way of knowing which, if any, of its DVBE outreach activities yield positive results or need revamping. CalVet has little way of knowing which, if any, of its DVBE outreach activities yield positive results or need revamping. CalVet stated that it has not had access to the data necessary to conduct a meaningful assessment of its outreach activities. According to information provided by CalVet, it attended 18 outreach events during fiscal year 2017–18, and it estimated that staff interacted with an average of 70 attendees at each event. However, CalVet explained that it has not been able to obtain data from General Services to assess the effectiveness of these outreach activities in increasing the number of certified DVBE firms because several years ago, as part of the transition to FI$Cal, General Services began to automatically recertify DVBEs and at that point it stopped providing monthly data to CalVet regarding newly certified DVBEs. Thus, CalVet indicated that, beginning in October 2017, the data provided by General Services did not differentiate between newly certified DVBE firms and recertified DVBE firms, which prevented CalVet from identifying firms new to the program and performing further analyses of its outreach efforts. Although CalVet asserted that it had requested that General Services provide better data, it could not demonstrate that it had done so. Further, it has not attempted to find alternate ways to assess the effectiveness of its outreach activities. For example, CalVet could track all interactions with businesses owned by disabled veterans at outreach events and subsequently cross‑reference these businesses to certified DVBE firms to determine whether they became certified. CalVet could also survey the veterans who attended outreach events to determine how useful they found the events and use this information to improve its outreach activities. General Services also promotes the DVBE program primarily by attending events hosted by various entities, including veterans’ organizations, but it has also failed to assess the effectiveness of its DVBE outreach efforts. General Services provided a list of nearly 200 events it claimed to have attended during fiscal year 2017–18 and at which it specifically promoted the DVBE program. It stated that it has observed a correlation between the number of outreach events it attends to promote the DVBE program and the number of businesses 22 California State Auditor Report 2018-114 February 2019 owned by disabled veterans that become certified. However, General Services has not performed an analysis to support its observation. Further, General Services stated that its staff prepare evaluations of events it attends. We reviewed one of these evaluations and found that General Services compares its expectations for an event, based on its agreement with the organization hosting the event, with the actual experience at the event. General Services explained that these evaluations help it determine whether the event was worth its resources and whether it should attend again in the future. It also pointed to the numerous awards it has received for its contribution to the DVBE program as an indication of its success in promoting the program. However, we question General Services’ reliance on these awards as a way to gauge the effectiveness of its outreach efforts, particularly since these awards did not explicitly recognize General Services’ outreach efforts for being effective in increasing the success of the DVBE program. In fact, several of the awards simply related to its sponsoring of events and not necessarily to the effectiveness of its outreach. General Services has not assessed the effectiveness of its DVBE outreach efforts. General Services acknowledged that it has not conducted a formal assessment, nor does it have metrics by which it can identify the outreach efforts that have contributed the most to an increase in DVBE firms participating in the program. Without strong metrics and assessment of data on the number of businesses owned by disabled veterans in attendance at an event and the number that applied subsequently for certification, General Services cannot have confidence that its outreach efforts are effective. Despite the lack of a formal assessment, some evidence suggests that the two departments’ outreach may not be effective. In its 2016 survey of DVBE firms, CalVet asked only one question related to outreach: how the DVBE firms learned about the DVBE program. Of the nearly 300 DVBE firms that responded to this question, only 11 (less than 4 percent) and 38 (13 percent) stated that they learned about it through CalVet’s and General Services’ outreach, respectively. In fact, 99 DVBE firms (more than 34 percent) stated that they learned about the program on their own, while 55 (19 percent) stated that they learned about it through veterans’ service organizations. The responses to this question from CalVet’s survey suggest that the departments’ current outreach efforts are not very effective in making veterans aware of the program. California State Auditor Report 2018-114 23 February 2019 In addition, in planning their outreach, both CalVet and General Services have failed to consider the types of goods and services that awarding departments have difficulty procuring from DVBE firms. As we discuss previously, some awarding departments could not always identify a DVBE firm that provides the products or services they need. We expected CalVet and General Services to be working with awarding departments to understand why they struggle to find DVBE firms to award their contracts to and to use this information to guide their outreach efforts. However, until recently neither department could demonstrate that they had done so. General Services told us that it attends industry‑focused events; however, based on our review of the names of nearly 200 events it attended in fiscal year 2017–18, just three were industry‑focused. Similarly, CalVet apparently did not consider this information when developing its most recent outreach plan. For example, its fiscal year 2017–18 outreach plan was a spreadsheet that provided only the name, date, location, and type of event that it planned to attend for the year, along with any associated costs. The plan did not demonstrate that CalVet had considered the types of goods or services that state agencies struggle to procure from DVBE firms. Without considering this information, alongside information from awarding departments about their contracting needs, CalVet and General Services are missing opportunities to increase the number of DVBE firms that offer products or services that departments are seeking. General Services and CalVet stated that they intend to take steps to improve their outreach efforts. General Services and CalVet stated that they intend to take steps to improve their outreach efforts. In December 2018, General Services completed a case study of 10 awarding departments and reviewed their waivers for exempting contracts from DVBE requirements to, in part, identify potential contract opportunities for DVBE firms. Further, General Services planned to implement an analytics tool in January 2019 to better inform its DVBE outreach. General Services stated that this tool will analyze contracting data and will be able to provide key information on the DVBE program, including how much awarding departments spend on specific goods and services as well as the names of vendors to whom the State awards the most contracts. According to General Services, this analytics tool will allow it to identify goods and services for which there are only a few or no available DVBE firms, and it can use this information to help focus its outreach efforts on those industries that provide the needed products or services. 24 California State Auditor Report 2018-114 February 2019 Similarly, CalVet’s deputy secretary of minority veterans, who began overseeing the DVBE program in July 2018, stated that she intends to make significant changes to CalVet’s outreach efforts. She explained that since assuming the responsibility for the DVBE program, she has been proactively working with General Services to enhance the CalVet’s statewide DVBE advocate role. However, although she is developing a plan to guide the improvements CalVet expects to make, the only item in the plan as of November 2018 for outreach improvement was to engage with other entities, such as veteran services organizations and DVBE‑participating state agencies. Although CalVet and General Services have begun to improve their outreach efforts, until they implement outreach improvement plans to better understand the impediments that awarding departments face in increasing DVBE participation, outreach efforts will not be as effective as they could be. General Services Is Better Suited Than CalVet to Help Underachieving Departments Meet the DVBE Participation Goal CalVet has not fulfilled its responsibility to assist underachieving departments in meeting the 3 percent goal. State law requires CalVet’s statewide DVBE advocate to coordinate with awarding departments to help them meet this goal. In addition, our 2014 report recommended that CalVet work more closely with awarding departments to help them meet the goal and to promote DVBE contracting opportunities. As such, we expected CalVet to be able to demonstrate that it had identified underperforming departments and to provide us with specific examples of the advice and assistance it has offered to such agencies, but that was not the case. We selected five awarding departments that had not met the 3 percent goal during at least one year between fiscal years 2014–15 and 2016–17: the Department of State Hospitals, the California Department of Resources Recycling and Recovery, the Office of Systems Integration, the Office of the Attorney General, and the California Department of Fish and Wildlife. CalVet could not demonstrate that it helped any of these five departments meet the 3 percent goal. Although CalVet is required to assist awarding departments in meeting the 3 percent goal, it indicated that its approach to helping underachieving departments has been to rely on General Services to identify and schedule meetings with such departments. Until fiscal year 2017–18, CalVet had an interagency agreement with General Services for several years that funded certain positions within CalVet, primarily to perform outreach activities. In fiscal year 2017–18, this agreement provided nearly $270,000 to fund two positions within CalVet. The interagency agreement also stated that CalVet would work in partnership with General Services California State Auditor Report 2018-114 25 February 2019 to meet with and provide recommendations and additional resources to assist awarding departments that failed to meet the 3 percent goal. However, according to CalVet, it believed that General Services was responsible for taking the lead in identifying the underachieving departments and scheduling meetings with them before CalVet developed a plan to assist those departments. For example, General Services listed awarding departments’ DVBE participation rates, which indicated whether they met the 3 percent goal, in its Statewide Consolidated Annual Report for fiscal year 2016–17. Yet CalVet cited only one instance in which it attempted to assist a department that did not meet the 3 percent goal in fiscal year 2016–17, and it stated that General Services had scheduled a meeting with the underachieving department. In advance of that meeting, CalVet prepared a report, which included proposed solutions to help that awarding department meet the participation goal, but it did not provide the report to the department because General Services canceled the meeting. However, given that CalVet has a statutory responsibility to assist underachieving departments, we expected CalVet to have taken the needed actions independently of General Services’ activities. By relying on General Services to take the lead, CalVet missed an opportunity to improve the success of the DVBE program. CalVet’s passive role in assisting awarding departments was also evident when we spoke with the DVBE advocates at selected departments. CalVet’s passive role in assisting awarding departments was also evident when we spoke with the DVBE advocates at selected departments. CalVet claimed that it mainly focuses on assisting DVBE advocates at awarding departments. We interviewed advocates at the five departments that did not meet the DVBE goal and two additional departments that had failed to meet the 3 percent goal during at least one year between fiscal years 2014–15 through 2016–17. In general, each of the seven advocates we interviewed stated that CalVet has never initiated contact with them to offer help. Moreover, five of the seven advocates either were unaware of or were unclear as to CalVet’s role in the DVBE program. These responses indicate that CalVet has not taken an active role in improving the success of the DVBE program. 26 California State Auditor Report 2018-114 February 2019 CalVet also lacks the necessary resources to meet its statutory responsibility to help underachieving departments meet the DVBE participation goal. CalVet explained that it has relied on funding from General Services to fund the two positions mentioned earlier. In fact, CalVet told us that the only other position within the department that worked on the DVBE program was a manager who had many other duties besides the DVBE program. As we noted earlier, the interagency agreement between CalVet and General Services is no longer in place, as the two departments reached a mutual agreement that it no longer best served their interests or needs. Therefore, CalVet told us that as of fiscal year 2018–19, it approved temporary internal funding for the two positions in August 2018. It has since filled one position as of January 2019 and is in the process of filling the other position. CalVet lacks the necessary resources to meet its statutory responsibility to help underachieving departments meet the DVBE participation goal. CalVet plans to seek additional resources in the near future to ensure that these two positions become permanent when the temporary funding expires in fiscal year 2020–21. However, even with two positions CalVet may not be able to meet its responsibilities. Specifically, CalVet provided us with a document describing a workload analysis that it conducted in March 2018, which concluded that it needs three positions to carry out its responsibilities for the DVBE program. CalVet explained that it plans to perform another workload analysis and request additional resources in the near future. Even if CalVet were fulfilling its statutory responsibility, we believe that General Services is in a better position to assist underachieving departments in meeting the 3 percent goal. Specifically, as stated in its 2018 strategic plan, General Services serves as the State of California’s business manager. As such, its Procurement Division oversees policies and procedures used by state agencies in their purchasing and contracting activities. The Procurement Division also has the strategic direction of developing innovative and effective procurement solutions that will benefit state departments and DVBE firms. Further, General Services maintains contracting data and prepares the annual report compiling the data reported on the awarding departments’ DVBE activity reports, giving it immediate access to the necessary information to identify underachieving departments and the number and types of contracts they awarded. In fact, General Services provided us with documentation that it had assessed a couple of departments that did not meet the DVBE goal in fiscal year 2016–17 to identify if there was any assistance it could offer. In each case it concluded that the awarding California State Auditor Report 2018-114 27 February 2019 departments did not need its assistance, as they were using best practices or had reasonable processes in place. Considering its expertise, resources, and role in the DVBE program, General Services is better suited than CalVet to assist underachieving departments. General Services agreed with this assessment. Such a shift in the departments’ responsibilities would also allow CalVet to focus primarily on outreach activities. General Services Needs to Provide Additional Direction to Ensure That Abuse in the DVBE Program Is Consistently Identified and Addressed Most awarding departments lack a formalized process for identifying and addressing allegations of abuse in the DVBE program. As a result, such abuse is likely underreported. Program abuse is any fraudulent use of the DVBE program, such as knowingly and intentionally representing false participation by a non‑DVBE firm in order to receive preference in a contract bid. Members of the public, including DVBE firms, can report alleged program abuse to the relevant awarding department or to General Services’ DVBE office. To learn about the experiences DVBE firms have had with program abuse, we interviewed 24 DVBE firms that were listed as subcontractors on the winning bids of selected contracts awarded by the six departments that we reviewed. As Figure 2 on the following page shows, 12 of the DVBE firms, or 50 percent, informed us that a prime contractor had listed them as a subcontractor but had never used their services. Similarly, in a 2016 survey of DVBE firms that CalVet conducted, 37 of the 78 respondents, or 47 percent, stated that they had been listed as a subcontractor on a bid that had been awarded but they had not received the specified work. More than half of these 37 firms stated that they had experienced this type of program abuse at least three times in the preceding five years. However, of the six departments we reviewed, only one reported receiving a program abuse allegation regarding one of its contracts during our review period. Specifically, in June 2018 a DVBE firm reached out to the awarding department—General Services—expressing concern that it had not been used on an awarded contract although the prime contractor’s bid had listed the DVBE firm as a subcontractor. The DVBE firm explained that it had reached out to the prime contractor to coordinate the work in October 2017, the same month the contract was executed, and again in March 2018, but the prime contractor had not used it. In June 2018, when the DVBE firm contacted General Services, the project had been completed. The contracting division reviewed the complaint and submitted its conclusions to General Services’ DVBE office in August 2018 and requested assistance in further investigating the suspected abuse. As of November 2018, this complaint is under review by the DVBE office. 28 California State Auditor Report 2018-114 February 2019 Figure 2 Interviews With 24 DVBE Firms Identified as Subcontractors Indicate That Awarding Departments Are Not Doing Enough to Protect the Interests of DVBE Firms and to Reduce Program Abuse (cid:31)(cid:30)(cid:29)(cid:30)(cid:28)(cid:27)(cid:26)(cid:25)(cid:30)(cid:24)(cid:23)(cid:30)(cid:28)(cid:22)(cid:30)(cid:29)(cid:21)(cid:30)(cid:25)(cid:20)(cid:19)(cid:28)(cid:18)(cid:22)(cid:29)(cid:31)(cid:25)(cid:19)(cid:29)(cid:25)(cid:17)(cid:16)(cid:27)(cid:16)(cid:30)(cid:25)(cid:21)(cid:19)(cid:29)(cid:16)(cid:28)(cid:27)(cid:21)(cid:16)(cid:17) (cid:14)(cid:13) were aware of being listed on at least one winning bid (cid:13)(cid:12) but did not work OF on the contract (cid:13) others worked substantially less on awarded contracts than indicated in the contracts (cid:14)(cid:13) encountered program abuse but only (cid:14) waiting on (cid:13)(cid:12) 5 made a complaint the outcome OF (cid:12)(cid:25) (cid:25)(cid:11) were not satisfied with the outcome of the OF investigation after the complaint was closed (cid:30)(cid:24)(cid:23)(cid:30)(cid:28)(cid:22)(cid:30)(cid:29)(cid:21)(cid:30)(cid:25)(cid:20)(cid:19)(cid:28)(cid:18)(cid:22)(cid:29)(cid:31)(cid:25)(cid:19)(cid:29)(cid:25)(cid:17)(cid:23)(cid:30)(cid:21)(cid:22)(cid:15)(cid:22)(cid:21)(cid:25)(cid:21)(cid:19)(cid:29)(cid:16)(cid:28)(cid:27)(cid:21)(cid:16)(cid:17) (cid:10) did not perform work on the (cid:13)(cid:12) contracts OF (cid:12)(cid:25) (cid:25)(cid:10) were not aware that they had been listed OF on the contract until we contacted them (cid:9) were notified by awarding departments of their inclusion on OF (cid:13)(cid:12) the winning bid Source: Interviews with 24 DVBE firms listed as subcontractors on a selection of contracts awarded by six departments we reviewed. California State Auditor Report 2018-114 29 February 2019 Until recently, General Services’ DVBE office had provided inadequate guidance to departments on how to identify and address allegations of program abuse. In fact, the guidance General Services included in its February 2012 DVBE Advocate Toolkit (toolkit), which was available on its website as of January 2019, did not specify the types of allegations that constitute program abuse. It also did not explain that awarding departments must provide a written report to General Services with recommended actions against the contractor investigated. Rather, the toolkit only described steps awarding departments should take to address just one type of program abuse. Although the DVBE office posted additional information on its website regarding the roles and responsibilities of awarding departments and the DVBE office in investigating complaints, the information does not adequately explain what constitutes program abuse. Without clearly defining program abuse, awarding departments may not recognize program abuse when it receives an inquiry or concern. In November 2018, to help ensure that awarding departments know how to identify DVBE program abuse, the DVBE office offered its first comprehensive training on the types of violations that constitute abuse. General Services stated that it plans to continue to develop this training and offer it periodically in the future. To ensure potential allegations of abuse are handled appropriately, we expect departments to have a formalized process for identifying and documenting complaints, as well as procedures for investigating and tracking these complaints. Although these are steps in the right direction, they are recent, and the limited guidance General Services has historically provided to awarding departments may have contributed to their inconsistent approaches to handling complaints. To ensure potential allegations of abuse are handled appropriately, we expect departments to have a formalized process for identifying and documenting complaints, such as a standardized complaint form, as well as procedures for investigating and tracking these complaints. Only Caltrans has procedures such as these in place. Of the five remaining awarding departments we reviewed, only General Services could demonstrate that it tracks complaints that it receives. For the one complaint that General Services’ contracting office received during our audit period, for which the investigation is still ongoing, we found that 30 California State Auditor Report 2018-114 February 2019 it processed the complaint in accordance with requirements in state law and regulations. However, General Services’ contracting office and the other four awarding departments lack adequate procedures, if any, for addressing complaints. The lack of procedures at these five departments is of concern, particularly given that all four DVBE firms we interviewed that had filed a complaint that had subsequently been closed told us that they were not satisfied with the final outcome. Unless departments consistently document and track complaints received from DVBE firms, they cannot be certain that they have properly identified and addressed allegations of program abuse. Further, awarding departments have not always been proactive in taking steps to identify one particular type of DVBE program abuse. Specifically, several of the awarding departments we reviewed do not have procedures in place that require staff to notify a DVBE firm that a business that was awarded a contract has named the DVBE firm as a subcontractor. Without such notification, a DVBE subcontractor may not be aware that it should receive work from the prime contractor. General Services’ DVBE office has issued guidance suggesting that awarding departments notify DVBE firms of their role as subcontractors on awarded contracts. However, Caltrans, CalVet, Corrections, and one of the three contracting offices of DMV stated that they do not require staff to notify DVBE subcontractors of awarded contracts. As Figure 2 on page 28 shows, only eight of the 24 DVBE firms we interviewed that had been named as subcontractors on the contracts we reviewed stated that they had been notified by the awarding department. In fact, four of the remaining 16 DVBE firms told us that they were not aware that the prime contractor had listed them as a subcontractor on the contracts we selected until we asked about them. When we asked CalVet and General Services about the frequency of this potential abuse, in which a prime contractor lists a subcontractor in order to receive the DVBE incentive without any intention of using the subcontractor’s services, both departments acknowledged that this abuse can occur but they do not know exactly how often it happens. Four DVBE firms told us that they were not aware that the prime contractor had listed them as a subcontractor on the contracts. In fact, the six awarding departments we reviewed told us that they do not have a direct relationship with subcontractors. Therefore, awarding departments may not become aware of this abuse unless California State Auditor Report 2018-114 31 February 2019 DVBE subcontractors file a complaint. However, two of the 24 DVBE firms we interviewed indicated that they were not aware of who to contact to file a complaint, and one said it was not even aware that filing a complaint was an option. If an awarding department does not notify the DVBE firm that it has awarded a contract that lists the firm as a subcontractor, along with basic contract details and information on how to file a complaint, program abuse may go unreported and unaddressed. In addition, we found that General Services’ DVBE office could make better use of its tracking of program abuse allegations from all awarding departments to reduce future abuse. State law requires General Services to monitor the status of all reported violations statewide. General Services’ compliance manager explained that he tracks and manages program abuse cases using spreadsheets. However, he acknowledged that General Services has not taken advantage of the potential benefits of program abuse tracking and instead has focused on case management of the abuse allegations it receives. Tracking the main elements of program abuse allegations, such as the type of program abuse and how it was reported or discovered, would allow General Services to identify and address trends in program abuse that otherwise may go unnoticed. For example, if General Services identifies one common type of abuse, it can add safeguards to prevent this type of abuse from occurring and implement procedures for detecting future incidents of such abuse. General Services agreed that this tracking would be beneficial. Recommendations Legislature To ensure that awarding departments that fail to meet the 3 percent goal receive the assistance necessary to achieve the goal, the Legislature should amend state law to transfer the responsibility for monitoring and assisting underachieving departments from CalVet to General Services. To minimize the occurrence of program abuse involving DVBE subcontractors, the Legislature should amend state law to require awarding departments to notify those DVBE subcontractors when they are named on an awarded contract. 32 California State Auditor Report 2018-114 February 2019 CalVet and General Services as Oversight Entities To ensure that their outreach efforts are effective and result in a greater number of DVBE firms available that can provide the necessary goods and services awarding departments are seeking, CalVet and General Services should do the following: • Assess, at least annually, the effectiveness of their past outreach efforts in increasing the number of DVBE firms that become certified. • Work with awarding departments to identify the types of goods and services for which they struggle to find a DVBE contractor or subcontractor. • Develop an outreach plan to include outreach activities found to be effective in the past based on their assessment. This plan should also emphasize outreach to increase the number of DVBE firms that provide the types of goods and services that awarding departments struggle to obtain from DVBE firms. • Develop better tracking of the businesses owned by disabled veterans that attend their outreach events and review certification data to determine whether these businesses obtained their certifications. • Conduct periodic surveys of businesses owned by disabled veterans that attended their outreach events but chose not to become DVBE certified to determine the reasons for not applying for the certification. The departments should use this information to improve both their outreach and any other areas of the program. Until the Legislature amends the law to transfer its responsibility for assisting underachieving departments to General Services, CalVet should develop and follow policies and procedures to identify and assist awarding departments that fail to meet, or are at risk of not meeting, the 3 percent DVBE participation goal. To minimize the occurrence of program abuse and ensure that program abuse cases are handled appropriately and consistently, General Services should do the following: • Remind the awarding departments about preventive measures, including contract award notification to all subcontractors listed on the winning contractor’s bid and providing the subcontractors with the name of the prime contractor, the role of the DVBE firm in the contract, the amount of the contract dollars designated for each subcontractor, and contact information that subcontractors can use if they encounter any issues on the project. California State Auditor Report 2018-114 33 February 2019 • Develop procedures for awarding departments to help them identify whether a complaint constitutes program abuse, document and track all complaints, and take appropriate steps when investigating program abuse complaints. To strengthen the enforcement of DVBE laws, regulations, and guidelines, General Services should track program abuse complaints, including the type of program abuse, how it was reported or discovered, and the dates specific actions were taken on the case. This tracking will enable the awarding departments to identify weaknesses within their processes and provide insight into how to address these issues, improving the DVBE program overall. 34 California State Auditor Report 2018-114 February 2019 Blank page inserted for reproduction purposes only. California State Auditor Report 2018-114 35 February 2019 The State Lacks Accurate Data to Fully Measure the DVBE Program’s Success Key Points • None of the six awarding departments we reviewed could fully support their fiscal year 2017–18 DVBE activity reports. As a result, users of these reports could draw incorrect conclusions about the departments’ success in meeting the 3 percent goal. • General Services may not be correctly reporting DVBE participation because of inaccurate data that state departments entered into FI$Cal. Awarding Departments Inaccurately Reported DVBE Participation Amounts None of the six departments we reviewed could fully support their reported fiscal year 2017–18 DVBE contracting activity, as shown in Figure 3. These unsupported reports raise concerns about whether awarding departments maintain sufficient documentation to accurately report and assess their DVBE participation. Figure 3 None of the Six Departments Accurately Reported All DVBE Participation Data (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:31)(cid:28) (cid:20)(cid:26)(cid:28)(cid:26) (cid:20)(cid:17)(cid:16)(cid:22) (cid:25)(cid:24)(cid:23)(cid:22)(cid:21) (cid:21)(cid:19)(cid:21)(cid:28)(cid:22)(cid:18) (cid:26)(cid:31)(cid:28)(cid:24)(cid:17)(cid:24)(cid:28)(cid:19) (cid:27)(cid:22)(cid:15)(cid:30)(cid:27)(cid:28) (cid:31)(cid:22)(cid:26)(cid:28)(cid:27)(cid:30)(cid:21)(cid:28)(cid:16)(cid:8)(cid:20)(cid:29)(cid:23)(cid:25) (cid:19)(cid:30)(cid:28)(cid:30)(cid:16)(cid:25)(cid:7)(cid:25)(cid:28)(cid:23)(cid:4)(cid:16)(cid:30)(cid:21)(cid:21)(cid:12)(cid:27)(cid:30)(cid:28)(cid:23)(cid:29)(cid:7) (cid:19)(cid:24)(cid:2)(cid:1)(cid:16)(cid:21)(cid:22)(cid:26)(cid:28)(cid:27)(cid:30)(cid:21)(cid:28)(cid:20)(cid:26) (cid:16) (cid:30)(cid:21)(cid:21)(cid:12)(cid:27)(cid:30)(cid:28)(cid:23)(cid:29)(cid:7)(cid:16)(cid:25)(cid:12)(cid:6)(cid:6)(cid:22)(cid:27)(cid:28) (cid:25)(cid:12)(cid:6)(cid:6)(cid:22)(cid:27)(cid:28)(cid:25)(cid:16)(cid:19)(cid:24)(cid:2)(cid:1) (cid:30)(cid:21)(cid:28)(cid:20)(cid:14)(cid:20)(cid:28)(cid:20)(cid:23)(cid:25)(cid:16)(cid:30)(cid:27)(cid:23)(cid:16)(cid:8)(cid:12)(cid:29)(cid:29)(cid:7) (cid:5)(cid:30)(cid:28)(cid:30)(cid:16)(cid:25)(cid:7)(cid:25)(cid:28)(cid:23)(cid:4)(cid:3) (cid:30)(cid:21)(cid:28)(cid:20)(cid:14)(cid:20)(cid:28)(cid:7)(cid:16)(cid:27)(cid:23)(cid:6)(cid:22)(cid:27)(cid:28)(cid:3) (cid:25)(cid:12)(cid:6)(cid:6)(cid:22)(cid:27)(cid:28)(cid:23)(cid:5)(cid:3) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:30)(cid:26)(cid:25) (cid:13)(cid:127)(cid:129)(cid:141)(cid:143)(cid:127)(cid:144)(cid:144)(cid:157) (cid:13)(cid:127)(cid:129)(cid:141)(cid:143)(cid:127)(cid:144)(cid:144)(cid:157) € (cid:31)(cid:30)(cid:29)(cid:24)(cid:23)(cid:28) (cid:157)(cid:1)(cid:15) (cid:13)(cid:127)(cid:129)(cid:141)(cid:143)(cid:127)(cid:144)(cid:144)(cid:157) € (cid:31)(cid:22)(cid:27)(cid:27)(cid:23)(cid:21)(cid:28)(cid:20)(cid:22)(cid:26)(cid:25) (cid:13)(cid:127)(cid:129)(cid:141)(cid:143)(cid:127)(cid:144)(cid:144)(cid:157) (cid:13)(cid:127)(cid:129)(cid:141)(cid:143)(cid:127)(cid:144)(cid:144)(cid:157) € (cid:19)(cid:18)(cid:24) (cid:13)(cid:127)(cid:129)(cid:141)(cid:143)(cid:127)(cid:144)(cid:144)(cid:157) (cid:157)(cid:1)(cid:15) € (cid:17)(cid:23)(cid:26)(cid:23)(cid:27)(cid:30)(cid:29)(cid:16)(cid:15)(cid:23)(cid:27)(cid:14)(cid:20)(cid:21)(cid:23)(cid:25) (cid:13)(cid:127)(cid:129)(cid:141)(cid:143)(cid:127)(cid:144)(cid:144)(cid:157) (cid:13)(cid:127)(cid:129)(cid:141)(cid:143)(cid:127)(cid:144)(cid:144)(cid:157) € (cid:13)(cid:12)(cid:11)(cid:29)(cid:20)(cid:21)(cid:16)(cid:10)(cid:23)(cid:30)(cid:29)(cid:28)(cid:9) (cid:13)(cid:127)(cid:129)(cid:141)(cid:143)(cid:127)(cid:144)(cid:144)(cid:157) (cid:13)(cid:127)(cid:129)(cid:141)(cid:143)(cid:127)(cid:144)(cid:144)(cid:157) € Source: DVBE activity reports for fiscal year 2017–18 and contracting data provided by Caltrans, CalVet, Corrections, DMV, General Services, and Public Health. 36 California State Auditor Report 2018-114 February 2019 State law requires General Services to publish an annual report of statewide contracting activity that consolidates data on departments’ DVBE usage. To assist General Services in publishing this report, departments are required by state law to report annually to General Services the value of certain contracts they awarded during the fiscal year, the level of DVBE participation in those contracts, and whether they achieved the DVBE participation goal. Further, General Services requires each awarding department to maintain records, which should include documentation such as a list of contracts and the associated dollar amounts, to support the amounts included on their DVBE activity reports. Each of the departments we reviewed maintains an electronic listing of contracts (data system), along with the respective hard‑copy contract files, to support the amounts reported in their activity reports. General Services specifies that the supporting documentation should allow a person viewing it to find the connection between an individual contract and the department’s activity report. Five of the six departments overstated DVBE participation amounts in their data systems for a selection of contracts we reviewed. We selected five to seven contracts at each of the six departments to identify whether they accurately recorded DVBE participation amounts in the data systems they use to complete their DVBE activity reports. Only one department, CalVet, accurately reported all of the contracts we reviewed. The remaining five departments recorded at least one of the contracts we reviewed incorrectly in their data systems, causing us to question whether departments are using accurate information to complete their activity reports. For example, as shown in Table 2, Caltrans inaccurately recorded a contract as having $10.5 million in DVBE participation in its data system, when the contract included only $110,000 for a DVBE subcontractor. Similarly, DMV’s data system reflected an overstatement of $631,000 in DVBE participation for one contract. Further, Public Health’s supporting documentation reflected $24,000 in DVBE participation for a contract amendment that did not change the value of the contract and it recorded another contract as having $5,000 in DVBE participation when in fact it did not include any. These discrepancies, which the awarding departments generally attributed to clerical errors, are of concern. In particular, when awarding departments record DVBE participation amounts for contracts that have no such participation or overstate DVBE participation amounts, the total DVBE participation amounts they ultimately report to General Services could be significantly inflated. As a result, users of these reports could be relying on misleading information about departments’ success in meeting the 3 percent goal. California State Auditor Report 2018-114 37 February 2019 Table 2 Five Awarding Departments Overstated DVBE Participation in Their Data Systems for Some of the Contracts We Reviewed NUMBER OF SELECTED DEPARTMENT CONTRACTS REPORTED AMOUNT IN DATA SYSTEM ACTUAL AMOUNT AMOUNT OVERREPORTED INCORRECTLY Caltrans 1 $10,456,000 $110,000 $10,346,000 Corrections 1 13,000 1,000 12,000 DMV 1 946,000 315,000 631,000 General Services 2 77,000 36,000 41,000 Public Health 2 29,000 0 29,000 Source: Departments’ supporting documentation for amounts reported on their fiscal year 2017–18 DVBE activity reports. We found no reporting errors for the CalVet contracts we reviewed. Indicates that the amount of DVBE participation reported in the tracking system does not match the amount reported on the contract. We also found that five of the six departments submitted DVBE activity reports that were not fully supported by their data systems. Although Caltrans’ DVBE activity report matched its data system, we determined that the department could not fully support its DVBE activity report because its data system is incomplete, as we discuss later. As Table 3 on the following page shows, the other four departments overreported or underreported their contracting activity by as much as approximately $26 million. CalVet stated that it chose not to report a category of contracts for one of its divisions because the division had not certified the total amount before CalVet submitted its activity report. The remaining three departments attributed the inaccurate reports primarily to clerical errors. For instance, Corrections double‑counted DVBE participation for one category of subcontracts, causing it to overreport its DVBE contracting activity by $36,000. Likewise, Public Health overreported its DVBE contracting activity by $187,000 and underreported its total contracting activity by $25.7 million—causing it to overstate its DVBE participation. By contrast, General Services’ reported DVBE participation matched the amounts in its data system, but the department failed to include all reportable contracts in its system and listed several hundred thousand dollars in the wrong contracting activity categories of the report. These discrepancies had little effect on the departments’ reported DVBE participation; however, we question whether departments’ DVBE data, and DVBE activity reports generated from these data, can be relied upon, given the inaccurate amounts in the five departments’ data systems that we noted in Table 2, as well as some cases of missing data discussed in Table 3 on page 38. 38 California State Auditor Report 2018-114 February 2019 Table 3 Four Awarding Departments’ Data Systems Did Not Fully Support Their DVBE Activity Reports TOTAL CONTRACTING TOTAL DVBE PARTICIPATION DVBE ACTIVITY AMOUNT DVBE ACTIVITY AMOUNT DEPARTMENT DATA SYSTEM DATA SYSTEM REPORT UNDERREPORTED REPORT OVERREPORTED Caltrans* $1,785,183,000 $1,785,183,000 $– $87,857,000 $87,857,000 $– CalVet 83,548,000 84,627,000 (1,079,000) 6,960,000 6,960,000 – Corrections 789,683,000 789,683,000 – 39,531,000 39,495,000 36,000 DMV 91,840,000 91,840,000 – 9,107,000 9,107,000 – General Services 1,611,307,000 1,614,357,000 (3,050,000) 48,690,000 48,690,000 – Public Health 553,985,000 579,739,000 (25,754,000) 22,953,000 22,766,000 187,000 Source: DVBE activity reports for fiscal year 2017–18 and supporting documents provided by the six departments. Indicates that the amount reported by the awarding department on the DVBE Activity Report was not supported by the information in the data system. * Caltrans told us that its data system is unable to quantify the amount of subcontracting for contracts that were collectively worth roughly $290 million. Therefore, it may have underreported some DVBE participation. Three of the six departments’ data systems did not contain complete contracting data, which also raises questions about the reliability of their DVBE activity reports. We selected 10 contracts from every department we visited to identify whether each department included all reportable contracts in its data system. Two departments, General Services and Corrections, failed to include all of the reportable contracts we reviewed. General Services stated that it did not include two contracts due to human error. For example, a contract worth $350,000 was omitted from its data system because the contracting office thought a different division had already included it. Corrections also failed to include an amended contract. When we asked Corrections why the amended contract was missing from its data system, the department disclosed that its data system does not track amendments to the value of contracts or the full value of some multiyear contracts. As a result, the department may be underreporting a significant amount of its contracting activity, including DVBE participation. Further, although Caltrans included in its DVBE activity report all 10 contracts we selected, it told us that its data system is unable to quantify the amount of subcontracting for roughly $290 million in contracting activity, meaning that it may have underreported some DVBE participation. Beginning with fiscal year 2018–19, General Services plans to use FI$Cal to automatically generate DVBE activity reports on behalf of other awarding departments that use FI$Cal, which may alleviate some DVBE reporting issues. For instance, General Services indicated that FI$Cal is able to track all subcontractors, which should resolve the issue faced by those departments whose data systems are unable to quantify amounts designated to all DVBE California State Auditor Report 2018-114 39 February 2019 subcontractors. Nonetheless, the transition to reporting through FI$Cal does not fully eliminate the risk of inaccurate reporting. Specifically, the reliability of each department’s DVBE activity report will depend on whether staff accurately enter contract information into FI$Cal. For this reason, awarding departments’ efforts to mitigate the risks of clerical errors is important. General Services May Not Be Able to Rely on FI$Cal Data to Track DVBE Program Success General Services does not have reliable contracting data to measure the DVBE program’s success. In our February 2014 report and in our June 2017 report titled Department of General Services and California Department of Technology: Neither Entity Has Provided the Oversight Necessary to Ensure That State Agencies Consistently Use the Competitive Bidding Process (Report 2016‑124), we noted that General Services’ contracting data contained inaccurate or incomplete information. Specifically, its data did not include contracts valued under $5,000, some agencies were not consistently recording contracts in General Services’ system, and the data did not fully track DVBE subcontractors. To begin addressing these issues, General Services subsequently revised its reporting instructions to require awarding departments to record all contracts in its data system, regardless of dollar value. Additionally, for the more than 135 entities that actively use FI$Cal to record contracting data as of January 2019, the relevant DVBE contracting data are automatically collected and made available to General Services, reducing the likelihood of input error. General Services also asserted that FI$Cal started recording subcontractor information in January 2016, and this information should be available for fiscal year 2018–19 DVBE reporting. However, as of December 2018, General Services has not completed the programming necessary to generate the annual reports using this information. Despite these improvements, General Services’ data have an additional problem. As noted in our June 2017 report, any agency that does not primarily use FI$Cal for contracts must instead enter contracting data into it manually, which creates a risk of data entry errors. In fact, some of the departments discussed previously that could not fully support the figures included in their DVBE participation reports do not use the FI$Cal system to record accounting and contracting transactions. Instead, they are entering their contracting data manually, resulting in a greater risk of data entry errors and inaccurate reporting. 40 California State Auditor Report 2018-114 February 2019 Recommendations Awarding Departments To ensure that DVBE participation data are reported accurately and consistently, Caltrans, Corrections, DMV, General Services, and Public Health should implement or strengthen a review process to ensure that DVBE participation amounts entered into their data systems or FI$Cal are accurate. This review process should include verification, on a sample basis, of the amounts awarded to, and the certification status of, the DVBE contractor or subcontractor for high‑value contracts that include DVBE participation. General Services as Oversight Entity Until it begins generating DVBE activity reports using FI$Cal, General Services should issue a policy to require awarding departments to implement or strengthen a secondary review process to ensure that the DVBE activity reports are accurate and supported by departments’ data systems. To ensure that it can create accurate annual DVBE participation reports, General Services should complete the programming necessary to include DVBE subcontractor information by June 30, 2019. We conducted this audit under the authority vested in the California State Auditor by Government Code 8543 et seq. and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Respectfully submitted, ELAINE M. HOWLE, CPA California State Auditor Date: February 14, 2019 California State Auditor Report 2018-114 41 February 2019 APPENDIX A SCOPE AND METHODOLOGY The Joint Legislative Audit Committee (Audit Committee) directed the California State Auditor to review the DVBE program, including following up on issues identified in our February 2014 report. Specifically, the Audit Committee asked, among other things, whether DVBE contracts go to a small number of DVBE certified contractors and whether CalVet has sufficient resources to accomplish its statutory responsibilities. Table A lists the objectives that the Audit Committee approved and the methods we used to address them. Table A Audit Objectives and the Methods Used to Address Them AUDIT OBJECTIVE METHOD 1 Review and evaluate the laws, rules, and Reviewed relevant laws, regulations, policies, and procedures. regulations significant to the audit objectives. 2 Determine whether conditions identified • Interviewed staff and reviewed relevant documents from Caltrans, CalVet, Corrections, in State Auditor Report 2013‑115, Disabled and General Services to understand actions taken to address recommendations from Veteran Business Enterprise Program: Meaningful the 2014 report. Performance Standards and Better Guidance by • Interviewed staff and reviewed relevant documents from DMV and Public Health to the California Departments of General Services understand their processes related to areas of findings from the 2014 report. and Veterans Affairs Would Strengthen the • Reviewed five contracts each from Caltrans, Corrections, DMV, and Public Health to Program (Report 2013‑115), persist at the determine if these departments complied with DVBE participation requirements. California Department of Veterans Affairs (CalVet), the Department of General Services • Assessed the process that Caltrans, DMV, General Services, and Public Health have in (General Services), the California Department place to verify DVBE firms’ certification status before submitting the DVBE activity report of Transportation (Caltrans), and the California to General Services. Department of Corrections and Rehabilitation • Interviewed staff and reviewed documentation from CalVet and General Services related (Corrections), and determine whether similar to their evaluation of the effectiveness of their respective department’s outreach efforts. conditions exist at two additional entities by • Interviewed staff at CalVet, General Services, and selected awarding departments performing audit procedures similar to those that did not meet their DVBE participation goals in at least one of three fiscal years used to address the scope and objectives for (2014–15 through 2016–17) to understand the level of engagement CalVet had with Report 2013‑115. underachieving departments. • Interviewed staff and reviewed documentation related to CalVet’s work with underachieving departments. • Interviewed staff and reviewed documents at General Services to determine whether it has issued any directives or guidance on how to report multiyear contracts on the DVBE activity report. continued on next page . . . 42 California State Auditor Report 2018-114 February 2019 AUDIT OBJECTIVE METHOD 3 Obtain updated data on the DVBE program and • Identified the relevant procurement information related to fiscal year 2017–18 report the same demographic information on the purchase orders and contracts data for prime contractors using General Services’ program as in Report 2013‑115. In addition, to Cal eProcure website. the extent possible, report on the following: • Determined that General Services’ Cal eProcure database does not capture some data, a. The percentage of certified DVBEs that bid on including information on bids and subcontractors. As a result, we focused our analysis state contracts in fiscal year 2017–18. of this information on the 30 DVBE firms that received the most money from state contracts (top 30 DVBE firms). b. The percentage of certified DVBEs that won state contracts in fiscal year 2017–18. • For the top 30 DVBE firms, we reviewed the DVBE certification files to identify three‑year average gross revenue, the number of employees, disability ratings, and ownership c. The total value of contracts awarded to data. We present various available data for the top 30 DVBE firms in Appendix C. certified DVBEs in fiscal year 2017–18. d. The portion of contracts used to achieve the goals of the DVBE program that come from prime contractors and from subcontractors in fiscal year 2017–18. e. If each of the top 30 DVBEs is certified also as a small business or microbusiness. f. The three‑year average gross revenue for each of the top 30 DVBEs. g. The number of employees for each of the top 30 DVBEs. h. The statistical distribution of disability ratings for all DVBEs and for the top 30 DVBEs. i. The statistical distribution of DVBE ownership percentages for all DVBEs, the top 30 DVBEs, prime contractors, and subcontractors. 4 Determine whether DVBE contracts go to a • Analyzed the data from General Services’ Cal eProcure website for prime contractors to small number of DVBE certified contractors, identify the contract number and amounts awarded to all DVBE firms and to the top as noted in Report 2013‑115. Determine what 30 DVBE firms. actions General Services, CalVet, or participating • Interviewed staff at the six awarding departments to understand their perspectives on departments may take to correct this condition. why a small number of DVBE contractors are receiving the majority of contract dollars and what actions they have taken to address this condition. • Reviewed a total of 10 contracts that the six departments we visited awarded to 10 of the top 30 DVBE firms and determined that the chosen contract method did not unfairly limit participation opportunities for other DVBE firms. 5 Evaluate the effectiveness of General Services’ • Interviewed staff and reviewed guidance and policies issued by General Services and process for handling complaints and allegations the awarding departments to determine how each department handles complaints. of fraud or waste in the program and for • Obtained, to the extent available, complaint logs from each of the six departments we protecting whistleblowers. Also, review the reviewed to identify the frequency and type of complaints they received during fiscal types and resolutions of complaints that General years 2015–16 through 2017–18. Services receives. • Reviewed the case file for the only complaint received among the six departments during fiscal years 2015–16 through 2017–18 and determined whether the complaint was investigated appropriately. California State Auditor Report 2018-114 43 February 2019 AUDIT OBJECTIVE METHOD 6 Determine whether departments obtain sufficient • Interviewed staff at the six departments and reviewed departmental policies and assurance regarding the amounts paid to DVBE procedures, and determined that although departments do not verify payments subcontractors, as noted in Report 2013‑115. To to DVBE subcontractors, this lack of verification does not affect their reporting of the extent possible, determine whether DVBE DVBE partcipation because state law requires awarding departments to report DVBE prime contractors contracting with General participation using contract award amounts and not payments. Services, CalVet, or other departments use • Interviewed staff at the six departments and reviewed appropriate documents, and non‑DVBE subcontractors and determine to determined that state law does not require DVBE prime contractors to report payment what extent those departments have policies information about non‑DVBE subcontractors when calculating DVBE participation. or practices to exclude payments from DVBE • Selected five to seven contracts that each of the six departments awarded during fiscal prime contractors to non‑DVBE subcontractors year 2017–18 and determined whether the total amounts and DVBE participation when calculating whether the departments met amounts listed on the contracts were accurately recorded in the respective the DVBE participation goal. Determine what department’s fiscal year 2017–18 tracking system. actions General Services, CalVet, or participating departments may take to monitor and correct • Recalculated each department’s fiscal year 2017–18 DVBE activity report using its this condition. tracking system to evaluate the accuracy of the DVBE participation amounts each department reported to General Services. • Haphazardly selected 10 fiscal year 2017–18 contract files from each department and determined whether those contracts were included on the department’s fiscal year 2017–18 tracking system to determine whether the department accounted for all contracts. 7 Identify and evaluate the actions General Interviewed appropriate staff at General Services and reviewed relevant documentation Services took subsequent to Report 2013‑115 to and determined that General Services has taken reasonable steps to monitor other correct or prevent issues identified in that audit departments for findings similar to the ones we identified in our Report 2013‑115. at departments other than the five reviewed in Report 2013‑115. 8 Evaluate the effectiveness of actions taken by See Audit Objective 2 regarding the work we performed to determine the effectiveness of General Services, CalVet, Caltrans, and Corrections the actions the departments took in response to recommendations from the 2014 report. in response to recommendations from Report 2013‑115. 9 Determine whether the program addresses the Interviewed relevant staff at each awarding department. Determined that state law special needs of specific populations of veterans. governing the DVBE program does not differentiate between specific populations of or the specific special needs of disabled veterans. Determined that the departments we reviewed do not treat certified DVBE firms differently. 10 Determine whether CalVet has sufficient • Interviewed staff and reviewed available documentation at General Services and CalVet. resources to accomplish statutory responsibilities, • Assessed whether the statutory responsibilities assigned to these two departments are especially regarding program outreach and appropriate given their resources and expertise. development, and whether the distribution of funding and workload between General Services and CalVet is effective to accomplish program goals. 11 Review and assess any other issues that are • Conducted telephone interviews with a selection of DVBE subcontractors about their significant to the audit. experience working with prime contractors and awarding departments. • Assessed DVBE subcontractors’ responses to our interview questions to identify any recurring issues. Source: Analysis of the Audit Committee’s audit request number 2018‑114, as well as information and documentation identified in the column titled Method. 44 California State Auditor Report 2018-114 February 2019 Assessment of Data Reliability In performing this audit, we relied on electronic data we obtained from General Services’ Cal eProcure website to calculate the number and dollar amount of contracts and procurements awarded to DVBE firms. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of any computer‑processed information we use to support our findings, conclusions, or recommendations. We did not perform any assessment of these data because the supporting documentation is maintained by various state agencies, making accuracy or completeness testing impractical. As a result, we found that these data are of undetermined reliability for audit purposes. Although this determination may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations. California State Auditor Report 2018-114 45 February 2019 APPENDIX B Implementation of Recommendations From Our Previous Audit In our February 2014 report, we evaluated, among other items, General Services’ and CalVet’s policies, procedures, and practices for administering and overseeing the DVBE program, assisting departments and agencies in reaching the program goals and fulfilling the intent of the program, and reporting on program performance. The report identified several shortcomings. For example, it found that the five departments we reviewed could not fully support their reported DVBE contracting activity. It also found that a sixth department—CalVet—needed to take a more active role in the DVBE program. The report included several recommendations to four of the six departments we reviewed. Table B shows these recommendations and whether the departments have addressed them. Three of the four departments have fully addressed our recommendations from the 2014 report. However, as we discuss earlier in this report, CalVet has not implemented any of the recommendations we made in our previous report. Table B Implementation Status of the Recommendations From Our 2014 Report DEPARTMENT SUMMARY OF RECOMMENDATION IMPLEMENTED? Caltrans Ensure that it applies the DVBE incentive to all Yes applicable contracts and procurements Caltrans Verify the certification status of the DVBE firms on a Yes sample basis for high‑value contracts CalVet Develop stronger measures to evaluate outreach efforts No CalVet Help awarding departments meet DVBE participation No goals and promote DVBE contracting opportunities Corrections Document policies and procedures for applying the DVBE Yes incentive to all applicable contracts and procurements General Services Extract a reliable copy of all of the State’s procurement Yes data from BidSync General Services Verify the certification status of the DVBE firms on a Yes sample basis for high‑value contracts Source: Review of available documentation provided by the four departments. 46 California State Auditor Report 2018-114 February 2019 Blank page inserted for reproduction purposes only. California State Auditor Report 2018-114 47 February 2019 APPENDIX C Selected Data Related to the 30 DVBE Firms That Received the Most Money From State Contracts The Audit Committee asked us to identify certain data related to DVBE firms. Specifically, it asked for the percentage of certified DVBE firms that bid on state contracts in fiscal year 2017–18 and the percentage of certified DVBE firms that won state contracts in fiscal year 2017–18. The Audit Committee also asked that we identify specific information, such as the number of employees and average gross revenue, for the 30 DVBE firms that received the highest amounts in state contracts during fiscal year 2017–18. We used General Services’ data related to DVBE prime contractors—those DVBE firms that entered into contracts directly with awarding departments—to identify the top 30 DVBE firms. However, limitations in General Services’ data prevented us from identifying certain information that the Audit Committee requested. For example, General Services’ statewide contracting database does not capture bid information. Further, as we discuss earlier in this report, General Services’ statewide database does not identify DVBE subcontractors. As a result, we could not report data related to DVBE bids and DVBE subcontractors. Moreover, under state and federal law, a veteran’s disability rating constitutes private information. As a result, we do not present this information. However, our review found that the top 30 DVBE firms had a wide range of disability ratings, each of which met the legal requirement for participation in the program. Similarly, we do not present information related to average revenue for the top 30 DVBE firms because the revenue information provided to General Services constitutes confidential federal tax information. Table C on the following page shows the information related to the 30 DVBE firms that received the highest dollar amounts in state contracts as prime contractors during fiscal year 2017–18. 48 California State Auditor Report 2018-114 February 2019 C elbaT 81–7102 raeY lacsiF gniruD srotcartnoC emirP sa gnitcartnoC etatS ni gnitapicitraP smriF EBVD 03 poT REBMUN SSENISUB LLAMS S’MRIF EBVD ETATS FO LATOT ETATS LATOT STNEMTRAPED ETATS EVIF POT NARETEV EBVD RO )BS( LAITINI FO REBMUN RO SDOOG FO EPYT STNEMTRAPED REBMUN TCARTNOC EHT OT STCARTNOC GNIDRAWA FO EGATNECREP EMAN MRIF EBVD SSENISUBORCIM NOITACIFITREC SEEYOLPME DEDIVORP SECIVRES GNIDRAWA ETATS FO DRAWA MRIF EBVD PIHSRENWO *)BM( NOITANGISED ETAD EBVD STCARTNOC TNUOMA STCARTNOC fo tnemtrapeD ainrofilaC • krowteN deillA 1 )ygolonhceT( ygolonhceT .cnI ,snoituloS )draoB xaT( draoB xaT esihcnarF • erawdrah retupmoC lairtsudnI fo tnemtrapeD • AN 5002 ,82 lirpA nwonknU ,erawtfos dna 87 848 000,043,42$ %15 snoitaleR srehto gnoma snoitcerroC • fo tnemtrapeD ainrofilaC • )ecitsuJ( ecitsuJ htlaeH cilbuP • gnuoY nilknarF 2 dooF fo tnemtrapeD ainrofilaC • .cnI ,lanoitanretnI dna dooF( erutlucirgA dna tnempiuqe yrotarobaL )erutlucirgA BS 9002 ,82 tsuguA nwonknU ,slacimehc dna cixoT fo tnemtrapeD • 5 75 000,017,51$ %001 srehto gnoma )CSTD( lortnoC secnatsbuS hsiF fo tnemtrapeD ainrofilaC • )efildliW dna hsiF( efildliW dna snoitcerroC • snoitcerroC • etaivA 3 gnidlew dna lacirtcelE secivreS lareneG • .cnI ,sesirpretnE noitcurtsnoc ,slairetam slatipsoH etatS fo tnemtrapeD • )slatipsoH etatS( BS 5102 ,82 yraunaJ 01 ,rebmul dna seilppus 92 254 000,093,9$ %001 fo tnemtrapeD ainrofilaC • ,seilppus ecffio dna noitalugeR edicitseP srehto gnoma dna noitisopxE ainrofilaC • riaF etatS snoitcerroC • ainrofilaC 4 ,ecffio ,lairotinaJ snartlaC • nareteV BS 2002 ,51 tsuguA 5 dna ,retupmoc erutlucirgA dna dooF • 81 466 000,076,8$ %15 .cnI ,ylppuS ,seilppus lacidem retaW fo tnemtrapeD • srehto gnoma )secruoseR retaW( secruoseR slatipsoH etatS • dna skraP fo tnemtrapeD • eulB labolG 5 ,gnikrowten ataD )skraP etatS( noitaerceR .cnI ,EBVD noitamrofnI snoitcerroC • secivres ygolonhceT remusnoC fo tnemtrapeD • BS 1102 ,2 lirpA 35 82 07 000,047,7$ %001 retupmoc dna ,)TI( )sriaffA remusnoC( sriaffA gnoma ,erawtfos draoB xaT • srehto fo tnemtrapeD ainrofilaC • noitacudE California State Auditor Report 2018-114 49 February 2019 REBMUN SSENISUB LLAMS S’MRIF EBVD ETATS FO LATOT ETATS LATOT STNEMTRAPED ETATS EVIF POT NARETEV EBVD RO )BS( LAITINI FO REBMUN RO SDOOG FO EPYT STNEMTRAPED REBMUN TCARTNOC EHT OT STCARTNOC GNIDRAWA FO EGATNECREP EMAN MRIF EBVD SSENISUBORCIM NOITACIFITREC SEEYOLPME DEDIVORP SECIVRES GNIDRAWA ETATS FO DRAWA MRIF EBVD PIHSRENWO *)BM( NOITANGISED ETAD EBVD STCARTNOC TNUOMA STCARTNOC dna laicremmoC snoitcerroC • lortnoC SU 6 ,tnempiuqe lairtsudni slatipsoH etatS • .cnI ,puorG ,noitalitnev ,gnitaeh secivreS lareneG • BS 7002 ,41 rebmeceD 5 gninoitidnoc ria dna fo ecffiO s’ronrevoG ainrofilaC • 11 722,1 000,046,5$ %001 )SEO laC( secivreS ycnegremE ,gnibmulp dna ,)CAVH( latnempoleveD fo tnemtrapeD • srehto gnoma )SDD( secivreS draoB xaT • srentraP & edahS 7 bew ,secivres tiduA eraC htlaeH fo tnemtrapeD • ygolonhceT dna ,tnempoleved )SCHD( secivreS BM dna BS 2102 ,41 rebmevoN 4 61 86 000,067,4$ %15 gnoma ,secivres TI sriaffA remusnoC • srehto noitargetnI smetsyS fo ecffiO • SDD • snartlaC • .cnI ,xitaN 8 retupmoc ,secivres TI VMD • BM dna BS 3102 ,7 hcraM 3 ,erawtfos dna ,erawdrah snoitcerroC • 17 406 000,071,4$ %001 srehto gnoma ecitsuJ • efildliW dna hsiF • secivres gnireenignE atsiV atlA 9 noitcurtsnoc dna snoituloS AN 5002 ,5 tsuguA 001 snartlaC • 1 1 000,000,4$ %15 gnoma ,slairetam srehto dna gnireenignE tseW‑caP 01 tnemtrapeD yratiliM ainrofilaC • BS 9002 ,5 rebotcO 71 ,secivres lacirtcele 1 02 000,059,3$ %15 .cnI ,lareneG )tnemtrapeD yratiliM( srehto gnoma sriaffA remusnoC • BSH 11 dna secivres TI secruoseR retaW • .cnI ,snoituloS fo tnemtrapeD • erawtfos retupmoc BS 0102 ,52 hcraM 3 thgisrevO ssenisuB 02 54 000,018,3$ %001 gnoma ,gnireenigne SCHD • srehto dlihC fo tnemtrapeD • secivreS troppuS draoB xaT • sugnA 21 ,riaper retupmoC noitavresnoC fo tnemtrapeD • .cnI ,remaH ,erawdrah ,erawtfos )noitavresnoC( BS 4102 ,32 yluJ 6 retupmoc dna tnempoleveD tnemyolpmE • 22 73 000,077,3$ %15 gnoma ,gnimmargorp tnemtrapeD srehto noitatilibaheR fo tnemtrapeD • SCHD • . . . egap txen no deunitnoc 50 California State Auditor Report 2018-114 February 2019 REBMUN SSENISUB LLAMS S’MRIF EBVD ETATS FO LATOT ETATS LATOT STNEMTRAPED ETATS EVIF POT NARETEV EBVD RO )BS( LAITINI FO REBMUN RO SDOOG FO EPYT STNEMTRAPED REBMUN TCARTNOC EHT OT STCARTNOC GNIDRAWA FO EGATNECREP EMAN MRIF EBVD SSENISUBORCIM NOITACIFITREC SEEYOLPME DEDIVORP SECIVRES GNIDRAWA ETATS FO DRAWA MRIF EBVD PIHSRENWO *)BM( NOITANGISED ETAD EBVD STCARTNOC TNUOMA STCARTNOC VMD • metsyS 31 ygolonhceT • snoituloS erawdrah retupmoC seitilitU cilbuP ainrofilaC • .cnI ,EBVD noissimmoC BM dna BS 2102 ,41 rebmevoN 2 gnoma ,erawtfos dna 13 441 000,040,3$ %15 fo tnemtrapeD ainrofilaC • srehto secivreS laicoS dna noitasnepmoC mitciV • draoB smialC tnemnrevoG secruoseR retaW • .cnI ,hceT ffatS 41 secivres TI tnemtrapeD yratiliM • retupmoc dna sriaffA remusnoC • BS 5102 ,7 lirpA 15 dna gnimmargorp 7 51 000,040,3$ %15 secruoseR riA ainrofilaC • gnoma ,ecnanetniam )BRA( draoB srehto SDD • htlaeH cilbuP • sesirpretnE MAR 51 lairotinaj ,sretupmoC CSTD • dna ,seilppus BM dna BS 5002 ,4 rebmevoN 1 noitavresnoC • 9 07 000,000,3$ %001 ,tnempiuqe lairtsudni secivreS lareneG • srehto gnoma VMD • VMD • otartS 61 erawdrah retupmoC htlaeH cilbuP • ,snoitacinummoC dna erawtfos dna BM dna BS 4102 ,91 rebmeceD 3 ,ytiruces krowten teVlaC • 72 88 000,007,2$ %001 .cnI snoitcerroC • srehto gnoma sriaffA remusnoC • slatipsoH etatS • tnegreM 71 ,gnicnerefnocoediV yrarbiL etatS ainrofilaC • .cnI ,smetsyS dna ,secivres duolc secivreS lareneG • BM dna BS 7102 ,6 yluJ nwonknU 9 72 000,082,2$ %15 ,erawtfos retupmoc laC$IF • srehto gnoma fo tnemtrapeD ainrofilaC • noitcetorP eriF dna yrtseroF snoitcerroC • sreilppuS EBVD 81 dna ,ecffio ,ycnegremE secivreS lareneG • ,seilppus retupmoc htlaeH cilbuP • BM dna BS 1102 ,03 rebmevoN 4 51 093 000,040,2$ %001 dna ,tlahpsa ,tnemec BRA • srehto gnoma ,tniap eht rof loohcS ainrofilaC • edisreviR—faeD California State Auditor Report 2018-114 51 February 2019 REBMUN SSENISUB LLAMS S’MRIF EBVD ETATS FO LATOT ETATS LATOT STNEMTRAPED ETATS EVIF POT NARETEV EBVD RO )BS( LAITINI FO REBMUN RO SDOOG FO EPYT STNEMTRAPED REBMUN TCARTNOC EHT OT STCARTNOC GNIDRAWA FO EGATNECREP EMAN MRIF EBVD SSENISUBORCIM NOITACIFITREC SEEYOLPME DEDIVORP SECIVRES GNIDRAWA ETATS FO DRAWA MRIF EBVD PIHSRENWO *)BM( NOITANGISED ETAD EBVD STCARTNOC TNUOMA STCARTNOC ,stcudorp rebbuR SPST 91 stnemurtsni lacidem .cnI ,seirtsudnI ,seilppus dna snoitcerroC • BS 9002 ,52 rebmetpeS 6 dna cidepohtro 2 815 000,000,2$ %001 slatipsoH etatS • ,stcudorp citehtsorp ,seilppus dia tsrfi dna srehto gnoma snoitcerroC • rohcnA 02 ,seilppus lairtsudnI secruoseR retaW • .cnI ,ylppuS ,seilppus lacirtcele BS 2102 ,01 lirpA 4 secivreS lareneG • 02 464 000,009,1$ %06 ,sloot gnibmulp dna )PHC( lortaP yawhgiH ainrofilaC • srehto gnoma SEO laC • snoitcerroC • nolehcE 12 ,seilppus lacideM slatipsoH etatS • CLL noitubirtsiD ,smetsys ecnallievrus BS 3102 ,71 enuJ 3 secivreS lareneG • 21 842 000,067,1$ %001 ,seilppus lairotinaj dna htlaeH cilbuP • srehto gnoma snartlaC • cffiart rof tnempiuqE snartlaC • ytefaS arreiS 22 ,sngis cffiart ,lortnoc skraP etatS • ynapmoC BM dna BS 9991 ,7 enuJ 91 4 03 000,027,1$ %55 gnoma ,lerappa dna sproC noitavresnoC ainrofilaC • srehto VMD • snoitcerroC • ynapmoC skoorB 32 ,CAVH ,rebmul ,slateM secivreS lareneG • ,erawdrah lacirtcele BM dna BS 9991 ,41 yluJ 41 slatipsoH etatS • 31 093 000,096,1$ %001 gnoma ,gnibmulp dna draoB xaT • srehto PHC • snoitcerroC • nodroG 42 tnempiuqe lairtsudnI secruoseR retaW • ylppuS lairtsudnI BS 2002 ,52 rebmetpeS 81 gnoma ,seilppus dna secivreS lareneG • 81 514 000,035,1$ %15 ynapmoC srehto efildliW dna hsiF • SDD • ,noitcurtsnoC mehtnA 52 tnemtrapeD yratiliM • BS 2102 ,31 enuJ 01 CAVH dna ,gnibmulp 2 3 000,015,1$ %001 .cnI ,sredliuB skraP etatS • srehto gnoma ,secivres ,gnitidua ,gnitnuoccA PHC • laicnaniF etinarG 62 tnemeganam dna snoitcerroC • .cnI ,snoituloS BS 2002 ,42 yraunaJ 21 retupmoc dna secivres ecitsuJ • 22 401 000,004,1$ %56 ,erawtfos dna erawdrah VMD • srehto gnoma snartlaC • . . . egap txen no deunitnoc 52 California State Auditor Report 2018-114 February 2019 REBMUN SSENISUB LLAMS S’MRIF EBVD ETATS FO LATOT ETATS LATOT STNEMTRAPED ETATS EVIF POT NARETEV EBVD RO )BS( LAITINI FO REBMUN RO SDOOG FO EPYT STNEMTRAPED REBMUN TCARTNOC EHT OT STCARTNOC GNIDRAWA FO EGATNECREP EMAN MRIF EBVD SSENISUBORCIM NOITACIFITREC SEEYOLPME DEDIVORP SECIVRES GNIDRAWA ETATS FO DRAWA MRIF EBVD PIHSRENWO *)BM( NOITANGISED ETAD EBVD STCARTNOC TNUOMA STCARTNOC noitcurtsnoC ERJT 72 ygrene ,tnemeganam .cnI ,secruoseR BS 4102 ,41 yraunaJ 7 dna ,gnitniap ,smetsys skraP etatS • 1 2 000,042,1$ %09 ,secivres lacirtcele srehto gnoma secruoseR retaW • odanoroC 82 ,seilppus ecffiO snartlaC • noitubirtsiD BS 3102 ,32 rebotcO 24 ,lairotinaj dna ,CAVH snoitcerroC • 91 342 000,012,1$ %07 ynapmoC srehto gnoma secivreS lareneG • efildliW dna hsiF • ,setag citamotuA sotkrA 92 ,stcudorp ecnallievrus tnemtrapeD yratiliM • detaroprocnI BS 6002 ,72 rebmetpeS 41 2 2 000,081,1$ %001 ,secivres lacirtcele dna efildliW dna hsiF • srehto gnoma dna seilppus latipsoH snoitcerroC • eromreviL 03 BM dna BS 4002 ,7 rebmeceD 6 ,tnempiuqe lacidem slatipsoH etatS • 3 34 000,011,1$ %001 .cnI ,cfiitneicS srehto gnoma SDD • 982,7 000,003,031$ slatoT .snoitaluger etats dna edoC tnemnrevoG dna ,esabatad noitacfiitrec EBVD ,esabatad erucorPe laC :ecruoS .elbacilppA toN = AN .sraey eerht suoiverp eht revo ssel ro noillim 51$ fo stpiecer ssorg launna egareva na htiw ssenisub detarepo dna denwo yltnednepedni na sa ,trap ni ,denfied saw ssenisub llams a ,81–7102 raey lacsfi gniruD * dlohserht stpiecer ssorg launna eht desaercni erutalsigeL eht ,9102 ,1 yraunaJ evitceffE .sraey eerht suoiverp eht revo ssel ro noillim 5.3$ fo stpiecer ssorg egareva na htiw ssenisub llams a sa denfied saw ssenisuborcim A .noillim 5$ ot ssenisuborcim rof California State Auditor Report 2018-114 53 February 2019 54 California State Auditor Report 2018-114 February 2019 Blank page inserted for reproduction purposes only. California State Auditor Report 2018-114 55 February 2019 56 California State Auditor Report 2018-114 February 2019 California State Auditor Report 2018-114 57 February 2019 58 California State Auditor Report 2018-114 February 2019 Blank page inserted for reproduction purposes only. California State Auditor Report 2018-114 59 February 2019 60 California State Auditor Report 2018-114 February 2019 California State Auditor Report 2018-114 61 February 2019 STATE OF CALIFORNIA GAVIN NEWSOM, Governor DEPARTMENT OF VETERANS AFFAIRS 1227 O Street Sacramento, California 95814 Telephone: (800) 952-5626 Fax: (916) 653-2456 January 25, 2019 Elaine M. Howle California State Auditor 621 Capitol Mall, Suite 1200 Sacramento, California 95814 Dear Ms. Howle: Thank you for the opportunity to respond to your audit of the Disabled Veteran Business Enterprise program. The mission of the California Department of Veterans Affairs (CalVet) is to serve and honor all California veterans by connecting them and their families with their earned benefits through education, advocacy and direct services. CalVet takes great pride in this mission and works tirelessly to ensure that our California veterans are aware of and connected with these benefits. CalVet employs many different methods to conduct outreach to veterans, both directly at events or through one-on-one contact, and indirectly through a well-developed 1 community of stakeholders. In all of these outreach efforts, CalVet includes information regarding the state’s DVBE program. CalVet’s outreach staff, Local Interagency Network Coordinators (LINCs), regularly interact with veterans and their families to provide information about their earned benefits. The Department’s California Transition Assistance Program (CalTAP) staff also present at transition events at all major military installations in the state (approximately 23), with the specific purpose of introducing service members to their community network of care and informing them of their state benefits. CalVet staff throughout the Department also take part in numerous community collaboratives, resource fairs, employment workshops, stand-downs, and veteran orientation workshops on college campuses. Staff also work with veterans to provide direct referrals for services either in-person, over the phone, or via email, for requests such as: claims assistance, housing, healthcare, employment, education, financial assistance, and requests for military records. In the next month, CalVet will distribute the 8th Edition of the California Veteran Resource Book. Annually, CalVet distributes more than 150,000 copies of the book to veterans and veteran stakeholders statewide. The Resource Book provides a detailed description of all of the earned benefits for which California veterans may be eligible and explains how to apply for those benefits. HONORING CALIFORNIA’S VETERANS * California State Auditor’s comments begin on page 63. 62 California State Auditor Report 2018-114 February 2019 Elaine M. Howle January 25, 2019 Page 2 Over the past several years, CalVet has also established a robust network of regional partnerships with county, city, community, and non-profit entities through its annual Leadership Summit. The Department will hold its 4th summit in spring 2019. CalVet does not oppose the findings in the audit, noting that the State Auditor recognizes that CalVet is not sufficiently resourced to fully meet its statutory responsibilities. While this recommendation proposes to shift responsibilities to the 2 Department of General Services (DGS), I feel it is critical that CalVet maintain a strong advocacy role in this program, should any change occur. Veterans seeking business opportunities in California may also need assistance connecting to their other state and federal benefits, many of which may directly impact their success in creating and growing their business. CalVet possesses the necessary cultural competency to connect veterans with their benefits, access communities of care through its robust stakeholder network, and respond to requests for assistance directly. The Department acknowledges that the focus of this audit is directed at 2 full- time employees who were provided to the Department through an Interagency Agreement (agreement) with DGS. The responsibilities and job duties of these staff members were also prescribed through the agreement. CalVet and DGS have since terminated the agreement and CalVet is now utilizing those positions to support other program needs. More so, CalVet can now direct the duties of these staff members and prioritize efforts that CalVet believes more efficiently and effectively address the Department’s statutory requirements in the Military and Veterans Code. CalVet’s Deputy Secretary for Minority and Underrepresented Veterans serves as the state’s DVBE Advocate and is training staff and developing an outreach strategy that conforms to the Department’s statutory requirements for the program. CalVet appreciates the efforts of the California State Auditor and its role as an oversight entity. It is our hope that your recommendations will improve the DVBE program and enhance the lives of veterans and their family members in California. Sincerely, VITO IMBASCIANI MD Secretary California State Auditor Report 2018-114 63 February 2019 COMMENTS CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM CALVET To provide clarity and perspective, we are commenting on CalVet’s response to the audit. The numbers below correspond to the numbers we have placed in the margin of CalVet’s response. Although CalVet states that it employs many different methods 1 to conduct outreach to veterans and includes information regarding the DVBE program, we found that it has not assessed the effectiveness of these outreach efforts as state law requires. As we describe on page 20, we found the reports that CalVet developed regarding its outreach activities did not provide any meaningful analysis regarding the quality, efficiency, and effectiveness of such activities. Because of these shortcomings, we recommend on page 32 that, among other things, CalVet assess the effectiveness of its past outreach efforts in increasing the number of DVBE firms that become certified. It should then develop an outreach plan that includes outreach activities the assessment found to be effective in the past. CalVet states that it wants to maintain a strong advocacy role in 2 the DVBE program, implying that its efforts in the past have been sufficient. However, as we state on page 24, CalVet has not fulfilled its responsibility to assist underachieving departments in meeting the 3 percent goal. Thus, we stand by our recommendation on page 31 to the Legislature that it transfer the responsibility for monitoring and assisting underachieving departments from CalVet to General Services. Nevertheless, if the Legislature were to choose to implement this recommendation, the resulting changes to state law would not preclude CalVet from taking an active role in the DVBE program. In fact, our recommendations on page 32 are intended to ensure that CalVet takes a more active and effective role in the program. 64 California State Auditor Report 2018-114 February 2019 Blank page inserted for reproduction purposes only. California State Auditor Report 2018-114 65 February 2019 66 California State Auditor Report 2018-114 February 2019 Blank page inserted for reproduction purposes only. California State Auditor Report 2018-114 67 February 2019 GAVIN NEWSOM California Governor January 25, 2019 MARYBEL BATJER Elaine M. Howle, State Auditor Secretary California State Auditor 621 Capitol Mall, Suite 1200 Sacramento, CA 95814 DEPARTMENTS Re: CALIFORNIA STATE AUDITOR’S REPORT NO. 2018-114 Office of Administrative Law Pursuant to the above audit report, enclosed are the Department Franchise Tax Board of General Services' comments pertaining to the results of the Department of audit. General Services Department of Human Resources The Government Operations Agency would like to thank the state State Personnel Board auditor for its comprehensive review. The results provide us with Public Employees’ the opportunity to better serve our clients and protect the public. Retirement System State Teachers’ Sincerely, Retirement System Department of Technology Victim Compensation Marybel Batjer, Secretary Board Government Operations Agency Department of Tax and Fee Administration Enc California Complete Count Office 915 Capitol Mall Suite 200 Sacramento, CA 95814 TEL:(916) 651-9011 www.GovOps.ca.gov * California State Auditor’s comments begin on page 75. 68 California State Auditor Report 2018-114 February 2019 California State Auditor Report 2018-114 69 February 2019 1 2 70 California State Auditor Report 2018-114 February 2019 3 California State Auditor Report 2018-114 71 February 2019 4 72 California State Auditor Report 2018-114 February 2019 5 California State Auditor Report 2018-114 73 February 2019 74 California State Auditor Report 2018-114 February 2019 Blank page inserted for reproduction purposes only. California State Auditor Report 2018-114 75 February 2019 COMMENTS CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM GENERAL SERVICES To provide clarity and perspective, we are commenting on General Services’ response to the audit. The numbers below correspond to the numbers we have placed in the margin of General Services’ response. Although General Services indicates that it already has a process for 1 regularly encouraging DVBE firms to participate in LPA contracts, we found that this process is not effective. Specifically, as we state on page 14, General Services claims that of the almost 3,500 LPAs available, only 137 of those LPAs list DVBE firms as vendors. Therefore, we stand by our recommendation on page 18 that General Services develop and implement a plan to encourage DVBE firms to participate in LPAs. General Services overstates the extent of its outreach to DVBE 2 firms on contracting opportunities with the State. As we describe on page 14, General Services has known for years that relatively few DVBE firms benefit from the DVBE program. We explain on that same page that we expected to find that General Services had conducted some analysis to assess why this is the case; however, it had not done so. Further, on pages 14 and 15 we state that General Services has not taken steps to determine what actions are necessary to increase the number of DVBE firms that receive contracts from awarding departments. Until General Services does so and uses this information to inform its outreach efforts, it cannot reliably ensure that the DVBE program provides its intended benefits. General Services misunderstands our recommendation. Our 3 recommendation does not suggest that awarding departments duplicate FI$Cal by posting individual contract solicitations on their websites. Rather, our recommendation is that General Services ensure that all awarding departments comply with its direction to make DVBE firms aware of potential procurement opportunities based on the departments’ anticipated needs. Specifically, as we state on page 17, General Services told us that in October 2018 it asked each awarding department’s DVBE advocate to identify the department’s contracting needs for the next six to 12 months and to post this information prominently on the department’s website to inform DVBE firms of opportunities. However, as of early January 2019, General Services knew of only two departments that had followed its direction. 76 California State Auditor Report 2018-114 February 2019 4 Although General Services indicates that it visits departments that fail to meet the DVBE goal, we did not see an outcome from its visits. As we describe on pages 26 and 27, General Services provided us with documentation that it had assessed a couple of departments that did not meet the DVBE goal in fiscal year 2016–17 to identify if there was any assistance it could offer. In each case, General Services concluded that the awarding departments did not need its assistance because they were using best practices or had reasonable processes in place. 5 General Services’ response implies that its tracking of program abuse cases has been sufficient. However, at our opening conference with General Services, it acknowledged that its tracking of program abuse allegations had shortcomings. In addition, as discussed on page 31, General Services acknowledged that it has not taken advantage of the potential benefits of tracking these abuse allegations. As we conclude on that same page, tracking the main elements of abuse allegations, such as the type of program abuse and how it was reported or discovered, would allow General Services to identify and address trends that otherwise may go unnoticed. California State Auditor Report 2018-114 77 February 2019 78 California State Auditor Report 2018-114 February 2019