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Report Number: 2016-125.1

The University of California Office of the President
It Has Not Adequately Ensured Compliance With Its Employee Displacement and Services Contract Policies



Summary

HIGHLIGHTS

Our audit concerning the Office of the President's oversight of university locations' use of services contracts revealed the following:


Results in Brief

The University of California (university) has not fully followed its policies for justifying its decisions to displace university employees. The university contracts with vendors for a variety of services. This practice can result in displacement—an employer's replacement of regular, full‑time employees with services contract workers who generally receive less pay. The university's Office of the President's University Guidelines on Contracting for Services (displacement guidelines) outline the process that campuses and medical centers must follow to demonstrate and justify the necessity of contracts that will displace university employees. Two of the 31 services contracts we reviewed at three campuses, two medical centers, and the Office of the President contained documentation indicating that university employees were displaced.

However, the two university locations administering these contracts did not fully adhere to the displacement guidelines in either contract. Specifically, in July 2016, the University of California, San Francisco, campus (San Francisco campus) entered into a contract to outsource certain information technology (IT) services, which it estimated would save $30 million over five years. As the displacement guidelines require, the San Francisco campus conducted a cost analysis to justify the business and financial necessity for its contracting decision. Although the San Francisco campus made the Office of the President aware of its plans, it did not provide formal, written notification of the displacement that included analysis justifying its outsourcing decision as required to the Office of the President for its review. Ultimately, the contract displaced 49 career and 12 contract employees. In the second instance, the University of California, Davis medical center failed to notify the Office of the President of a contract for housekeeping management services that displaced 12 employees.

We also found that the Office of the President has not enforced compliance with the displacement guidelines and that weaknesses in the displacement guidelines may undermine their effectiveness. For example, although the Office of the President was aware of the San Francisco campus's decision to contract for IT services, it did not follow up to ensure that the campus's analysis complied with the displacement guidelines. By not enforcing the guidelines, the Office of the President undercut its commitment to requiring adequate justification for displacement decisions. In addition, a lack of clarity in the displacement guidelines may reduce their effectiveness. For example, the displacement guidelines do not address situations in which university locations could provide services by hiring employees rather than by contracting for the services. In fact, we identified nine contracts for services that university employees could have likely performed, yet we found no indication that the university locations analyzed this option before entering these contracts. The university locations later replaced four of these contracts with university employees.

We also observed that services contract workers generally received less compensation in wages and benefits than university employees who performed similar work, which is not surprising given that university locations would not normally contract for services if it would cost more to do so. Specifically, we found that nearly all services contract workers in low‑wage contract categories—such as janitors, landscapers, and security guards—earned lower hourly wages than their university counterparts. Low‑wage services contract workers received hourly wages that were on average $3.86 lower than the wages received by comparable university employees. In addition, one‑quarter of the vendors that we contacted did not provide any form of either health or retirement benefits to their workers. Further, the health and retirement benefits that services contract workers did receive were often irregular or less generous than those received by comparable university employees.

Although our review of 30 services contracts determined that the campuses and medical centers generally adhered to the Office of the President's contract policy, we identified certain areas in which they could make improvements.1 For example, the university locations generally followed competitive bidding guidelines related to bid solicitation and evaluation methods. However, the locations did not always include the university's standard terms and conditions in their services contracts, even though these terms and conditions are meant to protect the university from potential legal problems in areas that are common to nearly all goods and services contracts. Further, the university locations could not demonstrate that the procurement staff who signed seven of the 30 services contracts we reviewed had the proper authority to do so.

Our review of these 30 contracts also found that some university locations did not consistently use competitive bidding to ensure that they procured services at the lowest cost or best possible value. For example, we found that some locations used amendments to repeatedly extend services contracts far beyond their original parameters. In one instance, the University of California, Davis, campus amended its contract with a food service vendor 24 times, extending the contract's term from seven years to 19 and increasing its value from $71 million to $237 million. The Office of the President only provides vague guidance on the appropriate use of amendments, which hinders the university locations' ability to fulfill their services needs at the lowest cost or best possible value while maximizing opportunities for vendors wishing to contract with them. In addition, some university locations appear to have misused sole‑source exemptions to avoid the competitive bidding process. For example, the University of California, San Francisco medical center asserted to us that it used a sole‑source contract to hire a janitorial services vendor because it had an urgent need for the services, yet its contract file lacked sufficient justification for the need to forego competitive bidding.

Additionally, in 2012 the Office of the President implemented a systemwide procurement program that has resulted in the university entering a number of procurement agreements that leverage the university's purchasing power to generate potential savings as a result of vendors discounting their rates. However, the Office of the President could do more to create further cost efficiencies. Specifically, the Office of the President lacks a systemwide database that would allow it to track contracts at all university locations and report basic contract data in the aggregate. To address this issue, the Office of the President executed a contract in May 2017 with a new procurement software vendor and anticipates implementing a central contract database within two years. Although the systemwide chief procurement officer indicated that planning efforts for the central contract database began in July 2017, the Office of the President has yet to develop a project implementation plan to guide this effort.

Finally, the university president asserted that in fiscal year 2015–16, the systemwide procurement program produced $269 million in procurement benefits—a term it uses to refer to cost reductions or avoidance, incentives, or revenue—and that the university redirected this $269 million to its core missions of teaching, research, and public service. However, our review found that the Office of the President lacked adequate support to substantiate nine of the 10 estimated benefits we reviewed, totaling $109 million. Moreover, as we noted in our March 2016 audit, University of California: Its Admissions and Financial Decisions Have Disadvantaged California Resident Students, Report 2015-107, the Office of the President has not provided guidance to university locations on how they should redirect benefits to the university's core missions of teaching, research, and public service.


Selected Recommendations

Legislature

To ensure that the university maximizes the use of competition, the Legislature should revise the Public Contract Code to specify the conditions under which the university may amend contracts without competition and more narrowly define the professional and personal services that the university may exempt from competitive bidding.

Office of the President

To ensure that all university locations adequately justify the necessity of contracts that will displace university employees, the Office of the President should do the following:

To ensure that the university achieves its goals of obtaining services at the lowest cost or best value while providing vendors with fair access to contracting opportunities, the Office of the President should do the following:

To help ensure that the university will implement its central contract database for tracking and monitoring all university contracts in a timely manner, the Office of the President should develop a detailed project implementation plan by October 2017.

To maximize the benefits from the systemwide procurement initiative and ensure that the university uses those benefits for its academic, research, and public service missions, the Office of the President should, to the extent possible, implement a process to centrally direct these funds to ensure that university locations use them to support the university's core missions. Further, the Office of the President should study ways to measure actual procurement benefits and fully substantiate the benefits claimed.


Agency Comments

The Office of the President agreed with most of our recommendations, indicating that they are constructive to its goals of continued improvement, progress, and success. However, the Office of the President disagreed with recommendations we made for maximizing the benefits from its systemwide procurement initiative.




Footnote

1 We reviewed 30 of 31 contracts for adherence with contract policy; the remaining contract we reviewed only against the displacement guidelines. Go back to text



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