HomeMy WebLinkAboutStaff Report 3461
CITY OF PALO ALTO OFFICE OF THE CITY AUDITOR
January 22, 2013
The Honorable City Council
Palo Alto, California
Policy and Services Committee Recommendation to Accept the
Contract Oversight Audit
The Office of the City Auditor recommends acceptance of the Contract Oversight Audit. At its
meeting on November 20, 2012, the Policy and Services Committee approved and unanimously
recommended the City Council accept the report. The Policy and Services Committee minutes
are included in this packet.
Recommended Action: Accept the Contract Oversight Audit.
Respectfully submitted,
Jim Pelletier
City Auditor
ATTACHMENTS:
: Attachment A: Contract Oversight Audit (PDF)
: Attachment B: Policy and Services Committee Meeting Minutes Excerpt (November 20,
2012) (PDF)
Department Head: Jim Pelletier, City Auditor
Page 2
CITY OF PALO ALTO OFFICE OF THE CITY AUDITOR
November 20, 2012
The Honorable City Council
Attention: Policy & Services Committee
Palo Alto, California
Contract Oversight Audit
In accordance with the Fiscal Year (FY) 2012 Annual Audit Work Plan, the Office of the City
Auditor has completed the Contract Oversight Audit. The audit contains six findings with a total
of ten recommendations. The Office of the City Auditor recommends the Policy and Services
Committee review and recommend to the City Council acceptance of the Contract Oversight
Audit.
We thank the staff of the Administrative Services Department (ASD) for their time, information,
and cooperation during the audit process.
Respectfully submitted,
Jim Pelletier
City Auditor
ATTACHMENTS:
Attachment A: Contract Oversight Audit (PDF)
Department Head: Jim Pelletier, City Auditor
Attachment A
Page 2
Attachment A
Jim Pelletier, City Auditor
Houman Boussina, Senior Performance Auditor
AUDIT OF CONTRACT OVERSIGHT:
OFFICE SUPPLIES
November 2012
Office of the City Auditor
Attachment A
Attachment A
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1 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
SUMMARY OF RESULTS
Internal controls within the Purchasing and Contract
Administration Division (Purchasing) of the
Administrative Services Department (ASD) require
improvement to ensure that contracts are
administered in accordance with the Municipal Code
and relevant policies and procedures.
In regard to the City’s contract with OfficeMax, the
City could have saved between $196,484 and
$389,426 if the contract had been appropriately
administered to ensure the City was receiving
reasonably expected discounts at authorized prices.
This includes:
$47,563 in overcharges from unauthorized price
increases (Finding 1).
$148,921 to $341,863 in additional discounts
(Finding 2).
Source: OfficeMax billing records for the City
In this report, the Office of the City Auditor (OCA) provides
10 recommendations to improve contract oversight
practices within the City and to support the City in
recovering additional discounts from OfficeMax.
We encourage other City departments with contract administration roles and responsibilities to review this report
and implement the recommendations where applicable. Page two of this executive summary presents highlights of
findings and recommendations presented in this report.
The City has spent more on office supplies per Full Time Equivalent (FTE) than other selected local jurisdictions (Finding 3)
Source: Cities
Office of the City Auditor
EXECUTIVE SUMMARY – CONTRACT OVERSIGHT AUDIT: OFFICE SUPPLIES
Audit Objective: To assess whether internal controls are effective and adequate to ensure that City
contracts are administered in accordance with the City of Palo Alto Municipal Code and relevant policies
and procedures. The audit focused on the City’s office supplies contract with OfficeMax Incorporated.
The City’s declining discount rate for office supplies purchased from OfficeMax under
the America Saves program (Finding 3):
Attachment A
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2 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
REPORT HIGHLIGHTS
OfficeMax overcharged the City at least $47,563 by
applying unauthorized changes to pricing—
OfficeMax changed the prices on items purchased
by the City under contract and could not provide
supporting evidence showing price changes were
approved as required by the contract. [Page 9]
The City could have received additional discounts
for non-contract office supplies—Our analysis
indicates the City could have saved between
$148,921 and $341,863. [Page 10]
ASD has not effectively administered the City’s
office supplies contract—ASD has not established
effective processes and procedures to ensure the
City receives contracted discounts and other key
benefits, and that the office supplies contract
meets the City’s business needs. [Page 13]
ASD should ensure the City’s financial records
accurately identify office supplies and should
properly budget for and control office supplies
expenditures—While City records indicate the City
has spent considerably more for office supplies
than other local jurisdictions sampled, we could
not reasonably associate a significant portion of
office supplies expenditures with office supplies
vendors. [Page 19]
Strategic contracting practices may provide
savings opportunities—The City did not have
authorized contracts for several vendors selected
for review and did not have a process to
document and approve all exemptions from
competitive procurement. [Page 20]
The City has not sufficiently defined contract
administration roles and responsibilities—We did
not find sufficient guidance regarding contract
administration roles, responsibilities, and business
practices to ensure compliance with the City’s
contract terms and also to ensure the City receives
contracted benefits. [Page 25]
RECOMMENDATION HIGHLIGHTS
OCA recommends that ASD consider the following
actions:
Request reimbursement of $47,563 from OfficeMax
for contract item overcharges.
Consult with the City Attorney’s Office to determine if
the City can recover additional discounts ranging
from $148,921 to $341,863 from OfficeMax for non-
contract items.
Develop formal procedures to effectively administer
the City’s office supplies contract.
Implement controls to ensure that office supplies are
accurately recorded in the City’s accounting records.
Clarify the City’s procurement policies and
procedures to specify when Purchasing should
negotiate contracts, based on dollar amount
thresholds applicable to total citywide expenditures
for goods and/or services regardless of payment
method.
Monitor expiring contracts to ensure they are re-
established in a timely manner.
Comply with Municipal Code requirements for
applying and documenting exemptions from
competitive solicitation in the procurement of goods
and services.
Monitor total citywide expenditures on categories of
goods and/or services to ensure the City has properly
approved contracts in order to maximize cost savings.
Ensure contract administration roles and
responsibilities are defined and appropriately
communicated.
This document represents a limited summary of the audit report and does not include all of the information available in the full report. The full
report can be found on the Office of the City Auditor website at: http://www.cityofpaloalto.org/gov/depts/aud/reports/performance.asp
Attachment A
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CONTENTS
EXECUTIVE SUMMARY ......................................................................................................................................................... 1
INTRODUCTION ................................................................................................................................................................... 5
AUDIT OBJECTIVE ......................................................................................................................................................................... 5
BACKGROUND.............................................................................................................................................................................. 5
AUDIT SCOPE AND LIMITATIONS ...................................................................................................................................................... 5
AUDIT METHODOLOGY .................................................................................................................................................................. 8
CITY AUDITOR’S CONCLUSION ......................................................................................................................................................... 8
FINDINGS:
FINDING 1: OFFICEMAX OVERCHARGED THE CITY AT LEAST $47,563 BY APPLYING UNAUTHORIZED CHANGES TO PRICING ................................ 9
FINDING 2: THE CITY COULD HAVE RECEIVED ADDITIONAL DISCOUNTS FOR NON-CONTRACT OFFICE SUPPLIES ................................................ 10
FINDING 3: ASD HAS NOT EFFECTIVELY ADMINISTERED THE CITY’S OFFICE SUPPLIES CONTRACT .................................................................. 13
FINDING 4: ASD SHOULD ENSURE THE CITY’S FINANCIAL RECORDS ACCURATELY IDENTIFY OFFICE SUPPLIES AND SHOULD PROPERLY BUDGET FOR
AND CONTROL OFFICE SUPPLIES EXPENDITURES ................................................................................................................ 19
FINDING 5: STRATEGIC CONTRACTING PRACTICES MAY PROVIDE SAVINGS OPPORTUNITIES ...................................................................... 20
FINDING 6: THE CITY HAS NOT SUFFICIENTLY DEFINED CONTRACT ADMINISTRATION ROLES AND RESPONSIBILITIES .......................................... 25
GLOSSARY OF ACRONYMS AND TERMS ............................................................................................................................. 27
ATTACHMENT 1: CITY OF PALO ALTO MUNICIPAL CODE—CONTRACTS AND PURCHASING PROCEDURES ......................... 29
ATTACHMENT 2: OFFICEMAX LIST OF “AMERICA SAVES NON CORE PRICE RANGES” ......................................................... 53
ATTACHMENT 3: CITY MANAGER’S ACTION SUMMARY ..................................................................................................... 55
ATTACHMENT 4: CITY MANAGER’S RESPONSE................................................................................................................... 61
In accordance with the Fiscal Year 2012 Annual Audit Work Plan, the Office of the City Auditor
has completed this Audit of Contract Oversight. We conducted this performance audit in
accordance with 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. We believe that
the evidence obtained provides a reasonable basis for our findings and conclusions based on our
audit objectives.
We would like to thank the staff of the Administrative Services Department for their time,
information, and cooperation during the audit process.
Attachment A
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Attachment A
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5 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
INTRODUCTION
Audit Objective
The objective of this audit was to assess whether internal controls are effective and adequate to ensure that City
contracts are administered in accordance with the City of Palo Alto Municipal Code (Municipal Code) and
relevant policies and procedures. The audit focused on the City’s office supplies contract with OfficeMax
Incorporated (OfficeMax).
Background
The Office of the City Auditor (OCA) presents its contract oversight audit, which is included in the OCA Fiscal
Year (FY) 2012 workplan approved by City Council. This audit provides an initial assessment of contract
oversight, with a focus on the City’s office supplies contract, which was selected for detailed review.
According to an OfficeMax representative, the City entered the OfficeMax America Saves program on November
1, 2007. Under its America Saves program, OfficeMax extended to other government agencies the terms of a
master purchasing agreement (the America Saves contract) it held with Oakland County, Michigan, the lead
agency. This contract covered the period from June 1, 2006 through June 30, 2011. OfficeMax extended the
America Saves program under the terms of a new agreement with Oakland County. According to an OfficeMax
representative, the City continued to participate in the America Saves program under the terms of the new
agreement. Staff has purchased office supplies using purchasing documents and also the City’s purchasing card
(CAL-Card) system. Exhibit 1 summarizes the City’s records of payments to OfficeMax for office supplies from
2005 through 2011.
Exhibit 1: City expenditures on office supplies from OfficeMax
Year Purchasing Documents CAL-Card Total
2005 $ 43,137 $ 32,271 $ 75,407
2006 $ 129,753 $ 154,809 $ 284,562
2007 $ 82,577 $ 177,652 $ 260,229
2008 $ 106,670 $ 174,790 $ 281,461
2009 $ 96,484 $ 185,899 $ 282,383
2010 $ 85,999 $ 201,878 $ 287,877
2011 $ 53,270 $ 220,645 $ 273,915
Total: $ 597,890 $ 1,147,945 $ 1,745,834
Source: City of Palo Alto financial records
Audit Scope and Limitations
The period covered was the assumed term of the City’s contract with OfficeMax under the America Saves
program, from November 1, 2007 through May 31, 2011. The City did not retain all contract documentation, and
we relied on information from OfficeMax to determine the contract commencement date for the City.
Subsequent to issuance of the draft audit report, OfficeMax provided documentation supporting that the
agreement had been extended through June 30, 2011 due to a delay in signing a new agreement dated June 1,
2011. We did not extend our testing to cover the month of June 2011.
The audit focused on the following areas:
OfficeMax compliance with the key America Saves contract terms, with an emphasis on pricing accuracy.
Attachment A
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6 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Enforcement of contract terms and monitoring of contractor performance by the City.
Usage of the OfficeMax America Saves contract by the City.
Scope Limitation—OfficeMax sales tax and service charge data was unreliable and incomplete
As illustrated in Exhibit 2a, sales tax was unusually high in 2006, 2007, and 2008. The exhibit also shows service
charges paid by the City totaling approximately $25,092.
Exhibit 2a: Summary of office supplies charges for the City – data reliability concerns highlighted
Year Amount Billed Sales Tax Service Charge
2006 $ 260,481 $ 134,370 $ 29
2007 $ 242,801 $ 145,759 $ 236
2008 $ 256,422 $ 125,478 $ -
2009 $ 246,788 $ 21,610 $ 581
2010 $ 256,674 $ 23,700 $ 23,700
2011 $ 240,857 $ 21,120 $ 546
Total: $ 1,504,023 $ 472,036 $ 25,092
Source: OfficeMax records originally provided for this audit
Section 7.17 of the America Saves contract required OfficeMax to maintain and provide access to accurate books
and records in connection with the services provided. In response to our concerns regarding data reliability and
completeness, OfficeMax provided a new data file that did not include complete sales tax and service charge
data. When asked, the OfficeMax representative stated service charge data was included “where applicable,”
but that sales tax was not standard data provided in response to an audit request. Because of this limitation:
We could not quantify service charges. We were unable to find any contractual basis for these charges.
We could not verify accuracy of tax charges.
We could not perform a direct comparison of OfficeMax records with the City’s accounting records,
which include tax charges, in order to verify OfficeMax records we tested were complete. OfficeMax
data we used may understate total City purchases by approximately $25,000 for the period from
November 1, 2007 to May 31, 2011.
Subsequent to issuance of the draft audit report, OfficeMax provided a new data file showing sales tax and
service charges for each invoice. The data appeared more consistent; however, we did not perform any testing
or verification on the new data, which is summarized in Exhibit 2b. OfficeMax stated that service charges were
delivery charges for special order items that were applied by the vendor and passed on by OfficeMax. However,
our analysis indicates OfficeMax only applied the “service charges” in some instances when the City placed an
order totaling less than $50. This practice appears consistent with printed language in invoices submitted to the
City stating a specified “small order fee” was applicable to orders under $50. We were unable to find any
contractual basis for these service charges or small order fees.
Attachment A
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7 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Exhibit 2b: Summary of office supplies charges for the City (restated)
Year Amount Billed Sales Tax Service Charge
2006 $ 260,481 $ 21,483 $ 215
2007 $ 242,801 $ 20,005 $ 379
2008 $ 256,422 $ 21,148 $ 424
2009 $ 246,788 $ 22,243 $ 312
2010 $ 256,674 $ 23,777 $ 240
2011 $ 240,857 $ 21,265 $ 534
Total: $ 1,504,023 $ 129,920 $ 2,104
Source: OfficeMax records provided subsequent to issuance of the draft audit report
Scope Limitation—OfficeMax unit of measure data field is not reliable
We also noted discrepancies between the unit of measure data field in OfficeMax billing data for the City and
the City’s contract. As a result, $72,099, or about 8 percent of the City’s net purchases during the period from
November 1, 2007 through May 31, 2011 was excluded from our analysis. For example, the contract price list
identified a ream of Aspen paper with the numeric identification number 322344, product code P154901, and
the contracted unit cost of $2.52. OfficeMax billing data for the City shows Aspen paper, identified by the same
numeric identification number and product code, was also sold using different units of measure, such as “CT” or
“PL,” with the unit cost ranging from $35.70 to $1,460. Due to differences of this type, which prevent a valid
comparison of charges with the contract terms, we limited the scope of our audit to records without unit of
measure discrepancies.
Subsequent to issuance of the draft audit report, OfficeMax explained that the unit of measure data listed in the
billing file represents the unit of measure that the City of Palo Alto end-user utilized when placing orders and
that a conversion is required to match the unit of measure with the unit of measure associated with the numeric
identification number. OfficeMax did not provide formal guidance to convert the information, and we did not
assess whether such conversion is feasible or practical.
Scope Limitation—Additional discounts offered by OfficeMax outside the America Saves program were not
clearly defined
During the audit, OfficeMax provided quarterly price lists of items that it stated were discounted specifically for
the City of Palo Alto. OfficeMax representatives did not have any formal documentation regarding how these
discounts were derived, but explained these items were “competitively bid in the marketplace and discounts
arrived from that competitive bid.”
In taking a conservative approach in our testing methodology, which is based on contract terms, we did not use
price lists not specifically defined and authorized in the contract and assumed all items not matching the valid
contract item list were non-contract items.
Attachment A
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8 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Exhibit 3 summarizes the City’s office
supplies purchases under the America
Saves program, shown by the contract
categories that are consistent with
contract terms, which we refer to in
our audit findings.
Audit Methodology
To conduct this audit, we analyzed
reports from the City’s SAP Enterprise
Resource Planning system on
payments to vendors through
purchasing cards and purchasing
documents in order to select a
contract for detailed review. We
interviewed Administrative Services Department (ASD) staff and assessed the City’s overall procurement policies
and procedures to determine if contract administration roles and responsibilities have been defined and if
contract administration practices were reasonable.
In order to assess OfficeMax’s compliance with the office supplies contract terms, we identified key contract
terms and conditions, including discounts and incentives to the City. We also interviewed OfficeMax
representatives and staff in the Oakland County, Michigan Purchasing Division, who had responsibilities in
administration of the America Saves program. We used data analysis software (ACL) to perform a complete
analysis of the City’s office supplies purchases from November 1, 2007 through May 31, 2011, to determine if
the City received expected discounts and incentives.
City Auditor’s Conclusion
Government auditing standards require us to report our conclusion based on the sufficiency and
appropriateness of the evidence supporting the findings in this report. These findings indicate that internal
controls within the Purchasing and Contract Administration Division of ASD require improvement to ensure that
contracts are administered in accordance with the Municipal Code and relevant policies and procedures.
In our detailed review of the City’s contract with OfficeMax, we found that the City could have saved between
$196,484 and $389,426 during the audit period if the contract had been appropriately monitored to ensure the
City was receiving reasonably expected discounts at authorized prices. This includes:
$47,563 in overcharges from unauthorized price increases (Finding 1).
$148,921 to $341,863 in additional discounts (Finding 2).
In this report, the Office of the City Auditor provides 10 recommendations to improve contract oversight
practices within the City and to support the City in recovering additional discounts from OfficeMax.
Exhibit 3: City’s office supplies purchases totaling $957,477 under
the America Saves program—November 1, 2007 to May 31, 2011
Source: Auditor’s analysis of OfficeMax records
Attachment A
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9 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
The audit recommendations in the report are addressed to ASD; however, in an effort to strengthen controls
over contract oversight throughout the City, we encourage other City departments with contract administration
roles and responsibilities to review this report and implement the recommendations where applicable.
Finding 1: OfficeMax overcharged the City at least $47,563 by applying unauthorized changes
to pricing
From November 1, 2007 through May 31, 2011, OfficeMax changed the prices on items purchased by the City
under the contract. Neither OfficeMax nor Oakland County, Michigan (the lead agency under the contract) could
provide supporting evidence showing price changes were approved
as required by the contract. Our analysis indicates OfficeMax
charged the City at least $47,563 more than the amount calculated
using the price list included in the contract. Most of the
overcharges ($38,045) were due to discrepancies between the
contracted price of $2.52 per ream for a commonly purchased
package of “Aspen” paper and prices actually charged per ream,
which ranged from $3.19 per ream in 2007 (a 27 percent increase
from the contracted price) to $3.92 per ream in 2010 (a 56 percent
increase).
The America Saves contract states that any changes, substitutions,
additions, deletions, and/or pricing revisions must be reviewed and
approved by Oakland County and OfficeMax in writing. The contract
goes on to state that the contractor will be responsible for
furnishing and delivering approved price lists to participating
agencies. Without any documentation showing price changes were appropriately authorized, our analysis was
limited to the original price list provided as an attachment to the contract.
Subsequent to issuance of the draft audit report, OfficeMax stated that although it does not have records of the
communications, it did follow the process of providing price change information to Oakland County and only
made changes with their approval. In addition, OfficeMax stated representatives met with the City of Palo Alto
purchasing agents and communicated any changes in writing and that City representatives accepted price
changes and at no time questioned prices. We did not find evidence that contract price list changes were
appropriately authorized or communicated. The original contract price list was incorporated and made a part of
the contract, which required the signature of an authorized OfficeMax employee and an Oakland County agent
for any contract modifications or amendments. In addition, Oakland County was contractually required to place
a copy of the America Saves contract on the County’s website. We did not find evidence that Oakland County
systematically authorized contract price list changes or that it disclosed the amended contract price lists on its
website. In fact, when we initially requested the contract price list(s) and information regarding how Oakland
County managed the contract, Oakland County provided a single price list and claimed it was the only one
available. Subsequently, OfficeMax provided, for our audit, 21 contract price lists associated with each quarter
during the term of the contract. In comparing the single Oakland County price list to the OfficeMax price lists,
we found it did not match the original contract price list provided by OfficeMax. In response to our repeated
Finding 1 Recommendation to
City Management:
1.ASD should consult with the
City Attorney’s Office to
pursue recovery of
unauthorized charges from
OfficeMax, including at least
$47,563 for contract item
overcharges under the
America Saves program during
the period November 1, 2007
through May 31, 2011.
1.
Attachment A
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10 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
requests for price lists, Oakland County did provide some additional price lists; however, there was no evidence
these price lists were approved as required by the contract or that there had been a systematic process to
authorize and/or communicate contract price list amendments to participating jurisdictions.
Considering the scope and magnitude of the America Saves program, OfficeMax and Oakland County should
have established processes and controls to ensure any modifications to the contract were appropriately
documented, communicated, and available to participating jurisdictions during and after the term of the
contract and also for audit purposes. According to OfficeMax, as of April 2012, the sales volume of the
(renewed) America Saves program was approximately $30 million annually. A 4th quarter 2011 report on the
America Saves program shows 1,128 “customers,” total spend of about $9.38 million, and administrative fees
totaling $46,918 due to Oakland County, based on a percentage of total net purchases made by participating
agencies during the quarter. We note that under the America Saves contract that was in effect during the audit
period, Oakland County was awarded in addition to administrative fees, a “long term contract incentive” of
approximately $250,000 paid in three equal installments “in consideration of the length of this contract and the
benefits that OfficeMax will derive as a result.”
Finding 2: The City could have received additional discounts for non-contract office supplies
About 71 percent of the City’s office supplies expenditures were for non-contract items discounted on average
40 percent, as opposed to contract items discounted on average 75 percent. The America Saves contract states
non-contract items would be discounted at “up to 85 percent.”
Since the contract terms were unclear as to the level of discount the
City should have received, our analysis considered other sources or
reference points in assessing the reasonableness of discounts
provided to the City. The two main sources we analyzed included
records of bids received from other jurisdictions during the
competitive solicitation process Oakland County, Michigan
conducted in awarding the office supplies contract in 2006 and
other local government audits of office supplies contracts. Overall,
while the City received about $452,604 in total discounts from
OfficeMax for non-contract items, our analysis of the two sources,
summarized below, finds the City could have reasonably anticipated
additional discounts between $148,921 and $341,863.
Source #1—Competing bids received by Oakland County,
Michigan, indicate the City could have received between $148,921
and $341,863 in additional discounts for non-contract items. In assessing other competing bids Oakland
County, Michigan, considered when it awarded its office supplies contract to OfficeMax in 2006, we found the
other vendors offered clearer terms and calculated additional discounts the City could have received during the
contract period:
$341,863 in additional discounts if the Staples bid terms were in effect, assuming the 70 percent
discount rate would not have resulted in items sold below cost.
$194,319 in additional discounts if the Corporate Express bid terms were in effect.
Finding 2 Recommendation to City
Management:
2.ASD should consult with the
City Attorney’s Office to
determine if the City can
recover additional discounts
ranging from $148,921 to
$341,863 for non-contract
items it purchased under the
America Saves program terms
from November 1, 2007
through May 31, 2011.
Attachment A
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$148,921 in additional discounts if the Kamar bid terms were in effect.
Source #2—Other local government audits of office supplies contracts indicate the City could have received
between $228,367 and $341,863 in additional discounts. We also reviewed office supplies contract audits
conducted by other jurisdictions to assess the reasonableness of the overall discount provided to the City for
non-contract items:
A City of San Jose January 2012 audit report on its office supply purchases under the terms of the same
OfficeMax America Saves program found the City’s understanding was that it could expect to save
approximately 60 percent for “fluctuating price” items (i.e., non-contract items) when it first signed on
to the America Saves program, but that the City actually received only an average discount of 35 percent
off list for these items The report states OfficeMax agreed to pay the City $166,000 to correct the
problem in the current fiscal year. If the City of Palo Alto had received an average discount of 60 percent
for the non-contract items it purchased under the America Saves program, it would have saved an
additional $228,367.
A City and County of San Francisco December 2009 audit report on its office supplies contract with
Office Depot found its contract terms indicated it should have received an average discount of 70
percent for items not listed in the contract’s fixed price list. If the City of Palo Alto had received an
average discount of 70 percent for non-contract items under the America Saves program, it would have
saved an additional $341,863.
Exhibit 4 summarizes our comparison of overall discounts for non-contract items OfficeMax provided to the City
and total discounts the City could have received using other sources or reference points.
Exhibit 4: Analysis of discount levels for non-contract office supplies
Source: Actual Discount %: Total Discount:
OfficeMax Actual 40% $452,604
Source: Proposed Discount
Percentage:
Total Discount If Applied to City’s
Non-contract Expenditures:
Additional Discounts the
City Could Have Received:
OfficeMax contract Up to 85% Not Auditable Not Auditable
Staples Bid 70% down to Cost Up to $794,466 Up to $341,863
Kamar Bid Generally 53% About $601,525 About $148,921
Corporate Express Bid 57% $646,923 $194,319
City of San Jose Audit 60% $680,971 $228,367
City of San Francisco Audit 70% $794,466 $341,863
The results of a separate analysis of the City’s office supplies expenditures conducted by ASD are consistent
with this finding. OfficeMax stated that many of the bids presented in this report as reference points are either
no longer in effect and are therefore inaccurate reference points, or have been proven to have inaccurate
information pertaining to their discount structures. Further, OfficeMax stated that each reference point also
represents an average, or general prices, not stated exact discounts across the board for every item. During the
audit, the City’s Purchasing and Contract Administration Division (Purchasing) requested three office supplies
vendors, including OfficeMax, to provide pricing from the most advantageous currently available agreements
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the City of Palo Alto could use. According to the Manager of Purchasing and Contract Administration (Purchasing
Manager), vendors applied current pricing to the City’s record of purchases for the top 20 percent of line items
that account for approximately 80 percent of the City’s annual office supplies expenditures. The Purchasing
Manager stated OfficeMax based its pricing on the current America Saves agreement. Our assessment of the
Purchasing Manager’s analysis suggests the City could save approximately $56,000 annually if the City contracts
with a different vendor. This is overall consistent with the results of our audit.
In response to the draft audit report, OfficeMax explained that the discount term “up to 85 percent” covers all
merchandise classes and product categories. OfficeMax provided for our review a spreadsheet titled “America
Saves Non Core Price Ranges” to show the basis for the non-contract item discount term of “up to 85 percent.”
The document, included as Attachment 2 in this report, shows merchandise classes (e.g., “Envelopes”), the
minimum discount from list, maximum discount from list, and average discount from list. In our review of this
document, which is not part of the actual contract, we noted the following:
There are a total of 80 merchandise classes, with only 3 of the 80 with a stated “average discount from
list” over 50 percent. There is not even one merchandise class with an “average discount from list”
approaching 85 percent.
Only 1 of the 80 merchandise classes (i.e., “RIBBONS”) has a “maximum discount from list” that meets or
exceeds the 85 percent discount level; however, the range of discount from list for this merchandise
class is reported to be from 4 percent to 86 percent, with a stated average discount from list of about 39
percent. We found the City purchased about $2,635 worth of ribbons during the audit period, and that
the City received an average discount of only 26 percent for this merchandise class.
We did not perform further testing or analysis using the provided “America Saves Non Core Price Ranges”
spreadsheet because it was not part of the contract and also because the information does not provide a
reasonable basis for audit purposes.
OfficeMax further stated that there is no basis for comparing the City of San Jose audit report to our report
findings because San Jose restricted purchases of specific items and negotiated terms beyond the America Saves
contract through a purchase order process (specifically in writing). This position is not consistent with the
OfficeMax written response to the City of San Jose audit report which states, “Also, it’s stated in the P.O., that
the estimated average discount will be 60% off of the manufacturers’ price list. Please note, this was an estimate
only of the general mix of non-core products under the America Saves Master Agreement. Since 2008, the City
changed its purchasing patterns by adding many different types of products to their spend mix including toner
products, which by industry standards carry lesser discounts than general office products.” OfficeMax reiterated
to the City of San Jose that the America Saves contract terms provided for discounts on non-core items of “up to
85 percent off manufacturers suggested list prices,” and further stated, “All local government customers that
are tied to the America Saves Agreement receive the same discounts and pricing for ‘non-core’ pricing [sic].”
OfficeMax offered a one-time payment of $166,000 to the City of San Jose “in an effort of goodwill to clear up
any misunderstandings in how the P.O. was interpreted and issues coming from the City audit.” This amount
covered the fiscal year 2011 overpayments for the “fluctuating price” or “non-core” items discussed in the audit
report.
Attachment A
November 2012
13 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Finding 3: ASD has not effectively administered the City’s office supplies contract
ASD has not established effective processes and procedures to ensure the City receives contracted discounts
and other key benefits, and that the office supplies contract meets the City’s business needs. As a result, the City
missed savings opportunities and did not maximize contracted benefits consistent with the City’s goals and
policies.
ASD did not ensure the office supplies contract met the City’s business needs, resulting in lost savings
opportunities
Contract items under the America Saves program that were discounted at about 75 percent accounted overall
for only about 21 percent ($203,030) of the City’s OfficeMax office supplies purchases, suggesting the City’s
office supplies needs were not adequately addressed in the contract. The City only received a discount of about
40 percent for the majority (71 percent) of its office supplies expenditures on non-contract items. ASD did not
have a process to monitor discounts provided to the City or the City’s purchasing patterns.
Exhibit 5 shows the City received an overall discount of about 58 percent from OfficeMax for purchases prior to
entering the America Saves program, from January 2006 to October 2007. The City’s overall discount dropped
each subsequent year, under the America Saves program, to about 45 percent off of list in 2011. The decline
appears to be due to a decrease in purchases of highly discounted contract items and an increase in purchases
of non-contract items. If the City had continued to receive an average discount of about 58 percent for all its
purchases subsequent to entering the America Saves program, it would have saved at least an additional
$67,302 from November 1, 2007 through May 31, 2011.
Exhibit 5: City of Palo Alto’s declining discount rate for office supplies purchased from OfficeMax
Source: OfficeMax billing records for the City
Overall discount on OfficeMax purchases
prior to entering the America Saves program
Attachment A
November 2012
14 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
We found ASD does not have procedures to ensure:
OfficeMax has made all contract items available for purchase.
Contract terms and highly discounted contract items continue to meet the City’s business needs.
OfficeMax provides correct discounts for both contract and non-contract items.
The City has spent more than other jurisdictions for office supplies and has not fully utilized its office supplies
contract
In FY 2011, the City budgeted $562,784 for office supplies and spent about $473,790, or about $425 per
authorized full time equivalent (FTE), indicating the City has spent more on office supplies than other local
jurisdictions. While the majority of the City’s expenditures coded as office supplies could be associated with
OfficeMax or other commonly known office supplies vendors (the blue and green bars in Exhibits 6a and 6b), we
also identified expenditures coded as office supplies that we could not necessarily identify with office supplies
vendors. These are labeled “Other Spend Coded as Office Supplies” (the red bar in Exhibits 6a and 6b).
Exhibit 6a: FY 2011 office supplies expenditures per Full Time Equivalent (FTE)
Source: Cities
Attachment A
November 2012
15 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
As shown in Exhibit 6b, office supplies expenditures as a percentage of total expenses were similarly higher than
other local jurisdictions in FY 2011.
Exhibit 6b: FY 2011 office supplies expenditures as a percentage of total expenses
Source: Cities
From 2006 through 2011, the City only purchased approximately 59 percent (about $1.67 million) of its office
supplies (about $2.8 million in total) from OfficeMax, as shown in Exhibit 7. This raises concerns regarding the
nature of expenditures identified in the City’s financial records as office supplies, and whether the City has fully
utilized its office supplies contract to realize benefits from the presumed discounts and other favorable terms.
We identified other office supplies vendors the City paid, such as Office Depot and Staples, which accounted for
about 3 percent of the City’s total office supplies purchases. We also concluded that about 38 percent of the
expenditures coded as office supplies in the City’s financial systems could not necessarily be associated with
office supplies vendors. This is further discussed in Finding 5.
Exhibit 7: City’s office supplies expenditures from 2006 through 2011
Source: City of Palo Alto financial records
Attachment A
November 2012
16 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
The City does not have procedures to maximize the use of its office supplies contract. According to the City’s
Purchasing Manager, the City’s goal is to provide maximum flexibility to staff in purchasing supplies.
ASD has not managed or monitored contract incentives owed to the City and/or available to the City
The City does not have a process to monitor or account for all contract incentives paid to the City or to ensure
the City maximizes its eligibility for contract incentives. The contract required OfficeMax to pay various
incentives, including:
Volume incentives from 0.5 percent to 2 percent, based upon total annual net purchases.
A prompt payment incentive of 2 percent, provided payment was made within 10 days via “EFT”
(electronic funds transfer). The contract does not further define what qualifies as EFT.
An electronic commerce (ecommerce) incentive of 1 percent of total net purchase volume, provided
greater than 75 percent of net purchases were placed electronically.
Because Purchasing does not have complete records of incentives received, we relied on OfficeMax to provide
the records for our review. As shown in Exhibit 8, OfficeMax likely paid the City volume incentives the City was
eligible for; however, the City did not receive all available ecommerce or prompt payment incentives.
Considering that staff purchased most office supplies using purchasing cards, a payment method that appears to
qualify as a form of electronic funds transfer, the City should at least have received most prompt payment
incentives. However, except for in 2011, the City did not qualify for the ecommerce incentive because less than
75 percent of net purchases were placed electronically, using purchasing cards.
Exhibit 8: Analysis of incentives
Source: OfficeMax billing records for the City
Attachment A
November 2012
17 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
City warehouse purchase and storage of office supplies
results in additional costs to City Departments
The City maintains an inventory of office supplies at its
warehouse at the Municipal Services Center despite the
contract with OfficeMax which ensures a 98.5 percent
fill rate and provides for next-day delivery. The
warehouse charges City departments for the cost of
office supplies plus a 2 percent markup. As shown in
Exhibit 9, approximately $1.06 million (about 25
percent) of the City's total office supplies purchases of
$4.26 million were issued through the City's warehouse
from July 2003 through February 2012. City
departments were charged a markup of about $40,000
during this period, or about 3.7 percent.1
The City incurs avoidable costs for maintaining and distributing office supplies, some of which is passed on to
City departments in the form of the 2 percent markup. We did not perform a detailed analysis of potential cost
savings as part of this audit; however, there is a cost associated with warehouse space used for storing the
supplies, as well as the cost for staff time to manage and deliver office supplies.
1 An analysis of the difference between the 2 percent markup rate stated in a City procedure and the actual inventory
markup was beyond the scope of this audit. We have brought this to the attention of the ASD Director.
Exhibit 10: The City’s inventory of office supplies at the warehouse
According to the City’s warehouse supervisor, office supplies occupy about 2 to 4 percent of warehouse space.
Exhibit 9: City’s office supplies purchases –
July 2003 to February 2012
Source: City of Palo Alto financial records
Attachment A
November 2012
18 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
ASD has not ensured the City’s office supplies purchases support the City’s environmental policies and goals
The City spent $229,420 plus tax on ASPEN 30% Post-Consumer paper, from December 23, 2005 to June 29,
2012. This product was mostly purchased by the warehouse, and according to staff, delivered to City
departments. The City’s policy on the procurement of
recycled paper products requires the City to purchase
paper products consisting of at least 50% secondary and
postconsumer waste, whenever the recycled alternative
meets the City’s requirements and specifications for
paper products, and within the constraints of staff time
and cost factors. The policy provides for a price
preference of up to 5 percent for recycled products
calculated based on the lowest responsible bid or price
quoted by suppliers offering non-recycled paper
products.
We also found the City’s June 2007 Zero Waste
Operational Plan raised concerns about compliance with the City’s policy on recycled content. The report
recommended the City establish and incorporate environmental standards into applicable bid solicitations and
purchasing opportunities. The plan stated: “The recycled product procurement process in the City has not
achieved the goals set out by the policy. For example, although the City’s Purchasing Department [sic] had
arranged for the purchase of 100 percent recycled paper, but [sic] after nine months of implementation, this
program was discontinued.” ASD does not have procedures to ensure the City’s office supplies contract supports
the City’s environmental goals and policies. Staff reported during the audit that the City has initiated efforts to
address the City’s environmental policies in the future procurement of office supplies.
Exhibit 11: The City’s most commonly purchased item:
BOISE ASPEN 30 (30% post-consumer content paper)
Source: BOISE Inc.
Attachment A
November 2012
19 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Finding 4: ASD should ensure the City’s financial records accurately identify office supplies
and should properly budget for and control office supplies expenditures
As discussed in Finding 3, while City records indicate the City has spent considerably more for office supplies
than other local jurisdictions sampled, we could not reasonably associate a significant portion of office supplies
expenditures with office supplies vendors. For example, we found instances where purchases from the following
vendors were recorded as office supplies:
Golden Gate Systems
Creative Data Products
Monterey Mechanical
Palo Alto Hardware Inc.
Hub International Inc.
Tax Collector
Advance Recruitment Solutions
ASD has not ensured the use of the office supplies code is limited to office supplies purchased from OfficeMax or
other office supplies vendors. In addition, the City’s office supplies budget is nearly double what the City
purchases from OfficeMax under its office supplies contract. In FY 2011, the City budgeted $562,784 for office
supplies, or approximately double the average total annual purchase amount of $281,409 from OfficeMax.
The City’s office supplies spending patterns, as shown in Exhibit 12, raise further concerns regarding what the
City has coded as office supplies and the nature and timing of “office supplies” purchases. Exhibit 12 shows, on a
monthly basis, the difference between expenditures we could associate with OfficeMax or other commonly
known office supplies vendors, and “Other Office Supplies Spend.” It also shows spikes in the purchase of office
Finding 3 Recommendation to City Management:
3.ASD should develop formal procedures to effectively administer the City’s office supplies contract
in order to ensure:
The contract supports the City’s business needs, policies, and goals, including the City’s
environmental policies.
Purchasing monitors discounts provided to the City in order to timely detect any negative
trends, such as a decline in the purchase of highly discounted contract items, and to ensure
the City receives all contracted discounts and other key benefits.
Use of the contract is maximized and purchases of office supplies from other vendors or
suppliers the City has not contracted with is restricted or minimized.
The City identifies and maximizes its eligibility for available contract incentives.
The City discontinues storing and delivering office supplies, unless staff can provide a
cost/benefit analysis justifying the current practice.
Responsibility for contract administration is formally assigned, documentation of contract
administration activities is retained, and contract administration is minimally impacted by
staff turnover.
2.
Attachment A
November 2012
20 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
supplies near the end or beginning of fiscal years. Our analysis in this area was limited because the City’s
financial records and systems do not provide the necessary detail and functionality to assess the nature of all
expenditures coded as office supplies. For example, the City’s SAP Enterprise Resource Planning system does not
have a report or the data required to assess the use of the office supplies code for purchasing card (CAL-Card)
transactions.
Exhibit 12: City of Palo Alto’s monthly office supplies expenditures
Source: City’s financial records
Finding 5: Strategic Contracting Practices May Provide Savings Opportunities
In order to assess contract oversight practices in light of concerns raised during our review of the OfficeMax
contract and considering the City’s expenditure trends showing increased use of purchasing cards, we
judgmentally selected 13 vendors for review. The sample was selected to ensure coverage of vendors we
classified into three groups:
Vendors paid using purchasing cards.
Vendors paid using purchasing documents.
Vendors awarded contracts exempted from the City’s competitive solicitation requirements.
The scope of our review included determining whether the City had an authorized and competitively solicited
contract in place for each vendor. Exhibit 13 summarizes our selection of vendors and the results of our review.
$-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
1/
2
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OfficeMax Other Office Supplies Vendors Other Spend Coded As Office Supplies
Finding 4 Recommendation to City Management:
4.ASD should develop and communicate to staff policies and procedures to ensure the office supplies
accounting code is clearly defined, its use is monitored, and that office supplies are accurately recorded in
the City’s accounting records.
11.
Attachment A
November 2012
21 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Exhibit 13: Summary of testing results for 13 selected vendors
Source: City’s financial reports and Auditor’s analysis of ASD Purchasing files for the period May 2003 through February 2012.
*Although there was a current properly authorized and exempted contract on file in the amount of $83,210 for each of three years
starting April 1, 2011, contracts were not available to cover all prior payments made to Canopy Trees For Palo Alto.
The City did not have authorized contracts for several vendors selected for review
As shown in Exhibit 13, the City did not have evidence of properly authorized contracts for 7 of 13 vendors we
selected for review, as listed below:
OfficeMax, Inc.
W.W. Grainger, Inc.
Wingfoot Commercial Tire Systems, LLC
The Home Depot, Inc.
Stone and Youngberg LLC
Quint & Thimmig LLP
Canopy Trees For Palo Alto
While the City had a valid contract with Canopy Trees For Palo Alto dated April 1, 2011 at the time of our review,
we found purchasing documents dating back to July 2003 without any record of a valid contract. In response to
our concerns regarding the lack of contracts for Canopy Trees For Palo Alto, ASD staff stated that Canopy Trees
For Palo Alto is a non-profit organization. We are not aware of Municipal Code provisions that exempt non-profit
organizations from the City’s contracting requirements. Moreover, we found a collection of staff emails dating
back to 2004 that taken together suggest the City has had ongoing problems in making payments to Canopy
Trees For Palo Alto because contracts had not been in place when payments were due.
The City does not have a properly authorized office supplies contract
The City’s financial records indicate approximately $1.9 million in purchasing documents and purchasing card
transactions for supplies from OfficeMax from May 2003 through February 2012. From 2006 through 2011, the
City purchased the majority of its office supplies from OfficeMax, with annual expenditures excluding tax and
Number Vendor
Total
(Historical in SAP)
Calendar Year
2011
Purchasing Card
(% of Calendar
Year 2011)
Authorized
Contract Exists?
Solicitation
Conducted or
Properly
Exempted?
1 Granite Rock Company 4,831,371$ 249,000$ 0%Yes Yes
2 Palo Alto Community Child Care 4,011,623$ 407,491$ 0%Yes Yes
3 Hydromax USA, LLC 3,800,000$ 3,800,000$ 0%Yes Yes
4 Ecology Action of Santa Cruz 3,759,190$ 817,397$ 0%Yes Yes
5 OfficeMax, Inc.1,897,830$ 266,039$ 83%No No
6 W.W. Grainger, Inc.833,039$ 64,754$ 69%No No
7 Canopy Trees For Palo Alto 646,993$ 62,408$ 0% No* No*
8 Wingfoot Commercial Tire Systems, LLC 518,977$ 122,331$ 100%No No
9 G&K Services, Inc.414,391$ 154,593$ 1%Yes Yes
10 The Home Depot, Inc.374,552$ 63,629$ 100%No No
11 Renne Sloan Holtzman Sakai LLP 85,000$ 85,000$ 0%Yes No
12 Stone and Youngberg LLC 91,285$ -$ N/A No No
13 Quint & Thimmig LLP 60,002$ -$ N/A No No
Total (Purchasing Documents plus
Purchasing Card Payments)
Attachment A
November 2012
22 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
service charges ranging from approximately $243,000 to $260,000. Municipal Code Chapter 2.30 (Part 3 -
Contracting Authority) requires City Council approval and the mayor or vice-mayor’s signature, if annual
expenditures on goods from a vendor surpass the $85,000 limit on the Purchasing Manager’s contract award
authority and the $250,000 limit on the City Manager’s contract award authority. In addition, Municipal Code
section 2.30.070 requires approval “as to form” from the City Attorney. We did not find any evidence the City
Council authorized the City’s OfficeMax contract or that ASD requested the City Attorney’s Office approve the
contract as to form. Staff initially reported the City had an agreement with OfficeMax for office supplies dating
back to 2006; however, staff provided an April 13, 2010 “supplier agreement” with the printed names of the
City’s Purchasing Manager and an OfficeMax Business Development Manager indicating the City had entered the
OfficeMax America Saves program approximately four years after the period initially reported. Staff
subsequently found an August 1, 2008 letter from an OfficeMax District Sales Manager stating the City was “tied
to the OfficeMax Nationwide Co-operative Purchasing Agreement with non-profit agency Public Sourcing
Solutions.” However, an OfficeMax representative stated OfficeMax records indicate the City had actually
entered the America Saves program on November 1, 2007.
Although the America Saves program master purchasing agreement expired on June 30, 2011, we found no
evidence the City subsequently took steps to appropriately contract for office supplies. Staff provided a
“Supplier Agreement” dated March 1, 2012, indicating the City re-entered the America Saves program, under a
new Oakland County, Michigan master agreement dated June 1, 2011, or eight months after the prior master
agreement expired. OfficeMax representatives stated, however, that the City’s account had been rolled over
into the new agreement terms when the prior terms had expired in 2011.
ASD could maximize savings opportunities for the City through strategic contracting practices
The City’s procurement policies and procedures do not clearly identify and communicate requirements for
establishing negotiated contracts for goods and/or services the City purchases mainly using purchasing cards,
which likely results in lost savings opportunities. Exhibit 13 identifies several vendors (OfficeMax, Inc., W.W.
Grainger, Inc., The Home Depot, Inc., and Wingfoot Commercial Tire Systems, LLC) the City purchased goods
and/or services from in 2011 primarily using purchasing cards, without having negotiated contracts. ASD staff
was not aware of any contracting or competitive solicitation requirements for the purchase of goods and
services using purchasing cards, and we did not find any evidence ASD has monitored the City’s aggregate spend
for categories of goods and/or services (or total spend by vendor) in order to determine whether cost savings
opportunities could be maximized by entering negotiated contracts.
The Purchasing Manager stated the role of the ASD Purchasing and Contract Administration Division
(Purchasing) is “reactive” to the procurement needs of City departments. Purchasing does not monitor
expenditures for goods and/or services from vendors through the use of the City’s SAP Enterprise Resource
Planning system reports and generally relies on City departments to contact Purchasing staff regarding
contracting needs. Also, according to the Purchasing Manager, Purchasing does not have a process to ensure
staff is alerted as contracts approach expiration.
In our review of the City’s policies and procedures, we noted the Municipal Code and key policies and
procedures suggest the use of procurement cards should not preclude efforts to establish negotiated
agreements and to maximize cost savings:
Attachment A
November 2012
23 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
The Municipal Code states that all petty cash or purchasing card purchases shall be in accordance with
the contract procedures and requirements contained in the purchasing manual, which implements the
requirements of the Municipal Code. The Municipal Code states that while Purchasing is centralized and
all purchases shall be made through the Purchasing Manager, designated employees authorized by their
department head may award and sign contracts for goods and services where the contract price does
not exceed $5,000 and the terms is one year or less.
The City’s current purchasing card guidebook states that the purchasing card program is designed as an
alternative to a variety of processes including petty cash, check requests, and low dollar purchase
orders. The guidebook states the purchasing card program is not intended to avoid or bypass
appropriate procurement or payment procedures. Although the guidebook establishes a $5,000 daily
transaction limit and a $15,000 monthly spending limit, it provides minimal guidance to ensure the City
maximizes savings opportunities where there are repetitive or significant annual purchases of particular
categories of goods and/or services.
The purchasing card guidebook makes reference to the Municipal Code prohibition on splitting of
purchases for the purpose of evading the City’s competitive solicitation requirements or contract
authority limitations. The guidebook presents as an example a situation where a cardholder purchases
the same $1,500 dollars in chemicals from one vendor each month, suggesting that while this is not
considered a “split,” the commodity should be bid and set up on a blanket purchase order.
We found purchasing card payments totaling more than $20,000 in 2011 to each of 19 different vendors. We
also noted significant expenditure levels for vendors that sell similar products and/or services without
negotiated contracts available for any of the vendors. For example, City records show the City purchases goods
and/or services from hardware vendors including W.W. Grainger, Inc., The Home Depot, Inc., and Orchard
Supply Hardware Stores Corporation without negotiated contracts to ensure the City maximizes discounts and
other benefits for the City. The Purchasing Manager stated the City does not have a “strategic sourcing” strategy
implemented, which could facilitate the City’s ability to consolidate expenditures for commonly purchased
goods and/or services under a contract with a selected vendor. A detailed analysis of cost savings to the City
through contracting with these vendors is beyond the scope of this audit. However, during the course of the
audit, we found examples of contracts available to governmental agencies that provide discounts the City could
potentially take advantage of for some of the goods and/or services purchased with purchasing cards:
A Home Depot U.S.A., Inc. (Home Depot) contract providing rebates ranging from 1 to 3 percent. We
also found potential opportunities for greater savings from a contract with Lowe’s HIW, Inc., which
provides discounts of 5 percent off of retail in addition to a 2 percent prompt pay discount. Subsequent
to issuance of the draft audit report, the City’s Purchasing Manager stated the City does have a contract
with Home Depot, however, the documentation was not provided during the audit. Moreover,
according to a Home Depot representative, Home Depot has record of only $13,623 in City of Palo Alto
expenditures in 2011. As shown in Exhibit 13, we found the City purchased goods and/or services
totaling $63,629 from Home Depot in 2011.
A W.W. Grainger, Inc. contract provides category discounts ranging from 15 percent to 45 percent off of
list price, in addition to negotiated pricing on selected items.
A Western States Contracting Alliance contract for tires, tubes, and services provides for discounts
ranging from 15 percent to 30 percent.
Attachment A
November 2012
24 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
ASD does not have a process to document and approve all exemptions from competitive procurement
As shown in Exhibit 13, there was no evidence that contracts for 8 of 13 vendors sampled were awarded
competitively or properly exempted from competitive solicitation requirements. Municipal Code Section
2.30.360 allows for narrowly applied exemptions from competitive solicitation requirements and provides
details on 18 different circumstances that may qualify for an exemption. Departments are required to request
an exemption by providing all relevant information supporting the application of the exemption to the
Purchasing Manager. Based on this information, the Purchasing Manager must make a recommendation to the
City Manager who will determine whether an exemption from competitive solicitation requirements applies.
ASD staff stated that Municipal Code section 2.30.360 only requires Departments to submit a “Sole Source
Justification Form” for 2 of the 18 exemption categories listed and that no additional step is required from the
requesting Department or from Purchasing for the other categories. We disagree with this interpretation.
Nearly half of City contracts listed in the City’s biannual report to Council are exempted from competitive
solicitation requirements. Staff submits a biannual report to Council on selected contracts, which indicates use
of exemptions in awarding these contracts. The
reports include sections on contracts awarded in the
following categories: service contracts ($25,000 to
$85,000), goods contracts ($65,000 to $250,000), and
blanket orders for goods and services We did not
audit or verify the information contained in the
reports. Two recent examples covering the period
January 1, 2011 through December 31, 2011 indicate a
significant number of City contracts are awarded using
bidding exemptions, as shown in Exhibit 14. However,
because the City’s SAP Enterprise Resource Planning system does not currently have the reporting capability to
effectively identify contracts awarded using exemptions, we could not quantify and assess the use of various
types of exemptions.
ASD Purchasing does not have any documentation to support it was authorized to participate in the
OfficeMax America Saves program through use of the Oakland County, Michigan master purchasing
agreement with OfficeMax. Although the Municipal Code provides that the City may, in certain instances, use
another governmental or public agency’s contract (i.e., piggyback on another entity’s contract), provided the
contract resulted from solicitation methods similar to those required by the Municipal Code, we did not find
evidence the Purchasing Manager made a recommendation to the City Manager regarding applying the
exemption or that the City Manager determined the exemption was applicable.
Exhibit 14: City contracts awarded
Source: ASD reports on contracts awarded by the City Manager
between January 1, 2011 and December 31, 2011
Contracts Awarded
through competitive
solicitation
51%
Contracts awarded
through exemptions
from competitive
solicitation
49%
Attachment A
November 2012
25 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Finding 6: The City has not sufficiently defined contract administration roles and
responsibilities
In reviewing the Municipal Code and the City’s Purchasing Manual, we did not find sufficient guidance regarding
contract administration roles, responsibilities, and business practices to ensure compliance with the City’s
contract terms and also to ensure the City receives contracted benefits. The Purchasing Manager stated ASD’s
Purchasing and Contract Administration Division (Purchasing) only administers two contracts:
The office supplies contract with OfficeMax, Inc.
A uniform rental services contract with G&K Services, Inc.
Finding 5 Recommendations to City Management:
5.ASD should clarify the City’s procurement policies and procedures, while ensuring consistency
with the Municipal Code, to specify when Purchasing should negotiate contracts, based on
dollar amount thresholds applicable to total citywide expenditures for goods and/or services
(or payments to vendors) in aggregate, regardless of payment method.
ASD should develop policies and procedures to ensure:
6.ASD monitors total citywide expenditures on categories of goods and/or services (or
expenditures by vendor) and periodically assesses whether the total volume of the
transactions and expenditures, regardless of payment method, may require the City to
contract for the goods and/or services either through the City’s competitive solicitation
methods or by using another agency’s contract, in order to maximize cost savings.
7.The City has properly approved contracts, when required by the Municipal Code, prior to
conducting business. Specifically, the City should ensure it establishes a process to prevent
and/or detect issuance of purchasing documents or purchasing card payments to vendors
without a properly approved contract, if required.
8.ASD Purchasing staff monitors expiring contracts and ensures contracts are re-established in a
timely manner.
9.ASD complies with Municipal Code requirements for applying and documenting exemptions
from competitive solicitation in the procurement of goods and services (A City working group
that promotes efficient and effective purchasing methods has drafted a new “City of Palo Alto
Sole Source Justification Form” which includes all 18 exemptions listed in the Municipal Code).
Attachment A
November 2012
26 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
However, we did not find any evidence of a defined, documented, or effective process to administer either of
these contracts. Specifically, we did not find evidence that staff had identified and monitored key contract
terms, such as pricing and incentive terms, contract amendment terms, and various milestone dates. In addition,
Purchasing does not monitor purchasing data to detect and follow up on unexplained variances and/or
expenditure trends. The Municipal Code states purchasing is to be centralized, and that all purchases shall be
made through the Manager of Purchasing and Contract Administration (Purchasing Manager), with certain
exceptions. The Purchasing Manual section on “Contractor Performance Documentation” indicates Purchasing is
responsible for documenting significant vendor performance issues for purchases of goods and that Department
project managers are responsible for documenting contractor performance issues for professional services, but
that the project manager should consult with the Purchasing and/or the City Attorney’s office, as needed, to
resolve significant performance issues.
According to the Purchasing Manager, contract administration practices are inherently defined by each contract
and contract administration is the responsibility of the departmental project manager. The Purchasing Manager
stated the City’s procurement process requires City departments to identify departmental procurement needs,
to manage the pre-solicitation process in order to identify and assess qualified vendors, and to administer each
contract to ensure compliance. He stated the role of Purchasing is to manage the competitive solicitation
process, address any contract non-compliance issues, and to manage the contract close-out process. In our
opinion, the City needs additional controls to ensure contracts are appropriately administered. Finding 3
discusses the results of ineffective contract administration of the City’s office supplies contract.
Finding 6 Recommendations to City Management:
10.ASD should ensure contract administration roles and responsibilities are defined and
appropriately communicated. At a minimum, ASD should broadly define contract administration
and develop a process to:
Formally identify the contract administrator and assign contract administration
responsibilities.
Identify and document key contract terms.
Identify and provide the necessary training to ensure the contract administrator has the
required expertise.
Identify or develop specific methodology, reports, and/or tools required to administer the
contract.
Establish and monitor timelines and milestones in administering the contract.
10.
Attachment A
November 2012
27 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Glossary of Acronyms and Terms
America Saves Program – An OfficeMax program that extends the terms of the Oakland County
Michigan master purchasing agreement with OfficeMax for office supplies to other government
agencies.
ASD – Administrative Services Department. The Purchasing and Contract Administration Division is part
of this department.
Contract – A mutually binding, legal relationship obligating the seller to furnish supplies or services, and
the buyer to pay for them.
Contract Administration – Government actions taken to obtain compliance with such contract
requirements as timely delivery of supplies or services, acceptance, payment, and closing of the
contract. These actions include technical, financial, audit, legal, administrative, and managerial services
in support of the contracting officer.
Contract items (also referred to as “core” items) – A list of office supplies with contracted prices
specifically identified in Exhibit 1 of the Oakland County Master Purchasing Agreement with OfficeMax,
which is the basis for the OfficeMax “America Saves” program.
List Price – The price which the manufacturer recommends that the retailer sell the product. According
to an OfficeMax representative, office supplies list prices are standardized across the industry and
across all OfficeMax contracts.
Non-Contract items (also referred to as “non-core” items) – Office supplies not specifically listed with
contracted prices in Exhibit 1 of the Oakland County master purchasing agreement with OfficeMax. The
America Saves program states these items are at discounts “up to 85%.”
Numeric ID (NID) – According to OfficeMax records, this is a unique, 6-digit identification number,
assigned to each product in an item file.
Product Code – A variable length alphanumeric identification number for office supplies. According to
OfficeMax guidance, the Product Code should correspond to an item’s unique NID.
Purchase order – A request or instruction from a purchasing organization to a vendor to deliver a
quantity of material or to perform services at a certain point in time.
Purchasing document – In the City’s SAP enterprise Resource Planning system, an instrument used by
Purchasing to procure materials or services. SAP purchasing documents may include purchase orders
and contracts.
Unit of Measure (UOM) – Identifies the quantity included in a uniquely identified office supplies item.
Unit Price – The price charged for each uniquely identified item with its unit of measure.
Attachment A
November 2012
28 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
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Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
29 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
ATTACHMENT 1: City of Palo Alto Municipal Code—Chapter 2.30
Contracts and Purchasing Procedures
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
30 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
31 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
32 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
33 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
34 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
35 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
36 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
37 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
38 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
39 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
40 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
41 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
42 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
43 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
44 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
45 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
46 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
47 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
48 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
49 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
50 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
51 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
Note: This was the current version of the Palo Alto Municipal Code chapter on contracts and purchasing procedures during audit field work (as of
February 8, 2012). A more current version is available at: http://www.amlegal.com/library/ca/paloalto.shtml
November 2012
52 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
Attachment A
November 2012
53 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
ATTACHMENT 2: OfficeMax list of “America Saves Non Core Price Ranges”
America Saves Non Core Price Ranges
Merchandise
Class Merchandise Class Description
# of in
Category Min DFL Max DFL Ave DFL
A1 ADHESIVES,CEMENTS,GLUE 25 9.00%66.00%41.60%
A2 SELF-ADHESIVE NOTES,TAPE FLAGS 85 12.00%50.00%36.86%
A3 SIGNS 1 12.00%12.00%12.00%
A4 COIN BOXES, BANKING SUPPLIES 9 13.00%48.00%32.78%
A5 LABELS,LABELMAKERS,TAGS,BADGES 203 4.00%63.00%37.54%
A6 RUBBERBANDS 30 13.00%81.00%57.43%
A7 LUNCHROOM SUPPLIES, FOOD 55 4.00%51.00%21.24%
A8 TAPES, DISPENSERS 87 4.00%70.00%39.70%
A9 CORRECTION FLUID,RUBBER FINGER 40 10.00%75.00%41.08%
B1 CALENDARS - DATED 175 4.00%66.00%35.17%
B2 CALENDARS - NON DATED 21 5.00%48.00%26.24%
B3 CALENDARS - ORGANIZERS 35 4.00%48.00%36.46%
B4 CALENDARS - ACADEMIC 6 30.00%53.00%45.17%
B5 REFERENCE BOOKS & DICTIONARIES 9 32.00%32.00%32.00%
E3 COMPUTER & LAN FURNITURE 6 26.00%48.00%32.33%
E4 SEATING 3 39.00%48.00%42.00%
E5 STORAGE,SHELVING,BOOKCASES 13 24.00%39.00%33.31%
E6 ERGONOMIC ACCESSORIES 100 10.00%52.00%30.11%
E7 MAILROOM FURNITURE, LIT RACKS 13 24.00%33.00%27.85%
E8 CONFERENCE & TRAINING ROOM 5 29.00%48.00%36.20%
E9 FURNITURE ACCESSORIES 66 4.00%48.00%30.39%
F1 FILE FOLDERS (TOP TAB) 182 4.00%76.00%43.93%
F2 FILING GUIDES, FILING SORTERS 53 4.00%64.00%34.81%
F3 INDEX CARDS, PRINTABLE CARDS 35 4.00%71.00%33.63%
F4 BUSINESS CARD FILES,ADDRESS BK 44 4.00%42.00%30.77%
F5 HANGING FOLDERS,FILE ORGANIZER 159 6.00%81.00%45.13%
F7 BOX/ARCH FILES, CLIPBOARDS 16 21.00%57.00%47.38%
F8 FILE FOLDERS (END TAB) 33 4.00%58.00%41.73%
G8 ATTACHES,PORTFOLIOS,CASES 11 4.00%48.00%33.09%
H1 STAPLERS,STAPLES,TACKERS 68 9.00%80.00%49.46%
H2 PUNCHES 34 10.00%71.00%41.85%
H3 SCISSORS,XACTO KNIVES,LTR OPNR 42 4.00%84.00%36.38%
H4 CLIPS,CLAMPS,TACKS,FASTENERS 77 4.00%68.00%43.51%
J1 DRAFTING,ART SUPPLIES, RULERS 16 4.00%53.00%28.88%
J4 BOARDS, EASELS 67 26.00%42.00%29.96%
K1 DESK PADS, MOTIVATIONAL ITEMS 29 4.00%50.00%29.59%
K3 DESK ACCESSORIES, KEY CONTROL 226 4.00%65.00%35.17%
K4 LAMPS 10 43.00%48.00%45.00%
K5 CLOCKS 14 7.00%61.00%36.14%
K6 WASTE BINS,LINERS 25 4.00%70.00%28.12%
K7 SHREDDERS 15 33.00%45.00%36.27%
L1 PRESENTATION PRODUCTS 8 9.00%61.00%38.50%
L2 BINDRS,REPORT COV, LAMINATING 434 4.00%70.00%40.61%
L3 INDEXES AND TABS 103 11.00%81.00%39.51%
L5 CATALOG/REFERENCE RACKS 3 29.00%36.00%33.67%
L6 DATA BINDERS & SUPPLIES 15 16.00%74.00%44.93%
L8 TELEPHONE & ACCESSORIES 15 4.00%68.00%40.80%
L9 BATTERIES 48 4.00%45.00%22.88%
M1 CALCULATORS 44 4.00%48.00%22.52%
M2 TYPEWRITERS & WORD PROCESSORS 2 12.00%41.00%26.50%
M3 FAX & MULTIFUNCTION MACHINES 2 31.00%38.00%34.50%
M5 AIRCLEANERS,FANS,HEATERS 6 12.00%48.00%31.50%
M6 DICTATION, RECORDERS, FILM 39 4.00%47.00%11.15%
M8 ELECTRONIC ORGANIZERS, & PDA'S 1 4.00%4.00%4.00%
N1 BALLPOINT,ROLLING,STYLUS PENS 339 4.00%68.00%40.11%
N2 MARKERS, HIGHLIGHTERS 227 4.00%64.00%38.49%
N3 PENCIL SHARPENERS 13 9.00%48.00%31.69%
N4 PENCILS-AUTOMATIC 76 7.00%54.00%38.54%
N5 PENCILS-WOODCASE 12 32.00%68.00%50.67%
N6 ERASERS-PENCIL & CHALKBOARD 10 17.00%48.00%41.60%
P1 PAPER, COPY, LASER, INKJET 128 4.00%80.00%46.90%
P2 ENVELOPES 131 4.00%66.00%47.57%
P3 PADS,NOTEBOOKS,FORM,ACCT BKS 144 4.00%80.00%39.66%
P4 ADD,CALCULATOR,FAX PPR ROLLS 18 19.00%79.00%48.56%
P5 STORAGE BOXES 19 27.00%61.00%43.84%
P6 COMPUTER PAPER 4 63.00%69.00%65.50%
P7 SHIPPING & MAILROOM SUPPLIES 6 41.00%48.00%46.17%
P8 WIDE FORMAT PAPER 4 48.00%48.00%48.00%
Q8 PRINTERS & SCANNERS 5 29.00%37.00%34.60%
R1 STAMPS,DATERS,NUMBER MACH 68 4.00%48.00%36.22%
R2 STAMP PADS, RACKS, INKS 10 12.00%53.00%38.10%
S1 PRINTER SUPPLIES 175 4.00%65.00%13.98%
S2 RIBBONS 35 4.00%86.00%38.54%
S5 COPIER & FAX SUPPLIES 39 4.00%49.00%22.90%
S6 COMPUTER ACCESSORIES 77 4.00%48.00%34.52%
S7 DISKETTES, DATA MEDIA/STORAGE 129 4.00%51.00%34.63%
S9 SURGE, MICE, KEYBOARDS 46 4.00%72.00%33.39%
W1 CUTTING BOARD,CTN OPENERS 9 39.00%48.00%42.11%
W3 MAINTENANCE SUPPLIES,FIRST AID 43 4.00%52.00%27.40%
W5 RESTROOM SUPPLIES 2 22.00%30.00%26.00%
Attachment A
November 2012
54 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
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Attachment A
55 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
November 2012
ATTACHMENT 3: City Manager’s Action Summary
In response to the Audit Recommendations in this report, the City Manager has agreed to take the following actions. The full response from the City Manager is
included in Attachment 4.
Finding
#
Summary of Finding Recommendation City Manager’s Action Plan Target
Date
1 OfficeMax overcharged the
City at least $47,563 by
applying unauthorized
changes to pricing for items
with specified contract
prices.
1. ASD should consult with the City
Attorney’s Office to pursue recovery of
unauthorized charges from OfficeMax,
including at least $47,563 for contract
item overcharges under the America
Saves program during the period
November 1, 2007 through May 31,
2011.
ASD will work with the City Attorney’s Office to request
reimbursement.
2 The City could have
received additional
discounts for non-contract
office supplies.
The City could have
reasonably anticipated
additional discounts
between $148,921 and
$341,863 for non-contract
office supplies.
2. ASD should consult with the City
Attorney’s Office to determine if the
City can recover additional discounts
ranging from $148,921 to $341,863 for
non-contract items it purchased under
the America Saves program terms from
November 1, 2007 through May 31,
2011.
ASD will work with the City Attorney’s Office to consider
options for recovering additional discounts.
3 ASD has not effectively
administered the City’s
office supplies contract.
ASD has not established
effective processes and
procedures to ensure the
City receives contracted
3. ASD should develop formal procedures
to effectively administer the City’s office
supplies contract in order to ensure:
The contract supports the City’s
business needs, policies, and goals,
including the City’s environmental
policies.
ASD has completed a request for proposal process for a
new office supply contract with the involvement of
department stakeholders and members of the City’s
environmental team. Collectively, this review panel
selected a new office supply provider that meets the
City’s needs, policies and goals. A contract with the new
office supply provider is estimated to save the City
$40,000 compared to the current contract. This
Q4 2012 –
Q1 2013
Attachment A
56 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
November 2012
Finding
#
Summary of Finding Recommendation City Manager’s Action Plan Target
Date
discounts and other key
benefits, and that the office
supplies contract meets the
City’s business needs.
Purchasing monitors discounts
provided to the City in order to
timely detect any negative trends,
such as a decline in the purchase of
highly discounted contract items,
and to ensure the City receives all
contracted discounts and other key
benefits.
Use of the contract is maximized
and purchases of office supplies
from other vendors or suppliers the
City has not contracted with is
restricted or minimized.
The City identifies and maximizes its
eligibility for available contract
incentives.
The City discontinues storing and
delivering office supplies, unless
staff can provide a cost/benefit
analysis justifying the current
practice.
Responsibility for contract
administration is formally assigned,
documentation of contract
administration activities is retained,
and contract administration is
minimally impacted by staff
turnover.
estimated savings figure may be reduced if: new costs are
realized for compliance with environmental policies,
incentives are not achieved, purchases from non contract
vendors is not prevented, purchases of non discounted
items is not prevented.
ASD has formally assigned and documented contract
administration duties and transitions those duties when
there is staff transition.
Using tools offered by the new contract, ASD will monitor
and ensure that discounts and incentives offered are
realized. New tools will enable staff to prevent the
purchase of non-discount items.
ASD will require departments to purchase office supplies
via the new contract and will consider ways to restrict the
purchase of office supplies outside of the contract via
restrictions in the PCard system.
ASD will review the practice of storing office supplies to
see if it is the best approach given the benefits of the new
contract.
4 ASD should ensure the
City’s financial records
4. ASD should develop and communicate
to staff policies and procedures to
City departments handle the classification of expenses at
the point of purchase. ASD will make clear to
Q4 2012
Attachment A
57 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
November 2012
Finding
#
Summary of Finding Recommendation City Manager’s Action Plan Target
Date
accurately identify office
supplies and should
properly budget for and
control office supplies
expenditures.
City records indicate the
City has spent considerably
more for office supplies
than other local
jurisdictions sampled,
however, we could not
reasonably associate a
significant portion of office
supplies expenditures with
office supplies vendors.
ensure the office supplies accounting
code is clearly defined, its use is
monitored, and that office supplies are
accurately recorded in the City’s
accounting records.
departments via policy and training and periodic review
to ensure compliance to properly classify office supply
expenses in the accounting system. As result of staffing
reductions and increased work volume ASD does not
have the person power to monitor how accurately
departments classify all expenses.
5 Strategic contracting
practices may provide
savings opportunities.
The City’s procurement
policies and procedures do
not clearly identify and
communicate requirements
for establishing negotiated
contracts for goods and/or
services the City purchases
mainly using purchasing
cards, which likely results in
lost savings opportunities.
5. ASD should clarify the City’s
procurement policies and procedures,
while ensuring consistency with the
Municipal Code, to specify when
Purchasing should negotiate contracts,
based on dollar amount thresholds
applicable to total citywide
expenditures for goods and/or services
(or payments to vendors) in aggregate,
regardless of payment method.
As staffing levels allow, ASD periodically reviews spending
activity, services used and commodities to determine if a
contract with a vendor would be advantageous. Due to
staffing reductions and increased work volume, this level
of review is time consuming for staff and staff may not
always be available to perform this type of analysis. Staff
will continue to perform this review as time permits and
will also look into automated tools to flag this activity. In
addition, staff will consider hiring temporary help to
accomplish this review, which could offset savings. When
ASD conducts this review a threshold will be set to flag
purchasing activity with vendors when aggregate spend
meets the level of $5,000. Where spending levels are
met, Purchasing staff will take action to ensure
competitive pricing agreements are put in place and are
consistent with the muni code.
Q4 2012 –
Q1 2013
Attachment A
58 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
November 2012
Finding
#
Summary of Finding Recommendation City Manager’s Action Plan Target
Date
5 Strategic contracting
practices may provide
savings opportunities.
The City did not have
authorized contracts for
several vendors selected
for review.
OCA did not find evidence
ASD Purchasing monitors
expenditures for goods
and/or services from
vendors through the use of
the City’s SAP Enterprise
Resource Planning system
reports in order to
determine whether cost
savings opportunities could
be maximized by entering
negotiated contracts.
6. ASD should develop policies and
procedures to ensure it monitors total
citywide expenditures on categories of
goods and/or services (or expenditures
by vendor) and periodically assesses
whether the total volume of the
transactions and expenditures,
regardless of payment method, may
require the City to contract for the
goods and/or services either through
the City’s competitive solicitation
methods or by using another agency’s
contract, in order to maximize cost
savings.
As staffing levels allow, ASD periodically reviews spending
activity, services used and commodities to determine if a
contract with a vendor would be advantageous. Due to
staffing reductions and increased work volume, this level
of review is time consuming for staff and staff may not
always be available to perform this type of analysis. Staff
will continue to perform this review as time permits and
will also look into automated tools to flag this activity. In
addition, staff will consider hiring temporary help to
accomplish this review, which could offset savings. When
ASD conducts this review a threshold will be set to flag
purchasing activity with vendors when aggregate spend
meets the level of $5,000. Where spending levels are
met, Purchasing staff will take action to ensure
competitive pricing agreements are put in place and are
consistent with the muni code.
Q4 2012 –
Q1 2013
5 Strategic contracting
practices may provide
savings opportunities.
OCA found that the City did
not have authorized
contracts for several
vendors selected for
review, despite significant
aggregate purchases in
2011 and/or historical total
7. ASD should develop policies and
procedures to ensure the City has
properly approved contracts, when
required by the Municipal Code, prior to
conducting business. Specifically, the
City should ensure it establishes a
process to prevent and/or detect
issuance of purchasing documents or
purchasing card payments to vendors
without a properly approved contract, if
required.
ASD has in place a Purchasing Manual that outlines the
process for contract approval. ASD will continue to work
with other departments to ensure that contracts are
approved consistent with the process outlined in the
Purchasing Manual prior to work commencing.
ASD will implement additional review steps in the
contract process to ensure contracts are executed
properly.
Q4 2012 –
Ongoing
Attachment A
59 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
November 2012
Finding
#
Summary of Finding Recommendation City Manager’s Action Plan Target
Date
purchases from the vendor.
5 Strategic contracting
practices may provide
savings opportunities.
The City does not have a
properly authorized office
supplies contract. Although
the America Saves program
master purchasing
agreement expired on June
30, 2011, we found no
evidence the City
subsequently took steps to
appropriately contract for
office supplies.
8. ASD should develop policies and
procedures to ensure ASD Purchasing
staff monitors expiring contracts and
ensures contracts are re-established in
a timely manner.
ASD will work with departments to help develop a
process for highlighting contracts that are due to expire.
There are reports available that departments can use to
review upcoming expiration dates.
Purchasing staff will be assigned to review SAP reports on
a quarterly basis to flag contracts that are due to expire.
Q4 2012 –
Q1 2013
5 Strategic contracting
practices may provide
savings opportunities.
ASD does not have a
process to document and
approve all exemptions
from competitive
procurement. As shown in
Exhibit 13, there was no
evidence to support that
contracts for 8 of 13
vendors sampled were
awarded competitively or
properly exempted from
9. ASD should develop policies and
procedures to ensure it complies with
Municipal Code requirements for
applying and documenting exemptions
from competitive solicitation in the
procurement of goods and services (A
City working group that promotes
efficient and effective purchasing
methods has drafted a new “City of Palo
Alto Sole Source Justification Form”
which includes all 18 exemptions listed
in the Municipal Code).
ASD prepares a report that goes to the City Council
documenting contracts that were approved with
exemptions. This has been established process for many
years and offers efficiency and approvals at the
appropriate staff level while satisfying accountability.
Staff will review the municipal code and current practice
to ensure they are both in sync and recommend revisions
to the municipal code where needed. Should Staff, in
collaboration with the City Attorney’s Office, consider
streamlining the municipal code requirements for
exemptions then staff will make the appropriate
recommendation to the City Council.
2013
Attachment A
60 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
November 2012
Finding
#
Summary of Finding Recommendation City Manager’s Action Plan Target
Date
competitive solicitation
requirements.
6 The City has not sufficiently
defined contract
administration roles and
responsibilities.
In reviewing the Municipal
Code and the City’s
Purchasing Manual, we did
not find sufficient guidance
regarding contract
administration roles,
responsibilities, and
business practices to
ensure compliance with the
City’s contract terms and
also to ensure the City
receives contracted
benefits.
10. ASD should ensure contract
administration roles and responsibilities
are defined and appropriately
communicated. At a minimum, ASD
should broadly define contract
administration and develop a process
to:
Formally identify the contract
administrator and assign contract
administration responsibilities.
Identify and document key contract
terms.
Identify and provide the necessary
training to ensure the contract
administrator has the required
expertise.
Identify or develop specific
methodology, reports, and/or tools
required to administer the contract.
Establish and monitor timelines and
milestones in administering the
contract.
ASD roles and responsibilities are defined and
communicated (e.g., the Contract Administrator or Buyer
who handled the solicitation is listed).
ASD will implement a checklist of minimum requirements
for project managers and contract administrators and
hold departments accountable for satisfying their
responsibilities.
Contractor Administrator and or Buyer are formally
identified and assigned administration responsibilities
pursuant to their respective job description.
ASD Purchasing staff is trained to understand specific
terms and conditions of a contract, and is knowledgeable
pursuant to the qualifications required to hold the
position as described within the job description.
Additionally, Team training is held on selected topics
(e.g., Risk Management) as needed.
ASD will look to determine if it would serve the
organization for Purchasing and Contract Administration
to take over the overall contract administration of
contracts for the City. Current process is Purchasing and
Contracts Administration Division performs the activities
required to award a contract. Contract Administration
duties are managed by the individual Departments who
the contract was issued for. Improved training, to
address turnover, and easy access to information will be
important.
The role of departments in the contract administration
process must be clearly defined.
2013
Attachment A
61 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
November 2012
ATTACHMENT 4: City Manager’s Response
Attachment A
62 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
November 2012
Attachment A
63 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
November 2012
Attachment A
64 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
November 2012
Attachment A
65 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
November 2012
Attachment A
66 City of Palo Alto | Office of the City Auditor | Contract Oversight Audit
November 2012
Attachment A
POLICY AND SERVICES COMMITTEE
DRAFT EXCERPT
Page 1 of 12
Special Meeting
November 20, 2012
Contract Oversight Audit
Jim Pelletier, City Auditor reported the Contract Oversight Audit (Audit)
focused on the City's office supplies contract with Office Max. The objective
of the Audit was to assess the effectiveness and adequacy of internal
controls to ensure contracts were administered in accordance with the
Municipal Code and relevant policies and procedures. The City Auditor’s
Office Staff focused on the office supplies contract, because they felt it would
be a simple and straightforward contract and it would allow them to review
broader contract administration practices. The office supplies contract was
one of the two main contracts administered directly by the Purchasing and
Contracting Division of the Administrative Services Department (ASD).
Houman Boussina, Senior Performance Auditor stated the Audit report
provided six findings and ten recommendations. The audit included selected
key points from Office Max's responses and management's perspective. The
report concluded with the City Manager's action summary and response.
Under the America Saves Program, Office Max extended to governmental
agencies a contract it held with Oakland County, Michigan. The term of the
Master Purchasing Agreement was June 1, 2006 through June 30, 2011.
The City's purchases from Office Max from 2005 through 2011 totaled
approximately $1.75 million. Staff did not have all contract documentation;
therefore, the City Auditor’s Office relied on Office Max to provide the
commencement date for the contract. Staff reported the commencement
date of the contract as 2006, while Office Max reported the City entered the
agreement on November 1, 2007. The Audit focused on Office Max's
compliance with key contract terms, the City's enforcement of contract
terms, and the City's usage of the contract. Finding 1 indicated Office Max
overcharged the City at least $47,563 by applying unauthorized changes to
pricing. The contract required formal amendments or authorized price list
changes for contract items. The City Auditor’s Office recommended ASD
Staff consult with the City Attorney's Office to pursue recovery of $47,563.
Finding 2 indicated the City could have received additional discounts of
approximately $149,342 for non-contract office supplies covered under the
terms of the contract. In order to provide this analysis, the City Auditor’s
Attachment B
DRAFT EXCERPT
Page 2 of 12
Policy and Services Committee Special Meeting
Draft Excerpt 11/20/2012
Office reviewed various reference points, such as the original bids of Oakland
County and other audit reports. During the audit, ASD Staff performed an
analysis of pricing from another available contract, and found that the City
could save $40,000 annually compared to the current contracts. The City
Auditor’s Office recommended ASD Staff consult with the City Attorney's
Office to determine if the City could recover additional discounts for non-
contract items. Finding 3 indicated ASD did not effectively administer the
City's office supplies contract. The City Auditor’s Office did not find effective
procedures to ensure the City received the contracted discounts and other
key benefits. The City Auditor’s Office found an overall decline in the
discount rate on office supplies. The City increasingly purchased non-
contract items discounted approximately 40 percent as opposed to contract
items discounted approximately 75 percent on average. The decrease in the
discount percentage resulted from the City's increased purchase of non-
contract items. The City spent more than other jurisdictions for office
supplies per Full Time Equivalent (FTE). Staff did not fully utilize the office
supplies contract to realize benefits. From 2006 through 2011, the City
purchased approximately 59 percent of its supplies from Office Max. The
City did not manage or monitor contract incentives. The contract provided a
98.5 percent fill rate and next-day delivery; therefore, The City Auditor’s
Office did not agree with the necessity for storing office supplies at the City
warehouse. ASD Staff did not ensure purchased office supplies supported
the City's environmental goals. The City spent approximately $230,000 on
30 percent recycled paper. City policy required the purchase of paper
products containing at least 50 percent recycled materials. The City
Auditor’s Office recommended ASD Staff develop formal procedures to
effectively administer the contract. ASD Staff should ensure the City's
financial records accurately identified office supplies. The City Auditor’s
Office could not reasonably associate a significant portion of office supply
expenditures with office supply vendors. In Fiscal Year 2011, the City
budgeted approximately $563,000 for office supplies, approximately twice
the actual purchase amount of office supplies from Office Max. The City
Auditor’s Office questioned the nature of expenditures for office supplies that
were coded as office supplies. The City Auditor’s Office recommended ASD
Staff develop and communicate policies and procedures to ensure the office
supplies accounting code was properly utilized. Strategic contracting
practices could provide savings opportunities. The City did not have
authorized contracts for several vendors selected for review in the Audit. In
addition, the City did not have a properly authorized office supplies contract.
The City Auditor’s Office found the policies and procedures did not clearly
identify contracting requirements for goods and services purchased with
purchase cards (P-Card). Purchasing did not monitor expenditures for goods
and services using reports, relied on departments to communicate
information, and did not have a process to ensure Staff was alerted to
Attachment B
DRAFT EXCERPT
Page 3 of 12
Policy and Services Committee Special Meeting
Draft Excerpt 11/20/2012
approaching contract expirations. ASD Staff did not have a process to
document and approve all exemptions from competitive solicitation. The
City Auditor’s Office found a large number of the City's contracts were
exempted. Staff reported that in practice approval was required for only 2
of 18 exemption categories specified in the Municipal Code. The Municipal
Code provided some details regarding the process for documenting
exemptions that were not followed in all cases. The City Auditor’s Office
recommended that ASD Staff clarify the City's procurement policies in this
area, develop policies and procedures to have approved contracts in place
prior to conducting business, monitor expiring contracts, and follow
Municipal Code requirements when documenting exemptions from
competitive solicitation. Finding 6 indicated Staff did not sufficiently define
contract administration rules and responsibilities. The City Auditor’s Office
did not find sufficient guidance regarding contract administration,
specifically, no evidence that two contracts administered by Purchasing were
properly administered. The City Auditor’s Office recommended ASD Staff
ensure contract administration rules and responsibilities were defined and
communicated.
Lalo Perez, Chief Financial Officer stated the recommendations were
reasonable, and Staff wished to provide responses. The America Saves
Program had more than 1,100 participants nationwide. Staff trusted that
Oakland County, Michigan performed a thorough analysis and selected the
lowest responsible bidder. As a result of the Audit and Staff's experience,
Staff determined the City could have saved more funds than it did. Staff
experienced numerous challenges during the period under review, including
a reduction in resources and various significant initiatives. He would report
the result of the new Request for Proposal (RFP) process and provide an
estimate of savings. Losses were reported, but savings and efficiencies were
not. The City was a large organization and some areas needed
improvement. The City Manager asked him to review the resource allocation
to this program. Rather than adding permanent staff, seasonal support
could assist with analysis, issue RFPs, and award contracts. Another option
was utilizing the Office of Management and Budget (OMB) to review various
areas. The City Manager tasked him with continuing to improve
opportunities for efficiency and savings. The Palo Alto process required
more expenditures than the process in other cities. The level of process
added to costs. In reviewing the audit findings, he determined Staff coded
various items as office supplies if there were no funds in the appropriate
category to fund the purchase. In July 2012, Staff elevated budget controls
to a group level. With more training and retraining, Staff could log the
proper codes.
Attachment B
DRAFT EXCERPT
Page 4 of 12
Policy and Services Committee Special Meeting
Draft Excerpt 11/20/2012
David Ramberg, Assistant Director of Administrative Services reported the
Purchasing Group was comprised of three contract administrators, two
buyers, and one purchasing manager. Three of those employees retired and
the positions had to be filled. The number of purchasing orders processed
during the term of the audit (approximately 3 1/2 years) was 8,589. The
number of contracts and contract amendments sent to the City Council was
336. The dollar value of purchase orders and contracts processed was
approximately $512 million. The number of bids completed was
approximately 1,200. The number of bid protests was six. Staff resolved all
six protests at Staff level, clearing the City of any inaccuracies in the bid
process. Two of the bid protests reached Council level, and the Council
supported Staff in not approving the bid protest. The City's purchasing
process provided a cost reduction when existing contracts were issued for
renewal. Cost reductions were achieved when compared to the estimates
Staff expected to receive for some key contracts. The total of cost
reductions over 3 1/2 years was approximately $5 million. A better and
more accountable P-Card system was installed in 2011. The issuer of the P-
Cards, JPMorgan Chase, provided a more favorable contract by offering a
competitive rebate based on spending. Staff anticipated a rebate of
approximately $40,000 per year. That rebate amount should increase year-
to-year as purchasing activity increased. Through the competitive process,
the City would have a new contract with Staples for office supplies. The
contract would provide savings, better reporting, and controls to ensure
Staff purchased only discounted items. In addition, the contract offered
remanufactured toner cartridges at a significant price advantage and the
largest suite of green products available. The City was moving in a positive
direction with the new contract with Staples.
Council Member Espinosa was interested in Staff responses to the Audit
Recommendations. Staff's responses to Recommendations 4 and 5 noted
staffing reductions. Staff's response to Recommendation 9 essentially stated
policy and procedures were in place. He inquired whether the City Auditor
felt Staff's responses would lead to change and compliance.
Mr. Pelletier worked closely with ASD Staff in the development of responses.
He was confident ASD Staff would make the necessary changes to correct
issues. The City Auditor’s Office follow-up would ensure ASD Staff met the
recommendations.
Council Member Espinosa asked if there were any areas Mr. Pelletier felt
would not change.
Attachment B
DRAFT EXCERPT
Page 5 of 12
Policy and Services Committee Special Meeting
Draft Excerpt 11/20/2012
Mr. Pelletier answered no. The City Auditor’s Office and ASD Staff generally
agreed with the issues noted and the actions to be taken.
Council Member Espinosa asked Mr. Perez if the results of the Audit
surprised him.
Mr. Perez was surprised by the extent of the amount. As Staff decreased,
he had to determine priorities based on the highest return of time. He chose
the implementation of the new P-Card as the top priority in order to provide
a new revenue stream for the City. The City's program for infrastructure
had increased dramatically, which impacted procurement. Contracts and
transactions were complex and required a great deal of time, which was
impacted by the decrease in staffing. Increased staffing could provide a
return that was larger than expenses. Reduced staffing levels increased risk
for the City. Other areas of the City organization would also have problems.
OMB Staff and additional software could assist with analysis. He would
return to the Council with a request for additional funding to address these
issues.
Mr. Pelletier noted Findings 1 and 2 were specific to Office Max. Other
findings concerned general contracting practices across the City. The City
Auditor’s Office encouraged ASD Staff to develop procedures and policies
that would impact all contracting across the City.
Council Member Espinosa expressed concern about Staff's responses
regarding the lack of Staff to perform the recommendations. The key
purchasing statistics alarmed him. He inquired about the level of risk for the
City based on the Audit.
Mr. Perez could only guess about the level of risk. This audit raised areas of
concern which Staff could review. When purchasing contracts were not in
place, Staff was performing some checks and balances to reassure the
Council. He could pursue other contracts and savings opportunities if Staff
was available. The larger contracts had a rigorous process and project
managers to provide checks and balances. One initiative under discussion
was decentralization of some purchasing. Staff planned to present Municipal
Code changes and levels of authority to the Council.
Council Member Schmid inquired whether the Audit could inform processes
for service-oriented contracts.
Attachment B
DRAFT EXCERPT
Page 6 of 12
Policy and Services Committee Special Meeting
Draft Excerpt 11/20/2012
Mr. Pelletier indicated the Audit considered broader processes regarding all
contracts within the City. The larger contracts received more attention;
however, the core processes for large and small contracts were similar.
Council Member Schmid believed much of the judgment for service contracts
was qualitative rather than quantitative.
Mr. Pelletier agreed. The City had expectations of what it planned to receive
from those contracts, and had a responsibility to monitor contracts to ensure
it received what it paid for.
Council Member Schmid noted a transition from measuring pieces of paper
to determining the quality of contract fulfillment.
Mr. Pelletier hoped service contracts contained specific requirements for
levels of service and ensured those services were actually provided.
Council Member Schmid noted in the Audit Report the number of times
information had to be obtained from Office Max, because SAP software did
not retain the records. He inquired whether SAP was providing accurate
coding.
Mr. Pelletier explained that Staff was coding items incorrectly in the SAP
system. It was not an issue with the SAP software.
Council Member Schmid believed the goal of SAP software was to coordinate
definitions across departments. He asked why Staff had to obtain
information from Office Max.
Mr. Pelletier stated City Staff had not maintained a copy of the contract.
Council Member Schmid inquired if Staff had obtained data from Office Max
in addition to the contract.
Mr. Pelletier explained Staff would request records from a vendor to compare
with City records as part of the audit process.
Council Member Schmid noted statements in the Audit Report indicating the
City did not have data and the reliance on Office Max information.
Attachment B
DRAFT EXCERPT
Page 7 of 12
Policy and Services Committee Special Meeting
Draft Excerpt 11/20/2012
Mr. Pelletier felt those statements referred to the City not having a copy of
the contract.
Mr. Boussina believed those statements concerned the contract initiation
date.
Mr. Pelletier recalled instances of SAP not being able to provide needed
reports.
Mr. Boussina indicated SAP could not generate a list of vendors coded as
office supplies providers.
Council Member Schmid inquired if there were limitations to the data SAP
could provide.
Mr. Perez stated the data depended on the configuration of the report. A
report could be configured to generate almost any data.
Council Member Schmid was disappointed SAP could not provide the needed
information.
Council Member Klein inquired whether other major contracts should be
audited given the data obtained from auditing the Office Max contract.
Mr. Pelletier stated it was important to review contracts on a regular basis.
Regardless of this Audit, he would feel the need to audit different contracts.
Council Member Klein asked if the Auditor's work plan included audits of
other contracts.
Mr. Pelletier reported the work plan contained an audit related to
construction practices. It had not been determined which specific contract
would be reviewed. Rather than auditing a contract, he could review the
processes for managing construction projects contracted to outside vendors.
Future audit plans should include one or two important contracts each year.
Council Member Klein asked if the ASD Audit had been presented to the
Finance Committee.
Attachment B
DRAFT EXCERPT
Page 8 of 12
Policy and Services Committee Special Meeting
Draft Excerpt 11/20/2012
Mr. Pelletier answered no. All audits except for utilities-related audits were
presented to the Policy and Services Committee (Committee). Utilities-
related audits were presented to the Finance Committee.
Council Member Klein suggested the Finance Committee should focus on
whether the City had a sufficient number of Staff before beginning the
budget process. If the purchasing section had an additional employee, the
City could have saved $500,000.
Mr. Perez believed an additional employee would pay for itself. The position
could begin as a temporary trial. If the employee found savings of
$500,000, then it would be logical to have a permanent, benefited person.
Council Member Klein felt that would be a worthy discussion.
Mr. Perez stated hiring an additional person need not necessarily wait for the
budget process, because he could work within the City Manager's authority
for funding. The Council would not regret an expenditure for an additional
Staff position.
Council Member Klein said there was a limit to the number of positions that
could be reduced before performance suffered.
Mr. Perez agreed. The City Manager and he had been reviewing that issue,
including the wear and tear on Staff, the capacity, and the level of risk.
Further discussions were needed.
Council Member Klein noted incorrectly coded purchases would result in
other categories being underreported, and inquired whether Staff knew what
those other categories were.
Mr. Pelletier reported the analysis only considered purchases coded to office
supplies. The incorrect coding led him to believe that other categories were
not properly stated.
Council Member Klein was not persuaded by Mr. Perez's response that Palo
Alto was different from other cities regarding spending per FTE. Mr. Perez's
response implied that Utility Workers consumed more office supplies than
General Fund employees.
Attachment B
DRAFT EXCERPT
Page 9 of 12
Policy and Services Committee Special Meeting
Draft Excerpt 11/20/2012
Mr. Perez said Palo Alto had multiple needs for different parts of the process.
If miscoding were removed from the equation, Palo Alto's spending per FTE
was not that far from Mountain View's spending per FTE.
Council Member Klein stated the amount of miscoding was unknown.
Mr. Perez suggested ASD needed further analysis. It was tempting for
employees to code purchases to categories with sufficient funding due to
lack of training. ASD stopped analyzing those issues when the number of
Staff was reduced.
Council Member Klein noted 59 percent of office supplies were purchased
from Office Max and the City Auditor’s surprise that such a large percentage
was purchased from other vendors.
Mr. Pelletier explained that the chart on Packet Page 89 included purchases
incorrectly coded to office supplies. Inclusion of the incorrectly coded
purchases made it difficult to analyze the numbers.
Council Member Klein asked why office supplies were purchased from
vendors other than Office Max.
Mr. Pelletier reported the Audit found 3 percent or $91,000 was spent for
office supplies from other vendors.
Council Member Klein reiterated his question.
Mr. Perez indicated the new bid provided more control. Staff may have
purchased office supplies from other vendors because of convenience or
unique needs. That was difficult to control, but Staff would provide
messaging.
Council Member Klein felt it was a training problem.
Council Member Schmid referenced the first full sentence at the top of page
94 regarding the City's financial records and systems not providing the
necessary detail and functionality. That implied that the basic system had a
problem.
Mr. Boussina stated that was a reasonable interpretation. He had no
difficulty determining purchases coded as office supplies when purchase
Attachment B
DRAFT EXCERPT
Page 10 of 12
Policy and Services Committee Special Meeting
Draft Excerpt 11/20/2012
orders were utilized. However, there was no visibility when P-Cards were
used for purchases.
Mr. Pelletier believed the root cause was the bank's lack of detail for
transactions. Under the new JPMorgan Chase system, those details would
be available.
Mr. Perez indicated the problem was the prior vendor, rather than the SAP
system. Staff was now scanning receipts and submitting a detailed receipt
in electronic format.
Mike Ramseck, Office Max Representative welcomed the opportunity to
participate in the Audit. It afforded the ability to provide the City with third-
party validation of the accuracy of processes. Office Max worked with the
City to provide significant amounts of information pertinent to the contract.
Office Max reviewed the draft Audit Findings in August 2012, and provided
additional information that he believed addressed all concerns. Office Max
was disappointed that the final report appeared to conclude there were
additional issues to address. Office Max intended to work directly with the
City and would continue to share all relevant information. They were
confident the process would deliver a resolution acceptable to both parties.
Regarding overcharges, Office Max provided the requested price lists, which
were validated and updated by a letter of certification from Oakland County.
Oakland County accepted all price changes over the audit period; therefore,
the price changes were passed on to the City of Palo Alto. Office Max was
concerned that it was not asked to participate in the competitive bid process
for future purchases. He requested documentation of the bid process to
determine why Office Max was not included.
Chair Holman inquired about the process to be used to determine additional
staffing.
Mr. Perez explained audit recommendations required more control, and more
control required more time across the organization. Training had to be
implemented; however, there was not an appropriate training plan for the
organization. Procedures, processes, and checks and balances required a
great deal of intervention and Staff time. Staff eliminated controls and
accepted risk, because of the lack of resources. Additional efficiencies would
not outweigh the requirements of the recommendations. Two concerns were
retaining employees on a temporary basis and the tremendous amount of
turnover in City Staff. Time and resources were needed to implement
processes and training.
Attachment B
DRAFT EXCERPT
Page 11 of 12
Policy and Services Committee Special Meeting
Draft Excerpt 11/20/2012
Chair Holman referenced ASD's response to warehousing office supplies, and
suggested it could have been more qualitative.
Mr. Perez explained Staff could not provide a better response prior to the
report being published. Currently, the vendor delivered orders to a central
point, and then Staff distributed individual orders to each department. ASD
reviewed the issue three to five years ago, and determined vendor delivery
to departments was not cost effective. They would review it again.
Chair Holman suggested fewer employees having P-Cards could decrease the
number of miscoded transactions.
Mr. Perez was willing to take the risk. Issuing P-Cards created more
efficiencies and more opportunity for risk. In the alternative, increased use
of P-Cards would provide higher rebates. If abuse occurred, then P-Cards
would be withdrawn.
Chair Holman inquired whether systems were in place for Staff to suggest
improvements and efficiencies such that problems identified in the Audit
could have been identified and halted earlier.
Mr. Perez indicated Staff could not implement suggestions quickly enough.
Speed teams worked with ASD Staff to make changes in the procurement
process. Those changes could include decentralization of some procurement
and reconsideration of authority and accountability for specific individuals.
Mr. Ramberg said the Audit offered good recommendations. The prior audit
of the P-Card system prompted Staff to replace the Cal Card system. In
doing so, Staff eliminated a manual process that had been in place for quite
some time. The new P-Card system delivered statements electronically, and
Staff uploaded paper receipts to the vendor's system. Staff searched for
opportunities to utilize new tools and to revise processes.
Chair Holman did not wish to convey the impression that the only goals were
speed and efficiency. The product and employees were important as well.
MOTION: Council Member Schmid moved, seconded by Council Member
Espinosa to recommend the City Council accept the Contract Oversight
Audit.
Attachment B
DRAFT EXCERPT
Page 12 of 12
Policy and Services Committee Special Meeting
Draft Excerpt 11/20/2012
Chair Holman hoped savings from audits would reinforce efficiencies and
support audit activities.
Mr. Pelletier recognized that audits demanded Staff time and resources, and
thanked ASD Staff for their cooperation and efforts.
Mr. Perez stated ASD Staff would address audit recommendations as quickly
as possible.
MOTION PASSED: 4-0
Attachment B