May 14, 2010

Auditors: State didn’t guarantee best price on huge gasoline, drug contracts

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By Erich Wagner
Erich@MarylandReporter.com

The state didn’t do enough to make sure it was getting the best price available when it renewed contracts for gasoline, pharmaceuticals and other products, state auditors said in a report released Thursday.

The audit also raised concerns about Maryland’s participation in contracts made by other government bodies, which don’t require the state to go through its normal procurement process.

Critics question whether multi-jurisdictional “intergovernmental cooperative purchasing agreements” are the best deal for Maryland and its small and minority-owned business community. State officials defend the practice as an efficient and fair way to save money.

When the Department of General Services Office of Procurement and Logistics renewed its contract for commercial fuel services for state agencies — worth about $77 million last year — it did not analyze whether it could save money by using different suppliers. Auditors said such a cost-benefit analysis would have been “prudent,” given that the existing contract had provisions that “effectively prohibited other vendors from being able to compete for the contract.”

The office also did not ensure that a state contract for pharmaceutical drugs, which was arranged through a multi-state pharmaceutical purchasing alliance, was the best possible deal. The deal cost the state $14 million in fiscal 2009. And when renewing the contract, the state didn’t analyze whether membership in the multi-state organization was in the best interest of the state.

Bruce Myers, chief auditor for the state Department of Legislative Services, said the finding raises larger concerns regarding intergovernmental cooperative purchasing agreements.

“It raises different questions, if anybody, anywhere can use a contract that any city or county or state enters into,” Myers said. “From an auditor’s perspective, we don’t know how these contracts came about. We don’t know the process, or controls, or lack thereof.”

Myers added that it could make it difficult for the state to ensure its policy priorities are reflected in contracts entered into with other states.

“If there’s a contract for, say, office supplies, what if some items are less expensive locally?” Myers asked. “Do you still use the other contract? And what about minority businesses and the [state’s] preference for that?”

But Mike Haifley, the DGS purchasing chief, said the main question that the finding raises is how the state can best ensure that a contract remains a “good deal.”

“I think the broad question is beyond just intergovernmental agreements, but at any renewal period, what’s the extent of the analysis you do to make sure it’s still the best deal?” Haifley said. “At the 100,000 foot level, you could ask that of all contract renewal options.”

Haifley argued that the state gets a good value when contracts are bid and rebid because they still go through a competitive process.

“There’s the ability for anyone to compete for them,” Haifley said. “What makes them a good value for the state is typically the volumes, because of the aggregation of many jurisdictions’ requirements, there’s a greater volume and that leads to better discounts. If you buy a box of pencils it might be a dollar, but if you buy a case of pencils, [the same amount of pencils] may cost 95 cents.”

Auditors recommended that the office make the proper analyses to determine whether these contracts are the best available for the state, and said the state should use those conclusions when it becomes time to renew or rebid the contracts.

The Office of Procurement and Logistics agreed with the audit’s recommendations on the issue of fuel services contracts, but argued that the state’s membership in the multi-state pharmaceutical-buying partnership is in Maryland’s best interest.

Since the actual contract was competitively bid by Minnesota, the result of that state’s bidding process “[represents] a statement of market reasonableness for the products,” The agency also argued that the process of buying in larger volumes for multiple states at once “has proven beneficial and in the best interest of the State of Maryland.”