City contracting is big business: in fiscal 1992, New York City spent an estimated $6.9 billion to purchase goods and services from the private sector, under 9,858 different contracts.
That kind of money is awfully tempting, so it’s no surprise that corruption scandals have plagued the city throughout its history. In 1872, when the “Tweed” courthouse was built behind City Hall, its original $250,000 price tag swelled to an estimated $13 million; Tammany Hall boss William Marcy Tweed pocketed two-thirds of the building’s cost. Sixty years later, Mayor James Walker resigned after the Seabury Investigation revealed widespread corruption, and in 1950, Mayor William O’Dwyer was rescued from corruption charges when President Truman appointed him ambassador to Mexico. In the 1980s, pressure mounted for the city to reshape the way it awards contracts after a series of scandals during Ed Koch’s final term as mayor.
The calls for reform were answered in 1989 when the new city charter changed the way contracts are awarded. The mayor now has almost total control over contracts, and the comptroller is vested with subordinate oversight responsibility.
These new rules were designed to create an efficient and accountable awards process. But less than three years after they were put in place, the city is awash with questionable contracts, despite cumbersome controls that slow the process to a snail’s pace. We now have the worst of both worlds-an inefficient system that does little to weed out the bad apples.
The intrusion of influence peddling into the contract awards process is illustrated by the recent revelations concerning the proposed Parking Violations Bureau contract with Lockheed Information Management Systems. A $200 million contract with Lockheed was in final negotiations when Village Voice writer Wayne Barrett blew the whistle. Barrett reported on highly improper incidents of arm-twisting by First Deputy Mayor Norman Steisel and Budget Director Philip Michael to win approval for the aerospace subsidiary, which in its previous incarnation as Datacom was implicated in a city bribery scandal in the mid-1980s. Steisel is accused of giving Lockheed extensive and exclusive access to high-level city officials.
The Lockheed contract not only illustrates the political influences at work in the awards process, but also exposes an intrinsic conflict of interest at the Department of Investigations, which is probing the influence-peddling allegations. In the city hall chain of command, the department’s commissioner, Susan Shepherd, reports directly to Steisel. While her respected background in law enforcement suggests that she will be impartial, her investigation is bound to have less credibility than if she were not investigating her own boss.
Another egregious example of political influence steering city business involves the largest contract given out last year-a $468 million award, negotiated without competitive bidding, for New York Organic Fertilizer Company to treat and dispose of city sludge. Steisel was actively involved in the selection process, despite a clear conflict of interest: he had been president of one of the companies that created the New York Organic joint venture and senior vice president at Lazard Freres & Co., the firm bankrolling the project. Steisel stayed with the sludge venture until four days before being named deputy mayor, and, according to the Department of Investigation, he continued to keep tabs on its progress while working as Dinkins’s first deputy.
Moreover, while the new rules for contracting fail to eliminate influence peddling, they also mandate reams of paperwork that unnecessarily prolong the awards process. “The rules to show accountability really diffuse responsibility with so many sign-off points that no one is responsible,” says Ilene Marcus, director of city policy for the United Jewish Appeal Federation. She estimates that it takes between 6 and 11 months to get a typical social-service contract through the bureaucratic maze.
Sometimes, as a result, the city is unable to meet deadlines for distributing or applying for federal funds. Bungling in the distribution of $5 million in federal Head Start money meant that a thousand poor children lost nearly a year of preschool instruction. Likewise, as much as $20 million in federal AIDS money was lost because of the city’s bureaucratic procedures.
Corrupt or incompetent contracting not only costs the city money, but also harms the quality of life. On 14th Street in Manhattan, for example, Perez Interboro Asphalt had to tear up the street and repave it after the firm was found to have used watered-down concrete. The continuing work was unsightly and disruptive, but Perez was allowed to keep its $23 million contract and apparently is about to be awarded another contract for similar work on Third Avenue.
The city has made some progress in improving its contracting procedures. Michael Rogers, director of the Mayor’s Office of Contracts, has made professionalizing the contracting staff a top priority. When he took office two years ago, none of the city’s 750 full-time contract specialists was certified by a professional contracting association. (Such certification is the equivalent of a CPA in the accounting profession.) Rogers arranged for the training of more than five hundred procurement staffers and convinced the mayor and City Council that the 14 largest mayoral agencies, each of which gives out more than $100 million a year in contracts, should hire experienced contracting officers. With the significant exception of the Department of Social Services, all have done so.
Rogers estimates that better staff training, along with a new computer system and greater centralization of contracting authority, will save $27.5 million in fiscal 1993 and $148.5 million a year by 1996.
These efforts are a step in the right direction, but more should be done. The city needs to be vigilant in weeding out contractors that cheat, deliver shoddy merchandise, or cut corners on contract specifications. Contractors can be debarred from city work after a hearing by the Office of Administrative Trials and Hearings. But since the office was designated to hear such cases in 1990, only three have been placed on its calendar and only one company has actually been debarred. The reason, according to Rogers, is that city agencies lack the resources to initiate such cases. The authority to do so, therefore, should be transferred from the agencies’ general counsels to the city’s Law Department, which could set up a special unit to handle these cases.
The city should also reform practices that restrict competition for contracts. In what amounts to a sweetheart deal, some contract specifications are designed to be so specific and detailed that only one company can supply the desired product. A red flag should be raised, for example, when the same handful of firms win street-lighting contracts year after year.
The city should also reconsider the “hold harmless” clause that prohibits a contractor from making claims for delays caused by the city. Because many legitimate companies refuse to accept a financial penalty for delays over which they have no control, the effect is to diminish competition by limiting the number of firms that are willing to do business with the city.
More local involvement in contracting decisions would also help make the city and its contractors more accountable. The present system provides scant room for meaningful public comment. Contract solicitations are published in the impenetrable City Record and hearings on awards are announced on cable TV, but attendance is sparse at the public hearings, even when highly controversial contracts are being awarded. At a typical hearing, more than $100 million worth of contracts are presented, usually without a morsel of public testimony. No one wants to return to the steamy days of the Board of Estimate, but there should be a way for the public to have a greater role in the process. One way of accomplishing this would be to involve borough presidents and community boards.
Finally, the reforms already undertaken should be expanded beyond the agencies directly under the mayor’s control. Perhaps as much as half the contracting budget is outside the scope of the new procurement process. Independent entities such as the Board of Education, Health and Hospitals Corporation, and Off-Track Betting Corporation all escape public scrutiny of their budgets and operate independent of the disclosure provisions mandated by the charter.
By improving its contracting operation, the city could save hundreds of millions of dollars while raising the quality of its services. In an era of municipal budget constraints, this is an effort the city cannot afford to avoid.