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District Dodges Spending Laws
Companies Snare Contracts With Connections, Not Competition

By Dan Keating and David S. Fallis
Washington Post Staff Writers
Sunday, November 27, 2005

District officials routinely violate city spending laws, avoiding competitive bidding, masking purchases under unrelated contracts and paying vendors without contracts or legal authority, according to D.C. records.

Out of $2.5 billion in purchases last year, the city spent roughly $425 million in unauthorized payments and no-bid contracts, according to a Washington Post review of thousands of documents, including the database that lists every dollar spent by the city over the past five years. Studies of no-competition contracts elsewhere indicate that the city is overpaying by $50 million a year.

In one case, the city has given a start-up computer consulting company 146 no-bid contracts worth a total of $13 million since 2003. The company has grown to 54 employees and has new offices in Northwest Washington.

The examination found problems that go far beyond sloppy paperwork as employees skirt the laws designed to prevent waste and fraud. In making purchases from riot gear to consulting services, for example, employees repeatedly send lucrative contracts to favored companies and pay huge cost overruns without getting permission for the spending.

"We screwed up," said Anthony F. Pompa, head of accounting for Chief Financial Officer Natwar M. Gandhi, when he was shown hundreds of millions of dollars in unauthorized checks. "We shouldn't do those things. We're going to clean it up."

The violations enrich well-connected companies at the expense of fair and open competition. Officials at a health agency used a technology contract as an open account to hire favored consultants and cover more than $1 million in unrelated expenses. Lottery agency officials paid an extra $900,000 so they could hire a telecommunications company they wanted without any bidding. The cable television agency paid more than $200,000 in cost overruns for a new truck without any spending authority.

To get around the rules, officials exploit loopholes not used in other cities.

The District spent about $225 million last year, for example, through a back door that allows payments without any authorization, violating policies that require approval from procurement and other officials. Under city policy, such "direct voucher" payments should be only for court-ordered judgments, monthly utility bills and other payments that cannot be negotiated. But they are used for computers, consultants, capital projects, special education services and furniture, among other things. The improper use of the practice is growing and approaching 10 percent of city spending, records show.

Deputy Mayor Herbert R. Tillery, who took over the contracting department last fall, insisted in an interview that it is impossible to spend money without a contract.

"That can't happen," he said. "If you can identify who . . . we'll know who to put in jail."

When shown records of more than $400 million that had been spent recently without authorization, Tillery turned to his staff and asked for an explanation.

Gandhi said that the city's purchasing system has "profound" problems, leaving him no choice but to pay bills for which there are no contracts.

"We have to manage a badly functioning bureaucracy to get it to provide badly needed services," he said. "The problems all come to my doorstep."

Gandhi has independent authority granted by Congress over every dollar spent by the District. But he said if he strictly enforced financial laws, many services would stop.

"I will be damned if a child is without textbooks or an AIDS patient is without medicine just because some bureaucrat did not file the paperwork right."

City officials also spent about $200 million last year through no-bid contracts that are intended to be used only when bidding is impossible. A loophole approved in 2002 by the D.C. Council greatly expanded their use, allowing the contracts to go to any company that agrees to charge according to a published schedule of prices. Studies of no-bid contracts nationally have found that the lack of competition drives up costs by as much as 39 percent.

The spending problems have drawn little attention, in part because city income has grown dramatically with rising property values. Mayor Anthony A. Williams (D) has been credited with transforming the financial health of the nation's capital, bringing it from near bankruptcy a decade ago to a $320 million surplus this year. But even as the city has balanced its books, records indicate it is violating its own rules.

National contracting experts said the District's spending policies are unique among cities and states across the country. Other cities do not allow their buyers to use direct vouchers. And experts said the city is also unusual in creating a loophole that allows no-competition contracts even when many companies could bid for the job.

That combination wastes taxpayer money and opens the door to misspending and fraud, said Kirby Behre, a former federal corruption prosecutor, who called it a "breeding ground for the District to be taken advantage of."

City leaders were aware of the abuse of direct vouchers at least a decade ago, although any efforts to stop them failed. When he was chief financial officer in the mid-1990s, Williams issued two memos banning the payments for standard purchases. "Agency controllers are required to adhere to these instructions carefully," he wrote in 1995 and again the following year.

Still, some of the spending problems have worsened with the city's streamlining efforts over the past three years, which reduced layers of approval and expanded the number of no-bid contracts. Those changes led to a vast increase in discretion for agency employees in charge of buying.

In response to The Post's findings, Gandhi's office said it would try to eliminate the improper use of direct vouchers through a new monitoring system that began last month.

Williams's spokesman, Vince Morris, in response to two requests over the past month for an interview, said the mayor was not available.

D.C. Auditor Deborah K. Nichols said that, although she believes financial management in the District is less troublesome than it was a decade ago, employees are still allowed to bend the rules.

"I am really shocked, very disappointed, that you have an administration that aligns itself with some of this nonsense," she said. "It certainly doesn't protect our resources."

Specialized Shortcut

Spending without contracts or authority through direct vouchers is so ingrained across agencies that the city is customizing its new $80 million computerized financial management system to allow it as standard practice. For others who bought the same software, including several states, large banks and universities, the program is specifically designed -- similar to a safety on a gun -- to prevent unauthorized spending. The District paid to have that safety removed.

Larry Daniels, director of the District's accounting managers, said the city added the direct-spending shortcut "because the District does our business in our own way."

City agencies have used that method 58 times in the past five years to pay Professional Products Inc. of Gaithersburg, a company that consults regularly for the District. When the city's cable television office, which carries the mayor's and D.C. Council's activities, wanted to buy a satellite transmission truck, it did not seek competitive bids but instead turned to the Gaithersburg company. To justify the no-bid contract, city buyer Kevin A. Green said in a memo that his research proved that the company's proposed price of $900,000 was fair.

The bill came in at $991,910, and the agency paid it. Later, the company sent an additional invoice for $219,000.

In a 2002 memo, the cable office's Director of Operations Robin M. Yeldell said the agency would pay the bill with a direct voucher. And despite laws requiring D.C. Council approval for purchases of more than $1 million, city officials did not seek permission from the council when the truck's cost rose above that figure.

In the next year, the city gave two more equipment contracts -- again without competition -- to Professional Products, at a total cost of $2.8 million.

The cost of the truck went up when the company recommended additional equipment, said its president, Bruce Kaufman. He said his company's expertise and longstanding relationship with the city led to the no-bid contracts.

"D.C. has been a very good client," Kaufman said. "D.C. has been a very aggressive technology city."

In the past two years, the city has paid consulting firm Deloitte & Touche $9.4 million under a contract to track children under the watch of the Child and Family Services Agency. When the firm sent an additional $1.8 million in bills for costs that ran over the contract figure, the city paid through direct vouchers.

Deloras A. Shepherd, associate chief financial officer at the agency, said in an interview "it shouldn't be" paid with direct vouchers, but they are commonly used. She said Deloitte & Touche was paid entirely through the vouchers until a few years ago, when she insisted a contract be written.

A Deloitte spokesman said the company did not want to comment on the contract costs.

Gandhi has complained about the direct payments, but his office uses them as well. In one case, the method was used to pay computer consultant Thomas F. Cosgrove III, who received more than $1 million from 2000 through 2002. That work was covered by a contract, except for a three-month period during which city officials neglected to write a new contract or seek approval for the funding. When Cosgrove submitted bills that totaled $125,000 for that period, the office paid him through a direct voucher. Pompa, Gandhi's head of accounting, said he mistakenly thought someone else had written the contract.

Inventive Avoidance

City agencies sometimes find creative ways to avoid competition.

The Lottery and Charitable Games Control Board, for example, wanted to hire GTech Corp., a national company it had worked with for years, to run the network of terminals that sell lottery tickets across the District, records show. But the agency said it was too rushed to put the contract out to bid. The fastest way to hire GTech was to add it as a subcontractor to an existing contract held by a company that has since been bought by Lockheed Martin Corp.

Contract records specified that GTech would do the work, and the prime contractor would get $626,000 as a fee over the five-year agreement. With other management and oversight fees, the extra charges amounted to $900,000, or one-third higher than the average paid by other states, according to the lottery agency's survey of comparative prices.

The network was plagued by slow performance and frequent outages, according to lottery agency documents. "Retailer satisfaction is extremely low," lottery officials wrote in a memo.

GTech spokesman Robert Vincent said, "We have not been made aware of any substantial complaints."

The Lockheed Martin arrangement expired last year, but the city kept GTech, paying it more than $1 million since then, without writing a contract or requiring competition.

The same method -- using one company as a pass-through to hire others -- is standard practice at the Office of the Chief Technology Officer, the city's computer department. Many of the pass-through contracts are granted without competition using the loophole adopted by the D.C. Council in 2002.

The biggest beneficiary has been DBTS Inc., a start-up company founded by Carrie-Ann Barrow, a 32-year-old entrepreneur from Northern Virginia. Barrow had been a $95,000-a-year consultant at the technology office when she decided to start a computer company in 2000.

The firm is now the agency's biggest local vendor and has received 146 no-bid contracts worth $13 million since 2003.

When the technology office wants to hire computer programmers, it notifies DBTS. The city sets the salary and the markup DBTS can charge. The firm then hires the programmers, although they work on agency projects in city offices. The process, which was described in interviews by Chief Technology Officer Suzanne J. Peck and contracting officer Bruce Witty, allowed the employees to work for the city without going through the normal hiring process or competitive bidding.

In one case, Peck's agency told the firm to hire the son of a city employee as a summer intern. The agency told DBTS that he should be put on the company's payroll, specifying that he would receive $12 an hour and the firm would be paid a $6-an-hour markup.

Barrow questioned the agency in an e-mail, asking if that would create a "conflict of interest situation" that could endanger her ability to get more contracts. "I'm trying very hard to follow all the rules," she wrote.

Officials at the agency said the employee's son was given the internship, but there are no records to determine which of many consulting companies was used to pay him. Barrow said her company never hired him.

Peck said she has done so much business with Barrow because she is reliable.

"She has done very well for us and we for her," Peck said, noting that DBTS is considered a small, local business that the city is committed to support.

Barrow declined three requests to be interviewed or answer questions in writing about her firm. "We are proud of the work we have done for the D.C. Government," she wrote in an e-mail.

Peck, a demanding, energetic leader who spent much of her career in private industry, said she bristles at the constraints of government purchasing. When she wants to hire someone, she wants it done quickly, without the delays of bidding and competition. She said she told Witty to stay within the law, but "exploit the hell out of the gray area."

Witty said the streamlining in D.C. contracting has made it easy to send work to DBTS or any other company without open bidding.

"Once you start working with someone, you hang in there with them," he said. "You form your partnerships and keep them. You have to do it within the law, but that's how you work today."

The D.C. Inspector General released a study this spring of sole-source contracts in Peck's office, including some from DBTS, and found that every one of the contracts examined should have been put out to bid and estimated that the agency overpaid by 24 percent.

Peck, however, said her approach saves money because it allows her to hire good workers as consultants rather than city employees. And, she said, her deputies negotiating for sought-after specialists get lower prices than she would get through competitive bidding.

"With the government pay scales, I can have more mediocre people or I can find creative ways around it," she said, "and I find ways around it."

Among those she relies on to negotiate is Sandy Lazar, a Pennsylvania consultant who had worked with Peck in private industry.

Lazar is directing an $80 million project creating a massive computer system to revamp the way the city coordinates spending, procurement, personnel and payroll. He was hired four years ago, after the D.C. Council gave Peck a waiver to bring in consultants as managers. Until officials noticed the problem last year, the law put him in the unusual position of approving his own consulting contract on behalf of the city.

City records show he has been paid $1.4 million since 2001 and recently has been given an additional contract for $719,000.

"I'm proud of what I've done," Lazar said. "I've been remunerated fairly, and I've given back many times over."

No-Compete Competition

In early 2002, Debi Gasper, co-owner of a D.C. public relations firm, The Ad Agency, was sitting in Peck's office working on an agency project when Lazar came by. He asked if she'd be interested in promoting his new software, which was being rolled out to city workers.

Gasper's firm prepared a proposal and began work that March. That first contract, for $15,000, was too small to require competition under city rules. But four months later, when a $40,000 follow-up project was on the table, city rules required competition.

With Gasper's existing proposal in hand, the city needed two other bids. But rather than advertise the job to gather competing bids, a contracting officer wrote that he contacted two other companies, and they declined to bid. That was considered sufficient competition, and the contract went to Gasper.

Officers at the two businesses listed in records said they did not remember being asked to bid on the project. One of them, John Vance, managing director at Levine and Associates, said the firm was seeking work at that time and, "I can't imagine anyone here picking up the phone and saying we wouldn't bid."

Lazar said competition for the contract was fair.

Over the next two years, The Ad Agency received a series of sole-source contracts as "good will ambassador" for the project, records show. It created posters and did other work to encourage city workers to get training on the new computer system. The total price was more than $680,000.

"We just really work hard," said Gasper, who added, "We give the government very good rates."

In one case, when the money under the contract was gone, the firm submitted another bill for more than $58,000. The agency paid it with a direct voucher.

Gasper's firm received another direct voucher payment, for $250,000, about the same time. She produced a proposal and an invoice saying the funds were used to buy advertising to promote the city as a destination for technology companies. But city officials said they could find no contract or invoices for the payments.

Repeat Business

The city said it also put out for competition a contract that ultimately went to former city official Harry Black, though there were no competing bids. Black had held several administrative jobs for the city in the 1990s, including deputy director of the contracting department.

In 2003, his former contracting office colleagues needed consulting help to review and approve a backlog of contracts. They didn't advertise the job but sent faxes to two firms, one of them Black's. When the other firm didn't bid, Black had no competition. Despite city rules requiring three competitors, the officials sought no more bids and granted the contract to Black for $64,000, records show. The business was extended several times and the city ended up paying $128,000.

Last year, when the city was seeking a consultant to review its buying rules, the city manager's office chose Black and sent his proposal to the contracting office without any competition, records show. The city later called two other consulting firms to request bids, and one replied. Black's price was 9 percent higher, but he was awarded the contract for $86,000.

In the past two years, records show, Black's firm was paid more than $550,000 through no-bid contracts or through competitive bidding when he was the only bidder or the high bidder. Black said his understanding was that competition for all contracts was fair.

Black said city contracting problems persist despite adequate laws to prevent employees from squandering money. City government has not developed a culture that holds people accountable for failing to live up to the laws, he said. "We don't attack the issues because we don't deal with the human element."

The urgency of solving spending problems, he added, has been lost amid the attention to the surplus caused by rising tax revenue.

"The beautiful thing with D.C., not like other jurisdictions, is the economy is booming so much that the inefficiencies get overshadowed."

Staff researcher Bobbye Pratt contributed to this report.

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