Lack of Controls Led the City to Ignore Red Flags of Possible Collusion Among Bidders
The New York City Department of
Education (DOE) failed to employ proper safeguards and controls in
awarding multi-million dollar milk distribution contracts for City
schools, making the City vulnerable to possible
collusion, New York City Comptroller Scott M. Stringer announced
today. The
findings of the audit have been referred to the United States Department of Justice for further investigation.
“DOE ignored red flags that its milk
contracts may have been tainted,” Stringer said. “We see possible
collusion when rival bidders become business partners within two months
of being awarded contracts. Instead of doing its
due diligence, DOE needlessly put taxpayers at risk. Moving forward,
DOE must put tighter controls in place to ensure that bids are made
independently and that bidders have the financial ability to deliver the
services they promise.”
Keeping close tabs on the city’s
school food supply chain is vital to protecting both the City’s physical
and fiscal health. New York City serves more meals and spends more
money on those meals than any other U.S. government
entity outside of the Department of Defense—some 850,000 meals each
day. Saving just one penny on the cost of each meal through better
controls adds up to big-time savings for taxpayers—more than $1.5
million per year.
The audit examined three contracts
worth $134 million for the supply and delivery of milk to City schools
from November 2008 to August 2013. The three winning vendors were Beyer
Farms, Inc., Elmhurst Dairy, Inc. and Bartlett
Dairy, Inc. The largest contract, totaling $111 million, went to Beyer,
for milk delivery in Brooklyn, Queens and the Bronx.
The audit found that DOE lacked
adequate procedures to detect warning signs of possible collusion. The
three winning bidders began as competitors, each vying for the same
contracts, but became business partners within two months
of the contracts being awarded. Beyer and Elmhurst, which had won the
lion’s share of the distribution bids in August and September 2008,
subcontracted the majority of that work in October 2008 to their former
competitor, Bartlett.
As a result of that subcontracting,
Bartlett’s percentage of milk delivery rose from 6% to almost 70%, all
before the first carton of milk was delivered. Furthermore, Beyer and
Elmhurst failed to provide any information that
they planned to use subcontractors in their original bids, even though
the Request for Bids required them to do so.
“All of these warning signs should
have raised concerns at DOE, and we have referred the matter to the
United States Department of Justice for further investigation,” Stringer
said.
The audit also found that DOE failed
to adequately assess the financial health of bidders. Beyer’s financial
statements clearly indicated a high risk of default—its debt had soared
in 2007 and its ratio of current assets to
current liabilities was far below industry competitors. DOE not only
failed to properly analyze the bidder’s financial statements, it
disregarded the warnings of one of its own analysts, who stated that
everything appeared to be “on the margin.” Beyer subsequently
went bankrupt in 2012, leaving DOE scrambling for a replacement. DOE
is now in the process of procuring new milk distribution contracts.
The audit urged DOE to:
1.
Develop and implement adequate written procedures to detect the warning signs of possible collusion;
2.
Put written procedures in place to identify and flag troubling bidders before it is too late;
3.
And
develop and implement procedures to ensure that a comprehensive analysis
of the financial capacity of low bidders is conducted prior to any
contract award.
“I am pleased that DOE has now agreed
with our recommendations to institute tougher scrutiny of future
bidders. We simply cannot allow these kinds of weak procurement
practices to continue,” Stringer said.
