CITIZENS ECONOMY AND EFFICIENCY
COMMISSION

of Los Amgeles County

ROOM 163 HALL 0F ADMINISTRATION / 500 WEST TEMPLE / LOS ANGELES, CALIF0RNIA 90012 / 974-1491


June 9, 1993

Honorable Edmund Edelman
Los Angeles County Board of Supervisors
500 W. Temple
Room 821, Hahn Hall of Administration
Los Angeles, CA 90012

Dear Chairman Edelman,

0n April 9, 1992, the Board of Supervisors of Los Angeles County asked the Economy and Efficiency Commission to "review and report" on County Proposition A contracting guidelines. The Chief Administrative Office (CAO) presented to your Board on December 23, 1992, a set of recommendations. Action was taken by your Board on January 28, 1993 and implementing instructions issued by the CAO on February 1, 1993.

The attached review specifically addresses the above actions, together with their impact on the contract evaluation process, while our 1987 Commission Report dealt with general recommendations on contracting policy. Nevertheless, when in the course of our investigation policy issues arose, the Commission attempted to identify them and to make appropriate recommendations within the framework of the Board's direction. In addition, our Commission has taken this opportunity to contribute to the process of evaluating both contractor and County management performance.

The Commission appreciates the opportunity to provide a review which will assist the County in achieving a more efficient and effective contracting process and looks forward to providing future assistance.

Sincerely,

Gunther Buerk
Chairperson

C:
Each Supervisor
Each Economy and Efficiency Commissioner
Harry Hufford, Chief Administrative Officer
DeWitt Clinton, County Counsel
Allan Sasaki, Acting Auditor Controller
Bruce J. Staniforth, Executive Director



A REVIEW OF ACTIONS TAKEN BY
LOS ANGELES COUNTY ON PROPOSITION A
CONTRACTING REQUIREMENTS

JUNE 1993


TABLE OF CONTENTS



Executive Overview

Introduction

Methodology

Issues For Review

Health Insurance Benefits for Contract Employees
Standard Format for Cost Savings Analysis
Department Head Evaluation of Services Proposed for Contracting
Report to the Board on Proposition A Contracts
Performance Based Pay Evaluation Guidelines
Cost Effective Contracting
Implementation

Impact Policy

Conclusion

Biblography

APPENDIX A: Board Order, Directing a Review and Report

APPENDIX B: Approved 1978 Proposition A Charter

APPENDIX C: CAO Memo, February 1, 1993, Changes to the Proposition A \ Contracting Requirements
APPENDIX D: Los Angeles County Code, CHAPTER 2.121, Contracting with PrivateBusiness
APPENDIX E: Department Head Performance Agreement and Evaluation Form



EXECUTIVE OVERVIEW

The Economy and Efficiency Commission, responding to an April 9, 1992 request by the Board of Supervisors, has reviewed the recent actions taken to develop and implement more efficient procedures to analyze and introduce Proposition A contracts (Appendix A). This review identifies several opportunities for improvement and recommends a number of actions that will result in a more effective approach to contract management.

In a June 1992 article in the Government Finance Review entitled "Reducing Service Delivery Costs Through Public/Private Partnerships," the then Los Angeles County Chief Administrative Officer (CAO), Richard Dixon, states:

From the beginning, contracting was approached with an eye to avoiding the administrative burden-excessive regulations, policies, procedures and directives that permeates so much of public purchasing programs and the civil service system. The County sought to encourage creative thinking through management incentives and a decentralized approach.

The actions taken recently lack this approach since they impose requirements and place administrative burdens upon departments and contractors without any clear identification of the objectives to be achieved or clear understanding of how the data requested is to be used.

The above article further asserts that the contracting program has resulted in savings of over $250 million since its inception and accounts for an estimated annual savings of $53.1 million. These savings justify an additional investigation that is wider in scope than that provided in the present review.

As illustrated in the discussion on contracting for the GAIN program held during the May 18, 1993 Board meeting, the current contract evaluation process lacks a coherent approach, is not clearly understood by labor and management of the County or by contractors, and is subject to question by some Board Members.

A reemphasis of the Board's desire to measure the efficiency and effectiveness of a program based upon an accepted cost analysis methodology is particularly necessary at this point in the development of contracting policy. County staff, contractors and consumers of County services have a right to expect a fair and objective evaluation of any contracting option. They also have a right to provide input to the formulation of this policy and to the processes that will affect their lives and livelihood. Once the Board establishes clear program objectives and approves the criteria, the parties involved will become better informed and able to understand the decision making process.

In the past some Board members have indicated concern over their inability to understand the cost differences between competing proposals. This has included an inability to clearly identify the costs of having a County department render the service, leaving unanswered the question as to whether a County department could provide the proposed service level at the same or lower cost as the contractor.

The review undertaken by this Commission has made numerous recommendations to improve the existing contracting process. It should be reemphasized that these recommendations are to be viewed as responding to only part of the issue. A more comprehensive review of the contracting program is required to insure that all of the requirements of the process have been integrated and that the objectives of the program are clearly identified and achieved.

The listing which follows presents, in summary form, a statement on each recommendation made in this review.

RECOMMENDATIONS:

HEALTH BENEFITS FOR CONTRACT EMPLOYEES

1. Issue instructions clarifying that it is not now a requirement for contractors to provide health benefits.

2. Analyze the economic, organizational, and individual impacts of mandating health benefits.

STANDARD FORMAT FOR COST SAVINGS ANALYSIS

3. Clearly explain any revisions to the contracting process.

4. Revise the Countywide Contracting Manual to reflect any changes to the contracting process.

5. Insure that all contracting instructions provide opportunity for suggestions.

6. Review the current contract evaluation procedures.

7. Require a statement in the Countywide Contracting Manual on qualitative impacts.

8. Revise the approved "Comparison of Estimated Avoidable Costs to the Cost of Contracting" Form.

9. Rescind approval of the "Contract Employee Wages & Benefits" Form.

EVALUATION OF SERVICES PROPOSED FOR CONTRACTING

10. Develop further a process for analyzing cost savings opportunities in contracting.

11. Clarify analytic requirements in renewing or modifying a contract.

12. Develop, where possible, public and/or private sector comparative performance data.

13. Report on the CAO review of contracting opportunities in "main mission activities" of departments.

REPORT TO THE BOARD ON PROPOSITION A CONTRACTS

14. Insure that the annual report evaluates the performance of the contract and the department.

15. Consider formation or use of advisory bodies to develop Statements of Service Quality.

16. Revise the approved "Report on How Proposition A Contracts are Being Carried Out" Form.

PERFORMANCE BASED PAY EVALUATION GUIDELINES

17. Clarify that Performance Evaluations are based on measurable objectives defined within the contract.

18. Revise the Countywide Contracting Manual to reflect performance-based objective accomplishments.

19. Revise the "Department Head Performance Agreement and Evaluation" Form.

COST EFFECTIVE CONTRACTING

Refer to Recommendations #6, #7, and #10.

COMMUNITY IMPACT/ CONTRACTING POLICY

20. Study the economic role of the County as an employer and buyer of goods and services in the region.

21. Direct that the economic role of the County be reviewed annually.

22. Develop a clearly defined set of objectives for the Contracting Program.

23. Conduct an overall review of the Contracting Program.

24. Direct the Chief Administrative Officer to provide this Commission with informational copies of any documents produced.




INTRODUCTION

The issue of contracting is one that is politically charged, eliciting strong opinions from both its supporters and its opponents. The purpose of this review is to evaluate recent actions and to make recommendations that will enhance the objectivity of the process.

The 1992 book by David Osborne and Ted Gaebler entitled Reinventing Government, How the Entrepreneurial Spirit Is Transforming the Public Sector from the Schoolhouse to Statehouse, City Hall to the Pentagon states:

Those who support privatization in all cases because they dislike government are as misguided as those who oppose it in all cases because they dislike business. The truth is that the ownership of a good or service whether public or private is far less important than the dynamics of the market or institution that produces it. Some private markets function beautifully; others do not. (Witness the savings-and-loan crisis.) Some public institutions function beautifully; others do not. (Witness public education.)

Both supporters and opponents have a right to understand the derivation of the information from which contracting decisions are made, whether or not they agree on the decisions that are made as a result.

An organization can mitigate the impact of diminished revenues by reducing one or more of the following: the range of services provided, the levels of service offered, and/or the quality of services delivered. The use of all or any of these alternatives to mitigate the effects of declining revenues on County services could have serious repercussions for our community. It is crucial that County management insure that all potential increases in efficiency have been identified, evaluated, and acted upon.

In the process of improving efficiencies, County management should be sensitive to the workload and demands being placed upon their employees. Management should also be aware of the additional requirements being placed upon the business community. As pointed out in the Economy and Efficiency Commission May 5, 1993 letter to the Board of Supervisors on legislative reforms, "The business of county, city, and state government should be to create an atmosphere which fosters economic growth and commerce." It is pivotal to the success of these efforts that contracting requirements encourage, not discourage, both staff and business participation in more effective government.

A method of reducing costs while maintaining service levels was afforded to the County in 1978 with the approval by the County electorate of Proposition A (Appendix B). Proposition A added Section 44.7 to Article IX of the County Charter. This Section authorizes the hiring of independent contractors to perform work that could be performed by County employees, when the Board of Supervisors finds that the work can more economically or feasibility be performed by independent contractors. Such contracts have become known as "Proposition A Contracts."

The CAO has reported that the Privatization Contracting Program has resulted in a savings of more than $250 million since its inception, with an estimated $53.1 million saved annually from more than 400 separate agreements. At these levels of savings additional analytic effort is justified to insure that these amounts are being correctly determined and that the savings, as they are achieved, are being effectively redirected.

On April 9, 1992, the Board of Supervisors requested the Economy and Efficiency Commission to independently "review and report" on Proposition A contracting guidelines. This review, undertaken in response to that direction, focuses upon the recommendations submitted by the Chief Administrative Officer on December 23, 1992 and subsequently approved by the Board on January 28, 1993. It also reviews the implementing instructions that were issued by the Chief Administrative Officer on February 1, 1993 (Appendix C).


METHODOLOGY

The Economy and Efficiency Commission has committed to making this review a resource to assist the County in the development of an efficient and effective contracting process. The Commission has also endeavored to contribute in a meaningful manner to the process of evaluating both contractor and County management performance.

The sensitivity of this issue raises numerous policy questions as to the cost effectiveness and appropriateness of contracting. These issues must be addressed by the Board prior to reaffirming a contracting policy. The Commission believes that reporting on these issues within this review would be beyond the scope of the Board's direction. Nonetheless, the Commission recognizes that these issues are vitally important, and when such issues have been raised in the course of our investigation, the Commission has sought to identify them in the context of the instructions given to the Commission.

In the conduct of this review the Commission used the reference material normally available to departments to manage this process, particularly County Code, Section 2.121 (Appendix D) and the Countywide Contracting Manual. In addition, the Commission has attempted to consider the views of as many of the participants as possible. We also reviewed various documents and publications, other studies published in this field, and comments from knowledgeable individuals.

ISSUES FOR REVIEW

The following issues were first acted upon by the Board on April 9, 1992 and after review, recommendations and approval, implementing instructions were issued by the Chief Administrative Office on February 1, 1993. After enumerating the actions taken, this review provides a discussion of each issue, followed by specific recommendations.

Issue: HEALTH INSURANCE BENEFITS FOR CONTRACT EMPLOYEES

Board Direction (April 9, 1992):

1. Instruct the Chief Administrative Officer and the Auditor-Controller to revise the Proposition A contracting guidelines to require that all new and all renewed contracts mandate the provision of basic health benefits.

CAO Recommendation (December 23, 1992):

Your Board instructed the Chief Administrative Officer (CAO) to revise the Proposition A contracting guidelines to require that all new and renewed contracts mandate the provision of basic health insurance. As you are aware, on July 2, 1992, the County Counsel issued the opinion (Attachment II) that this requirement is preempted by Federal statute, and implementation would subject the County to potential exposure for money damages or injunctive relief. County Counsel has indicated that the County could seek a ruling form the Department of Labor and will do so, if so instructed by your Board.

Board Action (January 28, 1993):

...instruct County Counsel to seek a ruling from the Department of Labor on the County's authority to mandate Proposition A contractors to provide health insurance to contract employees;...

Implementing Instruction (February 1, 1993):

County Counsel is in the process of requesting the Department of Labor to provide a ruling on the County's authority to mandate Proposition A contractors to provide health insurance to contract employees.

Discussion

This issue raises a legal question that, without advice of counsel, is beyond the capabilities of this Commission to address. However, we feel that the following general comments are appropriate:

a. The CAO Memo entitled Changes to the Proposition A Contracting Requirements, dated February 1, 1993, does not address what actions are required by departments concerning the mandate of health benefits for contract employees. This has the potential for creating confusion within departments since the Board direction on April 9, 1992 (above) required "that all new and all renewed contracts mandate the provision of basic health benefits."

b. If the Department of Labor rules that the County has the authority to mandate that Proposition A contractors provide health insurance to contract employees, it is not clear, without a significant analytical effort, what repercussions the implementation of this mandate would have on the economy of Los Angeles County, the budget of the County, contractors, employees of contractors, County employees, or the consumers of County services. Much of the evidence on contracting presented to date is anecdotal, with little hard data. This is particularly true in its application to the Los Angeles Area. Questions such as redundant health care coverage should be addressed to insure that any program or policy adopted is not only efficient, but effective in meeting the needs of those affected. In addition, a broad- based analysis of the consequences of requiring health insurance necessitates an appraisal of the anticipated health care reforms at both the Federal and state levels.

Historical precedent has demonstrated, in some cases rather dramatically and at great cost, that action without adequate analysis can result in the creation of additional problems not originally anticipated. This potential for significant costs to both individuals and organizations underscores the importance of such a review prior to the implementation of any contracting policy or program. It is also prudent budget management to compel the identification of the sources of funding prior to the adoption or modification of any program.

c. If the ruling from the Department of Labor does not permit mandating health benefits, it is possible that the Board's health concerns may be met in the near future, as pointed out above, by initiatives expected from the either the Federal or state governments. The Board should be made aware that any new Federal or state program in the field of health care will, in all likelihood, carry with it a cost and/or service level implications for the County and its citizens. As discussed above, it would be advisable for the County to analyze these effects, particularly funding, prior to implementing any revisions to contracting policy.

Recommendations

Commission Recommendations

1. Direct the Chief Administrative Officer to issue further instructions clarifying that until a ruling is received from the Department of Labor it is not now a requirement for departments to insure contractors provide health benefits to contract employees in Proposition A contracts.

2. Direct the Chief Administrative Officer, coordinating with the County Counsel and the Auditor-Controller, to provide the Board with an analysis of the economic, organizational and individual impacts of mandating basic health benefits. This analysis should be developed within the context of the Department of Labor ruling and any health reforms proposed and enacted by either the Federal or state governments.

Issue: STANDARD FORMAT FOR COST SAVINGS ANALYSIS

Board Direction (April 9, 1992):

2. Instruct the Auditor-Controller to develop a standard format that each Department shall use to summarize the cost savings analysis for proposed Proposition A contracts. The format should identify the actual personnel costs, supply costs and indirect costs that will be avoided through contracting. It should also include a comparison with the direct and any indirect costs, such as contract monitoring, employee retraining, etc., that will be incurred by contracting.

CAO Recommendation (December 23, 1992):

Your Board instructed the Auditor-Controller to develop a standard format for departments to use to summarize the cost savings analysis for all recommended Proposition A contracts. The Auditor-Controller sent their recommended format to each Board office (Attachment III) and all department heads were instructed that no Board letter recommending a Proposition A contract award would be placed on the agenda without it. In addition, my office has prepared a benefit comparison format (Attachment IV) which will also be required for all Proposition A Board letters, if your Board approves this letter.

Board Action (January 28, 1993):

...approve implementation of a benefit comparison format for all Proposition A contract awards, effective immediately;...

Implementing Instruction (February 1, 1993):

The Board instructed department heads to provide contract cost savings analysis and employee benefit comparisons for proposed Proposition A contract awards. Attached are the approved standardized formats that must be included in all Board letters requesting approval of Proposition A contracts. These are, the Comparison of Estimated Avoidable Costs to the Cost Contracting (Attachment I) and Contract Employee Wages and Benefits comparison (Attachment II). Proposition A Board letters, new and resolicitations, will not be placed on the agenda without them.

Discussion

General

It was demonstrated in discussions at the Board meeting on May 18, 1993, that the forms required per the February 1, 1993 CAO instructions will not respond to the needs of the Board, nor yield the details necessary to make an informed decision on the award of a contract. It was apparent that some of the participants in the process did not have any confidence in either the process or the resulting analysis. The consequence of this non-acceptance by the participants was a lengthy discussion during which the Board was placed in the position of conducting its own cost analysis.

Implementing Instructions

CAO Implementation Instructions state, "This memorandum summarizes the new requirements and provides the formats for the required reports." When actions are taken to revise the contracting process, as in this case with the addition of new forms, an explanation should be provided as to how the new form or process relates to the existing processes. If this discussion is not determined to be appropriate for the Countywide Contracting Manual, it should, as a minimum, be part of the implementing instructions.

The implementing instructions do not establish any procedures that would allow departments, employees or other interested parties to recommend modifications or improvements. Without procedure and encouragement to participate, the program fails to effectively utilize a vast amount of available talent and capability. This failure to employ existing expertise to uncover improvements leads to static policy and increasingly inefficient procedures.

Comparative Methodology

In the article, "Reducing Service Delivery Costs Through Public/Private Partnerships," the Chief Administrative Officer has stated:

Some argue that comparing only the county's avoidable costs to the private sector's total cost, including profit, is not an apples-to-apples comparison. However, that is not important. What is important is the integrity of the program and elected officials.

The Commission feels that developing an acceptable and accurate basis for comparison is not only important, but pivotal to the success of this endeavor. This methodology must be unbiased and complete to insure its acceptance.

It is generally recognized in the literature that a number of factors create structural difficulties for the development of the comparative methodology proposed above, for example, the comparability of governmental accounting to private sector accounting, the need for the private sector to show a profit, and the lack of a requirement for a government to pay taxes. Although it is clearly not easy to develop such a methodology, this difficulty does not negate the requirement. To claim that savings can not be quantified begs the question and significantly increases the subjectivity of the analysis. Without a meaningful comparative methodology the County is not able to make a fully informed decision on contracting as an operational alternative. Additionally, lack of an unbiased method of developing data frustrates many of the stake holders in contracting out and would likely discourage the private sector from aggressively bidding on contracts.

Qualitative Contract Benefits

The Auditor-Controller Contract Handbook states:

While qualitative factors will be of prime importance in certain situations, in most instances the evaluation process will center around quantitative considerations.

Although the Commission concurs with the statement that cost comparisons and potential savings are substantive elements in an evaluation, provision should be made in the analysis (forms) for those "certain situations" in which "qualitative factors will be of prime importance" to the decision-maker. Any process implemented to evaluate contracting alternatives must enable consideration of those elements of the analysis that may be of "prime importance in certain situations." Section 20-12.1.14 of the Countywide Contracting Manual which discusses what items are to be included in the Board letter recommending the award of a contract, does not establish any requirements for departments to consider "qualitative factors."

Comparison of Estimated Avoidable Costs to the Cost of Contracting Form

This form (Appendix C, Attachment I) has a number of opportunities for improvement. There is no reference as to the source of the data used. It does not provide any basis upon which any calculations have been made (since it does not follow the format specified in the Countywide Contracting Manual, it would be unwise to assume that the calculation methodology used in that document would apply to this form). It fails to present the data in as clear a manner as possible. Finally, it does not provide for the inclusion or existence of any supporting data. A revision of the form is needed to incorporate the following points.

a. There does not appear to be any stipulation in the procedures, in the documents reviewed, on the approved forms, or in County contracting publications for evaluating the value of continuing a program. The possibility that this procedure exists in another format does not justify its exclusion from this process, since it is during this process that the question must be considered. The implicit assumption that would have to be made by the decision-maker throughout this process is that the contract being reviewed has been evaluated and remains a viable priority for the County. This may or may not be true. If incorrect, this assumption may be costly in its application. Fiscal responsibility requires that this evaluation be undertaken prior to the award of a contract or to continuing a contract. The decision-maker must understand the conclusions of this evaluation. Assuming that the rationale for the existence of the program/function has been validated, how does the decision-maker resolve any questions on achieving further economies of scale through a possible modification, reduction or combinations.

b. This form is apparently designed to be used as an adjunct to the original documents and explanations required of departments in the Countywide Contracting Manual. If it is meant to supplement the current requirements, a question arises as to why the format currently required in Section 40 of the manual for conducting cost comparisons was not used. The format presented in the manual appears to be more complete, understandable and clearly reflective of the actual cost savings to be achieved. The introduction of an additional format, when it may not be necessary to do so, causes additional work and complexity for the contractor, the staff preparing these documents and for those required to use them in arriving at a decision. If there are legitimate reasons for using a different format it should be explained.

c. The cost comparison made on the adopted form does not discriminate between "one-time" and "ongoing" costs. For example, it is likely that there will be numerous "one-time" costs incurred by both the County and the contractor associated with bid preparation. In addition, significant "one-time" costs could result from the executive and managerial time required in the award of a contract. This cost would be particularly significant in those instances where contracting has major impacts upon existing staff. The termination of an in-house service may also involve a substantial "one-time" commitment.

The above examples, although perhaps critical to the success of the contract, are "one time" in nature. These are incremental costs because they are incurred as a result of the decision to contract and should be clearly identified as "one-time" in the cost comparison. Not identifying them could cause the cost comparison to be flawed, or at least, increase the potential for confusion on the part of the decision-maker. It may also lead to an incorrect application in a future cost comparison/evaluation. It is also possible that additional cost distortion may result by inappropriately incorporating "one-time" costs in an "annualized" cost comparison or as a result of being carried forward in the cost calculations involving contract renewal.

d. This form is designed to present a comparison of estimated avoidable costs over the life of the contract. Assuming that types of costs are differentiated as noted above, this is a reasonable approach in the aggregate, since it would even out the impact of any unusual costs in any one year. This approach is a recognition that cost savings may vary by period over the life of the contract. It could cause difficulty if the "estimated avoidable cost" amount were to be transferred to the "Estimated $" line on the "Contract Employee Wage and Benefit" Form. "Total contract cost" does not specify whether the amount is an "annualized" amount or the total cost over the life of this contract. The implication could be drawn that the cost is "annualized" since all other costs on this form are presented by period. "Annualized Savings" are also used in the "Report on How Proposition A Contracts are being Carried Out" Form. Inconsistency between forms may lead to confusion on the part of the preparer and/or the decision-maker or may result in an inappropriate transfer of data between forms.

e. The title of the line item "Estimated Savings From Contracting" presupposes that this analysis will result in savings. A more appropriate title would be "Estimated Savings (Loss) From Contracting." This change would also be consistent with the column titled "Cost Increase (Decrease) from Contracting." Even though the submission of this form presupposes that a savings would result, the use of the form in the original analysis of the contract should not presuppose a savings. Using this form in this manner could provide a potentially valuable historical resource in future cost evaluations.

f. A major consideration in the determination of the appropriateness of contracting is the level of risk involved and the distribution of that risk between the contracting parties. This is recognized in the Countywide Contracting Manual, Section 20-12.1.14.44, which states that the award board letter must include "A statement regarding any County tort liability implications of the proposed contracting, and the acceptability of the level of risk associated with such implications." (It is assumed that the party responsible for tort liability is to be also specified in the contract.) This statement does not specifically require an analysis of the costs associated with the transfer or retention of risk.

If a cost analysis is undertaken in determining the "liability implications" the resulting impacts should be identified in the "Comparison of Estimated Avoidable Costs to the Cost of Contracting" Form. If not addressed, the lack of cost information would cause such a statement to be less than adequate and would not have sufficiently covered the "liability implications." For example, in contracting for obstetric services the County, in the past, may have retained the liability. Although there may have been valid reasons for retaining this liability, the cost implications of this decision should be clearly identified and explicitly factored into the presentation to the Board. Conversely, if risk is to be transferred, then potential savings should also be identified. This information is not being provided or referenced on this form other than in the "Other" line item. The definition of "Other Avoidable Costs" in Section 40 of the Countywide Contracting Manual does not address the risk bonding, or insurance issues.

Attention should be paid to the cost implications of a decision to retain or transfer risk. Additionally, the degree to which risk is allocated may profoundly influence an evaluation of the acceptability of a contractor's financial condition and, thus, his/her ability to perform to the standards specified in the contract.

g. During the Board discussion on April 7, 1992, the following was stated, "It is imperative to ensure that Proposition A contracting results in true long term savings to the County and that savings achieved through contracting are not offset by increased costs to the County in other areas." Section 40-02 of the Countywide Contracting Manual defines the term "Costs in Other Departments' Budgets" as costs "which are budgeted in other department's budget." This term does not confront the possibility of an increase in costs to department A as a result of contracting on the part of department B. For example, a contract that would increase the capacity for the Sheriff to make arrests, could increase the need for prosecutions by the District Attorney, which, in turn, may result in an increased demand for the services of the Public Defender. It is not clear after reviewing the terms in the contracting manual and the content of the forms how such a cost would be categorized.

h. The terms "Other " and "Other (Specify)" are not consistent within this form. They are also not consistent with the term "Other Avoidable Costs" as presented in Section 40-02. This inconsistency, although perhaps not critical, may result in confusion on the part of the preparer or the decision-maker. If the definitions are to be the same, it is not clear why they are different on the form. If there is to be a difference it should be identified and included in the Countywide Contracting Manual for the reference of both the preparer and the user of this form.

i. The "Indirect" heading under the "Contract" Section of this form identifies those County costs that will be affected by the award of a contract. Because these costs are controllable by the County, the County has the ability to influence the outcome of this comparison. For example, the County determines the level of contract monitoring it wishes to institute, and thus, is able to increase or decrease the cost based upon what is determined to be a "desired" level. Costs of this nature should be defined in the Countywide Contracting Manual as objectively as possible to limit this capability and/or procedures should be established to determine how these amounts are to be calculated.

j. There are no provisions within the form to evaluate the revenue impacts associated with the award of a contract. Although discussed in the Countywide Contracting Manual, any summary of costs should include both the expenditure and the revenue side of the equation in establishing cost savings or loss. For example, the County may lose money when it contracts for programs which are partially or fully paid for by the state or Federal government. This happens if overhead costs, normally shared by funding agencies, are shifted to the County. In this case, program costs are reduced but overhead costs remain constant. This can result in reducing gross costs while increasing the net county cost.

k. Under contracting provisions presented in Section 10-03 of the Countywide Contracting Manual and in Code Section 2.121.280, subsection B, department heads are authorized to award a contract for services normally provided by a County department on their own authority for amounts up to $25,000 without going to the Board. To insure the fairness of this process the department providing the service must be given the opportunity to bid on the contract and the contracting department must have obtained at least three bids or proposals from independent contractors, one or more of which is lower than the bid or proposal submitted by the department normally providing the service. It would be a prudent management practice for the contracting department to undertake the same form of analysis as required in the award of a larger contract. Such an analysis may remain within the department, but would be available to support the contract award, if necessary, or as a basis for any future analysis.

l. The Countywide Contracting Manual, Section 10-04.56 states:

On subsequent contract awards, departments are no longer required to provide full cost effectiveness comparisons or to obtain prior Auditor-Controller approval if the specific service has been performed cost effectively under a prior contract.

How does a contracting department know that a "service has been performed cost effectively" if a cost analysis has not been undertaken? Conditions and situations change rapidly in the current economy and with technological advances. To continue either operations or contracting under conditions previously determined to be appropriate is not as cautious an approach to management as might be expected. These procedures may be particularly critical since the instruction "applies to all subsequent contract awards, including those over $1.0 million."

m. It is not clear from this form how the "Estimated Savings From Contracting" are to be used. Do the savings result in a reduction to the total departmental budget? Is the reduction made to a specific account, or are specific positions being eliminated? Since such savings would result in a revision to the submitted budget, it would seem to be appropriate to state how these savings were to be used. Such information would be useful, or perhaps critical, in reordering priorities within the program, department and/or the County.

n. County Code Section 2.121.390 states:

In making a recommendation for the award of a contract, the department recommending the award shall state in writing whether the contract will result in a reduction of county services, and if so, the extent of the reduction.

Section 20-12.14 which defines the information required in recommending the award of a contract does not require the statement specified in the Code. This is critical in evaluating the contract award to insure that comparisons are made based upon consistent service levels. Where these levels are changed the award recommendation should so specify.

Proposition A Contracting Contract Employee Wages & Benefits Form

This form (Appendix C, Attachment II) has been developed as a result of the Board's direction to "require that all new and all renewed contracts mandate the provision of basic health benefits." How this form is to be used and the objective(s) to be achieved by its use has not been made clear. The following comments are presented by sections identified within the form:

A. Introduction

This section duplicates the information provided in the "Comparison of Estimated Avoidable Costs to the Cost of Contracting" Form and is thus, redundant. If the "estimated $________" item were to be used, as mentioned above, would the amount be over the life of contract or annualized? In either case how would this amount relate to others on the form?

B. Comparison of Wages

The introduction of competition through the use of contracting to "provide a cost effective alternative to performing the work with County employees" is one of the objectives of the Contract Development Program (Countywide Contracting Manual, Section 10-02).

One way for contractors to become more competitive is to pay lower wages. This form requires a comparison between County and Contractor Wages. Such a comparison will indicate that the contractor is either higher or lower than the County, but it is not clear what will be done with this information once it is obtained. If the request is meant to imply that the County is defining an acceptable range for wages, the capability for the contractor to reduce costs through wages will be limited. If this is the case, it would follow that these criteria should be published for the use of contractors in the bidding process. If a range is to be defined for wages, will other line items on the "Comparison of Estimated Avoidable Costs to the Cost of Contracting" Form also indicate acceptable ranges? This does not appear to be the intent of the form since savings have been previously considered in the aggregate. What purpose is served in providing a comparison of wages? Since the purpose of this requirement is unclear, its clarification would appear to be advisable.

Other cost reduction possibilities are available to the contractor. The National Committee on Employment Policy (NCEP) in a 1989 study entitled Long-term Employment Implications of Privatization concluded that the ability of a contractor to bid a lower cost does not appear to come primarily from reductions in employee wages. Reductions in overhead, use of better equipment, and higher worker productivity had greater effect. Additionally, management efficiency was cited as having a significant effect on costs (See Figure 1 - Figure 1 showing how 32 contractors have been able to cut local service costs is available in hard copy from the EEC, Source: Partnership Focus, June 1990 p. 22).

It is evident that a comparison of "wages" as presented in this form would not be indicative of a contractor's ability to deliver the quality of service required by the County, and thus, the rationale for its presentation continues to remain undefined.

C. Contractor Employee Benefits

Benefit - This section does not provide a comparison between County and contractor. Since no comparison data are provided it is impossible to relate the benefits provided by the contractor to any other benefit package. What is the purpose of stating "benefits"? Without making a comparison to some "standard" it is difficult to determine what objective is to be accomplished by presenting this data. Even if some comparison data were presented, the County puts itself in the position again of potentially defining a range of acceptable benefits. The County might have to resolve such questions as the number of vacation days that would offset the lack of a dental plan. This approach entails an enormous amount of difficulty and confusion. Aside from this difficulty, the basic purpose for collecting this data is not clear. If the purpose is to establish a baseline of benefits from which decisions can be made concerning the health or other benefits provided, this format would not accomplish this objective.

Assuming that this information is necessary to establish whether benefits do or do not exist, the form fails to address any level of adequacy. For instance, identifying that a contractor has "Other" benefits says nothing, since the reader would not have any means of knowing what the "Other" benefits might be or what value they may have.

Contractor Health Plan Information - While this may be interesting information, as discussed above, the reason for collecting it or how it is to be used is not evident. More importantly to this discussion, the major portion of this form is inconsistent with a County Counsel opinion. This opinion issued on July 2, 1992 states:

County action short of mandating a specific level of health benefits, such as giving a preference to contractors who provide health benefit programs, would also be prohibited by the ERISA preemption since any action directly or indirectly relating to a benefit plan is preempted.

Since these instructions have been implemented and are required in any Board letter requesting approval of a Proposition A contract, it could be argued that this information is to be used to give "a preference to contractors who provide health benefit programs." Otherwise, how will this information be used?

Neither the objectives of the Contract Development Program or any other portion of the Countywide Contracting Manual address the issue of defining an acceptable level of health care benefits, or any other benefits, in evaluating a contract. For County management to evaluate benefits without agreement and direction from the Board that this is to be an objective of the program or for the Board to use this information in awarding a contract without a determination as to the legality of this action would not be a judicious course to pursue. If the Board wishes to make this objective a part of the program it should await the ruling from the Department of Labor.

It is not evident that the Board is aware that the actions taken to date have a number of serious ramifications, some of which appear to raise questions that could lead to potential litigation. The current course could significantly reduce the competitive nature of the contracting program due to the potential for meaningless increases in contracting costs and/or increased County costs in collecting and reporting information that has no defined objective or use. Unless considerable thought is given to this process the requirements placed upon both departments and contractors will increase costs and administrative requirements for no apparent purpose.

Recommendations:

Commission Recommendations

Implementing Instructions

3. Direct the Chief Administrative Officer, in coordination with the Auditor-Controller, to include in any implementing instructions and, as considered appropriate, in the Countywide Contracting Manual, an explanation as to how any proposed revision to the contracting process will impact current procedures.

4. Direct the Chief Administrative Officer, in conjunction with the Auditor-Controller and County Counsel, to revise the Countywide Contracting Manual and/or County Code to reflect implemented changes, those of this report adopted by the Board of Supervisors and any future changes as they are made.

5. Direct the Chief Administrative Officer to insure that all contracting instructions establish procedures to enable anyone, particularly County staff, the opportunity to suggest alternative means or methods to accomplish the objectives being sought and to actively encourage their participation.

Comparative Methodology

6. Direct the Chief Administrative Officer, in conjunction with the Auditor-Controller, to review the current contracting evaluation procedures to insure that the comparison between public and private program costs is unbiased, complete and communicated to all parties.

Qualitative Contract Benefits

7. Direct the Chief Administrative Officer, in coordination with the Auditor-Controller, to include in the Countywide Contracting Manual a requirement to provide a statement concerning qualitative impacts that may accrue as a result of awarding a contract.

Comparison of Estimated Avoidable Costs to the Cost of Contracting Form

8. Direct the Chief Administrative Officer, in coordination with the Auditor-Controller, to revise the approved "Comparison of Estimated Avoidable Costs to the Cost of Contracting" Form as follows:

a. Establish procedures within the evaluation of a Proposition A contract proposal that will establish a justification for the continuance of the program or activity.

b. Revise the approved cost comparison form to reflect the cost comparison approach currently used in the Countywide Contracting Manual.

c. Identify "one-time" costs, for example, start-up costs, associated within the evaluation of a proposed Proposition A contract to insure that these costs are appropriately accounted for over the lifetime of the contract.

d. Revise all adopted forms to enable comparisons of like costs.

e. Revise the title of the line item "Estimated Savings From Contracting" to "Estimated Savings (Loss) From Contracting."

f. Revise the Countywide Contracting Manual to include the requirement to identify both the costs associated with the allocation of risk within any Proposition A contract proposal and the ability of a contractor to financially accept that level of risk.

g. Revise the Countywide Contracting Manual and forms, as needed, to consider the possibility that in the course of analyzing the cost of the contracting alternative, costs to other departments may be affected.

h. The line items "Other" and "Other (Specify)" should be either consistent with the term "Other Avoidable Costs" as presented in the Countywide Contracting Manual or if "Other" and "Other (Specify)" are different from the definition presented in the Manual, these differences should be identified.

i. Define, in as objective a manner as possible, the term "indirect" costs as used on this form, and incorporate this definition in the Countywide Contracting Manual.

j. Revise the cost comparison form to accurately reflect the revenue impacts that may be associated with awarding a contract, for example, gain (loss) in Federal, state or grant funding.

k. Direct each department head to conduct the same form of analysis for any contracts awarded within his/her contracting authority as the one approved by the Board for large contracts.

l. Direct the Chief Administrative Officer to require that a department awarding subsequent contracts certify that the specific service has been performed cost effectively under the prior contract and that no circumstances have arisen that would negatively influence the contract cost.

m. Indicate on the form how the savings resulting from the contracting out will be used by the contracting program, department or County.

n. Direct the Chief Administrative to include in Section 20-12.14 of the Countywide Contracting Manual the statement on service levels as required in County Code Section 2.121.390.

Proposition A Contracting Contract Employee Wages & Benefits Form

9. Rescind the approval of the "Proposition A Contracting Contract Employee Wages & Benefits" Form until further analysis is undertaken to determine how this form contributes to the decision-making process and until a ruling is received from the Department of Labor on requiring contractors to provide health benefits.

Issue: DEPARTMENT HEAD EVALUATION OF SERVICES PROPOSED OR CONTRACTING

Board Direction (April 9, 1992):

3. Instruct each Department/District Head to present a cost savings analysis and an evaluation that details why equivalent cost savings can not be achieved with better County management practices, more efficient use of County personnel, technological improvements, or other means to reduce the cost of service proposed to be contracted.

4. Determine that no County Department/District Head shall recommend contracting out any function until the Department reports to the Board on how the County could perform that function more economically.

CAO Recommendation (December 23, 1992):

Your Board instructed department heads to explore cost efficiencies/productivity improvements that could be implemented to make a service proposed for contracting more economical prior to making a decision to contract out a function. Department heads were further instructed to provide a cost savings analysis and a report that details why equivalent cost savings cannot be achieved with better County management practices, more efficient use of County personnel, technological improvements, or other means to reduce service. This will push County managers to evaluate the edge private industry might have over County operations and determine if the County could, with reasonable effort, become more competitive.

Board Action (January 28, 1993):

...and instruct Department Heads, effective immediately, to provide a report to the Board on services proposed for contracting prior to issuing a Proposition A solicitation to evaluate if services could be performed more economically;...

Implementing Instruction (February 1, 1993):

The Board instructed department heads to explore cost efficiencies/productivity improvements that could be implemented to make a service proposed for contracting more economical prior to making a decision to contract out a function. Department heads were further instructed to provide a cost savings analysis and a report that details why equivalent cost savings cannot be achieved with better County management practice, more efficient use of County personnel, technological improvements, or other means to reduce the cost of the service. The department head's report on this must likewise be included in all Board letters requesting the award of a new Proposition A Contract.

Discussion

Proposition A allows the private sector to compete with the County, thus, introducing a competitive element to county government. Integral to this concept is that in-house providers are encouraged to improve their efficiency and effectiveness by bidding on providing a service, unless there are sound reasons to do otherwise. This provides a fair opportunity for County employees and can ensure the achievement of the best attainable foundation upon which other options will be assessed. Although this approach is valid, this purpose implies a lack of organizational process to routinely undertake this type of analysis and the lack of continuing incentives to make a department more efficient and effective. Contracting is only one tool. Those services not considered as a possibility for contracting should be analyzed just as closely for possible increases in efficiency and to determine the program effectiveness.

In the past, such an approach to contracting has produced substantial employee-initiated savings. Competition of this type can be used to stimulate new opportunities and markets, promote innovation and furnish incentives. The introduction of competition through the increased use of contracting can be a means of achieving the best combination of price and quality. It also gives County departments an incentive to improve their operations and competitive position before making a decision whether to contract out a function or activity.

The opportunity to review internal operations should instill within the department an increased concern for the mission of the organization and should place a much sharper focus on both the client's needs and the quality of service provided. A departmental review should evaluate the requirements for a service, costs, level of service, quality, and possible improvements in organizational effectiveness. Within this review process the department should ask itself whether fundamental changes would allow the strengths of the market place and the organization to be combined. Within the competitive bidding process departments can use the information gained through a self analysis to determine whether it is more efficient and economical to contract for services.

The department head's report on cost savings analysis is to be included "in all Board letters requesting the award of a new Proposition A Contract," but no instructions are given on whether this process is to be required in renewing a contract. Over the contract period circumstances will most likely have changed, thus making the contracting option more or less desirable. Unless some manner of review is conducted at the time of renewal this change may not become readily apparent to the contracting department. In this instance, the department may not be able to effectively consider additional costs or recognize and capitalize upon additional savings. Lack of analysis at this time may also reduce the incentive for the contractor to find alternative or additional cost savings or for the department to investigate opportunities for further organizational innovations.

The implementing instructions fail to describe the steps that would be necessary to properly evaluate a contract modification or to establish at what point such an analysis would be required. An assumption could be made that any evaluation of a modification would utilize the original cost analysis, but this comparison may have been invalidated as a result of actions or circumstances subsequent to the contract award.

Opportunities for performing a function more economically exist within all organizations. A significant aid in analyzing these opportunities lies in comparing the County with other counties or organizations of comparable size. In doing so a "measure of relative efficiency" can be established that would indicate whether the costs for delivering a particular service are at the high or low end of the "relative cost scale." The Board recognized the necessity for developing such a comparison during a discussion held on April 7, 1992 which stated: "Additionally, comparisons with private sector service providers should be encouraged to force a reexamination of the efficiency of County operations." Recognizing difficulties in comparing the public and private sectors or even, in comparing comparable organizations within the public sector, such a baseline can be of significant assistance in establishing the "relative efficiency" of any department's operations.

The 1987 Economy and Efficiency Commission Report on Contracting Policy in Los Angeles County Government states:

To take advantage of the incentive to improve technology and organization that results from competition, the County should focus its efforts on contracting for functions and services rather than on internal support labor.

The CAO stated in the Government Finance Review that "in 1988 the county took aim on its main mission activities." Since contracting opportunities for functions and services were recommended for exploration and the CAO said that "main mission activities" were being reviewed, it seems reasonable to present the results of this review to the Board for its consideration.

Ultimately, the County must institute an effective strategy to evaluate services being proposed for contracting. This strategy should address the matter through a coordination and integration of the following:

- The degree of reliance that the County wishes to place upon contractors,

- The means with which to effectively administer contracts,

- The oversight responsibilities of contract auditing, and

- The degree of executive attention to and accountability for contract management.

Recommendations:

Commission Recommendations

10. Direct the Chief Administrative Officer, in coordination with the Auditor-Controller, to develop a process that would assist department heads in analyzing opportunities for cost savings that are consistent with the factors identified in this report and,particularly, those presented in Figure #1, page 16.

11. Direct the Chief Administrative Officer, in coordination with the Auditor-Controller, to clarify the analytic requirements for renewing or modifying a contract, and include this clarification within the Countywide Contracting Manual.

12. Direct department heads, where possible, to develop public and/or private sector comparative performance data against which the efficiency of their operations can be measured.

13. Direct the Chief Administrative officer to report to the Board on contracting opportunities available within the "main mission activities" of departments as noted in the 1992 Government Finance Review article.

Issue: REPORT TO THE BOARD ON PROPOSITION A CONTRACTS

Board Direction (April 9, 1992):

5. Instruct each Department/District Head to report semi-annually, on how the terms of any contracts let under Proposition A are being carried out.

CAO Recommendation (December 23, 1992):

Your Board instructed department heads to report semi-annually on how the terms of any contracts executed under Proposition A are being carried out. In view of budget curtailments, especially to administrative staff, I recommend that departments report annually. This will still meet your Board's intent that departments routinely examine the effectiveness of their Proposition A contracts, but will also permit departments to focus more resources on the provision of services. The first report from departments heads will be due to this office by March 1, 1993. We will compile these reports and forward them to each Board office.

Board Action (January 28, 1993):

...also instruct department heads to submit annual reports on how the terms of any contract let under Proposition A are being carried out, the first report due to the Chief

Administrative Office by March 1, 1993, and instruct the Chief Administrative Officer to compile these reports for the Board;...

Implementing Instruction (February 1, 1993):

The Board instructed department heads to report annually on how the terms of any contracts executed under Proposition A are being carried out. The first annual report is due to this office March 1, 1993. Attachment III gives the requested format for this report which should be sent to your Chief Administrative Office (CAO) analyst. My office will forward a compiled report to each Board office.

Discussion

That things always collapse into the status quo ante three weeks after a drive is over, everybody knows and apparently expects...And yet many managements fail to draw the obvious conclusion...

------- Peter F.Drucker.

General

In January 1993, OMB Director Leon Panetta testifying before a Congressional Committee stated:

The whole contracting out issue scares me in terms of the kinds of operations that go on with people who don't follow up, who don't require certain objectives be achieved, who don't oversee these contracts when they are implemented.

The concerns articulated by Mr. Panetta must be recognized and acted upon by County management to insure that this program is effectively carried out. Insuring that both the letter and the intent of any directives are forcefully implemented, will govern the ultimate success or failure of the contracting program.

An analysis of the contracting issue raises questions that are fundamental to the mission and the role of government. Using an annual report to analyze the fundamental operations of the program may require an across the board review of operations in conjunction with a fundamental review of programs. It is possible that the transfer of service levels or funding can significantly affect the mix of organizational responsibilities.

An annual report should address contract and departmental performance in terms of service standards to complement financial reporting. It should be used in monitoring, over time, changes in the value and rates of contract cost increases and time extensions, for analyzing contract administrative work loads, and for identifying specific contracts or types of contracts for a more detailed review. Such a review should identify the reasons for any cost or time increases. It would be of significant assistance in minimizing County vulnerability to fraud, waste, and abuse.

Objectives

It is important that any report on contract performance address not only the specific measurement criteria (objectives) defined within the contract, but also how well that contract responded to the overall program goals established by the Board. An evaluation of both sets of goals would provide the Board with the clearest basis upon which to measure the economies to be gained by contracting this service and the efficiencies to be gained in the further development of the Countywide Contracting Program.

Available Data

For the most part, the data on contracting available within Los Angeles County seems to be based upon anecdotal or dated evidence. With limited data as to the specific impacts of contracting, it is difficult, if not impossible, to make any meaningful generalizations or to draw an objective conclusions as to its value in a given program. Improved availability of data, based upon information provided in an annual report, would enable an effective investigation of contract performance. It would also provide a base line from which to ascertain any deterioration in the quality of service or the extent to which there is a quality/price trade off from contracting out. At a minimum, records should be kept to substantiate savings claims, identify cost overruns and/or recognize any revenue losses.

Performance Indicators

Section 50-02 of the Countywide Contracting Manual states:

The key to an effective Quality Assurance Monitoring Plan is explicitly worded contracts. Contracts must specify quantifiable goals and objectives and the methods for assessing contractor's compliance with contract requirements. Specific performance indicators and standards must be written into the contract so that measurable outputs are identified.

To assist in formulating these performance indicators, councils or groups composed of potential contractors or customers, or when available present advisory bodies, could be used to produce a statement on what type and level of service are appropriate, or what standards of service are acceptable. The use of a Contract Services Advisory Committee of business, labor and public service representatives similar to the one formulated in 1979 may be advisable. The stated purpose of this group would be to ensure that the government is delivering economical and efficient contract services which are meeting citizens' requirements. Such action would indicate a willingness on the part of the County to make clear what standards of service the public can expect.

The increased use of consultative committees and/or surveys would provide feedback on the public response to services as customers. With this information the participating organizations would also help to develop a system of performance evaluation that it is both accurate and "user-friendly." This approach also has the advantage of involving community organizations and facilitating their commitment to the operations of their government. Participants would agreed to serve for sufficient time to establish a comprehensive set of standards.

The type of questions to be addressed by these groups may be:

- Are there any differences associated with individual departments or types of contract management?

- Is there a quality/price trade-off?

- Does the quality of service being contracted rise or fall, and if so, at what rate?

- What happens when a system of well defined performance standards is introduced?

Any indicators developed as a result of this review should be used in identifying contract performance and as a basis for corrective action.

Report On How Proposition A Contracts Are Being Carried Out Form

Any analysis of a program would normally include a description of the resources committed to furnishing a particular service(s). This data would be used to establish a basis for comparing performance: for example, the labor required to successfully complete the task. In addition, an analysis of this type would include a discussion of the outputs, defined in terms of the level of goods or services produced or purchased: for example, the number of patients treated. These items, although important, fail to consider the most critical element of an analysis, which is how well the contract has achieved the desired impact(s) within the community: for example, the objective of a health program is not necessarily to maximize the number of patients treated, but to improve the overall health of the population. This approach places a greater emphasis on a clear enumeration of the desired results: assessment of how quality is to be measured together with a definition of the quality required; possible innovation in the service delivery; assessment of the program effectiveness relative to the desired outcomes, and independent and objective monitoring of performance of the contract.

The following comments address how this form (Appendix C, Attachment III) would better achieve the requirements of an effective program evaluation.

a. The column entitled "Contractor/Contract No./Award Date" would be enhanced if it were to also include "the term of the contract." By including the term the reader would know when the contract was to be concluded, renegotiated, or rebid. It would also enable the calculation of the total contract savings by multiplying the "term" by the "Annualized Savings" column. This amount should equal the "estimated savings from contracting" presented on the "Comparison of Estimated Avoidable Costs to the Cost of Contracting" Form. In those instances where the savings are not the same, the form should make provision for explaining why a difference exists. By comparing the "Award Date" with the "term" the percentage of completion could be calculated. This calculation would also give the reader some means of determining the rate at which the contract is progressing. It would also provide a means of cross-checking the process statement(s) made in the "Compliance" prior to contract completion.

b. The column entitled "Budgeted Positions Eliminated or Avoided" apparently refers to the budgetary impact identified during the original contracting analysis. Although this information has significant value in determining the appropriateness of the original contract, as the contract progresses the value of knowing the original impact upon positions diminishes. What takes on greater importance is the potential impact(s) of continuing or not continuing the contract. Situations change and there is a good possibility that the impact(s) could increase or decrease over time. It would be more cautious to consider current/future impacts. If it is incorrect to assume that this form uses original impact data, then an explanation of what data is to be used by the preparer will be necessary.

c. On this form "Budgeted Positions" should represent positions (hard dollars) that are actually lost in the budgeting process. The determination of the impact of "Avoided Positions" is considerably more subjective (soft dollars) since the level lies in management's determination of their need, and thus, their avoidance. Saving has a greater budgetary impact than not spending. By combining these terms an important distinction is lost.

d. The primary savings from contracting a service is presumably achieved by a reduction in the number of required positions. More specifically, one would anticipate a reduction in the number of positions that are providing the service in question. This form uses "positions eliminated" without reference to any particular program or functional positions. To improve managerial accountability the form should indicate the positions eliminated within a specific program. If this were not the case, reductions could possibly be made from unfilled positions established to provide other services. The positions remaining in the program being reduced would duplicate the service being provided by the contractor and the eliminated unfilled positions would, presumably, reduce the required service level of another function. If another function could absorb a reduction, it should be done, notwithstanding any actions taken elsewhere.

e. It is not clear from this form whether the amount to be included in the "Annualized Savings" is the projected savings from the original analysis or whether it is to be actual savings based upon an annual evaluation of savings. Assuming that this amount is an actual savings, there is no comparison between this column and the line item titled "Estimated Savings from Contracting" on the form entitled "Comparison of Estimated Avoidable Costs to the Cost of Contracting." Thus, it could not be determined whether the savings presented in this form are greater or less than the projected savings upon which the initial contracting determination was made. A comparison between projected and actual savings is important since in a rebidding of the contract the bid price may change. This change may be indicative of the contractor's initial lack of experience in bidding on a particular project or it might reflect the intent of the contractor to offer a low initial bid to develop a relationship with the County for future work.

f. "Annualized Savings" does not indicate total savings as a result of contracting without extrapolating that amount based upon the inclusion of "term of contract," as suggested previously. This is important since the "Comparison of Estimated Avoidable Costs to the Cost of Contracting" Form uses "Estimated Savings From Contracting" as the basis upon which to recommend the contract award.

g. Accepting that this form is designed to provide a summarized statement on the contractor's compliance, the column titled "Compliance with Contract Terms/Expectations" may, in a limited fashion, accomplish this requirement. What both the reader and the preparer of this form must realize is that a "Yes" statement should come from a detailed analysis of the performance indicators and standards to arrive at this determination. Conversely, a "No" statement would require not just a "Comment", but an enumeration of those areas in which the performance indicators or standards were not met. This would probably require a considerable amount of space, relegating the "Comments" section to referencing attached sheet(s) for explanation of the comment. If attachments were not included there is some question as to what "Comments" could be made that would provide any meaningful information.

h. It is unclear what value the inclusion of "Expectations" has in the title of the "Compliance with Contract Terms/Expectations" column. The term implies that the preparer could or should make some determination on how the contract is being carried out. Such a determination would probably be made on a subjective level since all of the objective criteria of performance indicators and standards would have been established during the contracting process. This type of evaluation should be identified as subjective and the person making the statements should be identified. If, on the other hand, the intent of "Expectations" is to evaluate how well the contract objectives were accomplished, it is not clear why the "objectives" or "performance measures" defined in the contract were not used. This presentation would establish greater consistency and understanding. In either case, is not clear why this term was included since "Compliance" would presumably encompass all of the information required in a summary document of this nature.

i. This form does not enable the decision-maker to make any determination concerning the expenditures of any contract as a percentage of the total contract expenditures within the department and program. The lack of ability to make these comparisons could be of consequence when considering this contract expenditure relative to others within the department, the budgetary impacts of this or other contracting expenditures or as information supporting departmental or county program prioritization.

Recommendations:

Commission Recommendations

Objectives

14. Direct the Chief Administrative Officer, in coordination with the Auditor-Controller, to insure that the required annual report includes an evaluation of the performance of the contract(s) and how the contract has impacted the performance of the entire department using, to the extent possible, measurements of improvement based upon simple statistical tools. This report should be timed to coincide with the department's "Final Report on Target Achievement" currently required by the County.

Performance Indicators

15. Direct the Chief Administrative Officer to consider formation of advisory bodies or use of existing bodies to develop a Statement of Service Quality for each category of service being contracted and to advise the County on the implementation of its policy. This should be accomplished by:

- monitoring implementation;

- evaluating the achievement of contracting objectives; and,

- developing contracting policy recommendations.

Report On How Proposition A Contracts Are Being Carried Out Form

16. Direct the Chief Administrative Officer, in coordination with the Auditor-Controller, to revise the approved "Report on how Proposition A Contracts are Being Carried Out" Form as follows:

a. Include "Term of Contract" in the "Contractor" column and make provisions within the form to explain any differences between the original estimated savings and those determined to be applicable as of the submission of this form.

b. Revise instructions for the "Budgeted Positions" column to clarify for the preparer that the current/future impact of continuing or not continuing a contract is to be used.

c. Revise "Budgeted Positions" column to reflect the difference between "hard dollar" savings and "soft dollar" savings by changing "or" to "and."

d. Revise "Budgeted Positions" column to reflect the elimination of positions within the reduced program, not from the total positions budgeted within the department.

e. Clarify that "Annualized Savings" are actual savings and present the information so it is easily comparable with the projected savings from the original analysis.

f. Incorporate a "Total Savings" column for ease of comparison with the line item "Estimated Savings From Contracting."

g. Revise "Compliance" column to insure that it is clear that any statement made here is based upon an analysis of contracting detail. Make provisions within the form for attaching detail, where necessary, particularly when addressing the requirements established for determining compliance.

h. Eliminate "Expectations" from the title of the "Compliance" column.

i. Include contract costs as a percentage of the total contract expenditures within both the department and the program.

Issue: PERFORMANCE-BASED PAY EVALUATION GUIDELINES

6. Determine that pay-for-performance participants shall not be rated on the basis of how many Proposition A contracts have been awarded, but on the basic management functions of the position.

CAO Recommendation (December 23, 1992):

Your Board instructed that Performance-Based Pay (PBP) participants shall not be rated on the basis of how many Proposition A contract have been awarded, but on basic management functions of the position. While this has always been the case, it had been clarified by modification to PBP rating forms.

Board Action (January 28, 1993):

No Board action required.

Implementing Instruction (February 1, 1993):

The Board instructed that PBP participants shall not be rated on the basis of how many Proposition A contracts have been awarded, but on basic management functions. While this has always been the case, the PBP rating form has been modified to clarify this.

Discussion

Regardless of the system used for evaluating the performance of management in contract performance, it must be made clear that the organization awarding the contract will always remain accountable for engaging a contractor and for monitoring the contractor's performance. The book Reinventing Government, How the Entrepreneurial Spirit Is Transforming the Public Sector from the Schoolhouse to Statehouse, City Hall to the Pentagon addressed this issue from a slightly different approach, that the responsibility for governing can not be abrogated.

Services can be contracted out or turned over to the private sector. But Governance cannot. We can privatize discrete steering functions, but not the overall process of governance. If we did, we would have no mechanism by which to make collective decisions, no way to set the rules of the marketplace, no means to enforce behavior. We would lose all sense of equity and altruism: services that could not generate a profit, whether housing for the homeless or health care for the poor, would barely exist.

It is clear that the contracting alternative should not be considered an avenue for transferring the responsibility for governance, the ultimate program accountability, or for abrogating key management responsibilities. Thus, it is evident that effective planning for the award of a contract is as important as oversight of contractors' costs and performance.

A June 1980 study prepared by UCLA School of Management in conjunction with the Economy and Efficiency Commission entitled Contracting with Private Firms Under Proposition A: Some Issues for Los Angeles County states:

However, individuals, not departments, must be motivated for change to take place. The County should attempt to institute a system of significant personal rewards to employees who provide cost savings to the County. These incentives must be formally adopted, widely believed and uniformly implemented.

It is evident that the benefits of contracting can only be achieved through the commitment of management to insure that the desired objectives are being reached or achieved. Good contract management and administration encompasses all of the activities associated with the performance of the contract, from the decision to issue a request for proposal through contract completion.

Although correctly recognizing that Performance Based Pay (PBP) should not be based upon the number of contracts awarded, The Board reaffirmed its compensation policy by the action taken to base this evaluation upon the vague term of "basic management functions." What the Board action did not stress was how well the manager's actions contributed to the achievement of the contract objectives and cost savings goals. A more effective evaluation of managers would be achieved by having the action state "but on how well the measurable objectives established within the contract have been achieved."

Adoption of this approach emphasizes that each contracting manager must clearly define objectives within the contract and, in so doing, establish the criteria against which the success of both the contractor and the manager will be measured. Section 50-02.1 of the Countywide Contracting Manual supports this by stating, "Contracts must specify quantifiable goals and objectives and the methods for assessing contractor's compliance with contract requirements." It is also supported in Section 50-02.2 of this manual which states, "Contract monitoring is a process of evaluating contractor performance based on measurable service outputs."

The Chief Administrative Officer states in his implementing instructions that PBP participants have always been rated on how well they have performed their "basic management functions", but it is evident that confusion has arisen as to the basis of this evaluation. This confusion may be explained by considering Section 10-04.2 of the Countywide Contracting Manual which states:

The Board of Supervisors has adopted a program of merit pay for Department Heads as an incentive for continued high performance standards. Application of this policy for departmental contracting efforts compared to a target level would help insure that the County obtains a maximum effort in this program.

In stating that a comparison is to be made to a "target level" the implication can be drawn that a desirable level of contracting has been established. Under these circumstances a manager would have the incentive to reach this level and thus, would have an incentive to award the "target level" of Proposition A contracts.

The solution to this difficulty has been to revise the "Department Head Performance Agreement and Evaluation" Form (Appendix E) by changing a line item within that form from "Contributes to Achievement of Contracting/Productivity Results" to "Contributes to Achievement of Productivity Results." Considering the premise presented above, it would more effective to ask, "Did this manager achieve the objectives of the contracts for which he/she was responsible?" and "Did the accomplishment of these objectives meaningfully improve the efficiency and effectiveness of the department?" This approach would comply with the intent of the Countywide Contracting Manual, effectively respond to the requirements of the Board action on the (PBP) program taken on April 28, 1992, and would be consistent with the 1987 Commission Report on Contracting Policy in Los Angeles County Government. In this action the Board recognized that department heads achievement should be based upon measurements of improvement using simple statistical tools.

The changes required to insure that management understands the policy to be implemented lie not only in a revision to the PBP rating form, and to a corresponding revision to the Countywide Contracting Manual. The revision to this manual should be for informational purposes with the primary discussion of this issue in the appropriate County document discussing the policy and procedures of the Performance Based Pay Plan.

Recommendations:

Commission Recommendations

17. Direct the Chief Administrative Officer to issue a clarification to his instructions to state that performance evaluations in the area of contract management will be based upon the degree to which the measurable objectives of the contract have been achieved.

18. Direct the Chief Administrative Officer to revise the appropriate Performance Based Pay documents and, as necessary, the Countywide Contracting Manual to reflect the intent of the Board's action to recognize a manager's performance on the basis of the degree to which the objectives of the contract have been achieved in pursuing the optimization of service delivery systems over time.

19. Direct the Chief Administrative Office to revise the "Department Head Performance Agreement and Evaluation" form to answer the following questions "Did this manager achieve the objectives of the contracts for which he/she was responsible?" and "Did the accomplishment of these objectives meaningfully improve the efficiency and effectiveness of the unit, program or department?"

Issue: COST EFFECTIVE CONTRACTING

Board Direction (April 9, 1992):

7. Determine that contracting-out proposals shall be both cost effective and feasible.

CAO Recommendation (December 23, 1992):

The County Charter currently permits your Board to contract for services when the work can be performed more economically or feasibly by independent contractors. Based on your Board's instruction that all Proposition A contracts be cost effective, County Counsel has prepared the required ordinance changes (Attachment I) to delete the feasibility option from the County Code, although it is still provided in the Charter.

Board Action (January 28, 1993):

...also introduce, waive reading and place on agenda for adoption an ordinance amending the County Code, Title 2 - Administration, to eliminate the authority to award a contract based solely on a finding that the services can be performed more feasibly by an independent contractors.

Implementing Instruction (February 1, 1993):

The Board approved ordinance changes to delete the option to award a Proposition A contract based solely on feasibility. Board letters requesting award of a Proposition A contract must show cost effectiveness in all cases.

Discussion

The Commission supports the concept that the award of a Proposition A contract should be made upon a cost effectiveness basis to provide cost savings and as stated in recommendation #10. As suggested in this recommendation, departments should develop a method(s) to meet the cost savings objectives established by the Board and that will ensure a systematic approach in identifying those activities most appropriate for contracting. This strategy should provide for a progressive review of all the department's functions and could be integrated with other planned reviews and initiatives. Using this approach will facilitate the understanding of how different activities interrelate.

The problem of focusing solely upon the cost effectiveness approach has been mentioned in previous discussion and is pointed out in Recommendation #6 and #7. The need to use other measures in measuring the effectiveness can not and should not be ignored.

Recommendations:

Commission Recommendations

Refer to Recommendations #6, #7, and #10.

Issue: IMPLEMENTATION

Board Direction (April 9, 1992):

8. Instruct County Counsel and the Chief Administrative Officer to prepare the appropriate language and ordinance amendment to implement the aforementioned recommendations.

Discussion

The implementing instructions have been reviewed in each of the above sections.


IMPACT/POLICY

Contracting profoundly influences citizens, elected officials, county administrators, department heads, employees and contractors. The Board may find it necessary to resolve a conflict between its responsibility to these individuals and organizations with its fiduciary responsibility to the community to provide services in the most cost efficient manner possible. A coherent and well presented policy is essential for the management of a viable contracting program. Each affected group should be given an opportunity to contribute to the development of a county contracting policy. Any future contract proposal should then be thoroughly evaluated against that policy. Without an understandable and agreed upon policy in place, critical program design decisions will be made, not using policy or even performance criteria, but rather using limited survey and/or anecdotal information. The actions being reviewed in this report should be considered within the larger context of the County's role as an employer and buyer of goods and services in the region. Such an understanding will meaningfully assist in establishing an effective public policy towards contracting of government services.

In April 1991, the Service Employees International Union (SEIU), Local 660 and the Coalition to Stop Contracting Out (CSCO) prepared a report entitled The Public Cost of Private Contracting, A Review of the Los Angeles County Proposition A "Privatization" Program. This report cited a number of reservations about contracting policy within Los Angeles County. Among the concerns expressed was that "Privatization is increasing the demand for County services, thereby increasing the costs of private contracting." Questions have also been raised by other organizations, including the International City Managers Association (ICMA), the National Committee on Employment Policy (NCEP), the Wisconsin Policy Research Institute, the Reason Foundation, the U.S. Office of Management and Budget (OMB) and the U.S. General Accounting Office (GAO). From the evidence presented in the body of work of these organizations, it is clear that the County has a responsibility to consider a broad range of impacts in the establishment of an effective County contracting policy.

The Economy and Efficiency Commission Report on Contracting Policy in Los Angeles County Government issued in August 1987, recommended that the "Board of Supervisors direct the Chief Administrative Officer to develop and implement new contracting goals and programs...." Although this recommendation was addressed by the County and the action taken is described in Section 10-04.4 of the Countywide Contracting Manual, recent events affirm that recognition and concurrence with, the goals as presented in this manual are lacking.

Per the Countywide Contracting Manual, Section 10-02, the three basic goals of the Contract Development Program are to:

- Maintain essential program service levels at reduced costs.

- Identify program areas in which contracting with the private sector provides a cost effective alternative to performing the work with County employees.

- Significantly reduce the County work force by contracting with the private sector at reduced costs.

Additionally, barriers to contracting are being reduced through increased attention to the need to:

- Reduce or eliminate the need for layoffs.

- Avoid impact on minorities and other protected groups.

- Expand on reassignment and retraining efforts.

- Require contractor commitments to hire displaced employees.

Although the objectives are presented, the follow-on statements concerning "barriers" may cause confusion as to how this "increased attention" may be addressed or on how potential conflicts between a goal and "barriers" might be resolved: for example, how is the objective of "reduce the County work force" implemented relative to "avoid impact on minorities and other protected groups"? There also seems to be confusion on the part of the Board and County management as to the application of the goals as presented. Is each goal equally important? Since recent Board discussions have focused almost exclusively upon cost, the implication is that cost is the most important. If this is the primary focus, then it should be so stated in the goals and the others modified accordingly. If not, or other considerations are of equal concern, then this should also be indicated.

The problem of not having clear objectives can be demonstrated in the SEIU Local 660/CSCO report. SEIU/CSCO stated, "5,000 - 7,000 decent paying civil service jobs have been converted to low-wage 'working poor' jobs." Since the "primary goal" of the contracting program is to "to significantly reduce the County work force" with increased "attention" given to the potential impact upon minorities, how would the County be able to respond to the issue raised above? The implication could be drawn that the issue of minority impact would modify the original goals by adding further requirements for "increased attention." In this case, the application of such a policy by County management becomes more subjective and open to criticism. Until the Board clarifies its intent for the Contracting Program, this type of criticism will continue. Without clear direction as to how to implement this program, management is inappropriately placed in the position of interpreting the desires of the Board.

In order for County administration to effectively manage and monitor a contracting program the objectives of the program must be clearly stated and understood by all parties involved. This concept is presented in the Countywide Contracting Manual, Section 50, Monitoring. In order that a contract "specify quantifiable goals and objectives and the methods for assessing contractor's compliance with contract requirements," the specific "goals and objectives" of the contract must conform to the overall objectives of the contracting program. It is within the confines of these overall program goals that the contract must be formulated.

Recommendations:

Commission Recommendation

20. Direct the Chief Administrative Officer, to authorize a study to determine the economic role of the County as an employer and buyer of goods and services in the region.

21. Direct that the economic role of the County be reviewed annually, concurrent with the annual report on contracting, so as to reflect the impacts identified in other available data.

22. Direct the Chief Administrative Officer, in coordination with the Auditor-Controller, to recommend to the Board a clearly defined set of objectives for the Contract Development Program.

23. Direct the Chief Administrative Officer to conduct a review of the Contracting Program periodically, and at a minimum biannually, in order to insure that all requirements of the process are integrated, that the policy is consistent, and that the objectives of the program are being achieved.

24. Direct the Chief Administrative Officer to provide the Economy and Efficiency Commission with informational copies of any documents produced as a result of these recommendations.


CONCLUSION

The problems and difficulties that have been identified by this report are not unique. Previous reports by the 1982-83, 1984-85, and 1986-87 Grand Juries, the Contract Advisory Committee, the Commission on California State Government Organization and Economy (Little Hoover Commission), the UCLA Field Study Team and the 1987 report of the Economy and Efficiency Commission have all made contributions to improving the contracting process. Revising this process is obviously not an easy task, but given the amount of money that could potentially be saved, choosing not to take action on recommendations from so many agencies is potentially an extravagant waste of public funds.


BIBLIOGRAPHY

Bloodgood, Mark H., Auditor Controller, Los Angeles County, Auditor- Controller Contract Handbook.

County of Los Angeles, Countywide Contracting Manual; Revised March 30, 1990.

Dixon, Richard, Reducing Service Delivery Costs Through Public/Private Partnerships, Government Finance Review, June 1992. pp. 31-33.

Economy and Efficiency Commission Task Force on Contracting Policy, Report on Contracting Policy in Los Angeles County Government; August, 1987.

Hall, Christine and Domberger, Somin, Competitive Tendering and Contracting Out; Case Study, Competitive Tendering for Domestic Services: A Comparative Study of Three Hospitals in New South Wales; Graduate School of Business, The University of Sydney and The Office of Public Management, New South Wales Premier's Department, Australia; September, 1992.

Kyle, et al., The Public Cost of Private Contracting: A Review of the Los Angeles County Proposition A "Privatization" Program; The Service Employees International Union Local 660 and the Coalition to Stop Contracting Out; April 1991.

Office of Public Management, New South Wales Premier's Department, Competitive Tendering and Contracting Out; The Government as Purchaser, Australia; September, 1992.

Office of Public Management, New South Wales Premier's Department, Competitive Tendering and Contracting Out; Guidelines, Australia; September, 1992.

Office of Public Management, New South Wales Premier's Department, Competitive Tendering and Contracting Out; Costing Guidelines, Australia; 1992.

Oliver, et al., Contracting With Private Firms Under Proposition A: Some Issues for Los Angeles County.; Graduate School of Management, University of Southern California and The Economy and Efficiency Commission; June, 1980.

Osborne and Gaebler, Reinventing Government, Addison Wesley, 1992.

Peach, J. Dexter, Federal Contracting - Cost Effective Contract Management Requires Sustained Commitment, Government Accounting Office; Testimony before the Congressional Subcommittee on Oversight and Investigations, Committee on Energy and Commerce; Thursday, December 3, 1992.

Reason Foundation, Privatization 1991; Fifth Annual Report on Privatization; A Comprehensive Report on Privatization of Government Assets, Enterprises, and Public Services, 1991.

Stainback, John, Designing Comprehensive Privatization Programs for Cities; Reason Foundation; February, 1993.


APPENDIX A

BOARD ORDER DIRECTING A REVIEW
AND REPORT ON PROPOSITIONA CONTRACTING GUIDELINES.

MINUTES OF THE BOARD OF SUPERVISORS
COUNTY OF LOS ANGELES, STATE OF CALIFORNIA

Larry J. Monteilh, Executive Officer
Clerk of the Board of Supervisors
383 Hall of Administration
Los Angeles, California 90012

All Department/District Heads and Presiding Judges

At its meeting held April 9, 1992, the Board took the following action:

14.

The following matter was called up for consideration:

Supervisor Molina's recommendation to instruct the Chief Administrative Officer and the Auditor-Controller to revise the Proposition A contracting guidelines, to require that all new and renewed contracts mandate the provision of basic health benefits at a level equivalent to those provided to County employees in comparable positions; also instruct the Auditor-Controller to develop a standard format that each Department shall use to summarize the cost savings analysis for Proposed Proposition A contracts, identifying the actual personnel costs, supply costs and indirect costs that will be avoided through contracting, including a comparison with the direct and any indirect costs, such as contract monitoring, employee retraining, etc., that will be incurred by contracting; and instruct each Department/District Head to present its cost savings analysis and an evaluation that details why equ9ivalent cost savings cannot be achieved with better County management practices, more efficient use of County personnel, technological improvements, or other means to reduce the cost of service proposed to be contracted.

Interested persons addressed the Board.

After discussion, Supervisor Antonovich made a motion, seconded by Supervisor Dana, that the Board:

Said motion failed to carry by the following vote: Ayes: Supervisors Antonovich and Dana; Noes: Supervisors Molina Hahn and Edelman.

Supervisor Molina made a motion, seconded by Supervisor Edelman, that the Board take the following actions:

  1. Instruct the Chief Administrative Officer and the Auditor-Controller to revise the Proposition A contracting guidelines to require that all new and all renewed contracts mandate the provision of basic health benefits;

  2. Instruct the Auditor-Controller to develop a standard format that each Department shall use to summarize the cost savings analysis for proposed Proposition A contracts. The format should identify the actual personnel costs, supply costs and indirect costs that will be avoided through contracting. It should also include a comparison with the direct and any indirect costs, such as contract monitoring, employee retraining, etc., that will be incurred by contracting; and

  3. Instruct each Department/District Head to present a cost savings analysis and an evaluation that details why equivalent cost savings cannot be achieved with better County management practices, more efficient use of County personnel, technological improvements, or other means to reduce the cost of service proposed to be contracted.

Supervisor Edelman offered an amendment to add the following to Supervisor Molina's motion:

Supervisor Molina accepted Supervisor Edelman's amendment, and her motion, as amended, was adopted by the following vote: Ayes: Supervisors Molina, Hahn, Edelman and Dana; Noes: Supervisor Antonovich.

On motion of Supervisor Antonovich, seconded by Supervisor Hahn, unanimously carried, the aforementioned adopted actions were referred to the Los Angeles County Citizens Economy and Efficiency Co~missionfora-review and report.

30409-3.com

Copies distributed: Each Supervisor

Letter sent to:

Chairperson, Los Angeles County
Citizens Economy and Efficiency Commission




APPENDIX B

APPROVED 1978 PROPOSITION A CHARTER

 

Charter of the Los Angeles County

Article IX

Sec. 44.7. Nothing in this Article shall prevent the County, when the Board of Supervisors finds that work can more economically or feasibly be performed by independent contractors, from entering into contracts for the performance of such work. The Board of Supervisors shall adopt an ordinance specifying criteria for entering into contracts, and specifying competitive bidding procedures for the award of such contracts.*

*NOTE: The Board of Supervisors has mended the ordinance to delete the feasibility option from the County Code, although it is still provided in the Charter.




APPENDIX C

CAO MEMO, FEBRUARY 1, 1993, CHANGES TO THE PROPOSITION A
CONTRACTING REQUIREMENTS



COUNTY OF LOS ANGELES
CHIEF ADMINISTRATIVE OFFICE
713 HALL OF ADMINISTRATION / LOS ANGELES, CALIFORNIA 90012
974-1101

RICHARD B. DIXON
CHIEF ADMINISTRATIVE OFFICER


February 1, 1993


To: All Department Heads

From: Richard B. Dixon, Chief Administrative Officer

Subject: CHANGES TO THE PROPOSITION A CONTRACTING REQUIREMENTS

On January 28, 1993, the Board of Supervisors approved a number of changes to the Proposition A contracting requirements. This memorandum summarizes the new requirements and provides the formats for the required reports.

Standard Formats for Cost Savings Analysis and Benefit Comparison

The Board instructed department heads to provide contract cost savings analyses and employee benefit comparisons for proposed Proposition A contract awards. Attached are the approved standardized formats that must be included in all Board letters requesting approval of Proposition A contracts. These are, the Comparison of Estimated Avoidable Costs to the Cost of Contracting (Attachment I available from the EEC) and Contract Employee Wages and Benefits comparison (Attachment II available from the EEC). Proposition A Board letters, new and resolicitations, will not be placed on the agenda without them.

Department Head Evaluation of Services Proposed for Contractinn

The Board instructed department heads to explore cost efficiencies/productivity improvements that could be implemented to make a service proposed for contracting more economical prior to making a decision to contract out a function. Department heads were further instructed to provide a cost savings analysis and a report that details why equivalent cost savings cannot be achieved with better County management practice, more efficient use of County personnel, technological improvements, or other means to reduce' the cost of the service. The department bead's report on this must likewise be included in all Board letters requesting the award of a new Proposition A Contract.

Cost-Effective Contracting

The Board approved ordinance changes to delete the option to award a Proposition A contract based solely on feasibility. Board letters requesting award of a Proposition A contract must show cost-effectiveness in all cases.

Annual Report to the Board on Proposition A Contracts

The Board instructed department heads to report annually on how the terms of any contracts executed under Proposition A are being carried out. The first annual report is due to this office March 1, 1993. Attachment III (Available from the EEC) gives the requested format for this report which should be sent to your Chief Administrative Office (CAO) analyst. My office will forward a compiled report to each Board office.

Performance-Based Pay {PBP) Evaluation Guidelines

The Board instructed that PBP participants shall not be rated on the basis of how many Proposition A contracts have been awarded, but on basic management functions. While this has always been the case, the PBP rating form has been modified to clarify this.

Questions about these requirements may be directed to your CAO analyst.

RBD:VAC NF:os/G

Attachments

c: Each Supervisor




APPENDIX D

LOS ANGELES COUNTY CODE, CHAPTER 2.121
CONTRACTING WITH PRIVATE BUSINESS



Chapter 2.121

CONTRACTING WITH PRIVATE BUSINESSES

Sections:

2.121.250 Scope of Chapter 2. 121 provisions.
2.121.260 Definitions.
2.I21.280 Request for work to be performed by independent contractors
2.121.290 Rejection of bids or proposals -- Language to be included
2.121.295 Certain contracts prohibited
2.121.300 Bids and proposals - Solicitation, receipt and award.
2.121.310 Source selection and award -- Methods.
2.121.320 Competitive sealed bidding.
2.121.330 Competitive negotiation
2.121.340 Negotiations after competitive sealed bidding where all bids exceed available funds.
2. I21.350 Noncompetitive negotiation.
2.121.360 Determination of bidder responsibility -- Language to be included
2.121.380 Award of Contracts - Mandatory prerequisites
2.121.390 Award of Contracts -- Statement on reduction of county services
2.121.400 Breach of contract -- Liquidated damages clause required
2.121.410 Breach of contract -- Performance bond provisions.
2.121.420 Award of contracts -- Board of supervisors finding required.


2.121.250 Scope of Chapter 2.121 provisions. A. This Chapter 2.121 implements Charter Section 44.7 as revised on November 7, 1978, and shall apply to the contracting with private businesses to perform personal services which axe currently performed by county employees, or which could be performed by county employees through the recruitment of additional county personnel.

B. This Chapter 2.121 shall not apply to the contracting with private business to perform personal services when:

1. Authority to contract is expressly provided by statute:

2. The service cannot he performed adequately or competently or satisfactorily by civil service employees and it is impossible to recruit such personnel to perform such service for the period of time such service is needed by the county.

3. The service is of an extraordinary professional or technical nature and the services are of a temporary nature:

4. The services are needed on a part-time or intermittent basis: or

5. The contract is for personal services to provide an independent analysis/evaluation, review and/or audit of an existing or proposed county project, function or program, and there is a need or contractual obligation to obtain an independent analysis, evaluation, review and/or audit of said project, function or program.

C. This chapter shall not apply to the purchase, lease or acquisition of materials, supplies, furnishings, equipment, land other personal property. (Ord. 90-0030} 3 {part}. 1990.)

2.121.260 Definitions. As used in this chapter:

A. "Established catalogue price" means the price or rate included in the most current catalogue, price list, rate schedule or other form that:

1. Is regularly maintained by the offeror; and

2. Is either published or otherwise available for inspection by customers; and

3. States prices or rates at which services are currently, or were last, provided to a significant number of users constituting the general consuming public for that item of service.

B. "Evaluated bid price" means the dollar amount of a bid, after bid price adjustments are made pursuant to objective, measurable criteria set forth in the invitation for bids, which affect the economy and effectiveness of the service.

C. "Invitation for bids" means all documents, whether attached or incorporated by reference, utilized for soliciting bids in accordance with the procedures set forth in Section 2.121.320, competitive sealed bidding.

D. "Request for proposals" means all documents, whether attached or incorporated by reference, utilized for soliciting proposals in accordance with the procedures, set forth in Section 2.121.330, competitive negotiation, Section 2.121.340, negotiations after competitive sealed bidding where all bids exceed available funding, or Section 2.121.350, noncompetitive negotiation.

E. "Responsible bidder or offeror" means a person, firm or corporation who has the capability in all respects to perform fully the contract requirements, and the integrity and reliability which will assure good faith performance.

F. "Responsive bidder" means a person, firm or corporation who has submitted a bid under Section 2.121.320, competitive sealed bidding, which conforms in all material respects to the invitation for bids, so that all bidders may stand on equal footing with respect to the method and timeliness of submission and as to the substance of any resulting contract. (Ord. 90-0030 3 (part), 1990).

2.121.280 Request for work to be performed by independent contractors. A. The department recommending the award of a contract for services within the scope of this chapter shall be responsible for the preparation of the invitation for bids or request for proposals. The purchasing agent, county counsel and chief administrative officer shall advise the department, as appropriate, to assure proper format and compliance with this chapter and other legal, budget and policy requirements.

B. If any department determines to contract for services provided by another department, with the exception of services provided by the auditor-controller and county counsel, and believes that work can be performed more economically, by independent contractors, that budgeted funds are available, and that the work will not have an adverse effect on county ton liability, it may, with the consent of the chief administrative officer, solicit or request the purchasing agent to solicit bids or proposals for the work to be performed by independent contractors. The requesting department or purchasing agent shall also solicit a bid or proposal from the department providing the services. If the cost to perform the work is less than S25.000.00. and if at least three bids or proposals are obtained from independent contractors, the contract may be awarded by the department head. The obtaining of three bids or proposals from independent contractors, one or more of which is lower than the bid or proposal submitted by the department providing the services, shall constitute a finding by the board of supervisors that the work can be performed more economically by independent contractors. (Ord. 93-0013 1, 1993: Ord. 90-0030 3 (part), 1990.)

2.121.290 Rejection of bids or proposals m Language to be included. All bids or proposals may be rejected when such rejection is in the best interest of the county. All invitations for bids and requests for proposals shall contain a provision reading substantially as follows:

"The County may, at its sole discretion, reject all bids/proposals submitted in response to this Invitation for Bids/Request for Proposals. In the event of any such rejection, the County shall not be liable for any costs incurred in connection with the preparation and submittal of a bid/proposal." (Ord. 90-0030 3 (part), 1990.)

2.121.295 Certain contracts prohibited. A. Notwithstanding any other section of this code, the county shall not contract with, and shall reject any bid or proposal submitted by, the persons or entities specified below, unless the board of supervisors finds that special circumstances exist which justify the approval of such contract:

1.Employees of the county or of public agencies for which the board of supervisors is the governing body;

2. Profit-making firms or businesses in which employees described in subdivision 1 of subsection A serve as officers, principals, partners or major shareholders;

3. Persons who, within the immediately preceding 12 months, came within the provisions of subdivision 1 of subsection A, and who:

a. Were employed in positions of substantial responsibility in the area of service to be performed by the contract; or

b. Participated in any way in developing the contract or its service specifications; and

4. Profit-making firms or businesses in which the former employees, prescribed in subdivision 3 of subsection A, serve as officers, principals, partners or major shareholders.

B. Contracts submitted to the board of supervisors for approval or ratification shall be accompanied by an assurance by the department submitting, district or agency that the provisions of this section have not been violated. (Ord. 90-0030 3 (part). 1990.)

2.121.300 Bids and proposals t Solicitation, receipt and award. A. The purchasing agent or the department recommending the award of a contract within the scope of this chapter shall solicit and receive bids and proposals. All interested bidders shall have the same information and specifications. Responsive bids and proposals received by the purchasing agent shall be referred to the department recommending the award of a contract. The department recommending the award of a contract shall receive and evaluate the bids and proposals and make award recommendations to the board of supervisors. Except as otherwise provided in subsection B of Section 2.121.280, all contracts shall be awarded by the board of supervisors in accordance with the requirements in this chapter, and shall be signed by the chairman of the board of supervisors.

B. Any renewal or modification to any contract let under this chapter shall be approved by the board of supervisors and executed by the chairman unless the contract contains a provision expressly delegating to a county officer or employee the authority to renew or modify the contract and the scope of the authority so delegated is specifically set forth in the contract. In recommending the award of a contract containing such a delegation, the department recommending the award shall state in writing that the scope of delegation has been reviewed with and approved by the county counsel. (Ord. 90..0030 3 (pan), 1990.)

2321.310 Source selection and award m Methods. All contracts for services within the scope of this chapter shall be awarded by:.

A. Competitive sealed bidding, pursuant to Section 2.121.320;

B. Competitive negotiation, pursuant to Section 2.121.330 and Section 2.121.340; or

C. Noncompetitive negotiation, pursuant to Section 2.121.350. (Ord. 90-0030 3 (part), 1990.)

2.121.320 Competitive sealed bidding. A. Conditions for Use. Contracts shall be awarded by competitive sealed bidding unless it is determined in writing by the department recommending the award of a contract that this method is not practicable. Factors to be considered in determining whether competitive sealed bidding is not practicable shall include whether.

1. Specifications can be prepared that permit award on the basis of either the lowest bid price or the lowest evaluated bid price; and

2. The available sources, the time and place of performance, and other relevant circumstances are appropriate for the use of competitive sealed bidding.

B. Evaluation Factors. The invitation for bids shall state whether award shall be made on the basis of the lowest bid price or the lowest evaluated bid price. If the latter basis is used, the objective measurable criteria to be utilized shall be set forth in the invitation for bids.

C. Public Notice. Public notice of the invitation for bids shall be given a sufficient time prior to the date set forth therein for the opening of bids by the posting of a copy of the invitation for bid in the office of the purchasing agent. Where the award of a contract can reasonably be expected to exceed $25,000.00, such notice shall include publication in a newspaper of general circulation within the county of Los Angeles a reasonable time prior to bid opening.

D. Bid Opening. Bids shall remain sealed until opened publicly at the time and place designated in the invitation for bids. No bids shah be accepted after the time designated for the opening of bids. Each bid, together with the name of the bidder, shall be retained and be open to public inspection.

E. Award. Except in those instances where all bids are rejected pursuant to Section 2.121.290, the contract shall be awarded with reasonable promptness to the responsive and responsible bidder whose bid is either the lowest bid price or lowest evaluated bid price. (Ord. 90-0030 3 (part), 1990.)

2.121.330 Competitive negotiation. A. When Used. When the department recommending the award of a contract determines in writing that the use of competitive sealed bidding is not practicable, and except as provided in Section 2.121.350, a contract may be awarded by competitive negotiation.

B. Use After Unsuccessful Competitive Sealed Bidding,. Contracts may be competitively negotiated when it is determined in writing by the department recommending the award or a contract that the bid prices received by competitive sealed bidding either are unreasonable as to all or part of the requirements, or were not independently reached in open competition, and for which:

1. Each responsible bidder has been notified of the intention to negotiate and is given reasonable opportunity to negotiate;

2. The negotiated price is lower than the lowest rejected bid by any responsible bidder, and

3. The negotiated price is the lowest negotiated price offered by any responsible offeror.

C. Public Notice. Adequate public notice of the request for proposals shall be given in the same manner as provided in subsection C of Section 2.121.320.

D. Evaluation Factors. The request for proposals shall indicate the relative importance of price and other evaluation factors.

E. Award. Except in those instances where all bids are rejected pursuant to Section 2.121.290, award shall be made to the responsible offeror whose proposal is determined in writing to be the most advantageous to the county, taking into consideration price and the evaluation factors set forth in the request for proposals.

F. Discussion with All Responsible Offerors. Written or oral discussions may be conducted with responsible offerors who submit proposals determined in writing to be reasonably susceptible of being selected for award. Discussions shall not disclose any information derived from proposals submitted by competing offerors. (Ord. 90-0030 3 (pan), 1990.)

2.121.340 Negotiations after competitive sealed bidding where all bids exceed available funds. A. Determination. In the event that all bids submitted pursuant to competitive sealed bidding under Section 2.121.320 result in bid prices in excess of the funds available and the department recommending the award of the contract determines in writing:

1. That there are no additional funds available from any source so as to permit an award to the lowest responsive and responsible bidder, and

2. The best interest of the county will not permit the delay attendant to a resolicitation under revised specifications, and/or for reduced level of services, under competitive sealed bidding as provided in Section 2.121.320; then a negotiated award may be made as set forth in subsections B and C of this section.

B. Negotiation with Multiple Bidders. Where there is more than one bidder, competitive negotiations pursuant to Section 2.121.330 shall be conducted with the three (two if there are only two) bidders determined in writing to be the lowest responsive and responsible bidders to the competitive sealed bid invitation. Such competitive negotiations shall be conducted under the following restrictions:

1. If discussions pertaining to the revision of the specifications or quantifies are held with any potential offeror, all other potential offerors shall be afforded an opportunity to take part in such discussions;

2. An addendum to the invitation for bids, based upon revised specifications or quantities, shall be issued as promptly as possible, shall provide for an expeditious response to the revised requirements, and shall be awarded upon the basis of the lowest bid price or lowest evaluated bid price submitted by any responsive and responsible offeror. No discussion shall be conducted with offerors after submission of proposals except for a compelling reason as determined in writing by the department recommending the award of a contract. All addenda shall state that award is to be made without discussions except as herein provided.

C. Negotiation with Single Bidder. Where, after competitive sealed bidding, it is determined in writing by the department recommending the award of a contract that there is only one responsive and responsible bidder, a noncompetitive negotiated award may be made with such bidder in accordance with Section 2.121.350. (Ord. 90-0030 3 (part), 1990.)

2.121.350 Noncompetitive negotiation. A contract may be made by noncompetitive negotiation only when competition is not feasible, as determined in writing prior to award by the department recommending the award of a contract. (Ord. 90-0030 3 (part), 1990.)

2.121,360 Determination of bidder responsibility -- Language to be included. A determination of responsibility of a bidder or offeror shall be made. All invitations for bids and requests for proposals shall contain a provision reading substantially as follows:

"A reasonable inquiry to determine the responsibility of a bidder or offeror may be conducted. The unreasonable failure of a bidder or offeror to promptly supply information in connection with such inquiry, including but not limited to information regarding past performance, financial stability, and ability to perform on schedule, may be grounds for a determination of nonresponsibility with respect to such a bidder or offeror." (Ord. 90-0030 3 (part), 1990.)

2.121.380 Award of contracts-- Mandatory prerequisites. A. No contract may be awarded pursuant to this chapter unless all of the following requirements are met;

1.The services provided under the contract will be performed more economically by an independent contractor;

2. The county's ability to respond to emergencies will not be impaired;

3. The award of the contract will not result in the unauthorized disclosure of confidential information;

4. Alternative resources are available so that the services can be obtained from another source in the event of default by the contractor;,

5. The award of the contract will not infringe upon the proper role of thc county in its relationship to its citizens: and

6. The award of thc contract, if financed in whole or in part by federal or state funds, will be in full compliance with all applicable federal and state regulations.

B. In making a recommendation to the board of supervisors for the award of a contract, the department recommending the award shall state in writing that thc requirements of this section have been met. (Ord. 93-0013 2. 1993: Ord. 90-0030 3 (part). 1990.)

2.121.390 Award of contracts - Statement on reduction of county services. In making a recommendation for the award of a contract, the department recommending the award shall state in writing whether the contract will result in a reduction of county services, and if so, the extent of the reduction. (Ord. 90-0030 3 (part). 1990.)

2.121.400 Breach of contract -- Liquidated damages clause required when. In all cases where it would be impracticable or extremely difficult to fix the actual damage resulting from a breach by the contractor, the invitation for bids or request for proposals and the contract shall include a liquidated damages clause. (Ord. 90-0030 3 (pan), 1990.)

2.121.410 Breach of contract -- Performance bond provisions. Contracts awarded pursuant to this chapter may require the contractor to post a performance bond adequate in amount to cover the county's damages in the event of a breach of contract by the contractor. (Ord. 90-0030 3 (part), 1990.)

2.121.420 Award of contracts -- Board of supervisors finding required. A. No contract shall be awarded pursuant to this chapter until the board of supervisors has made a finding that the services can more economically be performed by the independent contractor.

B. The department recommending the award of a contract shall provide the board of supervisors, in writing:

1. Those facts which support a finding that the work can be performed more economically by independent contractors;

2. A description of the anticipated scope and cost of the work to be

contracted;

3. A statement as to the availability of budgeted funds;

4. A statement as to the possible impact on county tort liability; and

5. A statement concerning the projected employee relations implications. (Ord. 93-0013 3, 1993: Ord. 90-0030 3 (part), 1990.)

 




APPENDIX E

DEPARTMENT HEAD PERFORMANCE AGREEMENT AND EVALUATION FORM



NOTE: This Form is available in hard copy from the EEC