Penny for Your Thoughts? No? How About 50 Million Then?

by Tom Yamachika, President, Tax Foundation Hawaii

You may all recall that if you go to the store in Hawaii and buy a bottle of your favorite beverage, a couple of other charges show up on your bill. One is a 5 cent deposit, which you can get back if you bring back the bottle for recycling, and the other is a one cent fee, which you don’t get back. (This fee was increased to a penny and a half between September 2012 and August 2015 because the recycling rate was too high – which I think is perverse but that’s another story.)

Today, we’ll be talking about these charges, which are part of the Deposit Beverage Container Program. In late 2008, the Department of Health (DOH), which administers the program, needed an audit of six of the redemption centers it certified. What happened next is a classic example of the procurement process running amok, as found by the State Auditor in its Report 15-09, issued last month.

DOH sent out a request for proposals, or RFP, which was designed to invite potential vendors to bid on the job. Only one vendor bid. Accounting Firm G said they could do it for $76,400…but they wanted to talk about it some more.

In the ensuing months, Firm G figured out that they were the sole bidder, so they said they really needed to rethink their bid. That made DOH ask the State Procurement Office (SPO) for advice on whether they should re-do the RFP. SPO concluded that additional bidders might be interested in the changed job specifications, and recommended re-solicitation as a services procurement. Indeed, another accounting firm, Firm A, expressed an interest in the job in 2009, but said that the RFP as sent out was a procurement for goods, while Firm A was prepared to respond to a procurement for services.

Ultimately, SPO ordered DOH to redo the solicitation, and DOH refused, saying that there was only one bidder so it would be pointless to go through the RFP process again. It instead went with “alternative procurement” which in this case meant renegotiating with the sole bidder. DOH awarded the contract to Firm G in July 2009, and the contract price was $340,000. To justify the higher price, Firm G argued that (1) it was the first audit of the redemption centers, so they probably would find tons of irregularities; (2) additional time was needed to document their understanding of how the program worked; and (3) it was difficult to estimate the time needed to complete the audit testing. Huh? Why didn’t Firm G know all three of these things when it first submitted its bid?

There’s more. Just before DOH signed the contract with Firm G, Firm G said that it was pulling out of the Hawaii market, and that it sold its practice to Firm P. DOH then executed the contract with Firm P in August 2010. Firm P then apparently asked for some change orders. In February 2011, DOH and Firm P signed a contract modification raising the contract price to $543,374. Other problems arose as the contract was being executed, and DOH finally put the brakes on it; but by that time more than $525,000 was out the door. So instead of one penny for their thoughts, Firm P got more than 50 million of them.

What the heck is going on? When confronted with the State Auditor’s report, DOH admitted that “[i]n hindsight, re-solicitation would have been prudent.” That’s all? Is that how we steward taxpayers’ hard-earned dollars? Government procurement can work if it’s done right. The Auditor recommended changes in the process. But we need changes in not only process but mentality because this is the type of story we never want to see repeated.

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