State No-Bid Contracts: Justifiable or Indefensible?

Updated July 27, 2010

“Generally a no bid process for state contracts doesn't serve the public interest, unless the circumstances demand it, such as responding to a disaster where goods and services must be provided rapidly,” says Bob Phillips, Executive Director of Common Cause North Carolina. “Otherwise it is important for the state to take bids on everything it purchases to ensure that the public is getting the best value for our money.”

Admittedly, as Phillips indicates, there may be some situations in which circumventing competitive bidding may be the best course of action — the urgent response to a disaster, extending the contract of a reliable vendor to complete a project, contracting with the one firm that has the ability to fulfill the terms of the agreement, etc. However, the awarding of some no-bid contracts by state government has been accompanied by cronyism, conflicts of interest and other abuses in recent years.

In light of all this, should state no-bid contracts be more closely supervised, curtailed or even completely eliminated?

What is a no-bid contract?
The terms "no-bid contract" and "sole source contract" are generally interchangeable, both referring to a situation in which there is only one person or company that can provide the contractual services needed and that any attempt to obtain bids would only result in one person or company being available to meet the need. It is awarded usually, but not always, by a government after soliciting and negotiating with only one firm. These contracts can be negotiated much more quickly than a typical competitive contract but they are often fraught with suspicion that the company used illegal or immoral means to exclude competitors (usually cronyism or bribery). . . .

In North Carolina, the awarding of no-bid contracts by a division of the state government is authorized in the "Sole Source Exception" in G.S. 143-129(e)(6), which states that the bidding requirement does not apply to purchases of apparatus, supplies, materials, or equipment when:

(i) performance or price competition for a product are not available;
(ii) a needed product is available from only one source of supply; or
(iii) standardization or compatibility is the overriding consideration.

In addition, G.S. 143-129(g) and G.S. 143-53(a)(5) provide certain conditions in which competitive bidding may be waived, including the purchase of apparatus, supplies, materials or equipment from any person or entity that has, within the previous 12 months, completed a public, formal bid process and is willing to furnish the items at the same or more favorable terms (see also 01 NCAC 5B.1400 – Waiver of Competition).

Finally, 01 NCAC 5B.1602 – Emergencies states that in “situations in which a pressing need develops from unforeseen causes or where an emergency situation develops endangering lives or property which can only be addressed by an on-the-spot purchase.”

A look at no-bid contracts in North Carolina
A citizen would have a difficult time ascertaining how many state government no-bid contracts are currently in effect at this time. Jane Pinsky, director of the NC Coalition for Lobbying and Government Reform, thought it would be easy to find out by exploring the state website. After an unsuccessful search, Pinsky contacted the Department of Administration Division of Purchasing and Contract office. “After several calls, we were told that no one person had the information we wanted,” says Pinsky, “and we’re are still trying to figure out the simplest way to get it. North Carolinians should be able to easily find out which contracts are no-bid contracts and why they weren’t competitively bid.”

Calls to the Division of Purchasing & Contract by Capitol Monitor were similarly unsuccessful.  These efforts indicate that transparency is clearly an issue.

Finally, an appeal for the information by Rep. Susan Fisher (D-Buncombe) was met with a different result.  Her inquiry netted the information that of the 1265 contracts awarded by the state from October 1, 2008 through September 30, 2009, 175 of them were no-bid contracts that totaled more than $270 million in value.

John Turcotte, Director of the Program Evaluation Division of the General Assembly, outlines the benefits and pitfalls of state no-bid contracts. According to Turcotte:

Potential benefits of no-bid contracts

• No-bid contracts are more expedient when time is of the essence.
• It is sometimes more costly and time consuming to define services needed in an RFP than simply making the purchase and documenting the justification for subsequent review by the media, taxpayers or auditors.
• Political or federal requirements may necessitate purchasing from very small firms or businesses owned by underrepresented groups.

Potential downsides of no-bid contracts

• No-bid contracts generally are made on subjective grounds that are more prone to generate media criticism and audit exception.
• Governments lose the opportunity for price cutting if there is a competitive market—generally, the more bids you get for a good or service, the better the deal.
• Overuse of a single favored vendor can discourage potential bidders and further limit competition.
• No-bid contracts do not force the purchaser to evaluate the economy/capability of the product or service.

Do the drawbacks of no-bid contracts outweigh the advantages? You’ll have to decide for yourself. But several no-bid contracts which have been in the limelight recently give cause for concern, including:

• The Department of Health and Human Services contract with Med Solutions
• The State Health Plan contract with Blue Cross Blue Shield
• The Division of Motor Vehicles contract with Verizon Business
• The Department of Transportation’s contract with White's Tire Service

An examination of these agreements reveals some unsettling information.

The Department of Health and Human Services contract with Med Solutions
Almost immediately upon his appointment by Gov. Beverly Perdue to the post as Secretary of DHHS, former House member-turned-lobbyist Lanier Cansler asked the legislature for the authority to use no-bid contracts to expedite various projects and save money at DHHS, and the legislators obliged.

As might have been anticipated, a number of apparent conflicts of interest have arisen in Cansler’s first year as secretary.

In 2009, language from NC House Bill 190 was inserted into the budget bill giving the DHHS the authority to award a sole source contract to Med Solutions of Nashville, Tennessee for Medicaid Improper Claims Software — “technologically advanced software and services to improve the identification and rejection of improper Medicaid payments before the payment is made to the provider.” Effective July 1, 2009, the budget appropriated $5 million for fiscal 2009-10 and an additional $5 million for fiscal 2010-11 for this service. Estimates concluded that this investment of $10 million could result in a net savings of $27 million for the state during the first year of implementation.

DHHS asserted that bypassing competitive bidding on this project was necessary to immediately begin accruing the predicted savings for the state.

Sounds good so far, right? Under closer scrutiny, however, potential conflicts of interest become apparent: In July 2009, Med Solutions announced that Dataflux would assist with the work. Dataflux is a subsidiary of Cary-based SAS Corporation, and Manning Fulton & Skinner, the same law firm that employs Secretary Cansler’s wife, Barbara, lists SAS among its lobbying clients roster. What’s more, Cansler himself once served as a lobbyist for SAS.

In 2009, DHHS was involved in another apparent conflict of interest when it awarded the CSC Corporation a $265 million contract without competitive bidding. A former lobbyist for CSC: DHHS Secretary Cansler.

Finally, a controversy arose over a Medicaid contract worth $33 million that DHHS awarded in October 2009 to Prodigy Diabetes Care, a recently-formed diabetes supply company based in Charlotte. Prodigy is owned and operated by brothers, Ramzi Abulhaj and Rick Admani, who have a dubious business background that includes numerous legal battles, a bankruptcy and alleged patent piracy.

While there have complaints from other vendors about the lack of transparency in the awarding of this contract, just as disturbing are concerns that the glucose testing meters provided by Prodigy may be inferior to other meters on the market.

According to Carter Wrenn at Talking About Politics: "...Secretary Cansler hasn’t mentioned, addressed or offered one word of explanation about why he chose a company with Prodigy’s checkered past for an exclusive contract – or why he’s confident a diabetes patient using a syringe made in China by a company cited by the FDA for violating safety regulations doesn’t have anything to worry about."

Blue Cross Blue Shield contract to administer health care for state employees
North Carolina’s State Health Plan (SHP), which provides health coverage for 667,000 state workers, teachers, retirees and their family members, is facing substantial financial challenges. Even though recent revenues were higher than anticipated, expenses were even greater.

As the Capitol Monitor reported in 2009, “A surprise projection of a $300 million budget shortfall for the State Health Plan in the [2009] fiscal year – and even worse news for the next two years of the plan – has Raleigh politicians pointing fingers and scrambling for answers.”

Details on SHP’s fiscal dilemma are well documented in the Capitol Monitor article. One of the factors that contributed to the current situation: the state’s no-bid, cost-plus contract with Blue Cross Blue Shield of North Carolina (BCBSNC).

A little background: BCBSNC provides approximately 72 percent of all individual and employer-provided health care insurance in North Carolina and has a contract with SHP to administer claims for all state employees – constituting what amounts to a virtual monopoly in our state’s health care market place. And though the health care organization is a nonprofit, the CEO was paid nearly $4 million last year, including a $3 million bonus.

SHP did not create an RFP (Request for Proposals) setting out the terms of a proposed agreement to administer the program before seeking companies who could meet these terms; on the contrary, BCBSNC was handed a sweetheart deal — a no-bid, cost-plus contract worth $100 million per year that runs through 2013. Former State Senator Tony Rand sponsored the special legislation authorizing the no-bid contract with BCBSNC in 2005, claiming that disclosure of the contract’s details could weaken Blue Cross’ ability to negotiate competitive reimbursement rates with health-care providers.

A performance audit of the SHP for FY 2008 released by State Auditor Beth Wood in April 2009 declared, “It would have been prudent to have the BCBSNC contract reviewed by a contract attorney or other contract professional before it was signed to ensure that the contract terms and conditions protected the state’s interest and allowed the Plan access to necessary cost data.”

Nonetheless, SHP’s administrator signed the contract without such a review.

In the agreement, SHP agreed to compensate BCBSNC for the cost of actually administering the plan plus the 0.625 profit margin plus administrative costs, including implementation costs and various overhead costs, including officer’s bonuses. However, BCBSNC was not required to offer a breakdown of those costs. According to BCBSNC, doing so would have revealed confidential information and diminished their ability to negotiate competitive reimbursement rates with health care providers. And while there was a cap on the cost-plus charges, BCBSNC had ultimate authority to determine what that cap was. Thus, there was no incentive whatsoever for cost containment measures by BCBSNC because under this formula, as costs go up, so do profits.

The audit concluded that “... the cost-plus-a-percentage-of-cost type of contract that the Plan used with BCBSNC is not in the best interest of the State. The contract creates a potential conflict of interest for the vendor. . . . The federal government has prohibited the use of such contracts by federal agencies since 1941. . . . Additionally, 21 states have statewide or agency-specific laws that prohibit the use of such contracts.”

Since the multi-million dollar bailout from the state in 2009, SHP has revised its contract with BCBSNC so that it now has greater supervision of the health care organization’s administrative costs. But rather than investigating if BCBSNC had been overpaid under the unusually generous contract, legislators decided to increase out-of-pocket expenses for state employees instead.

As is not uncommon, one need only follow the money to gain a sense of how politics often work in the Tarheel State. An analysis by Democracy NC of campaign reports filed with the Federal Elections Commission and NC State Board of Elections revealed that:

• No other company the size of Blue Cross has donated more to state politics through its political action committee – a total of $643,000 from the 2000 election cycle through 2008.
• Executives from Blue Cross contributed an additional $117,000 to state politics during the same period of their analysis.
• Top recipients of the contributions from the Blue Cross PAC and Blue Cross executives for 2000-2008:
  * Senate President Pro Tem Marc Basnight--$55,600
  * Former Sen. Tony Rand, then-Democratic Majority Leader and chair of the Senate Select Committee on Employee Hospital and Medical Benefits--$43,850
  * State Attorney General Roy Cooper--$36,033
  * Lieutenant Governor Walter Dalton--$32,000
• While the State Health Plan is hemorrhaging, Blue Cross has amassed a reserve fund in excess of $1.2 billion for its three million customers across the state.
• Blue Cross rewarded its top six executives with a total of $10.5 million in salaries and bonuses during 2008.

Thus the pitfalls of no-bid contracts are once more readily apparent, especially given the fact that the SHP is overseen by the state legislature. A distrustful citizenry need only connect the dots to be persuaded that political contributions played a role in the preferential treatment BCBSNC seems to have received, to the detriment of taxpayers and state employees.

The Division of Motor Vehicles contract with Verizon Business
The buzzards have come home to roost at the NC Division of Motor Vehicles. After awarding Verizon Business a no-bid contract that could be worth more than $51.5 million over five years, the deal is being closely scrutinized by the State Bureau of Investigation following disclosure that the sales staff at Verizon bestowed meals and gifts on DMV and Division of Air Quality employees.

The contract in question called for Verizon to provide 3,000 new inspection computers for the innovative eSticker program, a system that digitally tracks auto inspections statewide, eliminating the need for windshield stickers. Since Verizon already had a contract to provide emissions inspections computing systems, DMV officials reasoned that it made sense to engage them to provide the additional eSticker services as well. So at DMV’s request, state legislators inserted a provision into 2007 legislation revamping the state's auto inspection program that included the eSticker program bill along with the no-bid provision.

While state law discourages no-bid contracts, DMV officials stated they were concerned that a competitive bidding process would be too time consuming given the constraints in the legislation for implementation of the inspection program. But the legislation was enacted a full fourteen months before the eSticker program was due to go into effect.

Shortly after DMV awarded the no-bid contract to Verizon in June 2008, the company wined and dined 15 state employees at the Capital City Chop House in Raleigh. According to the Charlotte Observer, “This was one of more than 200 occasions in the last four years in which Verizon says its staff provided meals and gifts to high-ranking employees from DMV, N.C. Division of Air Quality and state Department of Transportation. Many recipients directly oversee the company’s contract to provide computer services and technical support to the state’s vehicle inspections program.”

As a result of these allegations, on October 1, 2009, Gov. Beverly Perdue issued an Executive Order expanding North Carolina’s gift ban to cover all employees in state agencies under the governor’s control. In addition, the SBI is exploring whether Verizon Business or North Carolina state employees are guilty of criminal violations, including whether any state employee who benefitted from Verizon’s largesse helped steer the lucrative no-bid contract to the company.

The Department of Transportation’s contract with White's Tire Service
Rep. Nelson Cole (D-Rockingham), a retired auto dealer and vice chairman of the House Transportation Committee, introduced a tire-reform measure in May 2008 that included all of the key recommendations put forward by Smithers Scientific Services in their study of North Carolina's contract for retreaded tires. But after paying Smithers $110,000 for the study, the General Assembly passed a so-called reform bill that still allows RFPs to be written so that only one tire vendor could fulfill them — White’s Tire Service of Wilson, North Carolina.

The state contract for approximately 30,000 recycled tires purchased annually for use on school buses and Department of Transportation vehicles is worth up to $4 million a year, and for 30 years, White’s Tire Service has served as the state’s preferred vendor – despite Smithers’ assertion that the recapping process specified by the state and provided by White’s Tire Service is no better than the methods used by other vendors. It is, however, up to 40-percent more expensive.

At least one provision of the new measure will save taxpayers money. A 2005 report from the state auditor suggested that White’s Tire Service’s surcharges for minor “spot repairs” were open to challenge and were also unverifiable since these repairs are concealed once the tires have been retreaded. These surcharges, totaling up to $362,000 a year, have been disallowed.

White’s Tire Service vice president Robert White has made political contributions in moderate amounts to various candidates of both political parties over the past decade, and his company has engaged two lobbyists (one a former senator), who were paid a total of $24,000 for their efforts in 2007 and a total of $26,000 in 2008.

While there is no evidence that White’s Tire Service has done anything illegal in its efforts to preserve its contract with the state, there is ample evidence that, under the current contract, taxpayers are paying more for tires than they would be if this process were fully open to competition.

Effectively dealing with state no-bid contracts
Some involved in state government don’t seem to learn from their predecessors’ mistakes. Abuse of power for financial gain apparently extends across the spectrum — from the governor, as in the case of former Gov. Mike Easley to state workers, most notably the DMV, NC Division of Air Quality and state Department of Transportation employees who accepted gifts from Verizon Business.

If these guardians of the public trust can’t seem to restrain themselves from abusing their office, what can be done to control these avaricious impulses?

Recommendations from state audit of Blue Cross Blue Shield NC
An April 2009 Performance Audit of the North Carolina State Health Plan by the State Auditor provides some recommendations for effectively dealing with state contracts in the future. Even though these recommendations are specific to the State Health Plan and no-bid contracts are not mentioned, they might appropriately apply to all state contracts in general:

• A contract attorney or other contract professional should be required to review all contracts before signing to ensure that contract terms and conditions are in the best interest of the State.
• The State should ensure that all contracts are transparent and allow for auditing and verifying contractor cost data.
• The General Assembly should consider legislation to place the State Health Plan under the authority of an executive branch agency to ensure proper operational and financial oversight.
• The General Assembly should consider enacting legislation that prohibits all state agencies from using cost-plus-a-percentage-of-cost contracts.

With the addition of severe restrictions or a ban on no-bid contracts, these recommendations would go a long way toward constructively dealing with the abuses.

State gift bans
In response to the report that DMV and Division of Air Quality employees had accepted gifts from Verizon business, a vendor seeking a state no-bid contract, Gov. Beverly Perdue issued an Executive Order extending a gift ban to all employees of the executive branch. Secretary of State Elaine Marshall soon followed with a ban on gifts to employees of the Secretary of State’s office.

The governor’s executive order states in part that “. . . no State employee should be permitted to accept gifts or favors from contractors working or seeking to work with the employee’s agency . . .”

The previous gift ban (NC General Statute 133-32) pertained only to employees who deal with state contracts. Gov. Perdue has also called for legislation to broaden this statute so that it encompasses all state employees. The jury is still out on how well any gift ban will work without the compliance all state employees however — from the top of the pecking order to the bottom.

Note: See Capitol Monitor’s “Pity the Waitresses: Gift Ban Threatens Raleigh Restaurants” for more details on the state gift bans.

Ethics reform bills
Four ethics bills were considered by the legislature in 2009, a package that would have supported greater accountability and transparency in state government, thus helping to eliminate cronyism and corruption in awarding state contracts. The House quickly approved all four measures with only one dissenting vote; however the Senate approved only the one that did not affect the members themselves, delaying action on the other three until 2010.

In brief, the four bills called for the following:

• Appointees to major state boards and commissions would have to disclose their campaign fund-raising activities. (House Bill 944)
• Contractors with state contracts larger than $25,000 would not be allowed to make campaign contributions. (House Bill 961)
• Top executive-branch staff members could not be hired as lobbyists for six months after leaving their jobs. (House Bill 1136)
• Local governments would be required to adopt a code of ethics (This is the only bill that gained the approval of the General Assembly.). (House Bill 1452)

The passage of two of the bills, House Bills 961 and 1136 would help keep preferential treatment out of the awarding of state contracts. New Senate Majority Leader Martin Nesbitt says these ethics bills along with House Bill 944 will get a full hearing in 2010, even though it was his Senate Judiciary Committee in which they stalled during the 2009 legislative session.

Note: See Capitol Monitor’s “2009 NC Ethics Reforms: Strong Talk but Little Action” for more on state ethics reform.

Budget Reform & Accountability
Shortly after being sworn into office, Governor Perdue established the Budget Reform and Accountability Commission, which is charged with seeking to keep North Carolina competitive by making state government more efficient and effective. The commission is yet another in a long line of similar commissions with the same goals that have been created over the years.  While Perdue's commission is expected to soon issue a report which may include additional guidelines on the use and oversight of no-bid contracts, history indicates that lawmakers won't necessarily follow up on the suggestions.

Conclusion
The enactment of the new 2010 proposal represents another slide down a slippery slope.   For whether state officials have deliberately engaged in nefarious behavior in seeking and administering no-bid contracts remains undetermined, even the appearance of conflicts-of-interest must be avoided, especially when transparency is lacking and taxpayers must rely on perception alone.

While the need for greater oversight and more effective laws regarding the awarding of state contracts is apparent, there is another level of accountability that is also essential. We, the voters, choose our representatives in Raleigh, and it behooves us to be more informed and vigilant in making these choices. As long as we continue to elect men or women who seek political office for personal influence, ego gratification or monetary gain, we will continue to get cronyism, fraud, corruption and other abuses of power from our legislators and other elected officials.

On the other hand, if we are serious about our responsibility and seek to choose true public servants who are imbued with authenticity, honesty and integrity, then the results could be quite different, including fairness, ethical behavior and transparency in the way our state does business.

Finally, as the ultimate guardians of our own tax dollars, it is incumbent upon us to become more well-informed about state government and to speak out forcefully and without fail when apparent abuses arise.