LAO 2005-06 Budget Analysis: General Government

Analysis of the 2005-06 Budget Bill

Legislative Analyst's Office
February 2005

Procurement Reform (Control Section 33.50)

This control section allows the Department of Finance (DOF) to reduce departmental appropriations due to savings achieved from the Department of General Services' (DGS) "strategic sourcing" initiative. Strategic sourcing involves using past years' purchasing information and standard procurement methods to create new contracts for those same goods and services. The new contracts should result in lower costs.

This section was first included in the 2004-05 budget. At the time of 2004-05 budget's enactment, Control Section 33.50 was expected to achieve $96 million in current-year General Fund savings not accounted for elsewhere in the budget. The administration since has reduced its estimate of achievable General Fund savings this year to $48 million. The budget proposes ongoing General Fund savings of $96 million. This section provides the administration with authority to capture those savings from departments' budgets in 2005-06.

Minimal Contract Savings Achieved to Date

Since the Department of General Services (DGS) has only renegotiated one contract with an estimated savings of $3 million (all funds) and less than five months remain in the current year, it is unlikely that the administration will reach its estimate of $48 million in General Fund savings in the current year. For this reason, we recommend that the Legislature direct the Department of Finance (DOF) to revise the strategic sourcing savings estimates for both the current and budget years to be more realistic based on DGS' contracting experiences to date. In order to ensure that the Legislature has the opportunity to verify the savings, we also recommend that the control section be modified to include 30-day notification prior to DOF reducing appropriations.

Similar to the current language, the proposed Control Section 33.50 of the 2005-06 Budget Act would allow DOF to reduce appropriations due to savings achieved through DGS' strategic sourcing efforts. Unlike the current language, however, this proposed budget does not require DOF to report to the Legislature on the proposed savings prior to reducing appropriations.

Strategic Sourcing Contract. In June 2004, DGS signed a contract with American Management Systems (AMS) to provide strategic sourcing services. Specifically, under the contract, the vendor reviews the state's annual goods and services expenditures and identifies those expenditure areas where new contracts (based on competition or negotiation) would result in future savings. In addition, the contractor assists the state in creating these new contracts. Once new contract savings are achieved, the contractor will receive a percentage of the accrued savings. For example, under the contract's current payment structure, if the state accrues savings of $100 million by 2007, the contractor will receive payments totaling $11 million. The percentage of savings paid to the vendor declines as the total savings increase. According to DGS, the contractor has not yet received any payments.

DOF Reduced Appropriations. In the summer of 2004, AMS identified several potential goods and services categories in which the state could save $100 million in 2004-05 by using strategic sourcing techniques. In September 2004, DOF notified the Legislature that it would reduce 19 departments' General Fund appropriations by $78 million. According to DOF, if the savings are not achieved, then the funds will be returned to the departments.

Minimal Savings Achieved to Date. According to DGS, since signing the AMS contract in June 2004, the state has renegotiated one contract resulting in an estimated current-year savings of $3 million (all funds). The DGS anticipates it will enter into an additional eight contracts within the current year. The savings from these additional contracts is unknown at this time. In January 2005, DOF returned $30 million to the 19 departments to reflect lower expected savings.

Direct DOF to Revise Estimated Savings. Given that the state to date has only signed one contract with an estimated savings of $3 million and less than five months remain in the current year, it is unlikely that the administration will reach its estimate of $48 million in General Fund savings this year. Moreover, the expected budget-year savings are unlikely to be achieved. Consequently, we recommend that the Legislature direct DOF to revise the strategic sourcing savings estimates for both the current and budget years to be more realistic based on DGS' strategic sourcing and contracting experiences to date. In order to ensure that the Legislature has the opportunity to verify the savings, we also recommend that the control section be modified to include 30-day notification to the Legislature prior to DOF reducing appropriations.


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