Second in a Two-Part Series

Taxpayers who wonder just what the District is getting for its outlays to financial consultants ought to take a look at Contract No. GS-23F-9796H. Approved by Chief Financial Officer Valerie Holt last July, the $200,000 contract with KPMG Peat Marwick was intended to help Department of Public Works (DPW) street and alley cleaners “effectively and efficiently compete with the private sector.”

That goal sounds worthy enough—until, that is, you wade into the techno-babble of KPMG’s contract proposal. Here’s a nice excerpt: “Throughout this pilot project, the Contractor will work closely with the R*STARS implementation team to ensure that the cost allocation module is designed so that the methodology defined in this pilot project can be supported by the new financial system.”

LL may have an M.S. in B.S., but he’s clueless on that one.

And those segments of the proposal actually decipherable to the layman make KPMG—and, by association, the D.C. government—look even sillier. For example, the pitch charges the city treasury for “training” sessions to contemplate the following brain teaser: “DPW…Street & Alley’s services and customers must be identified so that elected officials, management and employees will have a clear understanding of…Street & Alley’s operating environment and therefore can make informed decisions.”

Says a DPW official who attended KPMG’s pricey workshops, “We don’t need consultants to tell us that the citizens are our customers.”

The “customer identification” contract is one of 30-odd deals flagged by Ward 3 Councilmember Kathy Patterson in a Jan. 6 study on the CFO’s procurement operations. The disturbing pattern in this particular business relationship, wrote Patterson, is that the CFO granted over $11 million in contracts to KPMG without competitive bidding—the kind of evasion of fiduciary rectitude that thrived for nearly 16 years under Mayor-for-Life Marion S. Barry Jr. “The preferential treatment that KPMG has received, in violation of basic principles of fair and effective procurement, raises the possibility that KPMG has been able to pursue its own business interests at the expense of the taxpayers,” wrote Patterson, who said that the matter merited investigation by D.C. Inspector General Charles Maddox.

Patterson also alleged that the CFO’s office acted as if it had carte blanche to push through the noncompetitive contracts. Instead of processing the contracts individually, Holt and her predecessor, Acting CFO Earl Cabbell, simply approved them as “add-ons” to the city’s whopper $21 million control board contract for a KPMG financial management system, known as the System of Accounting and Reporting (SOAR).

SOAR leaped into headlines two weeks ago as the slowpoke machine that delayed completion of the city’s fiscal year 1999 audit by 45 days. Many of the add-ons—like the DPW contract cited above—have no relation whatsoever to SOAR. When asked to justify using SOAR as a vehicle for DPW-managed competition projects, Holt snapped, “That was before me, I believe.” Her own documents show otherwise: The CFO, who took office last June, signed off on three DPW contracts worth $280,000 altogether.

The add-ons, furthermore, bear a quirk that should prompt shivers from the city’s good-government lobby. In seeking outside help with operations problems, city agencies customarily complete a “statement of work” outlining just what they want the contractor to accomplish. Nine of the KPMG add-ons, though, lack such job descriptions and include clauses reading, “Contractor shall perform services in accordance with the contractor’s proposal…”

That language says, in so many words, that KPMG is the one deciding which services the government needs and how much it should pay for them.

Holt says that the orders come from her shop: “We would have requested this work from KPMG,” says the CFO, although no documentation exists to back up that claim, according to Patterson. For its part, KPMG maintains that it “only responds to formal requests for proposals.”

Improper or not, the add-ons do reflect the business acumen of KPMG’s point man for D.C. accounts, Lawrence S. Herman. A personal friend of the mayor’s, Herman knows what’s hot in the D.C. bureaucracy—a mastery that helps account for KPMG’s hegemony in contracts dealing with “managed competition.” The firm has already snagged six contracts on this early Williams priority. (Most of the managed competition work is handled by KPMG’s Indianapolis office, and most of the contracts derive from SOAR.)

Another of Herman’s niftier pieces of corporate marketing is a July 1999 contract in which KPMG pledges to perform “benchmarking for fiscal year 2000 operating budget book.” Boiled to its essentials, the $65,000 noncompetitive contract requires KPMG to compare 14 key District agencies to those in Philadelphia, Indianapolis, Phoenix, Detroit, and Portland, Ore.—cities Mayor Anthony A. Williams has visited and cited as models for his local efforts.

KPMG’s city comparison proposal, of course, touts the firm’s “experience conducting such benchmarking engagements at the state, county, or city level.” One skeptic in the D.C. government, on the other hand, says that the only experience such a study actually requires is elementary computer skills. “This information is really easy to get—most of it is available on the Web,” says the source. And, although many D.C. government workers could use more training, Web surfing is a well-rehearsed specialty. For a lot less than 65 grand, some staffer could, say, click onto the comprehensive study of 35 different U.S. city governments that Syracuse University and Governing magazine released on Jan. 30.

But in light of D.C.’s growing addiction to consultants, using government workers to actually do government work suddenly seems a novel concept. At a Nov. 15 D.C. Council hearing on the topic, Patterson pressed Holt on her plans to wean the city from smartypants outsiders. “That’s one of the things we’re working on right now,” responded Holt. “We have been identifying the skill sets of personnel that we need….I can’t tell you when we will have the skills back in house.”

Holt’s assurances were tough to reconcile with the 14-page CFO document sitting in front of committee members. Over two years, the document showed, the CFO had issued more than 150 consulting contracts totaling over $110 million for everything from “SWAT implementation” to “ROD automation.” Heaven forbid we use regular city employees to implement SWAT and automate ROD.

“We now have a benchmark of $100 million spent on consultants,” says Ward 2 Councilmember Jack Evans, who chairs the Committee on Finance and Revenue. “I would expect not to see that again, and I will be very much against doing that.”

He’ll have to do some proselytizing with Holt, who guards her contracting prerogatives the way Anna Nicole Smith values her inheritance. After evaluating the CFO’s contracting practices vis-a-vis KPMG, Patterson on Jan. 5 requested that Holt bar any further noncompetitive add-ons to the SOAR contract.

The CFO’s brushoff came nine days later: “After a thorough review and assessment of your concerns the [CFO’s office] has elected to retain its rights under contract,” wrote Holt, noting that the SOAR contract had been awarded on competitive terms and that procurement regulations allow the ordering of additional work from the contractor. “Please be assured that this office shares your concern for fairness, price discipline, and the necessity for advanced acquisition planning….”

So KPMG will keep its express lane to the city’s treasury. In fact, after Patterson wrapped up her study, KPMG and Holt consummated two more noncompetitive contracts, totaling $580,000, for information systems at the University of the District of Columbia and the Department of Public Works. Like all SOAR add-ons, both deals sidestepped the council’s contract review prerogatives and, of course, whizzed right by the control board, which wouldn’t dare halt a gravy train that it had set in motion itself.

Look, then, at who’s left guarding the till: an appointed board accountable only to Congress, a CFO who could become an honorary KPMG partner any day now, and a mayor disinclined to throw red flags at consultant soulmates like KPMG’s Herman. With that crew in charge, LL is half-tempted to propose his own partnership with KPMG—how about journalistic benchmarking for all D.C. agencies?

Last year, after all, these powers that be allowed KPMG to continue crowding out its competitors in the lucrative arena of procurement reform. Back in August 1998, Compusearch had won a $1 million contract to install an automated procurement system—”OCP Express”—for all D.C. agencies, a project that was overdue by decades. When the Office of Contracting and Procurement stumbled in installing the system, however, the control board kicked off interim implementation of a KPMG product, known as Advanced Purchasing and Inventory Control System (ADPICS). Through a series of SOAR add-ons, the CFO’s office lopped off “interim” from ADPICS’ status, in effect elbowing Compusearch out of the ball game. ADPICS, by the way, had placed last in open competition, when Compusearch won the original contract.

In 1999 alone, the CFO’s office approved $500,000 in upgrades that have helped cement KPMG’s stranglehold on this piece of business—and it happened with a nod from the mayor. “We had so many procurement problems that I thought it was important to get a temporary working system in place,” says Williams, who says he confers with the CFO “on everything.”

To round out the story, KPMG in June snared a $418,000 contract to provide an interface between OCP Express and SOAR; six months later, the interface didn’t work, according to Patterson’s January report. In sum, Patterson blamed the double-dealing on procurement for $16 million in “confusion, inefficiency, duplication, and waste.”

Those who are looking for further examples of the firm’s coziness with officialdom should look to the Office of the Chief Technology Officer (OCTO). Under a 1999 contract, KPMG accountants are functioning as the office’s ad hoc CFO—a job description that includes reviewing contracts awarded to other consultants. “That gives them a lot of access to pretty good information if you’re interested in what the competition is doing,” says an OCTO contractor.

To their credit, Holt & Co. are limiting most of their KPMG contracts to the firm’s forte: systems engineering. By contrast, the company’s reputation as an objective analyst of management practices has suffered in recent years.

In November 1996, for example, KPMG was scouring management of the D.C. public schools for the control board, which was then executing its infamous schools takeover. In a briefing session with KPMG consultants, Herman reportedly issued the following instructions: “‘I want you to find out things about DCPS. Find everything that is abysmal. If anything is better than abysmal, come talk to me. We want to make everything look as bad as possible,’” recalls a former KPMG employee. KPMG did not address that allegation in response to questions from LL; spokesperson Marcie Odens Peck would say only that KPMG provides the District with “consistency, excellence, and commitment in a cost-effective manner.”

Doomsday mandates like those don’t shock Mary Levy, a schools budget analyst with the advocacy group Parents United and a fierce critic of KPMG’s work on D.C. schools. “That’s the way their reports read,” says Levy, who was particularly offended by the landmark KPMG product Children in Crisis, the document that the control board used to justify its schools putsch. “That report was terrible….They were comparing numbers for the D.C. school system in one year against other school systems in other years, and they didn’t understand the difference between operating budget and capital budget. How did they mess that one up?”

Here’s how: They were trying to please the guys at the control board, who were paying their bills. KPMG is hardly the only consulting firm that skews its studies to please the boss, which is a sound way to rake in millions in management overviews.

But while KPMG is still charging ahead, there are at least a few signs that some folks may be getting ready to pull the emergency brake. Holt, for starters, has admitted to having had “some difficulties” with the contractor in closing out the city’s fiscal year 1999 books. And at a council hearing last Thursday, KPMG reps turned in what may be the worst performance at a public hearing since bumbling Wilson building developer T. Conrad Monts.

When asked by Evans why the system was failing, KPMG partner Don Richardson responded, “I would just respectfully say to you that the system has worked as designed, and it has met all its requirements.” Evans then respectfully asked if one of those requirements was producing audits 45 days late. “I can’t speak to the audit schedule,” quipped Richardson.

KPMG’s clean-hands declaration captured the tenor of a hearing in which Holt, Maddox, and mayoral Chief of Staff Abdusalam Omer blamed everyone but Rock Newman—and KPMG—for the audit fiasco. “I found [KPMG’s] testimony to be woefully inadequate, and Patterson and I are going to look into that,” says Evans. There’s more: Patterson is also planning to investigate KPMG’s managed competition contracts in upcoming hearings.

In the same breath, Patterson will continue challenging the firm on what is emerging as her contractual pet peeve: KPMG’s $418,000 nonfunctioning procurement interface. “I want the $400,000 back,” says Patterson, who is already prepping for KPMG’s defense of the project. “My suspicion is that the answer will be that they performed to the terms of their contract—which they, of course, wrote.”

MILLENNIAL HANGOVER

After spending much of 1999 inoculating the District against the millennial bug, IBM is encountering an unforeseen Y2K glitch—the city won’t pay more than $36.7 million in IBM invoices it owes from May to December 1999. And instead of putting its hands on its hips, the infotech giant has demanded that the District pay up by Feb. 18; if it doesn’t, IBM will pull out of its ongoing projects in the D.C. bureaucracy.

“We want an indication that we’re going to get the full amount from the District,” says IBM communications specialist Mark Nelson.

Jack H. Winters, the company’s vice president of global services, issued the ultimatum to Deputy Mayor Norman Dong in a Jan. 11 letter. The firm’s drastic measures, wrote Winters, are necessary “[t]o minimize business risk while the District continues its efforts to identify funding….” Over the past four weeks, though, the two sides haven’t come much closer to a settlement. “We’d like to think we’d be able to resolve this before the 18th, but so far that hasn’t happened,” says Nelson.

D.C. Chief Technology Officer Suzanne Peck issued a terse statement on the matter: “When all is said and done, our contractors will be paid and the books will be clean.”

And if they’re not, IBM will in effect pull the plug on the computer systems at the University of the District of Columbia and the Department of Employment Services; under its current contract, IBM administers those systems from a remote site. “This letter is to serve as written notice that IBM will terminate the project if the District does not meet its contractual obligations,” wrote Winters. Linda Argo, spokesperson for Peck, says her boss is prepared with contingency plans if IBM makes good on its threat.

A pullout would end a six-month feud between the D.C. government and IBM over its Y2K consulting services. Last August, the chief financial officer in Peck’s unit questioned over $23 million in IBM invoices submitted for the various bug fixes. IBM consultants slogged through 650,000 lines of D.C. computer code in search of spots where the date changeover could have crippled city services.

In his letter to Dong, however, Winters noted that the District has “reviewed and approved” all IBM bills. “IBM expects payment for these services in the amount of $36,762,447.”

TOO MANY CHIEFS

The legendary mid-’90s battles between Mayor Barry and then-CFO Williams always had the look of a personality clash. Whether the issue at hand was budget estimates or congressional relations, the bout always featured an old political hack clinging to his few remaining powers vs. a bumptious newcomer spouting off about fiscal responsibility.

The CFO-mayor rivalry, however, appears not to have ended when Hizzoner grudgingly surrendered the Seal of the District of Columbia 13 months ago. In the 4-year-old governing regime foisted on the insolvent city by Congress, the CFO and the mayor are natural antagonists. And sure enough, last December, Williams and current CFO Holt nearly went to war over the mayor’s plans to shell out $9.9 million in bonuses to more than 5,800 unionized workers. “She jammed us every step of the way,” says a mayoral staffer, noting that Holt rejected nearly all of the mayor’s funding proposals and forced him into a nasty fight with the council.

In early January, Williams fired back, issuing a little-noticed executive order effectively stripping Holt of her authority to administer the city’s industrial revenue bond program. The order, dated Jan. 7, delegated that authority to the mayor’s deputy for planning and economic development, a post currently occupied by Eric Price.

Williams’ flirtation with executive fiat must have stemmed from a cocksure mayoral attitude early in the millennium: In the same week, the mayor hatched his plan to seize control of the D.C. public schools. Says an unnamed D.C. financial official about the bond move, “It was just a power grab.”

And it was an illegal one at that. In a Feb. 7 letter, control board Chair Alice Rivlin made like Wilt Chamberlain, swatting Williams’ lame shot into the cheap seats. “[I]t is the Authority’s opinion that the Order is inconsistent with provisions of the District of Columbia Financial Responsibility and Management Assistance Act of 1995, Public Law 104-8, which must be amended before the Order can be effectuated,” wrote Rivlin. In the first bit of evidence that control board lawyers are earning their keep, Rivlin’s letter cites 10 different provisions of law to uphold her view that CFO Holt must retain authority for administering the bond program.

With each legal citation, Holt breathed a sigh of relief. “We definitely had some concerns about [the order],” says CFO spokesperson Lucy Murray. “It was clear to us from our reading that the financing of programs has to stay over here with the CFO.” Murray, however, says that a recent agreement between the mayor and the CFO would allow Price to market the bond program.

Just like the council’s obstruction on the schools plan, Rivlin’s ruling forces a detour in what is emerging as Williams’ governing program: consolidate power in the mayor’s office and then improve services citywide. Mayors in other cities have used industrial revenue bonds to revitalize blighted neighborhoods and assist nonprofits in building otherwise unaffordable facilities. “Some cities have used them very aggressively to expand capacity for factories and industrial plants,” says economic development consultant Marc Weiss, a former official in D.C.’s Department of Housing and Community Development.

Although Williams has never waxed wistful about erecting steel mills on Benning Road, he clearly wants to use bonds to deliver on his economic development promises. The bond grab, after all, came just three weeks before Williams lured the city’s premier bond expert, Michael Hodge, away from Holt’s office. Widely acclaimed as a debt-financing genius, Hodge increased the number of bond deals in D.C. from one in 1995 to 24 in 1999 and reduced processing times from 6 to 9 months to 60 to 90 days.

In his new assignment, though, Hodge will have Rivlin and Holt looking over his shoulder. CP

Got a tip for Loose Lips? Call (202) 332-2100, Ext. 302, 24 hours a day. And visit Loose Lips on the Web at www.washingtoncitypaper.com.