STATE OF NEW JERSEY OFFICE OF THE STATE COMPTROLLER WASHINGTON BOROUGH (WARREN COUNTY) A PERFORMANCE AUDIT OF PROCUREMENT PRACTICES A. Matthew Boxer May 6, 2009 COMPTROLLER PA-03 TABLE OF CONTENTS Background ..................................................................................... 1 Audit Objective, Scope and Methodology ................................... 4 Summary of Audit Results ............................................................ 5 Audit Findings and Recommendations ........................................ 6 Procurement Practices ............................................................ 6 Construction of Public Works Garage ................................ 11 Purchase of Fire Truck ......................................................... 16 Internal Controls ................................................................... 18 Reporting Requirements ............................................................. 20 Auditee Response ........................................................ Appendix A 0 BACKGROUND Washington Borough (Borough) was incorporated as a borough by an Act of the New Jersey Legislature on February 20, 1868. As of the 2000 census, the Borough had 6,712 residents. Washington Borough is governed under the Faulkner Act/Council-Manager form of municipal government. This form of government consists of a Mayor, a Municipal Manager, and a Council. Under this form of government, the Municipal Manager serves as the chief executive and administrative official. The Municipal Manager appoints and supervises all municipal department heads, officers, subordinates and assistants; negotiates all contracts and assures their faithful performance; recommends and executes all municipal improvements; attends all Council meetings, apprising the Council of financial and other municipal matters as necessary; and prepares the municipal budget. In addition to having the power to appoint the Municipal Manager, all matters of policy are vested in the elected Council. The Mayor’s duties are confined to executing bonds, notes and contracts on the Borough’s behalf, and filling certain board vacancies. In calendar year 2006 (CY 2006), Washington Borough expended $96,577 in New Jersey State grant funds. The Borough received additional State aid of $242,643. In calendar year 2007 (CY 2007), Washington Borough expended $700 in federal grant funds and $1,482,665 in State grant funds. The Borough received additional State aid of $215,139. The map on the following page shows the location of Washington Borough within Warren County. The Borough is entirely surrounded by another municipality, i.e., Washington Township. 1 According to its audited financial statements, Washington Borough’s budgeted expenditures for CY 2006 were $5,845,224 and actual expenditures were $5,845,224. Budgeted expenditures for CY 2007 were $6,168,643 and actual expenditures were $6,168,639. In large part, these expenditures were funded through local property tax dollars. Figure 1 on the following page depicts CY 2007 actual expenditures by category. 2 3 AUDIT OBJECTIVE, SCOPE AND METHODOLOGY The objective of our performance audit was to evaluate Washington Borough’s procurement practices for the period January 1, 2006 through December 31, 2008. Our audit included an evaluation of internal controls over procurements and purchasing as well as compliance with applicable laws and regulations. Specifically, we evaluated: 1. procurement policies and procedures; 2. the contract review process; 3. how decisions were made concerning procurements, such as responsibilities, authority and delegation; and 4. use of bond proceeds for capital projects. This audit was performed in accordance with the State Comptroller’s authority as set forth in N.J.S.A. 52:15C-1 et seq. We conducted our performance audit in accordance with Generally Accepted Government Auditing Standards issued by the U.S. Government Accountability Office. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. To accomplish our objective, we interviewed Washington Borough management and staff, and reviewed relevant laws, policies and procedures. Using data provided by Washington Borough, we also performed a review of expenditures and tests of transactions. 4 SUMMARY OF AUDIT RESULTS We conclude that Washington Borough’s procurement practices are inadequate, have had negative fiscal consequences for the Borough, and need to be strengthened. For example: • The Borough did not award professional services contracts in compliance with the State’s Pay-to-Play legislation. • Borough staff and management did not always follow the requirements set forth in the Borough’s Purchasing Policy and Procedure Manual (Manual) or State law. In addition, the Manual is outdated. • After ten years and more than $1.9 million in costs, which is more than 280 percent over the original estimate, a prefabricated public works garage is still not completed. Engineering fees on the project, which were originally estimated to total $33,700, stood at $419,330 as of December 2008. Poor contract management and other Borough practices are the cause. • The specifications for the purchase of a fire truck appeared to contain items proprietary to a specific manufacturer. This manufacturer was the only vendor to bid and was awarded the contract following a procurement process not designed to promote competitive bidding on this complex purchase. Our evaluation of Washington Borough’s procurement practices also identified several internal control weaknesses related to its fiscal operations. We make 15 recommendations to enhance Washington Borough’s procurement and fiscal operations. 5 AUDIT FINDINGS AND RECOMMENDATIONS Procurement Practices Washington Borough management did not follow appropriate procurement procedures. _______________________________________________________________ Our review of Washington Borough’s Purchasing Policy and Procedure Manual dated May 2005 identified the following: • The bid threshold contained in the Manual is $25,000. Pursuant to N.J.S.A. 40A:11-3 the current bid threshold is $29,000 in municipalities with a “qualified” purchasing agent.1 Washington Borough does not have a “qualified” purchasing agent and therefore should be using the lower bid threshold of $21,000. • The Manual does not include procedures for Borough staff to follow to comply with Pay-to-Play legislation, as set forth in N.J.S.A 19:44A-20.4 et seq. Our review of eight purchase orders from CY 2007 found the following exceptions to Washington Borough’s policies and State law: • One purchase order ($6,850) for repairs on a sweeper was accompanied by only one quote. According to Washington Borough’s Manual, three quotes should have been obtained. Further, State law (N.J.S.A 40A:11- 6.1) requires a minimum of two quotations for items estimated to cost more than 15 percent of the $21,000 bid threshold, i.e., over $3,150. Obtaining multiple quotations helps ensure the Borough purchases goods and services at the lowest price and guards against favoritism. 1 Qualified purchasing agents are certified in accordance with criteria established by the New Jersey Department of Community Affairs. The criteria include actual experience as a purchasing agent and completion of certain education requirements. 6 • One purchase order ($5,000) for the purchase of a lawn mower was accompanied by a form containing three quotations on different models of lawn mowers, all from one vendor. Instead, a minimum of two quotations from two different vendors for the same purchased model should have been obtained as per N.J.S.A 40A:1-6.1A. • One purchase order ($1,350) for repairs on a loader was not accompanied by quotes. Washington Borough’s standard procedures require a minimum of three written price quotations for items estimated to cost over $1,000. • Two purchases exceeded the original quoted price without justification (or approval by Washington Borough’s Borough Manager2). One purchase had an original quote of $6,850 and a final cost of $8,543, an increase of $1,693 (25 percent). The second purchase had an original quote of $6,300 and a final cost of $11,085, an increase of $4,785 (76 percent). The lack of a justification for the increased costs circumvents budgetary and approval controls. • Purchasing activities were not reviewed and monitored by the Borough Manager, as required by the Borough Code, to ensure legitimacy and accuracy. During the period of our audit, the CFO/Treasurer was allowed to complete purchasing activities with minimal oversight. Six purchase orders were not approved by the Borough Manager. Non-Compliance with the Pay-to-Play Law Washington Borough did not adhere to contracting procedures required by the State’s Pay-to-Play legislation and related State-issued guidelines. In general, Pay-to-Play legislation requires that in awarding Professional Service contracts otherwise exempted from formal bid procedures, an entity must select either a “fair-and-open” process (one that bases selection of prospective professionals on award criteria publicly established by the entity in advance of the award) or a 2 Washington Borough uses the term Borough Manager to refer to its Municipal Manager. 7 “non-fair-and-open” process (one that does not require public notice and application