A free thinker in the Heartland...

Tuesday, July 18, 2006

How to Lie...

What article prompted this editorial? From the Fort Wayne Journal-Gazette:

At first blush, it might seem that Gov. Mitch Daniels’ new administration is doing a great job steering Indiana’s public purchasing dollars to companies in the state.

A recent “Buy Indiana” report tracking state expenditures on goods and services from July 1, 2005, to June 19, 2006, shows that 81 percent of the dollars are going to Indiana entities.

That is if you consider the University of Cincinnati and the University of Utah to be from Indiana.

Wanna read the rest of it?

The state’s report does – qualifying them as Indiana companies under the “principal place of business” designation.

Or at least it did until a recent analysis by The Journal Gazette identified the errors.

Those payments were small – $4,000 and $41,000 respectively – but represent cause for concern with the rest of the data as several other flaws in calculating the numbers make the overall percentage suspect.

And that doesn’t even take into consideration what some call an inflated definition of an Indiana business.

Before the 2004 governor’s race, many had never considered where the state’s procurement dollars were going. But then-candidate Daniels made it a key plank of his campaign. At the time, according to published reports, the Democratic administration reported at least 15 percent of the professional services and 40 percent of the goods bought were from out-of-state companies.

Daniels conducted news conferences and aired critical TV ads. He also took a swipe during a debate about the state’s purchase of rock salt from Illinois and Michigan.

(The state, ironically, signed a purchase agreement running August 2005 through this month for $1.3 million in rock salt from a Kansas-based company.)

Daniels promised to get the purchasing number to 90 percent with help from a price preference for Indiana firms bidding on state contracts.

The Journal Gazette examined a public purchasing database provided by the Indiana Department of Administration that contained more than 31,000 payments to various entities during the past fiscal year.

The total dollars flowing out were more than $2.1 billion with 81.1 percent, or $1.7 billion, labeled as going to Indiana vendors.

Not all of the payments are specific to a contract because items that are less than $25,000 can be bought through a purchase order. In fact, of the 24,321 Indiana vendor payments, more than 21,000 were less than $25,000.

“I’m pleased with the overall improvement but you’re right, there’s still individual things we trip over that we want to change,” Daniels said. “Many of the examples that caught my eye originally have been corrected.”

For instance, he touted the fact the state recently began buying Indiana-based Dixie Chopper lawn mowers.

Word games

Department of Administration Commissioner Carrie Henderson, whose agency is in charge of state procurement, said the original definition of an Indiana business included having its principal place of business here, paying a majority of its payroll to Hoosiers and employing Indiana residents as a majority of its workforce.

In 2005, Daniels and a Republican-dominated legislature added two other definitions – a business that makes significant capital investments in Indiana or has a substantial positive economic effect on Indiana. Specifically, that means a minimum $5 million capital investment or being designated among the top 500 companies in terms of number of employees or taxes paid in Indiana.

“The category was expanded a little bit to include larger employers that weren’t necessarily headquartered here but who had really meaningful investment in this state and employed a lot of people and … contributed to the economy in ways that were important,” Henderson said.

The change has caused some consternation – partly because it makes it difficult to compare old stats against new stats. It has also made it possible for major national and international companies that are headquartered elsewhere to receive the benefit of being an Indiana company.

Some examples include Wal-Mart, Aramark Correctional Services and General Revenue Corp.

Aramark, based in Philadelphia, reaped $21 million in the past year after gaining a major Department of Correction contract to provide food to prisons. Of the company’s 240,000 employees in 20 countries, 2,855 are in Indiana.

It qualifies as an Indiana company because it is a top 500 company.

Cincinnati-based General Revenue Corp., meanwhile, took home $13 million for administering the state’s tax amnesty program. Again, it qualified because it is a top 500 company.

Preferential treatment

So what benefits do companies receive in the procurement process if they are deemed Indiana businesses?

If the commodity or good is acquired through a straight bidding process, which is basically a price competition, an Indiana company automatically gets between 1 percent and 5 percent of its bid price lopped off for scoring purposes.

The percentage goes down as the contracts get larger.

For more complex service arrangements, officials use a Request for Proposal process. Henderson said each bid is scored on a 100-point basis.

A quarter of those points relate to the Buy Indiana program, including whether the bidder counts as an Indiana company.

“We truly are an Indiana company and a lot of our competitors come from out of state,” said Geoffrey Buck, CEO of InteCare Inc. of Indianapolis. “They do all kind of things to make themselves look like an Indiana company.”

And, he noted, they end up getting the same preferences as Indiana firms.

InteCare received $34.7 million from the state since July 2005. Buck said almost all of the money passed through the non-profit organization to community mental health centers and other mental health and addiction providers to pay for services.

He appreciates the state work but acknowledged it is hard for his group to compete.

Local perspective

At least two local business owners say the Buy Indiana initiative is paying off – both for their companies and for other in-state businesses.

Kathy Carrier, owner of Briljent LLC, said Indiana is “by far” the firm’s biggest client, accounting for about one-third of its revenue. Fort Wayne-based Briljent provides services in the areas of technical writing and documentation, curriculum design, learning assessments, hiring and training.

Briljent employs more than 60 people and expects to be at more than 70 by the end of July.

Among the firm’s contracts are an agreement to translate a Web site into Spanish and provide a full-time technical staff person to the Family and Social Services Administration’s Division of Mental Health and Addiction; a contract to map the processes in the Attorney General’s accounting and human resources areas and identify opportunities for automation; an agreement to assist with the basic actuarial analysis for property and casualty insurance rates for the Department of Insurance; and a contract to deliver cardiopulmonary resuscitation and other training to health care workers across the state for the Department of Correction.

The firm is the primary company on two contracts and a subcontractor on 38 more.

“The Buy Indiana program has really changed the landscape for the better,” Carrier said.

Some of those winning bidders are based out of state, and Carrier doesn’t have a problem with the five criteria state officials have developed to allow companies to be granted “Indiana business” status.

“I know (the Indiana Department of Administration) to be very, very careful and thoughtful and pro-business and pro-Indiana,” she said. “And they’ve been very helpful.”

Tom Borne, company president for the Asher Agency, a Fort Wayne-based advertising firm, has handled numerous state contracts over the years. The company is busily working on marketing for the Indiana State Fair, which begins Aug. 9.

In September, the state put all media buying under one umbrella. Asher won that $10 million-to-$12 million contract, which has been renewed, Borne said. The agency also won a contract to work on the Department of Revenue’s tax amnesty program.

Borne says the Daniels administration has done a good job of selecting in-state companies for contracts.

“I truly am impressed that this administration is looking for results. They’re not looking at whether you’re a Republican or a Democrat,” he said. “I admire the governor for living up to what he says.”

Questionable records

The reliability of the state’s data is a problem, though.

One major issue relates to a large part of the Indiana vendor list categorized as “ZIP code.” It accounts for $461 million – or 27 percent – of the Indiana vendor total.

Department of Administration Deputy Commissioner Kevin Ober said these companies have not yet self-certified. For new contracts, administration staff verifies their status as Indiana companies before an award.

But most of the dollars tracked in the database relate to previously existing contracts. When the new Indiana definitions were put in last year a note was sent to all vendors asking them to self-certify as Indiana companies if they qualified.

Those who failed to do so fell automatically into the ZIP code category, which essentially means their checks go to Indiana addresses.

The Department of Administration has a team slowly going through those to make sure they are indeed Indiana companies. In fact, when the new reporting methodology was started last October, companies recognized by ZIP code constituted half of the Indiana calculation.

In the meantime, the $461 million is still counted toward the administration’s Indiana number.

To confuse things further, two of the top 10 vendors are quasi-state agencies themselves – the State Office Building Commission and the Indiana Transportation Finance Authority, which has now been folded into the Indiana Finance Authority.

They are charged with handling some of the state’s major building and road construction projects, and the payments represent dollars paid by state agencies for services performed by the entities.

Their combined $186 million in payments count toward the Indiana vendor list because the entities exist solely in Indianapolis. The problem is they are known legally as “bodies corporate and politic,” and the Department of Administration’s report does not track their spending.

That means taxpayers don’t know whether that $186 million went to Hoosier firms to do the work or provide the services.

Another oddity is that some companies are counted on both the in-state and out-of-state vendor lists. For example, Walsh Construction Co. of Illinois ranks ninth on the Indiana vendor list, bringing in $27 million since July 2005.

But it also reaped an additional $20 million of taxpayer money as an out-of-state company.

Department of Administration officials said Walsh is a national company with a regional office in LaPorte that did not self-certify. As a result, the spending is classified depending on the two different addresses where the state has sent payments.

Secure in the statistics

Despite the confusion, Henderson is confident in the numbers.

“We think it is an accurate number, and we’ve been doing a lot of certification and audit to get us a lot of comfort. Plus the front end of the process is much improved, so I think the integrity of the number is good,” she said. “We’ve really committed to making sure that the numbers we have are real.”

A former Fort Wayne mayor, State Rep. Win Moses Jr., a Democrat, said he definitely cares where Indiana’s tax dollars go and is glad Daniels has made it an administration priority.

“I say this as a mayor who tried to buy locally because it makes a big difference in the vitality of your community,” he said. “The money ripples through the economy and people can buy homes.”

As a practical matter, he considers a vendor to be an Indiana company if the employees are living in the state and getting the money from the contract – something Daniels has stressed.

During the campaign, Daniels said “a storefront marketing operation is not enough; hire Hoosiers so the tax dollars recirculate here.”

But Moses does note that the definition shifted over time in a partisan move.

“It says more about the politics about the governor than any difference for Hoosiers,” he said. “The definitions don’t make common sense and they have been used in an apple-and-orange description, but as long as Hoosiers are working and the bulk of the dollars are staying in Indiana, I’m happy.”

State Rep. Randy Borror – a Fort Wayne Republican, former colleague of Daniels’ and the man who carried the governor’s controversial Toll Road lease legislation – thinks “they are doing as well as any other administration has done with more sensitivity to it.”

He noted there is a fine line between protecting a state’s economy and creating an un-level playing field. As a free-market enthusiast he believes competition will ultimately solve the issue.

That’s why he’s not enamored of the state preference given in contract scoring.

“Anytime we try to manipulate the market we find problems,” Borror said. “I believe the market over time will treat those companies fairly if they have a proper product price and a good product.”

Daniels said the state won’t – and shouldn’t – ever reach 100 percent.

“There will be some (contracts) where there just isn’t a given good or service available in the state and there will be some where to protect the taxpayer interest there’s just too big a savings available elsewhere,” Daniels said. “So we set 90 percent as our goal and I don’t know if that’s attainable, but we’ve gotten two-thirds of the way there.”