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Several years ago, we started work on a project about state contracts. The idea was to utilize the contract databases that the ten biggest states were putting up on much-heralded transparency websites to analyze trends in state contracts. This turned out to be a highly complex and frustrating task. We never were able to finish. Contract data was entered inconsistently. Contract information lacked timeliness and was often incomplete. Many data fields were blank. Our effort to analyze the information from databases of state contracts ended in early 2014. We’re sure there have been improvements since then and we’d love to try again. But a June 2017 audit by the California State Auditor provides a warning that we would run into similar obstacles today. Looking at the Department of General Services and the California Department of Technology, the audit found countless problems. In a letter to the Governor and legislative leaders, auditor Elaine Howle wrote:  “General services did not ensure the integrity of the data in the database it created to track the State’s contracts. As a result of its lack of oversight, the database contained numerous errors, essentially rendering it ineffective for its intended purpose.” Yesterday, we talked with Howle about the audit. She knows there’s enormous potential to learn more about the state’s contracting decisions by analyzing state data. “But if the data going in is bad, no matter how you analyze it, it’s going to give you bad information.” Poor data quality is a constant headache for her office and just about every other state audit and evaluation office, as we chronicled in the Causes, Costs and Consequences of Bad Government Data, our July 2015 cover story in Governing magazine.  The California State Auditor’s office has focused on this issue to such an extent that every two years, it releases a data reliability report, which summarizes the data problems it has found in multiple audits. In talking with Howle, several issues stood out relating to the contract database audit. The audit found that agencies were often entering data into the system incorrectly and inconsistently. Multiple contracts and contract amendments were missing from the database. Contracts were also identified as competitively bid, when they weren’t. For example, the Department of Motor Vehicles listed a $34 million contract as competitively bid. When auditors looked more closely, only the original $3 million contract was competitively bid. The original contract was subsequently amended “nine times, without competition,” increasing its value to $34 million. The audit covered database issues that occurred between July 2011 and December 2015. In January 2016, the General Services department began transitioning to an expensive new database, but Howle is troubled that many of the same data quality problems remain.  “We’re very worried about the problems continuing with the new system,” she told us. Currently, agency personnel still lack training that would help improve the data inputting process. Information is still inconsistent. In addition, the new database, like the old one, lacks comprehensible easy to access information on contract amendments. The conclusion of the audit and its recommendations centered on the need for far more oversight of data quality by both General Services and the Department of Technology, greater attention to the analysis of the data, and heightened enforcement of rules to prevent unnecessary use of non-competitive contracts.

We’ve had the good fortune, for some time now, of working with the Volcker Alliance on a series of projects and reports. The current effort involves a massive fifty-state analysis of practices of state budgets, and we thought Barrett and Greene, Inc. readers would benefit from hearing all about it. Bill Glasgall who spearheads the project was kind enough to write the following essay for us. Thanks, Bill. By William Glasgall If you want to investigate the practices of all fifty US state budgets, what better way to do it than fan out across the country to do the research? That is the modus operandi of the Volcker Alliance’s Truth and Integrity in Government Finance Project, which is relying on a network of public finance professors and graduate students at eleven public administration and policy schools from New York to California to dig into a mountain of fiscal documents to help answer the question, “What, truly, is a balanced budget?” That answer is critical because while forty-nine states require balanced budgets by law, and the lone holdout, Vermont, follows its peers’ example, how revenues and expenditures are mixed and matched can vary widely from state to state and year to year. In asking a common set of questions about the states’ budgeting practices, the researchers are highlighting which states use one-time revenue items to achieve balance; the state of pension funding and its relationship to annual or biennial budgets; whether and how states forecast long-term financial trends; and how transparent is each state’s budget process. The work follows the Alliance’s 2015 publication of Truth and Integrity in State Budgeting: Lessons from Three States, written by special project consultants Katherine Barrett and Richard Greene, as well as subsequent papers by the duo covering budget transparency and budget information sources for policymakers and civic groups, taxpayers, and the media. In early June, Barrett and Greene joined Volcker Alliance Chairman Paul A. Volcker, President Tom Ross, Director Richard Ravitch Matt Fabian, project consultant with Municipal Market Analytics Inc., and the Alliance’s state and local team to meet in New York with academics from the eleven schools to discuss progress on the Truth and Integrity project. A full report on the research is planned for later in 2017, and preliminary findings recently appeared in the Bond Buyer newspaper. Among the findings in fiscal 2016: • Half of the states failed to make contributions to public employee pension systems that the plans’ actuaries recommended. • About 20 percent of states filled budget gaps with proceeds of asset sales, upfront payments on financings, or other financial transactions. • Seven states borrowed funds to close budget deficits, while 17 shifted current-year costs to future years. • Only a handful of states fully disclosed the cost of deferred infrastructure maintenance.

We’re taking this week off, but wanted to alert you to our Second Quarter Blog Subject Guide.  This document lists our blog posts under topic headings so that readers with particular interests can find what they’re looking for. The Second quarter guide covers the period from April 1 to June 30th, 2017. Our First Quarter Blog Subject Guide covered our posts between January 4 (when we launched this website) until March 31. You can also find both guides in the Resources section of our website. We’ll be back in action on Tuesday of next week.

We’ve written a lot about citizen distrust of government, which we abundantly believe is a bad thing. On the other hand, introspectively, we’re aware that we may be as much a part of the disease as we are of the cure. For example, we lean heavily on performance audits for the news we cover — but it’s rare that we give much attention to audits that say everything is swell. Instead we,  like many government observers, tend to focus on the audits that point out aspects of government that are flawed. Here’s our excuse: We have not figured out a good way to report on government audits that find little wrong and still convince readers to click through to see the details. It’s the old man bites dog/dog bites man issue.  Some skeptics refer to this phenomenon with the mantra, “You lead with what bleeds.” And we’re not the worst, by any means. When it comes to local newspaper, TV, Internet or radio coverage not only are positive audits virtually ignored, one tiny negative can be plucked out and turned into a headline. We don’t do that. There is, however, something the auditors can do to help ameliorate this problem. Missouri’s audit office has a neat way of putting its audit results into context and that, we believe can be a big help. The Missouri system provides audit ratings, based on both the quantity and seriousness of the findings, as well as the efforts made to fix the problems. Audits are labeled poor, fair, good or excellent. A somewhat different rating system is in use by the Texas State Auditor’s Office, where individual findings are labeled on a low, medium or high scale (accompanied by colored dots). We have not noticed other examples. We visit lots of audit offices and believe this kind of system is quite rare. The Missouri rating system was designed before the current auditor, Nicole Galloway, took office in spring 2015, but she’s a big supporter of the practice. “I strongly believe in the rating system. It serves the citizens well,” she told us. “The sky is not falling with every audit report. Citizens would like the audit report to be put in context.  The rating system does that.” There is some subjectivity to the ratings, which are not formulaic. Sometimes an audit with a handful of minor findings could still get a good, while an audit with one major finding could be labeled fair. Auditors use their judgment. One advantage of the rating system is that entities with a lower rating have a chance to show improvement. Getting a “fair” rating is nothing to brag about, but if an agency is moving up from poor, it does show that improvements are in the works.  A poor rating also helps the audit office focus attention. “For every poor rating, we conduct a follow-up review. If there’s one hot-button issue in a ‘fair’ audit, we may do a follow up just on that,” Galloway said. One other advantage to the system: When Carroll County, Missouri got an excellent rating last year, the county’s audit was accompanied by a press release from the auditor’s office announcing “the first-ever excellent rating to a county” since the rating system started in 2011. (About 5 percent of audits, in general, receive excellent ratings.) The news was covered by stations KMMO and KMZU. Counties and elected officials celebrated with cake.

Over the course of years, we’ve written extensively about the problems with state tax systems, and proposed a number of “solutions.” At or near the top of the list of approaches we’ve recommended has been to expand on the number of services that should be taxed. After all, the logic goes, many of the states’ economies have shifted from those based on manufacturing to those based on the provision of services. And yet a whole host of business activities — like funeral services, home repair and personal care — have tended to escape the taxman’s net in many places. And yet, actions to extend sales taxes to many new services have been stifled in state after state according to an excellent article in the Pew Charitable Trusts’ Stateline, by Elaine Povitch. (Thanks to Kil Huh, of Pew, for pointing out this piece via Twitter). Povitch points, for example, to an effort in Oklahoma to tax more services, writing that the proposal “immediately ran into trouble both from anti-tax legislators who predominate in the conservative state, and service industries that could have been affected. The funeral home industry called the proposal a ‘death tax’ and argued that families already burdened with thousands of dollars of funeral expenses didn’t need a sales tax bill on top. “‘Should I smoke? I am going to pay a price. They’re going to tax me more. But I still have a choice of not smoking,’ funeral home owner Jerry Dillon told a Tulsa, Oklahoma, ABC affiliate in February. ‘But death is gonna happen. Let’s not take advantage of a grieving family at the worst times of their family’s life.'” Povitch’s article goes on to demonstrate that problems continue to exist even in states that have been able to get expanded service-based sales taxes. She writes, “Since North Carolina began implementing a tax on some services this year, which was enacted in 2016, the Department of Revenue has been flooded with questions about what is taxable and what is not. There have also been inquiries about how to collect and remit taxes from businesses that have never had to worry about it before, according to Schorr Johnson, public affairs director for the department. ‘People are looking for guidance, especially in clarifying the definitions … about what is and what is not taxable,’ he said.” We strongly recommend you read the full piece, which you can find by clicking here.

A couple of decades ago, like many observers of government, we were wildly exuberant about the potential for state and local governments using  websites to improve transparency, involve the citizenry, provide fast, efficient services and cultivate a one-on-one relationship with taxpayers. Back in 1999, we wrote in Governing magazine that “the siren call of the Internet intrigues [the states]. Many states now have detailed websites where citizens can call up all sorts of information about jobs and tourism and often find a lovely full-color photograph of the governor, available to be printed out.” We went on to write about the wonderful opportunities in advanced states to do amazing things like sign up for fishing licenses or pay tax bills. My, how time has passed. Many of the futuristic opportunities we mentioned have long since become a reality. Sadly, reality is a two edged sword, and even as the capacity of the Internet to improve state and local government services to the public has grown, there’s much more to complain about as well. Here are a handful of our gripes. Some may seem minor, but they all get under our skin: 1) Missing dates. When we find documents on websites, particularly those that consist largely of text, they’re often missing any kind of date. As a result, it’s difficult to tell whether the information is current or thoroughly out of date. 2) Missing phone numbers. It’s almost as though cities and states have forgotten that some folks might want to reach their representatives with a telephone. Often, but not always, you can find e-mail addresses, but phone numbers are often missing. The phrase “contact us,” is overrated. 3) Queries. Many state and local websites give users the opportunities to ask questions by filling out a form, which is deposited in a “general mailbox,” of some kind. This might seem like an efficient way to triage the questions that flow in. But in our experience, most of our questions fall into the hangnail, not the heart attack stack – and so we never hear back at all. This can’t do any good for citizens’ faith that government cares. 4) Un-English English. Acronyms are epidemic online, and they can stand as a giant stumbling block between alleged transparency and real understanding of an issue being featured on line. 5) Search tools. Many state and local websites have some kind of search mechanism. We repeatedly blunder into the error of believing that we can actually find what we want on the site through this fill-in-the-blank service. But it’s not always clear exactly what’s being searched – the website itself, or the entire Internet. And we find ourselves frustrated by the search findings more often than not.

Multiple tensions afflict state-local relationships. States often balance budgets on the backs of locals. They mandate services without funding and increasingly pre-empt local action. So, it wasn’t a surprise to us to see the 2017 Michigan Public Policy Survey reveal that nearly half of local officials surveyed rated their relationship with the state as either poor (13 percent) or fair (36 percent). But we did wonder why the dreariest assessment of state-local relations came from counties. When researchers at the Center for Local, State and Urban Policy at the University of Michigan, disaggregated the survey results, it found 19 percent of county officials rated their relations with the state as poor and 41 percent said fair. We asked Steve Currie, executive director of the Michigan Association of Counties, why he thought counties appeared to have the worst relationship with state officials. His answer focused on money. Counties have more mandated services than other forms of local government. That means that when property taxes are capped (as they have been in Michigan) or when tax exemptions reduce local revenue (as they do in Michigan), the pain is greater. Currie believes some of the problem boils down to structural issues. Cities and townships get constitutional revenue sharing from the state, whereas counties don’t have that protection. At the same time, he says counties have more limited revenue raising capability for themselves. Was he surprised by the results of the survey? “I talk to county commissioners every day. The angst wasn’t surprising to me, but I was a little surprised to see that other levels of government weren’t quite as frustrated as our county folks,” he told us. County frustration, which we hear about all the time, comes partly from being poorly understood.  The Michigan Association of Counties has produced a web page to fix that problem, but it still grates. We hear about the plight of misunderstood counties all the time. “Everyone knows what a downtown area of a city is and what services are provided,” says Currie. “Counties deal with the services that people don’t want to think about until they have to – local public health, community mental health, court systems and jails. “These are all very expensive to provide. You don’t think about them until you need them.”

The sentence that we’ve heard most frequently about states in our 25 plus years of researching them has been “they vary.” They sure do. We entertained ourselves this morning by skimming through an excellent ranking of state performance that was published this week by the Missouri Auditor’s Office. We’ve seen “how do we compare” documents from a variety of other state auditor-evaluator offices, but thought this one was particularly good. Of course, it draws attention to Missouri specifically, but the rankings for the other 49 states are there, too. The comparisons cover the economy, education, civic involvement, health, crime and transportation and include 28 separate rankings. It was put together by the Harry S. Truman School of Public Affairs’ Institute of Public Policy at the University  of Missouri – Columbia. Some of the rankings surprised us. (The fact that they did, probably shows some admitted prejudices about how we think states are likely to perform.) Our home state, New York, had the second to lowest property crime rate per capita and Hawaii had the highest. Vermont had the lowest property crime rate per capita. (2015 data) Nevada had the lowest percentage of roads in poor or mediocre condition. Hawaii, again, had the highest. (2013 data) Minnesota, where the I-35 West St. Anthony Falls Bridge famously collapsed in 2007, has the lowest number of deficient or obsolete bridges. (2014 data) Montana has the highest percentage of the population with a high school diploma (93.5 percent) and California (where our son and daughter-in-law live) has the lowest (82.2 percent) (2015 data) Kentucky is among the states with the highest 4th grade reading scores. (2015 data) Idaho and South Carolina (where our daughter lives) had the highest job growth rate in 2014-2015. Maine and Wisconsin had the highest voter turnout rates for the last mid-term elections in 2014 (58.7 and 56.9 percent ). New York and Indiana had the lowest.(29 and 28.7 percent). By the way, Missouri is found at the middle of the pack for most of the rankings. But it does rise to the top and bottom of some lists.  Its state and local tax revenue is among the lowest as a percentage of personal income (2013 data), and its 17-cent cigarette tax is the lowest. (2016 data) Its percentage of adult smokers – 22.3 percent of the population – is among the highest. (2015 data)

We’ve written a good deal about auditor independence lately. The issue comes up all the time in our interviews, whether it involves retaliatory budget actions, departmental resistance to document requests or rejection of audit topics.  We’re not alone in sensing rising tensions. The Institute of Internal Auditors recently published an article about public sector auditors, entitled “Under Siege”. Some attacks on auditors threaten their very existence. Last week, we wrote about Lawrence, Kansas, where City Manager Tom Markus has asked for the one-person City Auditor office to be abolished. He made the same request of the Lawrence City Commission in 2016, but it failed. No decision has been made yet by the commission this year. The Lawrence Journal-World ran an editorial supporting the auditor on June 14th, a day after the issue was discussed in a budget working session. “Perhaps the city of Lawrence should elevate — instead of eliminate — the role of city auditor,” it said. In a letter to the editor on Monday, Rob Chestnut, a former mayor of Lawrence, wrote: “The city auditor has highlighted persistent issues with collections in Lawrence, and it is disappointing to see the reaction of our city manager. It is clear that the audit function is not well understood by leadership within the city.” The status of the City Auditor’s office in Lawrence will be discussed again in a July 11 City Commission meeting.  For more details on the situation, see our June 13, 2017 blog post, Lawrence, Kansas: A city auditor under attack. We should also note that auditor struggles are far from new. Kansas City Auditor Douglas Jones recently reminded us of  the excellent May 31, 2008 Governing article, “Focusing on Accountability”, written by our friend Jonathan Walters.

Given the tensions that face auditors, we thought this was a good time to talk with Tina Adams, the new president of the Association of Local Government Auditors (ALGA) about auditor independence.  ALGA has 340 member organizations in the United States and Canada and focuses largely on performance auditing, as opposed to financial auditing. Adams took over the one-year presidency term in May. She is the deputy city auditor in the internal audit office of Charlotte, N.C., and has been in the profession for two decades. B&G: Why can’t performance auditing be handled on a contract basis rather than having an internal office? What are the reasons that you believe an internal office is preferable? Adams: Internal auditing is a basic cornerstone for good public governance. Internal auditors meet with department heads on a regular basis, understand their concerns and what they see as risks and help them address or mitigate those risks. That’s something that an internal auditor brings to the table that an external auditor may not. As internal auditors, we develop an annual audit plan partly based on areas where we see opportunities for improvement. Management and council may review and make suggestions for our audit plan, but in the end, we decide what to audit. Contractors may be steered to certain topics and away from other ones that could reflect negatively on management. B&G: What do you see as the goal of internal audit offices? Adams: When establishing an audit shop, one goal should be to maximize transparency and accountability to the public. Depending upon what the local organization does, whether it’s a city or county government or a school district or an authority, you want to give some assurance to the public that the organization is achieving its mission effectively and efficiently and ethically. B&G: What are the major issues that cause local auditors to lose sleep? Adams: For me, it’s threats to independence. That causes me to lose sleep. That’s the core and then all of the issues that come along with that threat – am I going to be able to report what I find honestly without fear of retribution. Will I be able to exercise my professional judgment? B&G: Why is auditor independence so important? Adams: I think it’s important because of public perception. Auditors have to be independent, both in appearance and in fact. If the public does not perceive that an auditor has integrity and is objective or if they think the auditor has been compromised in some way, it can erode the confidence they have in the organization. Having an independent auditor in-house helps with the public perception that the organization is trustworthy accountable and transparent. B&G: What are the key elements that build auditor independence? Adams: For a lot of our members it’s who the auditor reports to – the placement of the internal shop within the organization.  You don’t want an internal auditor placed within an operating department of a city or county. It should be reporting to those charged with governance. A lot of people indicate that the best way to provide independence is to have it legislatively mandated, whether in a city charter or through some other authoritative law. B&G: In Lawrence, Kansas, it’s been suggested that setting up an audit committee will help protect the city auditor’s office. What do you see as the advantage of having an audit committee? Adams: Having an audit committee provides more time to hear the details of an audit. Otherwise, you may end up with five minutes at the end of a four-hour council meeting. An audit committee can also help to make sure that recommendations are implemented. Audit committees can ensure the quality of audits and help to resolve problems caused by a lack of resources. B&G: Are there disadvantages? Adams: Sometimes the members of the committee have a conflict between supporting internal audit and management. Those conflicts could be a challenge for an audit committee member.

Inspections often fall short of goals and requirements. A fire department inspection audit from the City Controller’s office in Houston, released last week, was particularly alarming. It focused on the Life Safety Bureau of the Houston Fire Department, laying out 28 problems considered to be high risk. While fire department management assured the auditor that it is addressing the issues mentioned, the scope and quantity of issues must have been alarming to residents. One example: As the Houston Chronicle pointed out in its June 15 article about the audit, just 526 of Houston’s 5,000 plus apartment buildings were inspected in the last two years. This falls far short of the goal of 470 of these inspections each month. One clear problem is that the Life Safety Bureau is “highly understaffed” in relation to the number of buildings. Houston is the fourth largest city in the U.S. The number of high risk issues in Houston may be extreme, but inspections in many places and for many different areas of city, county and state oversight fall way short of requirements and goals. We wrote about this problem in Governing last February: “From Food to Buildings, Safety Inspections are Lagging.” Since we researched that column, we have noticed the issue continuing to crop up for different areas of government oversight, such as dam inspections, which have fallen behind schedule in California, or nursing home inspections, which have been lagging in Ohio. Here are some of the highlights of the Houston report: Occupancy permits were often issued without inspections Many policies and procures had not been updated in years Department teams and units did not communicate with each other Record keeping was poor, with no document management system and some inspection records scattered in file cabinets and desk drawers Overtime costs were beyond estimates New high rise buildings were not reliably added to the bureau’s building master list Inspections were not consistently performed and inspection records did not clearly show what building components had been checked. Of the 5,000 plus apartment locations, 4,818 had no inspection date recorded. The inspection rate for “apartment locations” was just 5 percent in Fiscal Years 2015 and 2016. There were no inspection reports found of the three major airports The bureau’s database was not updated to reflect changes to the fire code that were made in 2012. Due to “resource constraints” copies of the fire code amendments have not been provided to inspectors. There were no established inspection cycles for “apartments, hotels/motels, airports & heliports, mid-rise atriums, general occupancy buildings and hazmat/high-piled storage facilities.” Like so many issues that are focused on prevention, inspection shortcomings are rarely a high priority until something terrible happens like the Oakland Warehouse fire last year or the tragic high-rise fire in London last week.

About a month ago, we put up our “which states are the best” video, which features the many superlatives that governors use when talking about their states. We followed that up with a text blog post of “Governor Superlatives”  that included more governors bragging about how their states were the best. It’s a lot less common to see governors bring up the areas in which their states are at — or close to — the bottom of 50-state rankings.  It’s braver, too. We have to give credit to governors who use annual speeches in bully pulpit fashion to raise public concern and to try to push for fixes. So, today, here’s a short list of quotes from governors speeches about ways in which their states are the worst (or among the worst). We’ve linked to the addresses themselves, so you can see that they also had good things to say. The following come from state of the state or annual budget addresses and in one case, an inaugural address. Illinois Governor Bruce Rauner, January 25, 2017 “For years Illinois has provided the lowest percentage of education financial support from any state in the country. And we have the largest gap between funding for high income schools and low income schools in the country, both across the state and within the city of Chicago.” . . . “We haven’t had a full year budget of some kind in a year-and-a-half– and we haven’t had a state budget that is truly balanced in decades. We have more than $11 billion in unpaid bills, a $130 billion unfunded pension liability, and the worst credit rating in the nation. We have the 5th highest overall tax burden and one of the lowest rates of job creation of any state.” Montana Gov. Steve Bullock, January 24, 2017 “And while I’m so pleased that Montana leads the nation in many economic indicators, I cannot tolerate that Montana leads the nation in youth suicide. I am haunted by this statistic, and I imagine you are as well. I am proposing $1 million to fund evidence-based pilot programs. We will take what we learn from these efforts to bring it to scale, to better keep our kids safe. New Hampshire Gov. Chris Sununu, Feb. 9, 2017 “We all know that our energy rates are among the highest in the nation. It’s an economic development issue and an affordability issue for our citizens. “We need to work on energy rates for everyone, but the people struggling the most are on fixed incomes, often low-income rate payers, and are struggling to afford their energy bill. “I propose to dedicate 20% of the renewable energy fund to supplement our current electricity relief programs for low-income families. “Fixing energy is a long-term problem, but some people can’t wait. And we simply have to provide them resources today.” Oklahoma Gov. Mary Fallin, February 6, 2017 “It’s no secret our prison population is in a crisis with over 61,000 people under the jurisdiction of corrections. Our prisons are way over capacity, and our prison population is expected to grow by 25 percent in the next 10 years. “Oklahoma’s overall incarceration rate is the second-highest in the country. We lead the nation in female incarceration – incarcerating women at two and a half times the national average. Oregon Gov. Kate Brown inaugural address, January 9, 2017 “Our schools continue to be among the nation’s leaders in all the wrong categories–the largest class size, the shortest school year, and the highest dropout rate.” Tennessee Governor Bill Haslam, January 30, 2017 “While we take great pride in paying the lowest amount of tax as a percentage of income in the country as individuals, unfortunately that’s not true for our business taxes. We are the third highest in the country in business taxes as a percentage of income and as a percentage of our budget.” Texas Governor Greg Abbott, January 31, 2017 “Texas schools are filled with some of the best teachers in America who are called to their profession. Unfortunately, a small number of teachers have given Texas an unwanted ranking. Texas reportedly leads the nation in teacher-student sexual assaults. Some of those teachers are not prosecuted. And worse, some are shuffled off to other schools.We are the ones with the duty to do something about it.”