San Diego improperly upped spending on contracts by $155M, audit finds

SAN DIEGO (FOX 5/KUSI) — San Diego Mayor Todd Gloria, his predecessor Kevin Faulconer and city staff regularly increased spending limits for city contracts by amounts totaling millions of dollars without obtaining the required city council approval beforehand, a recent audit found.

The 50-page report released by City Auditor Andy Hanau last month found 42% of contract altercations amounting to $155 million in taxpayer funds over the five-year period between 2017 and 2023 had been brought to the city council in an untimely manner, retroactively or not at all.

The audit determined these improper approvals, which encompassed about 30% of all contract dollars, often stem from "incomplete and inaccurate contract information and unwritten policies" that have led to work inefficiencies and staff errors.

These issues, the audit said, stifles oversight and transparency while also opening up city contractors to risks like not getting paid for their services.

"Council’s review of contracts is an essential function of oversight and preserves the balance of power within the City’s government," the audit read. "Contract alterations without proper approvals prevent Council from exercising its responsibility of ensuring contracts are in the best interest of the City, and limit transparency in City government."

The audit made over a dozen recommendations to address some of these issues, including bringing currently unapproved contracts to the council for approval, drafting updated guidance to clarify requirements for contract amendments, creating a formal process for how contracts are altered, and developing a policy for electronic contract storage and management.

"Good contract management in City contracting is crucial for ensuring public funds are used
efficiently and responsibly," Claudia Abarca, director of the city's Purchasing and Contracting Department, wrote in an audit response, where she agreed with all of the recommendations.

The city spends hundreds of millions of dollars every year on outside vendors who help deliver critical services like operating homeless shelters, supplying public safety equipment, collecting waste and maintaining parks.

According to the report, upwards of 16% of the city's annual operating budget is allocated to these contracts.

The mayor's office has some ability to amend these contracts without going directly to the city council, but the audit explains that the vast majority of contract changes require city council review and approval.

Notably, local law requires the council — the legislative wing of the city's government — to ratify the change if the cost of increases the contract amount by more than $200,000 or if the contract exceeds five years in length, the audit said.

Contracts with a nonprofit or agency exceeding over $1 million, and those for goods and services larger than $3 million that are not funded through annual budgeting processes are also required to get city council approval, according to the report.

However, as the audit found, a number of spending increases on city contracts did not go through this process ahead of time, if at all.

In a statement, Dave Rolland, Gloria's deputy director of communications, said these instances occur "with a small percentage of our overall volume of contracts." He added that the city has sought retroactive approval at times "to ensure that there's no delay in delivering services to the people of San Diego."

According to the report, 42% of contract alterations between 2017 and 2023 were improperly handled, including 19% that were retroactively approved by the city council and 11% that were not approved at all.

The unapproved contract amendments totaled around $15 million, averaging around $856,000 per instance, the audit said.

One such instance detailed in the report was a $1.6 million, three-year contract awarded in 2017 that was upped to $3 million in 2020 without council approval — a change $1.2 million over the threshold to trigger council oversight.

Of the contract changes that were brought to the council for ratification in an untimely fashion, the audit found most were brought forward either less than three months before their expiration, or over three months after the alterations had already been made.

City spokesperson Nicole Darling said in a statement that untimely approvals or changes to spending limits are "often driven by urgent needs combined with unexpected administrative challenges."

She went on to add that the city should update existing municipal law to aid in meeting operational needs while ensuring adherence to contract review procedures.

"Further streamlining sections of the Municipal Code related to contract execution and alteration would help ensure the integrity of city governance is maintained while allowing for necessary flexibility in decision making," Darling said.

However, the audit noted that this is not the first time the city's practices tied to contract management have come under scrutiny.

Previous probes flagged violations of city spending rules tied to contracts, including a report from last year that found it had spent millions of dollars improperly on "emergency purchases," as the San Diego Union-Tribune reported.

The issues highlighted in those audits appear to remain: Last month's audit report said the recommendations given after previous probes into contract spending were never implemented.

In its response, the city's Purchasing and Contracting Department indicated that it aims to implement many of the recommendations outlined in the audit by late this year or mid-2025.