Cost Estimate: Bringing in Private Companies to Do Public Work

It was a scandal so big, it pushed an IT deal into the headlines of New York City’s sexed-up tabloids: CityTime, a software system that was supposed to modernize the city’s payroll administration, turned out to be riddled with fraud.

A $63 million contract with Science Applications International Corp. (SAIC) that began in 1998 and was to be completed by 2003 had ballooned to at least $700 million and remained unfinished. But that was, in a way, the good news. The bad news was that at least some of the millions had allegedly been embezzled by the very people the Bloomberg administration trusted to oversee the work. Eleven people and one subcontractor, TechnoDyne, have so far been charged in the case, and two have fled the country with millions in allegedly stolen cash. Preet Bharara, the U.S. Attorney for the Southern District of New York, called CityTime one of “the largest and most brazen frauds ever committed against the city of New York.”

CityTime might be in the spotlight, but it’s far from the only contracting deal to go sour during the Bloomberg administration. NYCAPS, another personnel information- tracking system, developed by the management company Accenture, has so far cost taxpayers $363 million (and is also incomplete), despite being initially budgeted for $66 million in 2002. The Emergency Communications Transformation Program (ECTP), a contract that started out as a $380 million deal with Hewlett-Packard to upgrade the city’s 911 system, had by early 2011 mushroomed to $666 million without any discernible change in the scope of the project, according to Comptroller John Liu. A deal to give Snapple access to all city schools and many municipal buildings fell apart after it was learned that bidding for the deal was overseen by a consultant who favored the beverage-maker, with whom it had a long-standing relationship.

In the complex world of New York City politics, some might call this the cost of doing business — or rather, of having private companies involved in the public’s business. Indeed, scandals involving the interplay of public money and private businesses aren’t new. As far back as 1969, there was outrage when Mayor John Lindsay commissioned a traffic study by the management-consulting firm McKinsey & Co. and appointed two of its consultants to city positions as an apparent thank-you for polling the company did during his re-election campaign. In the mid-’80s, the exposure of a scam to sell nonexistent computers to the Parking Violations Bureau plunged the Koch administration into crisis.


Today’s scandals are different, however, because the role private companies play in New York’s government has changed. From 1996, when the city began publishing a contracts budget, inflation-adjusted spending on outside work — everything from IT consultants to foster care agencies — has swelled from $5.7 billion to $10.5 billion, its share of the city budget growing by 33 percent. The contract budget this year is $3 billion more than it was when Mayor Bloomberg was first elected.

More important, under the current administration, there has been a steady shift in the way private companies are being used by the city. It’s no longer just about putting the delivery of individual government services — say, fixing roads or providing school food — in the hands of private companies. These days, tech firms are being hired to perform huge and hugely complex IT projects that not only cost an enormous sum but raise issues around how dependent the city might be come on these high-tech wizards: A January report commissioned by the city comptroller found that the CityTime contractor had done such a poor job training city employees on how to run the system that, despite outrage over the project’s cost to date, the city might have to keep paying the contractor to run the thing once it’s finally done.

Meanwhile, other private firms are being hired not to provide services or IT know-how, but to tell the city how to run its existing programs — crafting its policy, strategy and management. Accenture, Alvarez & Marsal, Boston Consulting Group and McKinsey have been summoned to guide the city through everything from rebranding city departments to restructuring the budget for city schools. It’s not the first time private firms have been brought in to help craft policy — the fire department used Rand studies to site firehouses in the 1970s — but it’s the first time so many agencies have spent so many millions asking outsiders how they should do their jobs. Spending on “professional services” contracts has nearly tripled under Bloomberg.

Getting advice from consultants or help from private IT experts is sometimes a good idea. But an investigation by City Limits and The Investigative Fund at The Nation Institute into recent contracts let by just three city agencies uncovered a host of issues — beyond cost concerns — that pop up when private entities take on public work:

  • Free-market rhetoric aside, there is often little real competition under privatization. A national survey of local governments found that in most locations and for most public services, the average number of private firms that could possibly take on government work was less than two — not exactly perfect competition. When it comes to getting strategic advice, governments tend to seek help from only a handful of companies with big enough names to offer credibility.
  • There’s little accountability for failure — when a consultant’s report is done, the consultant moves on and the flaws in its ideas are the city’s to deal with. Consultants can indemnify themselves from any problems that crop up when an idea is implemented.
  • Transparency is also a concern. City Limits sought to find out exactly what Boston Consulting Group was doing for the two multimillion-dollar contracts it won this year from the New York City Housing Authority, but our Freedom of Information Law request was rebuffed because BCG’s advice is considered private. Even a request to see the BCG contract itself was not fulfilled. NYCHA chairman John Rhea, who once worked for BCG, insists the consultant’s project “is open to public disclosure — ultimately.”
  • Consultants often use data they’ve derived from other situations and cities that might not suitably match the problems of a city the size of New York. Rather than getting innovative ideas, New York gets concepts repurposed from Atlanta or Chicago.
  • The contracts, notably the ones in the IT sector, can cost a huge amount of money for a technological fix to what is not a wholly technological problem. We find that a project to improve special education case management produced a better (if imperfect) tracking system, but did not address other, underlying problems that might be more important.

Despite the high-profile problems of contracts under its watch, the Bloomberg administration at press time was threatening to veto a City Council measure, the Outsourcing Accountability Act, which would require a cost-benefit analysis of each outsourcing move. City Hall’s apparent objection? The bill would create too much red tape.

Even as the details about the scope of the CityTime disaster unfolded earlier this year, Mayor Bloomberg defended the project, saying on his weekly radio show in May that “We actually did a pretty good job here, in retrospect … The FAA hasn’t been able to get their new traffic control system and the IRS — at the federal level some of these programs go on for decades, cost billions and billions of dollars and never come up with anything.” The mayor added:

“The one thing here there’s no excuse for is we didn’t catch fraud, which we should have. But having said that, the project is done, it is working. It will stop fraud and it will be efficient.”

Indeed, CityTime might end up working well. But whether CityTime succeeds or fails, it is far from the only test of whether private contractors are worth their costs — financial and otherwise — to the city of New York.

Adrienne Day

From Buses to Special Ed, Contractors’ Role in Schools Questioned

Literally freezing out public school kids might not have been what Alvarez & Marsal, the maverick “turnaround” firm hired by the New York City Department of Education (DOE), sought as its legacy in New York City, but one frigid January morning and thousands of stranded kids settled that score.

After A&M won a no-bid $15.8 million city contract to help the DOE streamline its budget, the global consulting company saw opportunities for the department to save money, especially on some school-bus routes that the Bloomberg administration said were carrying too few students and wasting millions of dollars in the process. A&M predicted savings by rearranging and eliminating such “unnecessary” routes. According to a 2004 article in Business Week, back in the ’80s, partners Bryan Marsal and Antonio Alvarez solidified their vision for their company over a game of golf. Their philosophy, forged over the tee: “It’s better to make a decision, be 10 percent wrong and 90 percent right, than not to address the problem.” They’ve since applied that theory to such companies as Hostess, which was suffering financially after redoing its cupcakes and Ding Dongs recipes, rendering them “doughy and unappetizing.”

In 2003 came its first foray into the public sector: A&M was hired to help St. Louis schools consolidate their bus routes, as part of an effort to overhaul the city’s financially strapped public school system. In April 2005, A&M was hired to oversee the reconstruction of the failing New Orleans school system. Then, in August of 2006, the DOE’s Division of Contracts and Purchasing approved a request from the office of then-chancellor Joel Klein to retroactively hire A&M for the period spanning June ’06 to November ’07.

At the time, the Bloomberg administration was in a big hurry to implement “Empowerment Schools,” an initiative to transfer authority over curriculum and budget from the DOE to individual schools, if said schools agreed to meet certain performance goals. The plan required that services provided centrally, like transportation, be streamlined. For this reason, there would be no time for a competitive bidding process. The DOE’s Committee on Contracts green-lighted the no-bid A&M deal, giving the firm — which was already working in the public schools under the auspices of the Klein-led nonprofit Fund for Public Schools — a guaranteed payday that the DOE justified on the grounds that A&M was the only firm to have done this type of restructuring work with public schools before and that it has done so with dramatic success in St. Louis and New Orleans.

But in November 2006, before A&M released its rejiggered busing plan, the City Council’s education committee released a report that raised issues with the A&M contract itself, namely the salaries paid to its top consultants ($450 per hour) and outrageous expense reports (an estimated $1.5 million for the duration of the contract). The report also expressed alarm over a larger issue: the fact that the DOE’s contract budget had more than doubled, from $1.28 billion in 2002 to $2.68 billion in 2006, with the cost of no-bid contracts growing from $12 million in 2002 to $56 million in 2006.

While DOE officials credited A&M with improving St. Louis schools, Public Advocate Betsy Gotbaum said in a statement that “Alvarez & Marsal … left [St. Louis’] school district in a shambles” and that “even a cursory check” of A&M’s track record there “would have been enough to raise suspicions.” After A&M departed St. Louis, the school system was taken over by the state on the brink of bankruptcy.

Many in Missouri faulted the consultancy for its cost-cutting and school-closing; some said A&M did its job of trying to balance the system’s books.

Yet there was no escaping the fact that there are twice as many children in pre-K and kindergarten in New York as in the entire St. Louis school system. Would A&M be up to the demands of so huge an educational empire? Two months later, in January, came the answer. For weeks following the implementation of the new busing plan, the DOE received thousands of calls from furious parents: Many buses never showed, leaving kids waiting in the cold; and some kids as young as 5 were given MetroCards and left to fend for themselves. “It was a disaster,” says Council Member Robert Jackson, the chair of the education committee, of the A&M plan, “in retrospect, just a complete disaster.”

In the midst of it, school officials set up a hot line that fielded more than 2,000 calls on the first two days.

Asked to comment on the snafus, the mayor said: “I think there were the teething pains which you could expect. Could they have done it better? Could they have handled the press better? Sure. But let’s get on with it and get things done.”

The DOE’s contracts budget now stands at $4.5 billion — with $149 million of it going for “professional services” covering work other than direct educational services. The use of contractors in general, consultants in particular, and no-bid deals in several high-profile cases, is typical of the Bloomberg approach across agencies citywide. But the DOE is not like other agencies; it’s a sui generis creature. It’s not considered a mayoral agency, but the mayor exercises complete control over it with regard to the hiring and firing of its executive players. In addition, the mayor appoints eight of the 13 members of the purportedly independent Panel on Education Policy, which ostensibly monitors contracting. “The PEP is a rubber stamp for the mayor, and everybody knows it [thump]!” Jackson says, pounding his fist on the table for emphasis. “Look at Cathie Black — in essence the mayor gave her a no-bid contract! [thump].”)

DOE consultants do everything from ordering textbooks to coaching teachers to wiring classrooms. Some of those projects have been considered successful. Some, like the A&M bus project and a deal with the global consulting firm Accenture to streamline school food operations ran into serious trouble. And just this summer, the DOE belatedly nixed a contract with Future Technology Associates (FTA) after spending $74 million on mostly no-bid contracts with the firm, so FTA could set up “an electronic ordering system” for principals. The FTA had no track record, its headquarters were a mail box in Jacksonville and an FTA owner, with help from a former DOE executive, allegedly skimmed from the multimillion-dollar project, in part by secretly subcontracting work to cheap labor in India and Turkey.

But some contracts are harder to categorize as a success or failure.

SESIS (Special Education Student Information System) is one of these. Its implementation has been neither an unbridled success nor a total failure. But what’s more interesting — and troubling — is that even a perfect SESIS might not have helped the students it was designed to assist.

It’s a bright day in the first week of class for New York City’s 1.1 million public school students. In a Clinton Hill coffee shop, a special-education teacher who works with seventh- and eighth-grade kids in a school and a neighborhood he’d rather not name, is frowning at his laptop. He’s showing me the new software program that’s supposed to make his life, not to mention the lives of the kids he teaches, easier. But for now the system is rejecting his username and password.

A few keystrokes later, we’re in. The teacher pulls up the Individualized Education Program, or IEP, for one of his students, a 12-year-old we’ll call Joe. (Under a federal law known as the Individuals With Disabilities Education Act, every special-ed student in New York State must have an IEP designed in accordance with his or her specific educational needs.) The teacher scans the page and points out a data field that’s been left blank. “This document is useless to me,” he says, shaking his head. “Joe now has a beautiful IEP, but it doesn’t change anything. His mom didn’t show up for the IEP meeting.” Without her input, the teacher explains, the process of implementing a federally mandated educational program tailor-made for Joe — who is in seventh grade but reads at a second-grade level — grinds to a halt.

Last year, New York City’s Department of Education starting rolling out SESIS. The program is designed to track special-ed students regarding their specific educational needs — what’s been done on each student’s case, who’s done it (teacher? paraprofessional? administrator?), and what needs to be done next. If anyone involved with the child shirks his or her duties, it’s noted in the system.

When the DOE moved to upgrade its IEP process in 2005, there wasn’t really much of a process to speak of. Roger Maldonado, an attorney, represents special-ed plaintiffs in the “Jose P.” litigation, a landmark lawsuit filed in the 1970s to force the state to provide school services to disabled children. Before the move to SESIS, Maldonado says, the DOE relied on an old software system that made it next to impossible to find special-ed students who were falling through the cracks.

And the quality of the IEPs varied widely. They were largely hand-written or kept in local computer databases, which often caused major problems whenever a student transferred schools or graduated to a new one. “A child would change schools and their IEP would show up six months later,” says Patricia Connelly, a parent advocate and activist with a focus on special education, and who was serving on the Citywide Council on Special Education Needs when the DOE announced the SESIS contract. “So the general consensus was that something had to be done.”

So the DOE put out a request for proposals for a new system and got several bids. The Virginia-based consulting company Maximus won the contract.

Maximus’ motto is “Helping government serve the people,” but, as with all corporations, its bottom line is to help its shareholders. A February 2009 earnings conference call made clear that where others see policy or politics, Maximus (and probably other consultants) sees profit.

“Our business today stands well-positioned to benefit in the long run from greater demand for our services due to the economic slowdown and new legislation that calls for expansion of existing programs. This includes increased funding through the proposed $800 billion-plus stimulus plan,” Richard Montoni, Maximus’ CEO, said on the call. He added that the stimulus bill encompasses “many of the benefit programs in which we operate, in fact, in offerings where Maximus is the market leader.” He went on to say: “Once the legislation is passed, we expect that it will begin to benefit Maximus perhaps somewhat in the tail end of fiscal 2009 but materially so in fiscal 2010 and beyond.”

Montoni’s monologue revealed a company in mid-pivot, shifting from a “revmax” business model — identifying and claiming reimbursable federal dollars for state and local governments — to a provider of IT services like SESIS. And SESIS, as the conference call revealed, is simply a repurposing of an existing software package called TIENET — a system that Maximus had already implemented in the Chicago school system. Montoni reassured an anxious analyst: “Naturally, we’ll have to interface it with the systems of New York City, and we’ll have to train the users in New York City on how to use it. But it should not be viewed as a custom-build situation.” Just as when A&M came into town riding high on projects in St. Louis and New Orleans, SESIS was a case of a consultant getting big bucks to map a product created for a different (smaller) school system onto New York’s unique education superstructure.

One of the early champions of SESIS was Linda Wernikoff, who in June 2009 retired from her job as the city’s top special-ed official, only to be rehired by the Fund for Public Schools as a DOE consultant on SESIS less than a year later. New York City’s Conflict of Interest Board signed off on a wavier for her rehire at $1,000 per day — on top of her DOE pension. (Wernikoff declined to comment for this story.)

At about $79 million, SESIS is a bargain compared with CityTime. But chances are that SESIS, along with many other IT contracts the city is currently engaged in, will end up costing taxpayers more than its originally stated “base” rate. City Limits obtained a copy of the SESIS contract — which, at about the thickness of The Collected Dialogues of Plato and similarly dense, is a pamphlet compared with many other such contracts — and there are several places in which it is clear that Maximus can bill the city many million dollars more under a so-called renewal of contract and also under something called a change order — which effectively renders the originally agreed-upon price of the contract obsolete. (An example of this potential is the contracts awarded to Accenture in the past decade, whose value has swelled from $455 million to $723 million.)

“In these types of contracts, no one looks at the details, and change orders happen all the time,” says Donald Cohen, chair of In the Public Interest, a good-government group that focuses on responsible contracting. He compares a government consultant wielding a change order to a contractor you’ve hired to build your house: “I’ve done half of it, and I’ll leave it as is unless you pay me double.”

But more important than the amount spent might be where that spending shows up in the city’s budget. Hiring a consultant can lower a politically sensitive expense — say, the cost of paying all those politically unpopular public servants — while raising another, lower-profile spending area. “It’s a different line item in the budget, consultants versus civil workers. It’s no longer a personnel expense. In one case I know of, [consultant hires] went into the same budget line item as paper clips,” says Cohen. “It makes it harder to see them, and it leads to greater and greater [contractor] involvement.”

Meanwhile, major oversight and accountability issues loom. According to the DOE’s Procurement Policy and Procedures Manual, approved by the Panel for Education Policy, the board that oversees the DOE, in January 2010, the DOE is required to establish a process for evaluating and documenting the performance of its vendors. But no such system exists yet. Barbara Morgan, a spokeswoman for the DOE, says, “A prototype system has been developed and will be rolled out in the near future to capture this data.”

For an administration intent on measuring and grading everything from teacher performance to school graduation rates, metrics on high-priced private contractors are, surprisingly, absent.

Beyond the questions about cost and oversight, how good is the SESIS product that Maximus has delivered?

Maldonado says SESIS makes the process of tracking the IEP much easier, and when implemented correctly, everyone who needs to sign off on it is held accountable. “SESIS makes sure that everyone does what they need to do. They have to provide the service before they check the box,” he says.

But implementing SESIS has been anything but easy. The biggest issue has been schools literally not having the bandwidth to run the program: Many principals don’t have enough money in their recession-strapped budgets to buy textbooks, let alone laptops. Connelly was at a special education district office when they tried to demo SESIS, but that too was a failure. “Even from a district office they couldn’t produce an IEP,” she says.

And if schools manage to get SESIS up and running, there’s been little formal training in how to use it, and up to a two- hour wait for teachers who call a SESIS helpline.

“In the beginning, I think they handed us a few sheets of instructions,” says the teacher, who confesses that after a year of using it, he still doesn’t fully understand the software. In response to myriad complaints, the United Federation of Teachers (UFT), the union representing most public school employees, has drafted a SESIS grievance form, available for download on its website, because the various teachers, school psychologists, guidance counselors, occupational therapists and so on who need to use the system are spending nights and weekends figuring out how to use it.

In a June Daily News article, Schools Chancellor Dennis Walcott blamed SESIS for the DOE’s failure to find seats for about 2,500 kindergartners with special needs, saying that the transition to the new system delayed placement efforts past a mid-June deadline. Officials authorized schools to use emergency funds — essentially overtime — to pay for teachers to try to find seats for the incoming kindergartners on evenings and weekends. Kids who don’t get places are entitled to a private education paid for by the city, and tuition can be upwards of $30,000 a year. The city already spends about $100 million a year to educate about 4,000 kids in this situation.

The latest snafu, says a source within the UFT, is that on September 15th, SESIS locked out anyone who had not yet entered a new layer of attendance-related data for students for the month of September.

But as troubled as the implementation has been, some critics point to a deeper problem — a problem that on one hand has little to do with SESIS, but on another casts in harsh light the decision to prioritize an IT solution.

“There are about 170,000 kids with special-ed needs, and not all are getting what they need, says Maggie Moroff, from Advocates for Children. “They don’t have perfect IEPs now [with SESIS], but part of the problem is that they didn’t have good IEPs to begin with.” And, as the city has spent more on IT ideas executed by private consultants, the human side of the DOE “product” has suffered. This might have particular bearing on special education, where graduation rates have been stagnant despite progress elsewhere in the system.

“Instead of the DOE hiring more social workers and more school psychiatrists, people that would have time to actually work with students are now just filling out paperwork. I used to have many conversations with social workers at my school, and now that hardly happens anymore,” says the teacher who showed us SESIS. That’s not surprising, given the current ratio of counselors to students. “For the 1,000 kids at my school,” he says, “we have three guidance counselors and one part-time social worker who splits her time between four other schools.”

“They are selling SESIS as the greatest thing since Jesus,” the teacher says. “But the kids are still not ready for college.” He qualifies his statement: “SESIS is not the real problem — the real problem is the lack of support, and support for parents, to help the kids with their social and emotional issues.” As the 2011-12 school year kicked off, the DOE was still monkeying with bus routes, leaving some Queens students to face three and even four-hour commutes via public transportation.

This is not Alvarez & Marsal’s problem anymore — if it ever was. The firm’s contract with the DOE specified that the city “assumes responsibility for the implementation of any restructuring proposal,” which department employees “are assigned to implement or select.” But legal niceties aside, the firm has moved on, physically. Right around the end of the school year that was punctuated by the bus episode, The Washington Post ran a story about an audit that the District of Columbia had ordered.

“The audit will cost $3.3 million and be performed by two management consulting firms: Alvarez & Marsal and McKinsey & Co.,” the article read, adding that Board of Education president Robert Bobb “said he began considering an audit of the system shortly after he took over the school board in January, adding that he had interviewed several potential firms and favored Alvarez & Marsal.”

“That company has worked with school systems in St. Louis, New York City and New Orleans, although its work has included some highly publicized missteps, including the creation of consolidated bus routes that left students stranded. Bobb defended the selection of the auditing firms, saying Alvarez & Marsal has learned from its mistakes and will not repeat them in Washington.”

Adrienne Day

Consultants’ Prescriptions for City Hospitals Get Closer Look

Axing hospital workers and closing pediatric clinics are never popular decisions to make. And when the New York City Health and Hospitals Corporation hired Deloitte Consulting LLP in September 2009 to help the agency with restructuring and cost containment, the consulting firm knew of no comparably challenged health care delivery system in the U.S. against which to size up the needs and problems of New York City’s public-hospital system. But that did not dissuade Deloitte from taking the job.

Quite the opposite, in fact. Indeed, Deloitte had every reason to power forward. Having bested its closest competitors in a series of presentations to senior HHC management in the spring of 2009, the firm was not just adding another client to its portfolio. It was also keeping a firm grasp on the latest holy grail of management consulting — the public sector and its money.

Moreover, because Deloitte was hired through an expedited negotiation acquisition process, with HHC arguing that there were only a limited number of firms capable of doing the work, it meant that it would be difficult for anyone, like the city comptroller or the unions representing HHC workers, to kick up a fuss. And while the amount of the contract, $3.85 million, was hardly a king’s ransom, it was nothing to sneeze at — averaging out to a healthy $160,000 a week for six months of work.

Finally, one of the best reasons to work for HHC: The agency was taking the unusual step of revising its executive hierarchy to create a restructuring steering committee to oversee Deloitte’s analysts as they gathered and collated data on the 38,000 employees and 1.3 million patients who make up one of the oldest and the largest public health care delivery systems in the U.S. — making the contract for HHC seem not only possible but eminently doable.

With HHC senior staffers working side by side with Deloitte consultants to monitor the data gathering, HHC was helping in two ways, guiding the intelligence gathering and cutting down on the possibility of any miscommunication between consulting firm and client.

In fact, once Deloitte was hired, the only truly politically sensitive issue was HHC’s problem, not Deloitte’s: letting the unions know about the reorg and weathering the inevitable storm of questions and criticism that would arise.

That would not be a pleasant task for HHC. So the corporation waited. And then waited some more. Finally, six weeks after Deloitte’s official start date of Sept. 30, 2009 (and four days before the consulting firm submitted its first bill — for $787,500), HHC president Alan Aviles met with the hospital system’s municipal labor committee on November 9 to announce the sweeping review of the system — its 11 hospitals, four nursing homes, six diagnostic and treatment centers, and 81 community clinics — that was already under way. It was no secret to anyone in that meeting that HHC was under the gun. With the corporation facing a projected budget deficit for FY 2011 of $1.2 billion, according to its own calculations — a deficit due to the combined result of cuts in Medicaid funding, a rise in uninsured patients and climbing pension and health care costs for HHC workers — time was of the essence in not just identifying the changes the hospital system needed to make but also making them.

But DC 37, the city’s largest municipal union, was immediately on its guard with the news that it was Deloitte leading the reorganization. No one from the union was invited to sit on HHC’s restructuring steering committee, according to Henry Garrido, assistant associate director of DC 37. The union was simply there, in effect, to be told what to do. Not that DC 37 didn’t have ideas for how to reduce the fiscal pressure on HHC, and the city for that matter. Twice in the past decade, the union released white papers outlining ways the city could save money. In a 2002 white paper headlined “We Can Do the Work,” DC 37 estimated the city could save $121 million if it contracted in more of its services — ending the widespread use of temporary clerical, secretarial and handyman workers across city agencies as well as cutting down on consultants in the Board of Education.

And in February of 2009, seven months before Deloitte came on board, the union released “Massive Waste in a Time of Need,” calculating that New York City could save $130 million by ending the practice of hiring outside contractors and using city workers to do city work.

The union pointed proudly to the fact that after the release of the 2002 white paper, the Bloomberg administration had actually cut back on outside contracts and saved the city $175 million in 2004 and 2005. But by 2009, the report noted, city spending on private contractors had climbed to $9.2 billion a year out of a total budget of $60 billion — a $3 billion increase over 2003.

The net result? That there was a “shadow government with a parallel workforce” now embedded into New York City, DC37 Executive Director Lillian Roberts wrote.

But for DC 37, the biggest issue it had going into the November 9 meeting with Aviles was not that Deloitte had been hired to assist with the hospital’s reorganization: it was that plans for a major hospital system-wide reorganization had already started, months before.

In a press release posted on HHC’s website dated March 19, 2009, HHC listed the financial obstacles it was up against and the series of steps it was taking as a financial course correction: service reductions, layoffs, staff attrition and other efficiencies totaling $105 million. By July 1, HHC’s workforce would be reduced by “approximately 400 positions,” the press release stated.

Two months later, Aviles appeared before the City Council’s finance and health committees to take up where the press release left off: that even after the cuts previewed in March, HHC had to find an additional $211 million in savings — and that was only to address the immediate budget gap. Going forward, HHC was looking at a combined structural deficit of $514 million over the next three years, owing to decreased Medicaid reimbursements from the state and feds. HHC needed help, Aviles told the City Council members; it needed members of the City Council to help the corporation lobby state legislators to stop the Medicaid cuts.

But the state had actually already offered to provide a separate stream of money: $300 million in Disproportionate Share Hospital, or DSH, funding — money the federal government gives to the states each year to help cover the cost of serving the uninsured — provided the city came up with a matching $300 million. The question for HHC was, could it count on the city’s support? In previous years, the city had stepped up to the plate, authorizing $500 million annually to assist HHC in closing its deficit. But Aviles told the Council that HHC wasn’t taking any chances. It was going to identify targets for other cuts and bring in some outside advice. “My staff and I are in the process of identifying consulting firms with relevant expertise and a deep understanding of the New York City health care environment to assist us with the complex analysis that is required to develop a feasible restructuring implementation plan,” Aviles said.

Deloitte was hired that fall. The following May, Aviles had good news: The mayor had pledged to provide HHC with the $300 million in matching funds it needed to qualify for the DSH dollars from the federal government. And on May 11, 2010, Aviles unveiled on HHC’s website “Restructuring HHC: The Road Ahead,” the Deloitte-inspired, multimillion- dollar reorganization plan that was going to save New York City’s hospital system $300 million over the next four years.

Some observers believe the mayoral money was a reward to HHC for undertaking a consultant-led reorganization plan. It looked like the mayor agreed to “do the DSH matching and give HHC dollars — if they agreed to come up with a four-year plan to cut their budget by $300 million, and that led to layoffs and the like,” observes Judy Wessler, director of the Commission on the Public’s Health System, a 20-year- old coalition of community groups, health care activists and health care professionals that advocates for equal access to health care.

In an email, HHC spokeswoman Evelyn Hernandez emphatically denies the suggestion that Bloomberg and Aviles cut a deal: “Mayor Bloomberg was in no way involved in HHC’s decision to hire an outside consultant.”

But if HHC chief Aviles was testifying before the City Council in May 2009 that the corporation was embarking on cost containment actions, why then did the corporation have to hire Deloitte? According to Hernandez, while the need for cost containment actions had been identified as early as 2008, by the spring of 2009, “HHC senior leadership had determined that a broad, long-term plan” was needed to address the looming deficit.

The directive to Deloitte was clear, according to Hernandez: “Deloitte was asked to provide options for cost containment, restructuring of existing operations, consolidation of administrative services and opportunities for growth. The firm was told that the top priority for HHC leadership was to preserve the public hospital system’s core mission to care for all New Yorkers regardless of their ability to pay or immigration status.” Whether its recommendations — and HHC’s reaction to them — actually preserve that core mission is a matter for debate.

Of the 100 recommendations that Deloitte ultimately made, HHC turned 61 down. Some of the recommendations HHC rejected included closing one-third of HHC’s 81 community-based clinics, eliminating most outpatient specialty services and consolidating them into one facility (a move that would have netted HHC $179 million but would have had “high mission impact on HHC patients,” wrote Deloitte) and eliminating nearly all long-term-care beds.

The rest of Deloitte’s suggestions made it into the upbeat, “we’re all in this together” HHC report, The Road Ahead. Among the announced changes was the consolidation of the Coler-Goldwater campuses on Roosevelt Island, with the closing of Goldwater (and the sale of its land) and staff reductions at Coler. There was also the planned elimination of 3,700 jobs, or 10 percent of HHC’s workforce, through attrition and layoffs; the closure of six community-based clinics, including five pediatric clinics; and the outsourcing of HHC’s 16.5 million-pound- a-year laundry system. They were sweeping cuts. By comparison, the expertise behind them sometimes seemed less than all-encompassing.

Deloitte acknowledged “potential weaknesses” in its analyses, among them that it wasn’t clear what all the HHC job descriptions were and that collecting information on patients, surgeries and results was difficult because of “incomplete data.” But perhaps the biggest stumbling block was the fact that there was no patient pool truly analogous to HHC’s, at least none that Deloitte could find. “HHC’s patient population is more diverse than national norms,” Deloitte noted in its confidential report to HHC, which was released after a Freedom of Information Law request fromCity Limits.

Casting about for what both the consulting company and its client referred to as “national benchmarks,” Deloitte finally settled on several national reports and sets of statistics. But there were caveats.

One important resource “lacks benchmarks for public hospitals,” Deloitte noted. What’s more, compared to other systems, “HHC physicians may spend more time in ambulatory settings,” “patients may require additional time,” and standard service-measuring tools “do not capture teaching activity.” In short, HHC’s doctors handled sicker and more diverse patients, who required more time than average patients, and who were often dealt with in a teaching-hospital setting. In sum, there was no real comparable benchmark to HHC across the U.S. Perhaps the closest would be the veterans’ health care system. With the lack of a real benchmark came a lack of real understanding about the population that HHC serves, say critics of the restructuring.

Not that the consultant didn’t point to inefficiencies that needed to be addressed: The intake data collected on patients across HHC was uniformly acknowledged to be uneven, and a flawed billing system cost HHC untold amounts in Medicaid reimbursements. The lack of software compatibility across the sprawling system also made data-crunching enormously difficult and hampered HHC’s ability to find better ways to provide service at lower cost to the hospitals.

Then too there was the imbalance in HHC’s contracts with outside physician groups, known as affiliation agreements, which Deloitte suggested be renegotiated to save the hospital money. These deals cost HHC dearly not once but twice — once in fees to the outside doctors, and again when those doctors sent the patients to non-HHC facilities for follow-up treatment. With Deloitte’s recommendation in hand, HHC says it saved $18.5 million last year by renegotiating those affiliation deals.

But for Wessler, other recommendations that HHC was looking to implement were terrible, such as the shuttering of pediatric clinics, following on the heels of HHC’s decision to close four school-based mental health clinics — a decision she determined “appalling.” And while Aviles told the City Council that HHC needed to find savings in its central staff and administration, DC 37 says the cuts and layoffs listed in the Deloitte plan fell disproportionately on the lower levels of HHC’s workforce — secretaries, janitors, laundry workers, nurse’s aides and people like Patsy Carter, who for 24 years has worked at Brooklyn Central Laundry, or BCL.

From 1962 until this summer, workers at BCL on Kingston Avenue in Crown heights handled most or all of the 16.5 million pounds of laundry done yearly for the hospital system. Carter worked there for two decades, making lasting friendships, buying a house and raising three children on her salary, currently about $34,000 a year.

Among the pounding rollers, soaking bed sheets and clanging dryers, a sense of kinship and chivalry was almost literally built into BCL’s brickwork, former workers say. After the laundry was delivered, the heaviest and most dangerous work, sorting stained sheets and then loading them into washers, was handled by the men on the third floor. Then the laundry was moved to the dryers on the second floor and down to female workers on the first floor who fed the seemingly never- ending stream of sheets, pads, towels, blankets, scrubs and washcloths through industrial folding machines lined row upon row like hulking metal sentries along the facility’s cavernous first floor — eight hours a day, six days a week.

The work was hot, repetitive and hard on the feet and back. The rollers were loud, the sheets were heavy, and in the summer, the temperature could quickly surpass 100 degrees. But for the Brooklyn Central Laundry workers, once 300 strong, toiling and sweating at the laundry facility was akin to living in one big, noisy family for years and years.

The family had been under strain for some time — at least since 1998, when HHC first proposed to privatize its laundry services as a way to save money. Ultimately, a deal was reached with the workers at BCL: In exchange for new machines and the completion of a cost-savings analysis to determine whether it really was cheaper to outsource the linen services, the workers agreed to the redeployment of 63 of their 300 jobs and an outsourcing of a third of the laundry.

HHC in turn signed a contract with the Angelica Textile Services in Edison, N.J., starting in 2000, sending almost 6 million pounds of laundry out of state to be washed, ironed and shipped back.

For the next nine years, HHC’s linen service was divvied up between Brooklyn Central Laundry workers and Angelica, with Angelica racking up lawsuits from a subcontractor who sued the New Jersey company for failing to pay for supplies — and won. According to DC37, the cost-comparison study, done in 2001, proved that it was cheaper to do it at Brooklyn Central Laundry – “not by much, but it was cheaper,” according to Garrido. HHC maintained it could not find a copy of the survey.

In 2004, wanting to privatize again, this time in the area of food service, HHC went back to the unions and offered a trade: The contract with Angelica would be phased out over time and the 6 million pounds of laundry would come back to Brooklyn Central Laundry if, in return, the union would allow HHC to outsource meal preparation: the food giant Sodexo would prepare the food to be served in all 11 hospitals and four nursing homes and union employees would simply thaw the food, cook it all the way and serve it.

The union agreed. The food deal was done. But the laundry never came back.

(When the Angelica contract ended in 2010, a company called Superior Linen took over.) And when HHC released The Road Ahead in 2010, with the news that the laundry was going to be shut for good, the decision left many reeling.

“From the bottom of my heart, this is one of the most deceptive things that HHC has done,” says Carmen Charles, president of Local 420, which represents 9,500 of HHC’s 38,000 employees. “The deal was, they were going to bring the laundry back. The deal was, they were going to renovate [Brooklyn Central Laundry]. HHC deliberately did not put any money into the laundry so they could make the argument that they couldn’t keep it open because it’s old, it’s decaying.”

“If that was the decision, why did they pay $4 million to Deloitte to tell them this?” she asks. “Deloitte never once set foot in Brooklyn Central Laundry.” In July, HHC awarded the new laundry contract to a familiar face, Sodexo, this time leading a consortium of companies including Unitex, a linen and uniform rental company, and Nexera, a management company associated with the Greater New York Hospital Association.

In Deloitte’s confidential report to HHC, the savings anticipated by closing the laundry and outsourcing all its services were estimated at $6.1 million a year. In addition, Deloitte wrote, “Decommissioning operations at Brooklyn Central Laundry will eliminate the need for significant capital improvements” to the facility’s roof and equipment, “a savings of $1.2 million” a projection that was increased to $2 million in The Road Ahead. But there were risks to this plan, Deloitte warned: “The quality of customer service may be impacted.”

Looking at the fine-print of Sodexo’s offer raises some doubts about the projected cost savings. In its 100-page response to HHC’s laundry service request for proposals, Sodexo said it would be able to reduce HHC laundry costs by $65 million over the span of the nine-year contract. Sodexo said it could pick up, transport, wash, dry, fold, pack, transport and deliver (along with its consortium mates Unitex and Nexera) the 16.5 million pounds of laundry the HHC system produces annually for 61 cents a pound, compared to the union’s calculated costs of 70 to 79 cents a pound, and HHC management’s calculations of $1.30 per pound. But it turns out the relatively cheap cost of the contract covered only the price of cleaning the sheets, towels and blankets. Separate costs, such as cleaning scrubs and lab coats and cubical curtains, are extra costs under the deal (so is hanging the lab coats on hangers). In case of emergencies, Sodexo could guarantee only that needed sheets and scrubs would be available within a four-hour window, and in such a situation the price of getting the needed linens would rise past the $0.61 per pound initial cost.

Also in the Sodexo RFP was an endorsement from former HHC Chief Operating Officer Frank Cirillo — signer of the checks totaling $3.85 million to Deloitte over the six-month period it worked for HHC. Regarding the complete outsourcing of HHC’s laundry services, Cirillo wrote, “Every so-call[ed] expert we talked to said it would take three years to implement this model at HHC. I didn’t have that kind of time. I told the Consortium we had eighteen months and they beat that target!”

Reached by email, Cirillo, who retired from HHC in January 2011 to start Cirillo Consulting Group LLC — along with former HHC executive Stanley J. Pruszynski, HHC’s former corporate compliance officer — refused to comment.

For its part HHC vigorously defends the awarding of the laundry service contract to Sodexo. “I can tell you that the HHC contract with the consortium, a joint venture, to meet HHC’s laundry needs for a term of nine years will generate a total savings to HHC of $72 million,” Hernandez writes. Not only is this a money saving deal for HHC, “most other hospitals in the city outsource their laundry operations,” she notes. It’ll be years before the claims of cost savings can be tested. But already, the outcomes of the privatization have come under fire, at least from former Brooklyn Central Laundry workers, now assigned to new jobs throughout the HHC system.

According to Carmen Charles, this fall the management at Lincoln Hospital in the Bronx sent out a notice to its cleaning crew in the hospital that the new private laundry service was having difficulty getting the laundry distributed around the hospital in a timely manner and former BCLers were being asked to pitch in to assist. Charles was incensed: “They take this work away from us, they give it to someone else who is supposed to know how to do it, and do it for less, and then they want my workers to do the work? No way.”

Asked about reports of problems in getting the laundry distributed at Lincoln Hospital, a spokesman for Sodexo says that HHC had not complained of any problems to Sodexo. “HHC is pleased with the way things are going,” says the spokesman.

Failing to get bed linens and towels to patients in one hospital during a major transfer of operational reins is hardly sufficient reason to condemn the whole privatization process. But critics say Sodexo is a company that needs to be watched — and carefully. In 2010 the company was forced to pay a $20 million fine, the largest settlement negotiated by then-Attorney General Andrew Cuomo under the New York False Claims Act, for failing to pass on rebate savings to 21 New York school districts and the SUNY college system. The failure to pass on the rebate was a “clerical error, which was found and fixed,” says the Sodexo spokesman.

The closure of the Brooklyn Central Laundry is only one part of the Deloitte-endorsed HHC-restructuring plan. But in a sprawling system that deals with the complexities of modern health care, it offers a single and simple example of what a $3.85 million restructuring strategy can lead to — recommendations based on educated guesses about how a system works, savings projections with loopholes big enough to drive a laundry truck through, a contractor with a spotty record. Like the rest of The Road Ahead, the laundry plan could, indeed, end up saving HHC money. But there is reason to reserve judgment.

So, too, on the human impact of the plan. What will the closure of Goldwater and the consolidation of Coler really mean? What has been the effect of the closure of the clinics? City Limits asked HHC for usage statistics on the clinics that have remained open, but HHC has not provided the data.

Ruth Ford

NYCHA Seeks Multimillion-Dollar Advice — Quietly

As the oldest and largest public housing authority in the nation — with 414,000 residents living in 178,000 housing units spread across 344 developments whose physical plants and mechanical systems are aging out almost simultaneously amid a hostile federal funding environment — the New York City Housing Authority has a host of thorny issues it needs to tackle.

Earlier this year, seeking help to tackle them, NYCHA looked south. Not south like Staten Island. “Real Housewives of Atlanta”-type South.

Citing the ongoing work that the private consulting firm Boston Consulting Group (BCG) is doing for the Atlanta Housing Authority, the board of the New York City Housing Authority voted unanimously in March to give BCG $6.05 million to “provide comprehensive business transformation consulting services” pursuant to the terms and conditions of the current contract “between the Housing Authority of the City of Atlanta and BCG.”

That brief description was all the information that was publicly given at the March 2, 2011, board meeting. And the resolution made barely a splash. The vote to give BCG $6 million was one of five resolutions the NYCHA board voted on that morning, following votes to approve a half-million-dollar emergency contract for tree removal, a $600,000 commercial lease contract and the transfer of 32,000 square feet of land and 160,000 square feet of air rights in East Harlem to a real estate consortium building a charter school, community facility and 87 units of affordable housing.

Six months later on Sept. 14, with a nearly similar lack of fanfare, NYCHA’s board voted to extend BCG’s contract by another $4.26 million, a 70 percent increase in funding that left some in the authority doing a double take at the board’s largesse.

“In the past, with our capital projects, if a contract went before the board and the amount of the extra or percentage was this large, it would raise eyebrows, and people would get reamed,” said one NYCHA employee, a 15-year-plus veteran of the authority.

There was no incivility that morning, however, at NYCHA’s public board meeting, held in a conference room in the authority’s offices at 250 Broadway. Instead, the proposal for the contract extension was presented as a necessary but otherwise unexceptional request folded into a list of resolutions the board voted to approve, including commercial lease authorizations, capital improvements to an underground steam distribution system, and $10 million for a contract to purchase special waste-disposal bags.

There’s no question that NYCHA has a lot to think about. Since 2002 federal support for public housing operating expenses has plummeted, and capital funding has also lagged well behind the needs of an agency with buildings that are approaching 80 years old. Former Gov. George Pataki withdrew Albany support for the handful of NYCHA developments that were built by the state, and Mayor Bloomberg beat a similar retreat from several city-owned complexes. The $3 billion agency has been running an operating deficit that Chairman John Rhea has pegged between $150 million and $200 million a year and has had to lay off workers despite a staggering backlog of maintenance orders — a backlog that moved from onerous to fatal three years ago when a 5-year- old boy plummeted 10 stories down an elevator shaft in the Taylor-Wythe houses in Williamsburg, trying to escape a stalled elevator.

Ostensibly, BCG has been brought on to help NYCHA navigate these troubled waters. But exactly what the company is doing for its $10 million is a little hazy. NYCHA denied City Limits‘ request for a list of the policy recommendations BCG has made to date because these recommendations “are not yet policy,” Jacqueline C. Hernandez, the lawyer in charge of NYCHA’s Freedom of Information Law unit, told City Limits over the phone. (NYCHA agreed to fulfill a FOIL request to release a copy of BCG’s original contract, but had not released it at press time.)

NYCHA chairman Rhea describes BCG’s work in deft but general outlines. The work that the housing authority was doing with BCG is “part of a broader set of both transformational activities that we’re really embarking on here at the housing authority as well as trying to address some fundamental long-standing problems,” says Rhea, who took over as NYCHA chairman in May 2009, coming from Barclays Capital (formerly Lehman Brothers), where he served as managing director in investment banking and co-chair of the global consumer and retail group. Prior to joining Lehman in 2005, Rhea was an executive at J.P. Morgan, where he completed more than $100 billion worth of transactions overseeing corporate finance as well as mergers and acquisitions, and debt and equity underwritings for global consumer products companies, according to his official bio. Rhea’s bio also mentions that he serves on the board of the New York Business Development Corporation, is a founding member and director of the Council for Urban Professionals and has served as board chair of the Children’s Museum of Manhattan and as a member of the Obama for America national finance committee. It does not mention that he used to work at BCG.

The NYCHA boss insists BCG’s current work for the housing authority is unrelated to his former association with the firm. Rhea similarly downplays BCG’s first appearance at NYCHA two years ago, when he brought the company on board shortly after he was appointed chairman: BCG helped to design an employee survey of about the “climate” of NYCHA and helped “to crunch the data. That was pro bono. That was completely free,” he stresses.

As for the work Rhea did as a BCG employee, back in the 1990s, that was “very similar,” he allows, to work that BCG is doing for NYCHA now. From 1992 to 1995, he worked as a management consultant for BCG, with his projects focusing on helping large corporations “enhance revenue” and achieve “operational effectiveness.”

“The work that BCG has done for us is open to public disclosure — ultimately,” insists Rhea, who tells City Limits his management team made the recommendation to him to hire BCG, not the other way around. “Our management team talked about speaking to a McKinsey or a Bain,” Rhea adds, naming two other prominent consultancies, “but they decided that because the work needed to be done so quickly and the same kind of work was already done in Atlanta that it made sense to just go forward and hire BCG.”

But what exactly is that work, again?

Rhea describes the project as spanning two phases. In the first, BCG did a “very deep dive” into the nitty-gritty of NYCHA’s workings, “taking a hard look at our central-office costs” and functions — HR, legal, procurement, IT — and figuring out “how we can make them more efficient and reinvest those savings in the front line” — the caretakers, supers, housing assistants, plumbers and carpenters, “the frontline staff that ensures that at the end of the day, the residents are served directly.”

Then the firm asked itself, “OK, now that we understand all that, what does it mean for the design of the organization going forward?” and “What will it take to move the organization from where it is today to where we want to go?” Rhea says. Now the agency is in the second phase of its work with BCG. The $4 million contract extension “is about real implementation,” Rhea says.

Under Rhea’s predecessor as chairman, Tino Hernandez, NYCHA developed a strategy for meeting the combined fiscal and physical challenges facing the agency. It was called the Plan to Preserve Public Housing, and it called for steps like having the city pick up the cost of running NYCHA’s community centers, working with the city’s housing department to redevelop unused NYCHA properties into mixed-income affordable-housing projects and shrinking the workforce through attrition.

That earlier plan was good as far as it went, Rhea says, but “didn’t really address the capital deficit at all.” Rhea contends his own plan — also called the Plan to Preserve Public Housing — calls more comprehensively for real transformation within NYCHA, charting long-lasting change to surmount what he called “the pillar deficits” the authority is facing: an operating deficit, in terms of wages, energy, maintenance and upkeep on a day-to-day basis, “and this huge unmet multi-billion-dollar capital [project] backlog.”

Anti-public-housing sentiment emanating from Washington since the second Bush administration has imperiled housing authorities, resulting in a $30 billion backlog of capital needs in housing across the country. New York’s component alone is $6 billion, according to the NYCHA chairman, “and that’s just to-date capital unmet investment requirements: roofs, elevators, brickwork, boilers — all the things that actually preserve the physical infrastructure.”

Under the rules surrounding contract procurement as laid down by the state Office of General Services, as a public- benefit authority, NYCHA could “piggyback,” says Rhea, on another housing authority’s public procurement process, if that process was within the past year, done under a public procurement vetting, and the scope of work was the same. Ultimately, Rhea says, managers recommended that BCG be hired because the work NYCHA needed done was similar in scope to what BCG had done in Atlanta, BCG is “highly regarded” and the work needed to start right away. “There were many, many discussions about this,” he says.

But details of the work that BCG is doing for the Atlanta Housing Authority (AHA) are as hard to come by as specifics on what BCG is now doing in New York. Repeated phone calls and emails to press representatives of AHA went unanswered. BCG itself declined to talk about its work for either AHA or NYCHA. (Spokesman Dave Fondiller emailed, “As a matter of policy, BCG does not comment on its client work.”)

All we know about BCG’s work in Atlanta is a brief description in Atlanta’s Move to Work agreement — a strategy produced under a federal Department of Housing and Urban Development-led effort to renew and revitalize public housing. The Atlanta MTW calls for the AHA to merge funding streams to purchase new land and develop new housing, find job training and educational opportunities for residents and mandate that all working-age, able-bodied residents get a job or go to school. Under the MTW’s “Goal 3: Economic Viability/Corporate Support,” the report writers note, “To ensure long-term organization viability, began a business transformation initiative by hiring Boston Consulting Group, a world-renowned professional business consultancy, to make recommendations and to develop an implementation plan beginning in FY 2011 as a key component of AHA’s future business plan.”

According to Rhea, the consulting firm is doing similar things for NYCHA, “Which is how to rationalize their central office costs, the central office functions and to make it more efficient. And so a lot of the work they are doing there is specifically relevant to the work we are doing here.” There are similarities between Atlanta and New York City. Both housing agencies are run by people concerned about the health and welfare of their inhabitants, focus on creating public-private partnerships to improve the city’s housing stock and look for creative financing to keep that stock in good repair.

But in terms of size, organization, costs and scope of services, there is no comparison between NYCHA and its counterpart down south. Rhea himself made this point in remarks before the Citizens Housing and Planning Council in April 2010, when he said a plan to federalize 21 of NYCHA’s housing developments — only a fraction of the agency’s total holdings — was “the equivalent of having saved all the public housing in the city of Chicago or in the city of Boston or in all of San Francisco, Atlanta and Washington, D.C., combined.” Put another way, NYCHA has roughly 414,000 authorized residents across its 344 developments; the population of Atlanta (not just its housing authority, the entire city) is 420,000.

This past year, NYCHA transferred $76 million from its capital budget to its operating budget, an unorthodox move it has made for the past several years to address the repair backlog. At the same time, the agency has requested funds for several years running from the City Council to improve residents’ safety; so far, the City Council has given NYCHA $39 million for security measures, says spokeswoman Sheila Stainback.

Amid these pressing funding needs, why is NYCHA spending so much money on one contract with a consulting company, asks City Councilwoman Rosie Mendez, who was at the March 2 board meeting when the original $6.05 million contract was voted on. During the Council’s annual budget deliberations, Mendez says she and her staff wondered at the size of the amount but were distracted by the ongoing budget fight with the mayor and didn’t ask any questions. The recent $4.26 million contract extension has her asking questions. “I don’t get where they are spending all this money,” she says, noting that in the recent round of budget talks, NYCHA was “asking us for $10 million to catch up with repairs. So why is this $10.4 million necessary to give to an outside contractor? I just don’t get it,” says Mendez. “I find this alarming.”

So does Robert Hall, president of the Gun Hill Houses Resident Association in the Bronx. Practically born into the job — his mother was the resident association president from 1978 to 1981, and Hall, who has lived in the Gun Hill Houses all his life, has been president of the association for the past 12 years — Hall says Rhea has done some good things, in particular federalizing the 21 housing developments, but that the leadership at NYCHA needs to look harder at what is happening in the developments on the ground.

At an Aug. 24 public hearing on NYCHA’s draft agency plan for fiscal year 2012, held in the Pace University auditorium, Hall took to the microphone to query the board members on their current priorities, saying that at the development where he lives, “I see a lot of people in shirts and ties. I don’t see a lot of people doing the work.” There were three caretakers for his six-building, 14-story development, the manager’s office was located eight blocks away, and a rep showed up only once a week, to collect rent, he said.

“We need more stoves and refrigerators — [they are] falling apart, and we don’t have enough to go around. We’ve had leaves on the ground for two years that haven’t been cleaned up,” as well as garbage piling up, problems he has told NYCHA about but to which there’s been no response from the site manager. “I feel like I’m living in a ghost town. There are no people on the ground to work the facility on a day-to-day basis. There is a severe lack of personnel. It’s very harmful, and it’s dangerous.” Meanwhile, NYCHA “is top-heavy with executives.”

And many residents who deal with NYCHA have reason to distrust people in suits, particularly those working for an outside consultant. Last year, in an effort to save money, computer consultants revamped NYCHA’s handling of its Section 8 residents, removing the caseworkers that handled residents’ issues with their landlords and setting up a computer program to automatically contact residents about issues such as overdue rent and apartment inspections.

The result has been havoc, says Judith Goldiner, a supervisory attorney at The Legal Aid Society. Residents didn’t realize their rent had been changed and were learning of it only when they were ordered to show up in Housing Court for nonpayment. Landlords were getting letters addressed to residents with no address and had no way of knowing if residents were receiving their rent change notices or if they had been trying to schedule apartment inspections.

At the August public hearing at Pace, Goldiner outlined the problem for the silently listening NYCHA board. There were hundreds of Section 8 residents who had been affected by the massive screw-up in the computerization of the records.

“We have families who have paid their rent who are getting letters telling them their rental agreements are terminated, people who are going to the main office with canceled checks as proof ” and are still being kicked off the rent rolls. This is happening time and time again, and it’s not getting better, said Goldiner. “We are asking you to stop terminating Section 8 people until you get a handle on the problem.”

So far, says Goldiner, NYCHA officials’ response is that they have a backlog of corrections to make and that they are getting to them. She believes NYCHA should stop terminating residents’ rental agreements until they have their problem sorted out, “but they are not doing that.”

Rhea argues that BCG’s input to NYCHA will more than offset the contract cost that so concerns Councilwoman Mendez and others.

So far, “we’ve identified in this work they’ve done anywhere from $50 million to $100 million in annual savings,” he says. “I know that people want to look at the headlines and say 6 plus 4 is $10 million — how is that a good use of $10 million?” But if in one year, “we get to save just five times what we are spending on BCG,” it’s well worth it, Rhea contended. Rhea says NYCHA’s been completely transparent in hiring BCG. But he declined to offer specifics on where the savings actually were, except to say that some were in procurement and others needed investment to realize the savings. Nor was it clear if the savings identified by BCG would involve more cuts to the NYCHA workforce. “Layoffs, whether we would need to do them, would not need to do them, is really not related to the BCG work,” Rhea says. “That’s related to budget realities versus costs. Doing business differently — there’s a whole host of things, some that impact people, some that don’t impact people.”

When asked how long BCG workers would be at NCYHA and when the contract would end, Rhea replies, “I’m not going to say.”

And while on one hand, Rhea explains the recent, $4 million BCG contract renewal as covering “implementation,” on the other hand, NYCHA refuses to release any of the reports or recommendations that BCG has prepared for the agency on the grounds that they’re just ideas, not policy.

Julia Vitullo-Martin, a senior fellow at the Regional Plan Association and Director of the Center for Urban Innovation, is reluctant to criticize NYCHA for hiring BCG. “I think city agencies do need very good analysis,” she says. “It may well be that NYCHA is getting important information from this group — I’m all for that.” But $10 million for the information — “wow, that’s real money,” says Vitullo-Martin. For that matter, “six million is a lot of money to spend on a consultant for NYCHA” — particularly when the agency doesn’t want to disclose what the consultant is doing for it exactly. “NYCHA is a very secretive agency, and it’s only become more so recently,” she observes, something of a trend across the entire administration. City agencies need to be transparent, she adds. How else can their work be assessed? “In the fiscal crisis of the ’70s, the city was forced by a combination of government pressures and Wall Street to set up a good number of oversight divisions that analyzed and put out information on New York — and that was great. And I think we have actually gone backward from that.”

If the public is in the dark, so are NYCHA workers. “They aren’t telling us anything. There are tons of people from BCG here, and they were issuing all these demands to the different departments and won’t tell us what they are for. BCG has been here for more than a year, and the rumors are all over the place — about layoffs, about contracting out the commercial leasing, contracting out supplies and warehousing,” one worker says. “The morale here is terrible.”

All in all, adds the worker, BCG has “about maybe 20 people stationed here in-house to deal with this project. We probably have more people stationed side by side with them doing most of the research and gathering the work” than on any other single project in the agency.

But what, at the end of the day, is NYCHA going to get in return for the hiring of BCG?

“Consultants are brought in for a number of reasons, but it boils down to a few. A lot of times, consultants are brought in to make cuts that the organization itself won’t make on its own,” says Tom Rodenhauser, a director at Kennedy Consulting Research & Advisory, a firm that tracks trends in the field of management consulting. “Someone in the housing authority feels they need to change, but the culture can’t allow them to do it internally. So they go out and hire the change agent,” like BCG, “which brand name-wise is one of the biggest change agents they get. Whatever BCG comes up with may be as obvious as the day is long, but for some reason, the housing authority can’t do it on its own.”

Ruth Ford

Can Private Advice Save A Threatened Public Realm?

Mayor Bloomberg didn’t invent the idea of privatization — or contracting out. The opening scandal in the second term of Mayor John Lindsay’s administration was the discovery that the mayor had appointed Carter Bales, a principal at McKinsey & Co., to the position of assistant budget director as a thank-you for polling assistance during the campaign. At the same time, McKinsey itself had been awarded contracts worth at least $1.5 million, without competitive bidding. Part of the work that McKinsey did for the city was a glossy, high-end traffic report, with tissue paper between each page. It was an impressive product: “Their major finding was that traffic flowed into Manhattan in the morning and out of Manhattan in the evening,” deadpans Martin Tolchin, who covered the Lindsay administration for The New York Times.

Sarcasm aside, there’s nothing inherently wrong with asking a consultant to analyze a problem and offer solutions. Nor is there necessarily anything unwise about using private competition to provide better public services — as long as the solutions are good and the services are better and cheaper. The drive for privatization, though, has sometimes been fueled by the notion that the private sector always (or almost always) is the solution.

Bloomberg has pitched his businessman’s approach to government as innovative; his rationale for changing the law to facilitate a third term was that only his private-sector financial acumen could steer the city through its latest fiscal nightmare. But there’s nothing new about the notion that the biggest problem facing government is, well, government and that the private sector holds the answers. In fact, from Ronald Reagan’s “government is the problem” in 1981 to Barack Obama’s “we’re looking to run the government a little bit more like you run your business” in 2011, the idea that business can provide the model for getting things done has been the latest fad for a long time.

Under Bloomberg the city spends more on outside work: Even adjusted for inflation, his government’s spending on contracts is $3 billion more in 2012 than it was when he took office, and spending on “professional services” contracts has nearly tripled in that time.

But what’s really changed is the ambition behind the out- sourcing, from multimillion-dollar IT contracts to consulting deals whose dollar-figure isn’t stunning, but whose impact on city policy could be.

That there are things the private sector does better than government is obvious. And private contractors offer much that is attractive to municipal policymakers. Often their workers come without the encumbrance of pension and retiree health care costs. There are fewer unions to placate or work rules to deal with. Some of the private providers bring products or advice that can help city agencies navigate the sometimes-labyrinthine rules of instituting federally mandated policies. All of these can be helpful to city agencies looking to meet the bottom line, without busting the bank.

But the rosy picture that’s painted of the private options at government’s disposal often differs from reality. For one thing, privatization is often not really about competition. “Privatization does not result in cost savings in general, because most local-government services do not have a competitive market of alternate market providers. Without competition, all you do is substitute a private monopoly for a public monopoly,” says Cornell University professor Mildred Warner, a privatization expert. In a 2007 study of 1,400 municipal governments across the U.S. (New York City declined to participate), city managers were asked how many alternative providers they faced in their market for each of 67 different services, says Warner, who designed the survey. The answer: “The average was less than two.”

One needs to look no further than CityTime to see that private firms can have problems all their own. In the cases reviewed in this issue, no fraud is alleged, but we see other pitfalls of the private approach: Children left standing in the cold because their bus routes were canceled; the awarding of a multi-million-dollar laundry contract to a company with a troubled past; and the outsourcing of policy decisions to a Boston-based consulting company with no oversight by the public. The Department of Education’s SESIS program hit major snags during implementation and many of its users still need training, but even if the program succeeds at improving special education case management, it won’t wipe away the other problems facing special-ed kids.

In a perfect world, says City Comptroller John Liu, “city agencies would hire people based on need, and avoid outside consultants at all costs, expect when there’s a very short-term need, or a very specialized expertise that can only be obtained through outside consultants.”

The irony is, the agencies most affected by the contracts reviewed here — the Department of Education, the New York City housing Authority and the health and hospitals Corporation — embody an earlier generation’s very ambitious approach to government: that educating people, offering them access to health care and providing them with affordable housing is part and parcel of the social contract. Now those agencies are looking to the private sector for strategy, or even salvation. But what’s being lost in all the discussions during the Bloomberg administration about the benefits of private consultants and private contractors is the fact that government and business have two different missions, maintains Susan Lerner, director of the nonprofit advocacy group Common Cause.

“The difference between government and private industry is that government has to be responsive to more than just a profit motive,” says Lerner.

“That is why we have government — because it’s supposed to represent the best interests of the entire constituency, and to balance the different requirements of different groups of constituents.”

The CityTime debacle is one reason former deputy mayor Steven Goldsmith, a privatization guru when he was mayor of Indianapolis, wrote earlier this year that the city should try to in-source more of its IT work. If true, this might spare New York from more multimillion-dollar fiascos. But it’s not clear if the smaller consulting contracts like the ones performed for the DOE by Alvarez & Marsal, for HHC by Deloitte and by BCG for NYCHA, are included in the retreat that Goldsmith recommended. The fact that the administration is poised to veto the City Council’s Outsourcing Accountability Act doesn’t bode well. This bill would require agencies to explicitly state and track over time the costs and benefits of going outside their workforce to get a project done.

If City Hall is determined to keep private firms involved in making strategy and delivering services, then at a minimum, says Lerner, “there needs to be a thorough and clear discussion on what it means to move functions out of city government where elected officials can be held directly accountable and into the hands of consultants who are accountable to no one other than their own bottom line.”

Ruth Ford

Research support was provided by The Investigative Fund at The Nation Institute, now known as Type Investigations.