Public Work, Private Gain: The governor has hired consultants to do what state employees could do

Feb 1, 2005

At the hub of the state's bureaucracy, Central Management Services is big business. And more and more often, more and more of that business is going on behind closed doors.

The Illinois Department of Central Management Services is the all-purpose agency through which some $3 billion in state funds flow each year. It is state government's landlord and auto mechanic. And it oversees purchasing, information technology and telecommunications operations, as well as insurance benefits for thousands of state employees.

Simply put, CMS, the agency widely known by its initials, is a monolith of monotony. Name a thankless task and Central Management Services is most likely responsible. And the list keeps growing. In 2003, Gov. Rod Blagojevich added real estate management, auditing and legal services, using his reorganization powers to move those tasks out of other state agencies and centralize them under CMS. Last year, he moved agency spokespersons into one CMS Office of Communications.

And while the governor is making CMS bigger, he's aiming to make that nuts-and-bolts public-sector agency better with plenty of help from the private sector. The Blagojevich Administration has doled out at least $68 million in consulting contracts, eyeing cost savings of up to $1 billion.

But a look at one of the administration's most lucrative arrangements, a $24.9 million contract with a politically connected Chicago firm designed to help CMS streamline its property management practices, suggests savings projections were overblown. Meanwhile, the behemoth bureaucracy that now controls the governor's communications operations is accumulating a wealth of critics who say the agency is increasingly stingy with information. They argue CMS has established a pattern of secrecy and a penchant for high-priced consultants, often with political connections.

In short, the state may well be saving money and providing better service by privatizing operations, but it's hard to tell.

A CMS response to an Illinois Issues request under the Illinois Freedom of Information Act provides little insight into how the state saved an estimated $6.5 million on real estate costs last year, the first in the three-year life of the property management contract.  

"It's inconceivable to me that we have that much of a space planning difficulty that the only remedy is to spend $24 million to solve it," says state Sen. Peter Roskam, a Wheaton Republican. 

Just as disconcerting to Roskam and others is the administration's reluctance to share with taxpayers — who are footing the bill — details about the way it's now doing business. 

Roskam has been here before. Last spring, he wanted the state's top lawyer to get a peek at a Blagojevich plan to mortgage the James R. Thompson Center. Roskam questioned the constitutionality of the deal, a $216 million loan on the state's premier Chicago office building. Attorney General Lisa Madigan ruled the proposal unconstitutional only days before the closing deadline, apologizing to Roskam for a delay she blamed on difficulties obtaining information from CMS.

Madigan isn't the only high-ranking official to gripe about CMS' tight grip on information. As with the Thompson Center deal, CMS has shown a pattern of withholding public information to protect the interests of its private partners. 

CMS says its contract with Illinois Property Asset Management LLC, a Chicago consortium, saved taxpayers $6.5 million. But the contract was supposed to save at least $14 million last year. The state is paying the company to devise ways to improve the management of some 7,000 state buildings and several hundred private properties the state leases for parking, storage or office space. On top of that, the company sought to charge brokerage fees to landlords who want to rent to the state. Documents prepared by the company show that it expects to save the state up to $12 million this year by aggressively negotiating new leases, asserting that landlords will provide free rent and other concessions that reflect a current decline in the market.

According to state comptroller records, state agencies spent $158 million on leased property last year, a drop of $4.5 million, or nearly 3 percent from the previous fiscal year. Yet, those savings measure only half of Illinois Property Asset Management's commission for last year. And the company recently received an additional $668,000 no-bid contract to develop electronic property management systems for the state. 

The consortium won the original contract through competitive bidding. Still that deal drew scrutiny because Chicago-based Mesirow Financial Inc., parent company of one of the firms in the consortium, advised the administration on a $10 billion bond deal and once employed the cousin of John Filan, Blagojevich's budget director. Piper Rudnick, a lobbying firm for Mesirow, has contributed $100,000 to the governor's campaign fund. 

State officials have shrugged off those connections, suggesting the real story should be the savings brought by the outside review. 

But the savings estimates aren't set in stone, nor are they easily obtainable. In an interview last spring, CMS Director Michael Rumman estimated that the contract with Illinois Property Asset Management could eventually save the state $100 million a year. The budget proposal Blagojevich unveiled a few months earlier estimated savings of $120 million by 2006. Today, that estimate has been cut in half. CMS spokeswoman Nicole Grady now puts the total savings at $57 million over a three-year period.

The property management contract came at a time when the state gave private firms another $28 million to streamline information technology and telecommunications systems and shelled out $14.7 million for a procurement consultant. Smaller consulting contracts went to companies brought in to help CMS audit state agencies, provide legal services and run a more efficient vehicle fleet.

"We have to be breaking records by wide margins on the amount of money taxpayers are paying to have people consult with state government," says state Sen. Dale Righter, a Mattoon Republican.

While it's not uncommon for state government to seek outside help, critics have expressed alarm at the scope and manner in which the Blagojevich Administration outsources advice. 

For example, Ron Picur, an accounting professor on the payroll at the University of Illinois at Chicago, has received more than $300,000 as a financial consultant to the Governor's Office of Management and Budget. Under contract, he works with John Filan, Blagojevich's budget director who was previously a partner with Picur in the Chicago accounting and auditing firm of PTW. 

Another PTW employee who recently left the state payroll received a $19,000 no-bid contract to study state gambling revenues, a task the Illinois Gaming Board already performs on a regular basis. That contract comes on top of a $225,000 contract Deloitte & Touche received to analyze gaming revenue last year. 

Deloitte & Touche also received a $20,000 contract to assist the governor's budget office in analyzing the state's public pension debt, a task already performed by state actuaries. Another firm, Mercer Human Resources Consulting, received a $200,000 contract for similar actuarial work.

In general, the administration says private consultants provide the state with independent data and outside expertise. 

In the case of the property management consultant, the contract came amid a scathing review of state real estate practices. An Illinois auditor general report released a year ago revealed gross mismanagement. And Blagojevich Administration officials say that audit supported the need for the contract with Illinois Property Asset Management.

"Overall, we agree with the general message of the audit," CMS Director Rumman wrote to Auditor General William Holland. "We are now working with a world-class group of asset managers. ... It is my belief that the state's space utilization and asset manager's program will be a model for the country and a program other states will look to mimic."

The American Federation of State, County and Municipal Employees Council 31, Illinois' largest state employees union, says it can understand the need for the review.

"At the same time, it certainly seems that $25 million is an excessive sum and there's no question in my mind that a team could have been assembled from internal employees to perform the same work at a much lower cost to the taxpayer," says AFSCME spokesman Anders Lindall. "And we are extremely skeptical of the rich contracts handed out, seemingly left and right, by this administration to various consultants."

If the skeptics are unconvinced, it could be because the state's private sector advice tends to stay private unless it can support administration policy. For example, Deloitte & Touche's pension analysis has helped show legislators how cutting state employee benefits could reduce the state's staggering pension debt.

But the administration hasn't had a compelling reason to share details about its other consulting contracts. Internal documents show that Illinois Property Asset Management's savings plan banks on $8 million in asset sales. The company ordered appraisals for a vacant five-acre plot in northwest Chicago and unused property at the Elgin Mental Health Center, a 90-acre parcel the Blagojevich Administration proposed selling two years ago.

And at least two real estate deals signed since Illinois Property Asset Management came on board raised questions about the effectiveness of the high-priced advice CMS is getting. The first is a two-year no-bid lease for storage space near the Kennedy Expressway in Chicago. The Illinois Lottery inked the $48,000 deal with Mark IV Realty, which also rents billboard space to the agency and donated $90,000 worth of billboard space to Blagojevich during his campaign for governor.

The second deal involves the Illinois Department of Natural Resources. At the suggestion of Illinois Property Asset Management, DNR employees moved out of the Thompson Center last summer and into $61,000-a-year office space in the Chicago Loop. The five-year no-bid lease was signed a few months before the agency laid off 124 employees.

"Why does the Department of Natural Resources need 3,000 square feet in the Loop?" asks Righter, the Mattoon Republican. "I mean, if DNR is so burdened by the 4 percent across-the-board budget cuts that the General Assembly imposed last year, how do they justify spending that kind of money on some of the most expensive business real estate in the state of Illinois? I don't understand that."

At $307,000 over five years, the lease may not be a huge burden to the state, but it's being paid by an agency that says it can no longer afford 124 of its employees.

Natural resources spokesman Joe Bauer says the department moved four of its water resources division employees to the office at 36 S. Wabash because CMS needed more space in the Thompson Center. Bauer referred further questions to CMS.

Agency spokeswoman Nicole Grady says the move is part of a reorganization of the Thompson Center and the Michael A. Bilandic Building, another downtown outpost of state offices.

"This is an integral component of CMS' statewide space plan," Grady says. "The move with DNR is part of the restacking that will ultimately maximize the space usage in both those buildings and save money." 

She says the building at 36 S. Wabash was chosen because the Illinois Department of Employment Security already leases space there and because the administration wants to keep the transferred natural resources employees in the Chicago area.

According to Illinois Property Asset Management, moving natural resources and State Board of Elections offices out of the Thompson Center would give CMS more space and open up another 25,000 square feet that could be used by agencies that are currently leasing space elsewhere. The company estimates that the reorganization will save $5 million over 10 years.

The properties leased by natural resources and the Lottery are each smaller than 10,000 square feet, the threshold at which a competitive bid is required. 

Documents released by CMS do not indicate that Illinois Property Asset Management has suggested reforms that would have made those no-bid deals any less likely. In general, the advice the state is getting remains a mystery outside the administration.

This isn't the first or only time Central Management Services has drawn criticism for shielding information about its private contracts. Last spring, Comptroller Dan Hynes publicly criticized an $11 million information technology consulting contract CMS signed with Accenture. Hynes complained that the offshore company had no intention of paying state taxes on the income it would receive. The comptroller says the administration then slipped a tax clause into the Accenture contract just before his complaint came before a state review board.

Yet another contract snafu last summer forced CMS to scrap plans to re-bid $600 million in state employee health insurance contracts. Bumps in the bidding process sank the deal even while the state was paying the Chicago office of McKinsey and Company Inc. $14.7 million to reform state procurement practices.

Says Righter: "The explanation that we've received from the governor's office with regard to what created that fiasco [was] — the polite word would be mismanagement — the more accurate term would be ineptness." 

Questions arose regarding the way CMS evaluated the bids after Health Alliance, an Urbana company that served state employees for 23 years, was ousted from the competition, perhaps because of changes to the evaluation process made after bids were accepted. CMS eventually agreed to keep the current providers, including Health Alliance, while the state reopened the bidding process.

If nothing else, the health insurance debacle was another red flag for legislators who find it increasingly difficult to pry information from the Blagojevich Administration. Righter and Roskam are currently fighting CMS to obtain information about a contract with Caremark to supply state employees with mail-order prescriptions. The senators want to know the rates Caremark is charging so that local pharmacies can attempt to compete. CMS has denied their inquiries through the Freedom of Information Act. Roskam says the situation mirrors the agency's reluctance to release information about the $24.9 million property management contract.

"We saw it with the Thompson Center [lease]. We're seeing it with the Caremark situation. And now you're describing another situation and it seems like a pattern. It's a way of doing business that's not particularly healthy," Roskam says. "They don't want to disclose what they're doing, what they've recommended, what we've paid for. I think we can do better."

With CMS taking its cues from the private sector, the business of state government is increasingly becoming a private matter for this administration. Critics argue this sells short the 12 million Illinoisans who are the de facto shareholders in the business of state government. While the private sector might produce a better work product, so far Illinois taxpayers aren't seeing much more than the price tag. 

 

CMS update

Property management

Following an inquiry by Illinois Issues, the state moved to alter its $24.9 million real estate management contract with Illinois Property Asset Management.

The Chicago consortium will no longer be permitted to charge additional service fees to the state and private landlords. To compensate for the lost commissions, the state will increase Illinois Property Asset management's contract by $3.5 million, bringing the total value of the three-year deal to $28.4 million. The changes were made public after Illinois Issues went to print with the February issue. Nicole Grady, a spokeswoman for the Illinois Department of Central Management Services, says the contract revisions were under discussion beginning October, but she could not provide documents to support that timeframe.

As of February 1, the state comptroller's office had not received an updated contract. Central Management Services filed the original contract with Illinois Property Asset Management in January 2004. The pact was expected to save the state up to $120 million over three years, but that estimate has dropped to $57 million.

Drug benefits

Also in late January, Caremark asked a judge to block public release of its contract to provide state employees with prescription drug benefits. State Comptroller Dan Hynes was set to release the contract under a Freedom of Information Act request, but Caremark asked the court to intervene, arguing that its pricing methods are confidential trade secrets explicitly protected by terms of the state contract.

Cook County Judge Mary Anne Mason delayed the case, asking both sides to submit more information before a new hearing scheduled for February 4.

Republican state Sens. Dale Righter of Mattoon and Peter Roskam of Wheaton originally requested the contract information from the Illinois Department of Central Management Services. Their requests were denied based on the trade secrets qualification. The senators argue that all terms of the contract should be released because it is paid for by public dollars. The state's pharmacy benefits contract with Caremark is worth about $200 million a year.

The GOP senators sought the information this fall, after the contract was amended to cover long-term mail order prescriptions. They say the information would help local pharmacies compete with Caremark.

Patrick Guinane

Illinois Issues, February 2005