Susan Montee, CPA

Missouri State Auditor

City of St. Louis

Supply Division

September 2008 auditor.mo.gov

Report No. 2008-60
 Office of September 2008

Missouri State Auditor

Susan Montee, CPA

The following findings were included in our audit report on the City of St. Louis Supply
Division.
----------------------------------------------------------------------------------------------------------
It appears that some city departments may be using emergency purchases to circumvent
normal city purchasing procedures. Auditors reviewed 28 emergency purchases, totaling
$371,845, made by various city departments that were processed through the Supply
Division and approved by both the Supply Division and the Comptroller's Office. Of the
28 items reviewed, 22 did not appear to meet the city's definition of an emergency. Some
of these purchases included the following:

• The Street Department purchased a traffic signal detection system for $234,215.
It appears this purchase was delayed to the point where an emergency purchase
was required to complete the project on a timely basis, and there was no
documentation to indicate why the purchase had been delayed.

• The Supply Commissioner purchased a new car for $25,567 for the newly-elected
President of the Board of Aldermen.

• The Health Department purchased satellite telephones for $9,390, a digital camera
for $4,034, and other photo equipment for $1,131.

• The Information Technology Services Agency purchased W-2 forms for $626.
This purchase included all W-2 forms needed for city employee tax records for
the 2007 tax year. A similar purchase was made for the 2006 tax year.

Other items that did not appear to meet the definition of an emergency purchase included
a sno-cone machine, magnetic baseball schedules, fleece blankets, polo shirts, and
couches.

For 13 of the 22 items purchased that did not appear to meet the definition of an
emergency purchase, justification of the emergency nature of the purchase was not
adequately documented, and no justification was documented for two of the 22 purchases.
Nineteen items purchased included invoices with dates prior to the creation and approval
of the emergency requisition form. Further, 26 of the applicable 27 emergency purchases
were not bid as required. In addition, two of six applicable purchases did not have a letter
requesting waiver of advertising for bids, including one purchase exceeding $200,000.

(over)
Invoice prices for some purchases did not agree to the applicable contracted bid prices. In addition,
some invoices did not provide specific pricing information to allow invoices to be verified for
accuracy.

The city may be limiting available bidders due to the city's performance bonding requirements. The
Supply Division requires all contractors maintain a performance bond equal to 50 percent of the
value of the contract. The Supply Commissioner indicated some companies are choosing not to do
business with the city because the performance bonding requirement can be a financial hardship. In
addition, the city requires performance bonds for routine supply contracts where products would
appear to be readily available from other vendors if the contractor defaults.

The Supply Division received approximately $431,000 in checks and money orders during the year
ended June 30, 2007. Checks and money orders may be handled by as many as three individuals
prior to being recorded for transmittal to the City Treasurer, which could cause delays in
transmitting receipts on a timely basis. In addition, there is no process to allow for the reconciliation
of amounts received to amounts transmitted to the City Treasurer.

All reports are available on our Web site: www.auditor.mo.gov

 CITY OF ST. LOUIS
SUPPLY DIVISION

TABLE OF CONTENTS

Page

STATE AUDITOR'S REPORT................................................................................................... 1-3

MANAGEMENT ADVISORY REPORT - STATE AUDITOR'S FINDINGS ....................... 4-11

Number Description

1. Emergency Purchases ..................................................................................5

2. Contract Pricing ...........................................................................................8
3. Performance Bonding ..................................................................................9
4. Receipt Controls ........................................................................................10

HISTORY AND ORGANIZATION ....................................................................................... 12-13

-i-
STATE AUDITOR'S REPORT

-1-
 SUSAN MONTEE, CPA
Missouri State Auditor

To the Honorable Mayor

and
Supply Commissioner
City of St. Louis, Missouri

The State Auditor was petitioned under Section 29.230, RSMo, to audit the city of St.
Louis. The city engaged KPMG LLP, Certified Public Accountants (CPAs), to audit the city's
financial statements for the year ended June 30, 2007. To minimize duplication of effort, we
reviewed the CPA firm's audit report. We have conducted an audit of the City of St. Louis
Supply Division. The scope of our audit included, but was not necessarily limited to, the year
ended June 30, 2007. The objectives of our audit were to:

1. Obtain an understanding of the petitioners' concerns and perform various

procedures to determine their validity and significance.

2. Determine if the division has adequate internal controls over significant

management and financial functions.

3. Determine if the division has complied with certain legal provisions.

Our methodology included reviewing written policies and procedures, financial records,
and other pertinent documents; interviewing various personnel of the division, as well as certain
external parties; and testing selected transactions.

We obtained an understanding of internal controls that are significant within the context
of the audit objectives and assessed whether such controls have been properly designed and
placed in operation. We also tested certain of those controls to obtain evidence regarding the
effectiveness of their design and operation. However, providing an opinion on the effectiveness
of internal controls was not an objective of our audit and accordingly, we do not express such an
opinion.

We obtained an understanding of legal provisions that are significant within the context
of the audit objectives, and we assessed the risk that illegal acts, including fraud, and violations
of contract, or other legal provisions could occur. Based on that risk assessment, we designed
and performed procedures to provide reasonable assurance of detecting instances of

-2-
P.O. Box 869 • Jefferson City, MO 65102 • (573) 751-4213 • FAX (573) 751-7984
noncompliance significant to those provisions. However, providing an opinion on compliance
with those provisions was not an objective of our audit and accordingly, we do not express such
an opinion. Abuse, which refers to behavior that is deficient or improper when compared with
behavior that a prudent person would consider reasonable and necessary given the facts and
circumstances, does not necessarily involve noncompliance with legal provisions. Because the
determination of abuse is subjective, our audit is not required to provide reasonable assurance of
detecting abuse.

We conducted our audit in accordance with the standards applicable to performance

audits contained in Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform our audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and conclusions based on our
audit objectives. We believe that the evidence obtained provides such a basis.

The accompanying History and Organization is presented for informational purposes.

This information was obtained from the division's management and was not subjected to the
procedures applied in our audit of the division.

The accompanying Management Advisory Report presents our findings arising from our
audit of the City of St. Louis Supply Division.

Additional audits of various officials and departments of the city of St. Louis, fulfilling
our obligations under Section 29.230, RSMo, are still in process, and any additional findings and
recommendations will be included in subsequent reports.

Susan Montee, CPA

State Auditor

The following auditors participated in the preparation of this report:

Director of Audits: Alice M. Fast, CPA

Audit Manager: Mark Ruether, CPA
In-Charge Auditor: Kelly Davis, CPA
Audit Staff: Michael Reeves

-3-
MANAGEMENT ADVISORY REPORT -
STATE AUDITOR'S FINDINGS

-4-
 CITY OF ST. LOUIS
SUPPLY DIVISION
MANAGEMENT ADVISORY REPORT -
STATE AUDITOR'S FINDINGS

1. Emergency Purchases

Numerous emergency purchases were made that did not appear to meet the city's
definition of "emergency" or include adequate documentation to justify the emergency
nature of the purchases. In addition, some city departments did not follow required
emergency purchase procedures, including soliciting price quotes or bids and requesting
approval before purchase. The Supply Division processed approximately 395 emergency
purchase requisitions during the year ended June 30, 2007.

We reviewed 28 emergency purchases made by various city departments that were

processed through the Supply Division and approved by both the Supply Division and the
Comptroller's Office. These emergency purchases were made between July 1, 2006 and
March 27, 2008 and totaled $371,845. We noted the following concerns:

A. Of the 28 items reviewed, 22 did not appear to meet the city's definition of an
emergency. City policy states an emergency purchase can only be made when a
condition exists which might cause injury to a person, property damage, or
seriously impair public health or services. These 22 purchases included the
following:

• The Street Department purchased a traffic signal detection system for

$234,215. It appears this purchase was delayed to the point where an
emergency purchase was required to complete the project on a timely
basis, and there was no documentation to indicate why the purchase had
been delayed.

• The Supply Commissioner purchased a new car for $25,567 for the newly-
elected President of the Board of Aldermen.

• The Health Department purchased satellite telephones for $9,390, a digital

camera for $4,034, and other photo equipment for $1,131.

• The Information Technology Services Agency purchased W-2 forms for

$626. This purchase included all W-2 forms needed for city employee tax
records for the 2007 tax year. A similar purchase was made for the 2006
tax year.

Other items that did not appear to meet the definition of an emergency purchase
included a sno-cone machine, magnetic baseball schedules, fleece blankets, polo
shirts, and couches.

-5-
B. For 13 of the 22 items purchased that did not appear to meet the definition of an
emergency purchase (as noted in Part A), justification of the emergency nature of
the purchase was not adequately documented, and no justification was
documented for 2 of the 22 purchases. For the remaining 7 purchases, even
though the items purchased did not appear to meet the city's definition of an
emergency, the justification that was provided did appear to meet the city's
documentation requirements (for example, "time sensitivity" is considered an
appropriate justification).

The Supply Division Procedures Manual requires the applicable city department
or division to provide documentation of the need for each emergency purchase in
the justification section of the emergency requisition form; however, the
following represent examples of inadequate justifications provided:

• The Health Department stated the $4,100 digital camera was needed for
publicity photos.

• Couches and office chairs were purchased for two departments to replace
worn-out furniture.

• The Building Division needed six vehicles to replace worn-out vehicles

for building inspectors.

C. Nineteen items purchased included invoices with dates prior to the creation and
approval of the emergency requisition form. The Supply Division Procedures
Manual requires the Comptroller's and Supply Division's approval before an item
can be purchased on an emergency basis, unless the offices are closed. If the
offices are closed such as at night or on a weekend, purchases must be approved
by the department head at the lowest possible price. No documentation was
provided to indicate that these 19 purchases were made while the applicable
offices were closed.

D. Twenty-six of the applicable twenty-seven emergency purchases were not bid as

required. The Supply Division Procedures Manual requires two to three vendor
letterhead price quotations be obtained prior to making an emergency purchase,
unless a bid waiver is requested and approved by the Supply Division (a waiver
was requested and approved for one of the 28 purchases reviewed).

In addition, two of six applicable purchases did not have a letter requesting waiver
of advertising for bids. The Supply Division Procedures Manual requires a letter
be sent to the Supply Division at least two days prior to purchase requesting the
waiver of advertising for bids if the purchase price exceeds $5,000 (price quotes
must still be obtained even when advertising for bids is waived). One purchase
exceeded $200,000 but did not include the required waiver.

-6-
 In some cases, it may not be possible or practical to obtain price quotes, bids, or
bid waiver letters prior to purchase. In these cases, the reasons for not following
the applicable policy should be fully documented.

It appears that some city departments may be using emergency purchases to circumvent
normal city purchasing procedures. The Supply Division should work with the
Comptroller's Office and all city departments to ensure emergency purchases meet the
city's definition of an emergency and that all applicable procedures are followed for such
purchases. In addition, the Supply Division should work with the Mayor and Board of
Aldermen to determine if disciplinary action can be taken against city departments that
abuse emergency purchasing procedures. This would ensure non-emergency purchases
are made in accordance with standard city purchasing procedures, which helps ensure
purchases are reasonable and necessary and the city receives the best price for all
purchases.

WE RECOMMEND the Supply Division work with the Comptroller's Office to:

A. Ensure only emergency purchases that meet the definition of an emergency are
approved. In addition, the Supply Division should work with the Mayor and the
Board of Aldermen to determine if disciplinary action can be taken against city
departments that abuse emergency purchasing procedures.

B. Ensure all emergency purchases include adequate documentation to justify the

emergency.

C. Ensure all emergency purchases are approved prior to initiating the actual
purchase, or the reason for initiating the purchase prior to approval is adequately
documented.

D. Ensure two or three vendor letterhead price quotes are received for all emergency
purchases, and letters to waive advertising for bids are received for applicable
emergency purchases over $5,000. If there are valid reasons for not following
applicable city policies for such purchases, these reasons should be fully
documented.

AUDITEE'S RESPONSE

The Supply Division agrees with the audit finding. The Supply Division will work in conjunction
with the Mayor's Office, Comptroller's Office and the Board of Aldermen to ensure city policy
and procedures are followed. A joint letter will be sent to all departments and agencies by
November 30, 2008, requesting compliance and recommending departmental actions, if
appropriate, be imposed against repeat offenders.

-7-
2. Contract Pricing

Invoice prices for some purchases did not agree to the applicable contracted bid prices.
In addition, some invoices did not provide specific pricing information to allow invoices
to be verified for accuracy. The Supply Division is responsible for negotiating contracts
for the purchase of city supplies and materials. In addition, city accounting procedures
require the Supply Division review invoices for items purchased on an existing contract
to ensure the prices agree to the applicable contracts. If the prices agree, the Supply
Division authorizes a purchase order in the accounting system which allows for the
payment of the invoice. If the prices do not agree, the Supply Division is required to
send the invoice back to the applicable city department to resolve the differences.

We reviewed 14 contracts negotiated by the Supply Division between July 1, 2006 and
February 29, 2008 for compliance with city bidding and invoicing procedures. This
included a review of various invoices for each contract to ensure the invoice price agreed
to the bid price. We noted the following concerns:

A. Invoices for 2 of the 14 contracts included charges for items that were not bid nor
included in the contracted bid prices. While the Supply Division's Multigraph
Section provides printing services for most city departments, the Supply Division
contracts for printing services that cannot be provided by the Multigraph Section
or when the Multigraph Section cannot handle the capacity of certain printing
requests. The invoices for one printing order included items that were not
included in the contract. Instead, according to division personnel, the bid price
was for basic printing, and additional embellishments were purchased but not bid.
Division personnel indicated a supply clerk will contact the Multigraph Section to
determine if the invoiced prices are acceptable, but this verification is not
documented.

In the other instance, the city purchased rock at a pick-up price rather than the
negotiated delivery price. While the pick-up price was lower than the negotiated
delivery price, it appears the Supply Division should have obtained bids for pick-
up price, as well as delivery price, to ensure the best possible price was obtained.

To ensure the city only pays the negotiated prices and to help prevent over-billing,
the Supply Division should ensure all prices correspond with contracted prices
prior to authorizing the applicable purchase orders.

B. Invoices for 6 of the 14 contracts did not include necessary information to allow
the Supply Division to verify that the invoice price agreed to the contract price.
For one diesel fuel contract, the invoice prices were raised without consulting the
Supply Division as required. The invoices did not include specific unit pricing
information to allow for the pricing differences to be found, causing the city to
potentially overpay for fuel. In another instance, tree removal was contracted
based on an amount per ton of debris removed. The number of tons removed was

-8-
 not included on the invoices to allow Supply Division personnel to verify that the
correct amount was billed.

The Supply Division should ensure invoices include detailed information

regarding per unit rates to allow adequate comparison of invoice prices to contract
prices. This would help ensure the city pays the negotiated contract price.

WE RECOMMEND the Supply Division:

A. Ensure invoice prices correspond to contract prices before processing the

purchasing order in the accounting system.

B. Ensure invoices include sufficiently detailed information, such as per unit rates, to
allow adequate comparison of the invoice prices to the contract prices.

AUDITEE'S RESPONSE

The Supply Division agrees with the audit finding. The Supply Division’s buyers have been
instructed to insure that all contracts contain the appropriate per unit pricing. Accounting
personnel have been instructed to verify per unit pricing on all invoices with the corresponding
contract. Accounting personnel have also been instructed to refer all pricing discrepancies to
vendors and/or buyers for resolution before processing the invoice for payment. Action
completed as of June 30, 2008.

3. Performance Bonding

The city may be limiting available bidders due to the city's performance bonding
requirements. The Supply Division requires all contractors maintain a performance bond
equal to 50 percent of the value of the contract. St. Louis City Revised Code Section
5.58.160 states, the "Supply Commissioner shall require all parties contracting through
his department to give good and sufficient bond for the faithful performance of the
contracts, to be approved by the Mayor."

Performance bonds are a useful tool to ensure the city is indemnified if a contractor fails
to fulfill the contract. However, the Supply Commissioner indicated some companies are
choosing not to do business with the city because the performance bonding requirement
can be a financial hardship. In addition, the city requires performance bonds for routine
supply contracts where products would appear to be readily available from other vendors
if the contractor defaults. The State of Missouri Office of Administration, Purchasing
Division does not require performance bonds for routine items such as office supplies.
Instead, the wishes of the contracting departments and details of the contract are
evaluated to determine performance bond requirements.

Performance bonds should be used to ensure the city remains protected if a contractor
fails to fulfill a contact. However, requirements should be evaluated to determine the

-9-
 necessity of performance bonds in situations which may limit the city's ability to receive
the best pricing and services available.

WE RECOMMEND the Supply Commissioner work with the Mayor and Board of
Aldermen to evaluate the need of performance bonds for various types of contracts and
revise the City Code as applicable.

AUDITEE'S RESPONSE

The Supply Division agrees with the audit finding. The Supply Commissioner will work with the
Mayor's Office, Comptroller’s Office, Board of Aldermen, and the City Counselor's Office to
evaluate the need for performance bonds and seek revision of the City Code as applicable. If the
City Code is approved for revision, operating departments will be consulted in determining when
performance bonds are necessary. Estimated completion date is November 30, 2008.

4. Receipt Controls

The Supply Division does not maintain an initial record of checks received, and checks
are not restrictively endorsed immediately upon receipt. Checks may be handled by as
many as three individuals prior to being recorded for transmittal to the City Treasurer,
which could cause delays in transmitting receipts on a timely basis. In addition, there is
no process to allow for the reconciliation of checks received to checks transmitted.

The Supply Division received approximately $431,000 in surplus property receipts

during the year ended June 30, 2007. All receipts are in the form of check or money
order received through the mail; no cash is accepted by the Supply Division. After the
mail receipts are opened, monies may be forwarded to one of the purchasing staff or
directly to the Executive Secretary depending on the type of receipt. After review by the
purchasing staff, those monies are then forwarded to the Executive Secretary. The
Executive Secretary endorses the checks and money orders and completes the paperwork
to transmit the receipts to the City Treasurer. Our review noted at least one check was
not transmitted within one business day after it was recorded by the Executive Secretary,
and the lack of initial recording makes it impossible to determine whether receipts are
transmitted on a timely basis after they are received in the mail.

To adequately safeguard receipts and reduce the risk of loss or misuse of funds, an initial
record or mail log should be prepared and checks and money orders should be endorsed
immediately upon receipt. In addition, receipts should be transmitted to the City
Treasurer's office on a daily basis, and receipt logs should be reconciled to transmittal
records to ensure all receipts are transmitted.

WE RECOMMEND the Supply Division prepare and maintain an initial record or log
of all monies received, restrictively endorse all checks and money orders immediately
upon receipt, and transmit receipts to the City Treasurer daily. In addition, the record or
log of monies received should be reconciled to amounts transmitted to the City Treasurer.

-10-
AUDITEE'S RESPONSE

The Supply Division agrees with the audit finding. A log of all checks and money orders
received by the division was established and implemented on May 23, 2008. All personnel
involved in the receiving and disposition of monies for the division have been trained on the
proper maintenance of the log. An endorsement stamp has been made readily available to all
personnel initially receiving checks/money orders. The Deputy Supply Commissioner has been
given the responsibility for reconciling the check log with the receipt coding form to insure that
all monies are deposited in a timely manner.

-11-
HISTORY AND ORGANIZATION

-12-
 CITY OF ST. LOUIS
SUPPLY DIVISION
HISTORY AND ORGANIZATION

The City of St. Louis Supply Division is responsible for the procurement of supplies and
materials, printing, and mail services for the city. The division operates under the direction of
the Supply Commissioner, Freddie Dunlap, and employs 26 people in the following three
departments:

1. Office of the Supply Commissioner

The Office of the Supply Commissioner is responsible for the procurement of all
supplies, equipment, equipment maintenance, and selected services for all city
departments. The Supply Division only procures supplies and equipment for certain
elected officials and the police department upon request. The division processes nearly
7,000 requisitions per year and administers over 200 purchase contracts. During the year
ended June 30, 2007, the Supply Division awarded approximately $54.5 million in
purchase contracts.

2. Multigraph Section

The Multigraph Section provides copying, printing and design/typesetting services to all
city departments. Promotional and customized graphic design work is created according
to customer specifications. In addition, the Multigraph Section provides production
assistance and advice to city departments as needed.

3. Mail Room Services Section

The Mail Room Services Section delivers mail twice daily to 67 different city
departments. Approximately 1 million pieces of outgoing first class mail are processed
by the Mail Room Services Section in an average year. This section also folds and
inserts approximately 250,000 pieces of mail annually, and offers a courier service to city
departments.

-13-