Messy Milk Contracts at Department of Education

Stringer: Distributors May Have Colluded

The city Department of Education (DOE) failed to employ proper safeguards and controls in awarding multi-million dollar milk distribution contracts for city schools, making the city vulnerable to possible collusion, City Comptroller Scott M. Stringer announced.

The findings of the audit have been referred to the U.S. Department of Justice for further investigation.

“DOE ignored red flags that its milk contracts may have been tainted,” Stringer said. “We see possible collusion when rival bidders become business partners within two months of being awarded contracts. Instead of doing its due diligence, DOE needlessly put taxpayers at risk. Moving forward, DOE must put tighter controls in place to ensure that bids are made independently and that bidders have the financial ability to deliver the services they promise.”

Keeping close tabs on the city’s school food supply chain is vital to protecting both the City’s physical and fiscal health. New York City serves more meals and spends more money on those meals than any other U.S. government entity outside of the Department of Defense-some 850,000 meals each day. Saving just one penny on the cost of each meal through better controls adds up to big-time savings for taxpayers- more than $1.5 million per year.

The audit examined three contracts worth $134 million for the supply and delivery of milk to City schools from November 2008 to August 2013. The three winning vendors were Beyer Farms, Inc., Elmhurst Dairy, Inc. and Bartlett Dairy, Inc. The largest contract, totaling $111 million, went to Beyer, for milk delivery in Brooklyn, Queens and the Bronx.

The audit found that DOE lacked adequate procedures to detect warning signs of possible collusion. The three winning bidders began as competitors, each vying for the same contracts, but became business partners within two months of the contracts being awarded. Beyer and Elmhurst, which had won the lion’s share of the distribution bids in August and September 2008, subcontracted the majority of that work in October 2008 to their former competitor, Bartlett.

As a result of that subcontracting, Bartlett’s percentage of milk delivery rose from 6 percent to almost 70 percent, all before the first carton of milk was delivered. Furthermore, Beyer and Elmhurst failed to provide any information that they planned to use subcontractors in their original bids, even though the Request for Bids required them to do so.

The audit also found that DOE failed to adequately assess the financial health of bidders. Beyer’s financial statements clearly indicated a high risk of default-its debt had soared in 2007 and its ratio of current assets to current liabilities was far below industry competitors.

The DOE not only failed to properly analyze the bidder’s financial statements, it disregarded the warnings of one of its own analysts, who stated that everything appeared to be “on the margin.” Beyer subsequently went bankrupt in 2012, leaving DOE scrambling for a replacement. DOE is now in the process of procuring new milk distribution contracts.

The audit urged DOE to:

– develop and implement adequate written procedures to detect the warning signs of possible collusion;

– put written procedures in place to identify and flag troubling bidders before it is too late; and

– develop and implement procedures to ensure that a comprehensive analysis of the financial capacity of low bidders is conducted prior to any contract award.

“I am pleased that DOE has now agreed with our recommendations to institute tougher scrutiny of future bidders. We simply cannot allow these kinds of weak procurement practices to continue,” Stringer said.