Fiscal impact reports (FIRs) are prepared by the Legislative Finance Committee (LFC) for standing finance

committees of the NM Legislature. The LFC does not assume responsibility for the accuracy of these reports

if they are used for other purposes.

Current FIRs (in HTML & Adobe PDF formats) are a vailable on the NM Legislative Website (legis.state.nm.us).

Adobe PDF versions include all attachments, whereas HTML versions may not. Previously issued FIRs and

attachments may be obtained from the LFC in Suite 101 of the State Capitol Building North.

F I S C A L I M P A C T R E P O R T

SPONSOR Griego

ORIGINAL DATE

LAST UPDATED

2/06/07

2/15/07 HB

SHORT TITLE Contract Management Act

SB 769/aSJC

ANALYST Patel

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

$250.0

Recurring

General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Attorney General (AG)

Office of the State Auditor (OSA)

Department of Finance and Administration (DFA)

General Services Department (GSD)

Energy, Minerals and Natural Resources Department (EMNRD)

Office of the Chief Information Officer (OCIO)

Regulation and Licensing Department (RLD)

Department of Labor (DOL)

Department of Health (DOH)

Public Safety Department (PSD)

Higher Education Department (HED)

SUMMARY

Synopsis of SJC Amendment

The Senate Judiciary Committee amendment inserts “the judicial and legislative branches and

any" on page 4, line 5 of the bill.

The SJC amendment would exempt the judicial and legislative branches from review for

approval of contracts equal to or greater than $1 million by the office of the attorney general to

eliminate “separation of powers" issues.

Senate Bill 769/aSJC – Page

2

Synopsis of Original Bill

Senate Bill 769 would create the Contract Management Act and establishes procedures for

managing professional and consulting services contracts. The bill requires agencies to prepare

an objective evaluation of state resources prior to making a decision to contract. Evaluation

methodology shall consider whether the skill exist within the agency to provide the services,

whether the services would duplicate those already provided elsewhere and whether there are

deadlines the agency may not be able to meet.

An agency’s Administrative Services Division, General Counsel and Secretary shall review the

decision to contract, request for proposal process and before entering into any contract the

agency must certify to DFA they have complied with the determination of contract need and the

agency review process.

For contract over $1 million, the agency must develop specific guidelines for administration and

implementation of the contract. All contracts equal to or greater than $1 million, except for those

of public post-secondary educational institutions, shall be reviewed for approval by the office of

the attorney general.

For contracts under $1 million, agencies must use DFA guidelines that shall include

•

documentation to support the contract solicitation and selection process;

•

policies and procedures to ensure that contractors do not provide services until a fully

executed contract is in place;

•

cost effective methods to track performance and deliverables; and

•

filling of contracts and related documentation.

Unless exempted, contracts over $300.0 shall be a performance contract including performance

measures, accountability reporting provisions and monitoring requirements. DFA is to provide

guidelines on developing performance specifications. All contracts equal to or greater than

$300.0 shall be reviewed for approval by the state budget division of the DFA. The bill requires

DFA to create an agency schedule to ensure all agencies are in compliance with the Contract

Management Act by end of fiscal year 2009.

The bill requires contracts for specific services when applicable to include a warranty provision

and a provision allowing the agency to retain at least twenty (20) percent of the value of

deliverables as security for full performance under the terms of the contract.

FISCAL IMPLICATIONS

Senate Bill 769 appropriates $250,000 from the general fund to the Department of Finance and

Administration for recurring expenditure in fiscal year 2008 for three full-time employees to

implement the provisions of the Contract Management Act. Any unexpended or unencumbered

balance remaining at the end of fiscal year 2008 shall revert to the general fund.

According to the Department of Finance and Administration “since agencies currently have little

or no training in true performance contracting, all to them would require extensive training. In

fact, some persons currently processing contracts in some agencies might not even be able to

qualify to do such work…. Agencies could require new personnel to implement all these

changes." DFA also indicated that the DFA would have to be trained before it could train other

Senate Bill 769/aSJC – Page

3

agencies. All of this training would carry a significant cost.

According to the General Services Department “If current practices don’t include needs

assessment and performance contract measurements, these requirements could increase agency

focus on contractor performance and could lead to more cost-effective solutions. For agencies

currently deficient in these areas, requiring this kind of control could ultimately result in an

overall cost savings."

SIGNIFICANT ISSUES

According to the Attorney General’s Office “the bill exempts professional and consulting

services agreements of the legislative and judicial branches, and post education institutions

providing for compensation of $1 million or over from review by the Department of Finance and

Administration. However, the bill only exempts those contracts of post-secondary institutions

from review and approval of the Office of the Attorney General, implying that office must still

review such contracts entered into by the legislative and judiciary branches of government. This

review could raise “separation of powers" issues."

According to the General Services Department “Agencies would have to identify contract

deliverables and define a contract’s scope of work in terms of results required, which could

increase accountability and cost effectiveness."

The Department of Finance and Administration raises the following significant issues:

1) A cost/benefits analysis is a costly and time-consuming process and oftentimes would cost

more than any actual contract (especially those on the lower end of the $300,000 scale). Further,

the legislation mandates that such an analysis be performed in accordance with the Federal

Office of Management and Budget's guidelines which exceed some 20 pages and is only a small

portion of the OMB's guidebook on this subject. Currently, the Governor has put guidelines into

place which call for agencies to review and assess whether a contract can be done internally and

whether the contract is truly necessary.

2) The bill calls for an internal review by various persons in each agency (ASD Directors, legal

counsel and Secretary). Such review should already be occurring in agencies. DFA's Rule on

contracts specifically calls for legal sufficiency review at the agency level. Further, only those

with signature authority (generally the Secretary of an agency or designee such as a Deputy

Secretary, ASD Director, etc.) can bind any agency to a contract. One would presume that such

persons would "substantively review" the papers they are signing.

3) The bill mandates that contracts of $1,000,000 or more should have specific guidelines for

implementation above and beyond the agencies' regular guidelines and DFA's guidelines. This

would entail three layers of bureaucracy for a single contract. Such a duplication of efforts

appears to be wasteful on its face.

4) The legislation calls for contracts below $1,000,000 to be governed by internal agency

guidelines "or similar guidelines" (presumably those written by DFA.). This, too, should already

be happening at the agency level in accordance with the DFA rule and policies and procedures.

Senate Bill 769/aSJC – Page

4

5) The bill mandates that all contracts of $1,000,000 or more be reviewed and approved by the

AGO. There are several problems with this. First of all, such review adds no value to the

contracts since legal counsel at the agencies are already required to sign the same contract.

Secondly, in keeping with the DFA rule requiring agency signatures for legal sufficiency, many

agencies have had to hire attorneys for this and other work. Thirdly, why the arbitrary sum of

$1,000,000 (it used to be $200,000). Fourthly, in the past, when a similar policy was in place for

contracts of $200,000 or more, the AGO's review caused significant delays in processing of

agency contracts. A two week waiting period, at minimum, had to be factored into the

turnaround time for any contract that had to be reviewed by the AGO. Further, the AGO balked

at "approving" contracts and would not sign the contracts but only attach a memo certifying that

the contract had been reviewed. Finally, there may be a separation of powers issue if the AGO is

"approving" contracts from the legislative or judicial branches.

6) The amount is not as significant as the type of contract when dealing with performance

contracts. This is nowhere taken into consideration in this legislation.

7) Pursuant to DFA's rule NMAC 2.40.2, most of what is contained in this legislation (legal

review by agency, proper signature (and presumably, therefore) review by agency heads,

performance measures tied to agencies' strategic plans or missions) is already in place through

regulation. If the Rule needs to be tweaked to add more details on contract management

processes, etc., then this should come via a rule change; no legislation is required for such

changes.

8) The legislation calls for review by DFA's Budget Division for any contract over $300,000. It

is unlikely that the Budget Division would have the resources currently to perform such reviews.

And the bill makes no appropriation for funds to assist the Budget Division of DFA with adding

these resources.

9) "Selectively monitor contract procedures and projects in agencies." This, basically, is calling

for the Department of Finance and Administration to perform an audit function. Currently, this is

beyond the statutory power of DFA. Under Section 13-1-118 NMSA 1978, "All contracts for

professional services with state agencies shall be reviewed as to form, legal sufficiency and

budget requirements [.]" Performing contract audits within agencies is clearly not mandated by

this statutory language. Therefore, at present, DFA could not legally conform with the mandates

of SB-769.

10) The bill calls for DFA to provide training to agencies to write and manage such performance

contracts. The first problem with this is, as stated, the need for DFA personnel to receive training

themselves in such contracts. The second problem is that, even with such training, the issues with

moving toward full-out performance-based contracting are such that the Federal government is

still having difficulty with such contracting, even with all the Federal resources available to

implement this idea. A report done nine years after such contracting was instituted at the Federal

level showed that agencies still were not performing such contracting well or even properly, in

some instances (see GAO-02-1049).

11) Such a radical implementation as this bill calls for would make it appear that current

contracting practices in the State are somehow failing. Yet, no report has been issued which

clearly shows whether agencies have not received the value for which they have contracted under

current processes. In fact, no such study has even been made. Certainly, there are always going

Senate Bill 769/aSJC – Page

5

to be contracts which fail. But are the majority of the State's contracts failing so thoroughly that

such a radical overhaul should be considered. Where is the cost/benefits analysis that justifies

such a change.

PERFORMANCE IMPLICATIONS

The Attorney General will be required to devote staff time and resources to reviewing contracts

for the specified services having compensation amounts of $1 million or more.

According to DFA “there are a great many performance implications under this legislation both

at the agency level and at the level of the Department of Finance and Administration. New and

more personnel required, training, new policies, increasing the level of red tape (three levels of

guidelines/policies in some contracting situations), etc."

According to the Energy, Mineral and Natural Resources Department “ EMNRD already has in

place and follows a well-established contracts review policy that requires measurable

deliverables and includes guidelines about procurement documentation and policies and

procedures to ensure services are not provided until a fully executed contract is in place. There

will be additional responsibilities placed on agency personnel in addition to their daily work, to

monitor the performance measures reported by the contractor during the execution of the

contract. The exact impact of this is unknown since the level of performance measures would

probably vary from contract to contract."

ADMINISTRATIVE IMPLICATIONS

According to the General Services Department additional resources might be needed to track

performance measures not previously required. The amount of time for agencies to go from

identification of need to completing contracts for services might increase. If a detailed needs

assessment is not presently required, additional resources might be needed.

The Office of the Chief Information Officer (OCIO) indicated that a contract review process is in

place that is performance based. There are published rules and policies from the OCIO that

require deliverables based contracts, warranties, retain age and performance bonds, when

appropriate.

TECHNICAL ISSUES

According to DFA “it is questionable, given the current statutory authority of the Department of

Finance and Administration, whether the Department can even meet the mandates of this bill.

The current state of the law would seem to prohibit much of this legislation’s requirements upon

DFA (see under significant issues #9).

ALTERNATIVES

According to DFA “make what changes are required and possible in contracting process under

NMAC 2.40.2 instead of instituting new and duplicative legislation for which there is no

evidenced need."

MP/nt:csd