SAVE MILLIONS BY REDUCING NYS RELIANCE ON CONSULTANTS | 2

Executive Summary
1. New York State can save up to $316 million annually by replacing some of its consultants with State employees. 2. A plan that phases these savings in over three years can save the State $600 million by SFY 2014-15 and $300 million annually thereafter. 3. The average consultant cost the State $72.63 per hour in SFY 2010-11, 40% more than the average cost of comparable State employees ($51.72 per hour including the cost of benefits). 4. New York State spent over $3.5 billion on consultants in SFY 2011-12, over $840 million more than the State spent on consultants in SFY 2003-04, a 32% increase! Unfortunately New York States consultant spending over the last year also increased by over $285 million; from $3.23 billion to $3.51 billion. 5. In SFY 2011-12 State spending on consultants increased by $285 million while State spending on State employee salaries decreased by $395 million. This gives credence to the belief that the State has replaced State employees with higher cost consultants. 6. Based on data from the Office of the State Comptroller (OSC), the Division of the Budget (DOB) under-estimated SFY 2011-12 consultant spending by between $838 million and $2.7 billion. 7. Consultants only reported salary information for 15% of the State funding they received in SFY 2010-11. 8. In SFY 2010-11 consultant spending information was only filed for $497 million of consulting work even though the total State expenditures for consultants in SFY 2010-11 was $3.23 billion. This means salary information is unreported for up to 85% of consultant contracts. 9. The State can achieve significant cost savings by using a cost comparison process before committing to consultant contracts. The best way to do this is to adopt S3093 (Robach)/A5128-a (Bronson). This bill rests on a simple premise. Before a State agency commits to a large contract for consultant services, it should do a cost comparison to see whether State employees could do the same work at lower cost.

SAVE MILLIONS BY REDUCING NYS RELIANCE ON CONSULTANTS | 3

New Yorks Spending on Consultants Has Increased by More Than $840 million since SFY 2003-04
New York State spent over $3.5 billion on consultants in SFY 2011-12, over $840 million more than the State spent on consultants in SFY 2003-04. Thats a 32% increase! Unfortunately New York States consultant spending over the last year also increased by over $285 million; from $3.23 billion to $3.51 billion.

Consultant Spending Has Increased by 32% Since SFY 2003-04 and Continued To Increase in SFY 2011-12
Figure 1

$3.51 Billion
$2.67 Billion

$3.23 Billion

2003-04

2010-11

2011-2012

PEF has been tracking consultant spending using Office of the State Comptroller (OSC) CTL 470 expenditure data since SFY 2003-04. From SFY 2003-04 to SFY 2008-09 consultant expenditures increased annually (from $2.674 billion to $3.398 billion). Beginning in SFY 2009-10 consultant spending began to decrease slightly for the next two fiscal years (from $3.398 billion in SFY 2008-09 to $3.368 billion in SFY 2009-10, to $3.229 billion in SFY 201011). Unfortunately, in SFY 2011-12 the trend reversed and consultant spending increased to $3.514 billion.

SAVE MILLIONS BY REDUCING NYS RELIANCE ON CONSULTANTS | 4

Spending on State Employees Salaries Has Decreased While State Spending on Consultants Has Increased.
The Governor has emphasized the need to reduce State spending in general and has placed a particular emphasis on reducing spending for State agency operations. Last year, the State reduced personal services spending, the spending dedicated to State employee salaries, by over $395 million (from $12.11 billion in SFY 2010-11 to $11.716 billion in SFY 2011-12). Unfortunately the same restraint has not occurred in consultant spending which increased by $285 million over the same time period. Table 1 State Spending on Consultants Goes Up As Spending on Employee Salaries Goes Down
Fiscal Year SFY 2009-10 SFY 2010-11 SFY 2011-12 Change 10-11 to 11-12 (-)$395 million +$285 million

Employee Salaries Consulting Spending

$12.439 billion $3,368 billion

$12.111 billion $3.229 billion

$11.716 billion $3.514 billion

It is important to note that in SFY 2010-11 the State was able to reduce both its spending on consultants and its spending on State employee salaries. However, as the State continued to reduce the State employee workforce in SFY 2011-12, both in numbers and the amount it spent on State employee salaries, its spending on consultants increased dramatically. Over 72% of the money the State saved in employee salaries in SFY 2011-12 was consumed by increased spending on consultants. Figure 2

$285 million

$395 million

Consultant Spending Up

Spending on Employee Salaries Down

SAVE MILLIONS BY REDUCING NYS RELIANCE ON CONSULTANTS | 5

The Average Consultant Costs NY Almost $73 an Hour; 40% More Than Comparable State Employees Cost (including benefits)
Based on an analysis of the SFY 2010-11 Form B data all consultants are required to file and report to OSC, the average consultant in all occupations and State agencies, excluding SUNY, cost the State $72.63 an hour for doing work for which comparable State employees cost an average of $51.72, which includes the cost of their benefits. The average consultant hourly cost is likely to be higher because a large number of consultant companies did not report their consultant costs to the Comptroller, which is discussed and documented later in the report. Those consultants not reporting are likely to charge higher than average rates.

$72.63 per hr.

$51.72 per hr.

Comparable NY State Employees Cost Average NY Consultant Cost

Figure 3

SAVE MILLIONS BY REDUCING NYS RELIANCE ON CONSULTANTS | 6

Table 2

The State Can Save Up To $316 Million Annually by Replacing Some Of Its Consultants
Consultant CTL470 Consultant Service Object Code Description IT Consultant - Design/Develop (100%) IT Software Installation/Integration (50%) IT Software Maintenance (50%) IT Services - Other (30%) Accounting & Auditing Services (50%) Legal Services (50%) Medical/Clinical Services (50%) Conferences/Training Services (25%) Alter & Imp Existing Fac (25%) Cap Proj - Cnslt Svcs - Architects - State Projects (90%) Cap Proj - Cnslt Svcs - Engineers - State Projects (90%) Cap Proj - Cnslt Svcs - Bridge Inspection (90%) Cap Proj - Cnslt Svcs - Engineering Supervision (90%) Cap Proj - Cnslt Svcs - Material Testing (90%) Cap Proj - Cnslt Svcs - Other (50%) Subtotal Other Services Cost 2010-11 SFY $175,395,906 $11,250,827 $78,660,398 $155,314,810 $22,431,454 $13,613,871 $227,628,149 $77,293,729 $404,063,753 $933,827 $107,348,475 $42,581,800 $79,179,751 $6,928,559 $54,522,745 $1,457,148,053 $1,629,424,555 $3,086,572,609 Projected Annual Savings State Employee Cost doing Specified % of Work $110,338,578 $3,538,852 $24,741,958 $29,311,771 $3,677,481 $4,093,147 $85,878,164 $15,952,197 $61,189,348 $509,091 $58,522,694 $23,214,132 $43,166,075 $3,777,212 $16,513,291 $484,423,989 Estimated Savings $65,057,328 $2,086,562 $14,588,241 $17,282,672 $7,538,246 $2,713,788 $27,935,911 $3,371,236 $39,826,591 $331,354 $38,090,933 $15,109,488 $28,095,701 $2,458,491 $10,748,081 $275,234,623 $41,012,123 $316,246,746

Estimating how much the State can save by replacing some of its consultants with State employees is difficult to do with precision because so few consultants report employee cost information despite a law requiring them to do so and there is a significant difference between what the Division of the Budget (DOB) believes the State spends on consultants and what OSC reports the State spends on consultants. Therefore, any estimate has to provide a range of savings based on assumptions on how much of the consultant work can be done by State employees and whether or not savings can be obtained in the Other Services category maintained by OSC. PEFs analysis of the underlying contracts contained

SAVE MILLIONS BY REDUCING NYS RELIANCE ON CONSULTANTS | 7

in the Other Services category indicates that about 9% of the spending in that category is consultant work that can be done by State employees. The projected annual savings would be reduced to between $237.9 million and $278.9 million if we make two adjustments. The first adjustment would reduce the percentage of consultant engineering work that can be done by State employee engineers from 90% to 50%. The 90% assumption is based on the findings of three audits by the Office of the State Comptroller done in the early 1990s and a KPMG study that found that in 85% of the cases DOT consultant engineers cost between 50% and 75% more than State employee engineers doing comparable work. However, based on the States actions to date and considering the significant reduction that has occurred in the State employee engineering titles, particularly in the Department of Transportation, it is unlikely that it will ever be possible to have State employees do 90% of the engineering work that is currently performed by consultants even if it saved the State tens of millions of dollars annually. The other adjustment would be to eliminate the savings derived from the Other Services category that DOB disputes is work that is done by consultants, even though OSC categorizes it as consultant work

State Employees Can Do the Same Work as Consultants For Up To $316 million Less Annually

$911 million
$595 million

Consultant Cost

State Employee Cost

Figure 4

SAVE MILLIONS BY REDUCING NYS RELIANCE ON CONSULTANTS | 8

The Division of the Budget Underestimated 2011-12 Consultant Spending by between $838 Million and $2.7 Billion
OSCs CTL 470 consultant spending totals differ significantly from DOB estimates provided in the Executive Budget. DOB attributes the difference to the OSC expenditure data including the Other Services category. However, even when you exclude this spending, the States spending on consultants increased by over $388 million since SFY 2003-04 (from $1.243 billion to $1.631 billion) and by over $32.5 million since SFY 2010-11 (from $1.599 billion to $1.631 billion). In addition, when the Other Services category is excluded from the OSC data, DOB still underestimated consultant spending by $778 million in SFY 2010-11 and $838 million in SFY 2011-112 More disturbing, the DOB data shows consultant spending by State agencies decreasing by $28 million from SFY 2010-11 to SFY 2011-12 while the OSC expenditure data shows that it increased by between $32 million and $285 million. It is clear that the State needs a better method to track consultant spending and we are hopeful that the new Statewide Financial Management System will accomplish this. Table 3 The Division of Budget Significantly Underestimates Consultant Spending Fiscal Year SFY 2010-11
(millions)

SFY 2011-12
(millions)

DOB Estimates OSC Estimates OSC Estimates Other Services without

$821 $3,230 $1,599

$793 $3,510 $1,631

DOB Underestimate Range

$778 - $2,409

$838-$2,717

Consultants Only Reported Salary Information for 15% of the State Funding They Received in SFY 2010-11
In 2006 the State enacted the Contract Disclosure Law (Chapter 10 of the laws of 2006) which was intended to require all agencies that hired consultants to publicly disclose how many they hired, what titles they employed them in and how much they paid them. Unfortunately, since the laws enactment, agencies have only reported a small fraction of

SAVE MILLIONS BY REDUCING NYS RELIANCE ON CONSULTANTS | 9

their expenditures for consultants, which allows the State to only roughly estimate how many consultants they hire, what they are hired to do and how much they are paid.
In 2010-11 consultant spending information (filed on OSC Form Bs) was only filed for $497 million of consulting work even though the total State expenditures for consultants in SFY 2010-11 was $3.23 billion. That means we can only account for 15% of consultant spending and that 85% of their activity is unreported. Even if we use a lower estimate of consultant spending, which excludes the consultant, spending classified as Other Services, Form B consultant spending information only accounts for 31% of total consultant spending.

Consultants only provide employee information on 15% of the state funding they receive.

Figure 5

85% 15%

Reported Consultant Spending

Unreported Consultant Spending

Solution: Enact A Cost Benefit Analysis Law

The State can achieve significant cost savings by using a cost comparison process before committing to consultant contracts. The best way to do this is to adopt S3093 (Robach)/A5128-A (Bronson). This bill rests on a simple premise. Before a State agency commits to a large contract for consultant services, it should do a cost comparison to see whether State employees could do the same work at lower cost. In connection with Chapter 500 of the laws of 2009, DOB has developed a model for agencies to use to do cost comparison for information technology contracts. This model can easily be adapted to other types of consultant contracts. In 2008, Governor Paterson issued Executive Order 6 to create a process to review consultant contracts. But that process only reviews contracts of $1 million or more and only after they have been executed. It is unclear whether this process is still used, although the Executive Order is still in effect. In 2010 ,Governor Cuomo issued Executive Order 10 which called for a 10 percent reduction in the cost of personal service contracts that are renewed.

SAVE MILLIONS BY REDUCING NYS RELIANCE ON CONSULTANTS | 10

Unfortunately, these steps have not reduced consultant spending. Significantly more savings can be achieved if an ongoing cost comparison process is implemented under law. Other steps the State should take to reduce the cost of consultant services include:
1. The State should enact a Consultant Reduction Plan with a goal of saving $300 million

annually by 2014-15. Phased in over the three years, this plan could save the State more than $600 million. This is a very conservative plan that could be easily implemented by the State.

CONSULTANT REDUCTION PLAN SAVINGS SFY 2012-13 TO SFY 2014-15

SFY 2012-13 Savings SFY 2013-14 Savings SFY 2014-15 Savings Total 3-Year Savings $100 million $200 million $300 million $600 million

2. The State should establish within the new Statewide Financial System a personal service contract database so that consistent expenditure information on personal service contracts is available for each State agency and for each major category of personal service contracts. In December 2009 The Governors Task Force on Personal Services Contracting recommended that such a system be implemented. 3. The State should enact a law that requires penalties for failure to file reports required under Contract Disclosure Law.

Sources and Methodology

In general all data for this report is from the Office of State Comptroller (OSC) and the Division Budget (DOB). In particular OSCs monthly CTL 470 Reports, which track all State expenditures, and Form Bs which are part of the annual Procurement Services Act Report the most recent of which was released in August 2011 and covers spending in SFY 2010-11. Form Bs are required to be filed by consultant companies providing personal services under contract to State agencies and contain the title that the consultant is working in, how many hours they worked in that title, and the total paid to the consultant company for that work. PEF enters all this data into a database so we can determine the average hourly cost of consultants by title. Figure 1 is derived from the CTL 470 Reports that cover the entire 2003-04, 2010-11 and 201112 fiscal years. We isolated expenditure categories identified by OSC as consultant spending. This year we added a new category Alteration and Improvement of Existing Facilities in order to account for consultant spending that occurs in the Office of General Services Design and Construction unit. PEF estimates about 25% of the spending in this category is for engineering services that can be done by State employees. Table 1 is based on data from the CTL 470 Reports that cover the entire 2009-10, 2010-11 and 2011-12 fiscal years. We isolated the OSC categories identified as consultant spending and Personal Services, which are expenditures for State employee salaries. Figure 2 is based on the same data for SFY 2011-12 only. Figure 3 is based on 2010-11 Form Bs and State payroll data for 2010-11. All Form Bs filed by consultants were entered into a database. Form Bs include the title of the consultant, how many hours they worked, and what the State was charged for this work. We excluded all SUNY Form B data because the vast majority of the forms appeared to under report the number of hours worked by consultants, most of which were filed by the SUNY Research Foundation and various medical groups. We also exclude incomplete Form B data that did not allow for the calculation of hourly salaries State employee hourly rates were determined from OSC payroll data for 2010-11; we have the actual compensation for all PEF employees in the titles covered in Figure 3 and since Management/Confidential employees also work in those titles we used the job rate for the M/C titles which overestimates their average salary. All State employee hourly rates include the cost of their benefits (which was 48% of their salary in 2010-11). Table 2 and Figure 4 are derived from OSC CTL 470, Form B, and payroll reports. We take the total expenditures for each category of consultant spending, divided it by the average hourly consultant rate for that category, determine how many hours of work that represents, reduce those hours by the percentage stated in parenthesis in each category of consultant spending and calculate how much it would cost State employees to work those hours at the average hourly State employee rate (including the cost of their benefits) for titles that do that category of consultant work. Figure 4 simply depicts the consultant cost for the hours of work that we have identified as work that could be done by State employees and the State employee cost for

the same work. For a more detailed explanation of this methodology see Appendix 2 of our report Tip of the Iceberg (March 2010). Table 3 is based on OSC CTL 470 consultant expenditure data for SFY 2010-11 and 2011-12 and DOB data from the SFY2011-12 and SFY 2012-13 Executive Budget Agency Presentations. Figure 5 is based the total of is based on 2010-11 Form Bs and OSC CTL 470 total consultant expenditure data for SFY 2011-12.