Poor management over office-supply expenditures may have cost the City of Palo Alto close to $390,000 between November 2007 and May 2011, according to a critical audit the city released Wednesday evening, Nov. 14.

The audit by City Auditor Jim Pelletier focuses on the city's contracts with OfficeMax, which account for about 59 percent of total office supplies. It found, among other things, that OfficeMax overcharged the city by at least $47,563 through unauthorized changes to pricing; that the city has failed to take advantage of discounts that it may have been qualified for; and that the city's Administrative Services Department "has not effectively administered the City's office supplies contract."

Pelletier's review found that the office-supply chain has routinely changed prices on supplies without properly notifying the city. OfficeMax representatives said that they had communicated any price changes to the city in writing and that these changes were never questioned, according to the report. But the auditor's office "did not find evidence that contract price list changes were appropriately authorized or communicated."

The audit recommends that the city request a reimbursement from OfficeMax for these overcharges.

The city takes part in the "America Saves" program, which allows agencies to get high discounts on certain items. But the report notes that the city has in fact been spending more on office supplies since it joined the program in 2007. Whereas before it entered the program, Palo Alto had been receiving an overall discount of about 58 percent, the discount dropped in each subsequent year, to about 45 percent in 2011.

"If the City had continued to receive an average discount of about 58 percent for all its purchases subsequent to entering the America Saves program, it would have saved at least an additional $67,302 from Nov. 1, 2007 through May 31, 2011," the audit states.

The audit's other recommendations are broader in scope. After finding that the city does not have "effective processes and procedures to ensure the City receives contracted discounts," the audit recommends that the Administrative Services Department "develop formal procedures" to effectively administer the office supply contract and to properly account for its unusually high office expenditures.

In fiscal year 2011, the city had spent about $425 per full-time-equivalent employee, far more than other comparable jurisdictions. Mountain View, for example, had expenditures of $225 per employee. Sunnyvale's were $225 and Santa Clara's were $131.

But while the audit acknowledged that the city has spent "considerably more for office supplies than other local jurisdiction sampled," it also noted the difficulty of linking many of these expenditures with vendors. Furthermore, the audit found that nearly half of all city contracts are exempted from competitive bidding, which may also keep the city from getting the most for its money. The review also concluded that "about 38 percent of expenditures coded as office supplies in the City's financial systems could not necessarily be associated with office supplies vendors."

The audit recommends that the Administrative Services Department "ensure contract administration roles and responsibilities are defined and appropriately communicated." In reviewing the existing operation, the auditor's office "did not find any evidence of a defined documented, or effective process" to administer its contracts. Lalo Perez, the city's chief financial officer and director of administrative services, called these recommendations "reasonable."

"While we have saved significant dollars in other areas such as refinancing our long-term debt, we can make improvements in the contract services area," Perez said in a statement. "We feel that the audit recommendations are reasonable and we have already begun making process improvements."

City Manager James Keene said the city appreciates the audit and will make improvements to the procurement process based on its recommendations. Some of the opportunities lost, he said in a statement, "may have been generated by staff cutbacks made to save the City money."

"These tradeoffs will be examined more deeply in the ongoing audit response," Keene said.

While Pelletier's audit is sharply critical of Administrative Service Department's procurement policies, Pelletier lauded the department's effort in addressing the problems uncovered by the audit.

"I feel confident that the City can make process improvements in contract administration that will save money and positively impact the entire organization," Pelletier said.