Audit: State Health Agency Mishandled AT&T Contract

^{*This story has been updated throughout.}

A multimillion-dollar contract between a state agency and AT&T was established amid unreported conflicts of interest and has since been managed sloppily, drawing large and unexplained cost overruns, according to a state audit released Tuesday.

Texas State Auditor John Keel’s office studied the handling of a contract between the Health and Human Services Commission and AT&T Global Services from its inception in 2008 to February 2014, which is when HHSC officials requested the audit after learning of a “possible improper relationships between two IT employees and our telecommunications services vendor," HHSC spokeswoman Linda Edwards Gockel said in an email on Tuesday.

The audit found that the HHSC employee who served as the initial contract manager for the AT&T account never disclosed that he or she had previously worked for AT&T. Another HHSC employee put in charge of the account in 2014 had also previously worked for AT&T.

“One employee has been reassigned to a different area of IT, the other is deceased,” Edwards Gockel said. The agency has also issued a new request for bids for the telecommunications contract with AT&T, she said.

Despite HHSC’s admissions of problems with the contract, the agency pushed back Tuesday against one of the audit’s most damning findings — that the contract’s price tag skyrocketed from an initial estimate of $1 million in 2007 to $48 million when it was signed a year later. Edwards Gockel said HHSC officials never intended for anyone to believe the contract, which was for telephone services, would only be for $1 million.

“The $1 million was a minimal amount needed to begin the competitive procurement process and to trigger a higher level of oversight,” Edwards Gockel said. “It was not intended to be the estimated cost of the project.”

Auditors calculated that HHSC has spent at least $72.5 million on the contract between August 2008 and June of this year, but warned that the actual amount spent may be higher as HHSC staff did not implement proper bookkeeping to ensure that AT&T was handling the account as intended.

An AT&T spokeswoman said in an email on Tuesday, "We look forward to a thorough review of this report and, of course, working with the Health and Human Services Commission to ensure full compliance with the existing state contract." 

The critical audit comes a week after HHSC chief Kyle Janek said he was misled in briefings on a no-bid, $110 million deal handed to an Austin company for unproven software to detect Medicaid fraud. The mushrooming scandal over the agency’s contract with the company, known as 21CT, has since led to the canceling of two state contracts with the company and the resignations of Jack Stick, the No. 2 employee at the commission's Office of Inspector General, as well as Stick’s boss, Inspector General Doug Wilson.

The report also follows a September audit of Gov. Rick Perry’s Texas Enterprise Fund in which Keel found that the governor’s office used weak oversight policies and often relaxed the requirements of contracts to help private firms hold on to state grant funding even when they failed to produce intended job-creation goals.

In his audit of the AT&T contract, Keel warned that HHSC’s lack of oversight with its vendors could cause problems across state government. AT&T has 33 active contracts with state agencies or higher education institutions, according to the audit. 

“By not reporting deficiencies to the Office of the Comptroller of Public Accounts, the Commission increases the risk that other state agencies may select vendors with previous performance issues,” the auditor wrote.

Among the problems with the AT&T contract, auditors found that HHSC often did not receive discounts on equipment it was entitled to under its contract with AT&T. In one case, the report said, HHSC paid “up to 190 percent more for one piece of equipment.”

Auditors also found problems with AT&T's claims of meeting the contract's customer service goals. In the study of 12 months of data, auditors found that AT&T never met a stated goal of addressing 95 percent of help-desk requests in a timely manner, despite the company claiming it had met that standard in each of the 12 months.

Agency officials have said they launched measures earlier this year to increase oversight of contractors. Starting Jan. 5, several new measures will be in place to increase transparency and accountability of HHSC’s contracts with vendors, including a requirement that documents outlining a project’s requirements be reviewed by legal and information technology staff before the agency solicits bids.

"I appreciate the State Auditor's Office reviewing this contract at my request," Janek said. "We have new policies and procedures in place that take a very strict stance on disclosure of potential conflicts of interest and increase oversight and transparency. HHSC is a big agency with a lot of high dollar contracts and we must be vigilant in our efforts to be fair and transparent as we safeguard taxpayer dollars."

Terri Langford contributed to this report.

Disclosure: AT&T is a corporate sponsor of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.