State contracting is a critical component of Texas government. The latest edition of Fiscal Notes, a newsletter published by the state comptroller’s office, examines the state’s contracting process and what safeguards exist to guarantee few, if any, issues arise.

In the 1990’s, under Gov. George Bush, Texas began to experiment with privatizing some state government functions. Denial of federal rules waivers by the Clinton administration initially stonewalled these efforts. But in 2003, then-governor Rick Perry signed HB 2292, consolidating 12 health and human services agencies into five, and began the process of hiring private contractors to handle some of the state’s functions.

In 2015, following a series of state contracting scandals, former State Rep. Arlene Wohlgemuth, author of the bill, nevertheless declared that measure a success, citing a shrinking state government and better outsourcing services.

She did, however, indicate the need for contract oversight reform, saying, “In my opinion, it is one of the greatest weaknesses of state government. We need to do a better job of enforcing the contract once we have agreed upon it and auditing those contracts.”

Texas is no stranger to state contracting issues. In 2014, the contracting process came under fire when a sparsely known company named 21st Century Technologies received a contract outside of the competitive bidding process. Worth $20 million, the contract was for Medicaid fraud detection software for the Texas Health and Human Service Commission.

Revelations that the agency’s former chief counsel, Jack Stick, maintained ties with 21CT led to a series of investigations and the resignations of Stick and Doug Wilson, the agency’s former inspector general.

A 2015 analysis by the State Auditor’s Office of 14 audit results led to the following assessment:

“The majority of state entities audited did not consistently maintain documentation of their proposal evaluation processes and/or document their determinations of best value,” the auditor’s office reported.

“In addition, of the reports that discussed conflicts of interest, the majority of the state entities did not adequately identify and/or document conflicts of interest for the contracts audited.” The report also identified inconsistent contracting policies, stating “[M]ore than half of the audit reports concluded that the state entities audited did not have adequately documented contract management policies and procedures.”

“We need to make sure that contracts are awarded fairly and monitored carefully,” said Chair of the Senate Finance Committee, Sen. Jane Nelson (R–Flower Mound) at the time.

In 2015, Nelson filed SB 20 to correct some of the deficiencies in state contracting and oversight. The bill barred agencies from contracting with firms where financial conflicts of interest are present, forbade taking employment with a contractor for two years, barred some vendors with poor ratings from future contracts, and required multi-party bidding for some contracts above $50,000 in value.

It also required agencies to keep a contract database and created a vendor tracking system. The bill passed and was signed into law.

Nelson was convinced that hers and other changes made in a budget rider would protect taxpayers and make agencies more transparent. While ambiguously successful after passage, issues with contracting have reared their ugly head again recently.

Last year, State Rep. Giovanni Capriglione (R–Southlake) chastised HHS’ commissioner, Charles Smith, for the untimely and incomplete reporting of $100 million worth of contracts, claiming the deficiencies materially limited the legislature’s decision-making process. According to Capriglione, the agency failed to report at least 42 large contracts in the state’s central database. Smith blamed the Legislative Budget Board for failing to populate old data into the new system.

A month prior, the state auditor also found problems with Texas’ health insurance contract with a company called HealthSpring. The office uncovered over a staggering $53 million in non-compliant costs that included inappropriate gifts, stock options, and advertising costs. A further $35 million in costs were deemed inefficient and unjustified.

In January, a state audit showed $29.6 million in improper payments stemming from a contract between HHSC and Superior HealthPlan Inc.

Earlier this year, five HHS employees were fired after Gov. Greg Abbott sent a sharply worded letter to Commissioner Smith for “failing to ensure the integrity” of the state’s contracting process. That controversy emerged over the scoring method used to decide which company is awarded a contract. Failure to tally points correctly led to the cancellation of multiple contracts including ones awarded to Blue Cross Blue Shield of Texas, Texas Children’s Health Plan, and Superior HealthPlan.

Later in the same week, the state auditor released another report demonstrating the mishandling of contracts with HHS, the Department of State Health Services, and a company called Genesis Systems Inc. for work related to state birth and death records. This report identified inconsistent methodology, bad calculations, and data entry errors, in addition to failing to verifying the company’s qualifications and inaccurately reporting the contract value.

The examination of state contracting in Fiscal Notes shows Texas has extensive oversight, with multiple levels of approval and several different offices wielding powers of review. These key players include the Legislative Budget Board, the Office of the Governor, and the State Auditor’s Office. In addition, two teams composed of members across Texas government, the Contract Advisory Team and Quality Assurance Team, also review and approve major contracts.

Recent events demonstrate that where large sums of taxpayer money are doled out in the form of state contracts, mistakes, negligence, and outright fraud tend to follow. While the legislature has taken productive steps towards closing loopholes and making improvements, it’s clear work remains to be done.

After the latest controversy, Nelson seemed apoplectic. “Twice in one week?” she asked. “After an exhaustive Sunset review and major reforms, we are still seeing sloppy contracting that drives up costs and puts services at risk. I am investigating our options to tighten oversight policies.” Another reform bill by Nelson passed in 2017, mostly codifying temporary changes that had passed in a budget rider previously.

“I know that passing one more law is not going to solve the problem because they’re already ignoring the ones that we have,” State Rep. Gary Elkins (R–Houston) said in 2015. “What we have to do is put in a framework and put teeth into it.”

If the reforms from 2015 and 2017 continue to fail in addressing state contracting controversies, lawmakers will be forced to revisit the issue in January when the 86th Legislative Session convenes.


Salvador Ayala

Sal is the Budget & Policy Analyst for Empower Texans. He has been a committed proponent of American founding principles since 2007, shortly after receiving his J.D. from Chicago-Kent College of Law. Before joining Empower Texans, he served as legislative director for Rep. Matt Rinaldi in the Texas house and was a delegate to the 2012 RNC. In his leisure, Sal enjoys live music, digital photography, guitar, bicycling, trivia, and documentary films.