Beverage-maker Snapple's deal to be sole vendor in New York City buildings was rejected by Comptroller William Thompson on Thursday, who said he would take the issue to court if the mayor pressed ahead with it.

The Mayor ordered the Comptroller to accept the Snapple deal, saying the process of bidding wasnt there, but putting Snapple everywhere is, Mayor Bloomberg says, a matter of civic pride. Therefore, Mike, are you saying if anyone criticizes the deal, he/she is against what is good for the city? then, on April 22, 2004, the Comptroller sued the city and left the deal in limbo.

View Audit

The City of New York Office of the Comptroller
Bureau of Management Audit
Audit Report on the Process by Which the Department of Education Awarded a Vending Machine License to the Snapple Beverage Group

ME04-123A
March 18, 2004

AUDIT REPORT IN BRIEF

Download the complete audit (Size: 1146KB)

This audit of the New York City Department of Education (DOE) reviewed the processes by which DOE awarded a vending machine agreement to the Snapple Beverage Group, Inc. (Snapple) and authorized Octagon, Inc. (Octagon) to serve as its marketing agent.

In June 2003, DOE informed the schools that all existing vending machines selling beverages should be removed by the beginning of the 2003-2004 school year to allow for a centralized vending process. DOE centralized the vending process due to a new Chancellor regulation (Regulation A-812) on the nutritional content of the food and beverages being sold to students and the need for better controls over vending arrangements. In addition, DOE had an interest in establishing a concession and sponsorship arrangement with a beverage company.

On June 23, 2003, DOE, based on a request for proposals (RFP) issued in 2001, signed an interim authorization for Octagon to serve as DOE's agent for a vending machine marketing and administration program. On behalf of DOE, Octagon implemented a vendor selection process in July and August to select a beverage company for the school vending machine opportunity.

On September 9, 2003, DOE signed an interim agreement giving Snapple the exclusive right to sell water and 100 percent juice products in vending machines to be installed in the New York City public schools. The agreement guaranteed that Snapple would pay a minimum of $40.2 million to DOE between September 1, 2003 and August 31, 2008. Also on September 9, 2003, the New York City Marketing Development Corporation (MDC) signed a letter of intent with Snapple for the exclusive right to sell water, iced tea, and chocolate drink beverages in vending machines to be installed in City buildings. This agreement guaranteed that Snapple would pay a minimum of $126 million to the City between January 1, 2004 and December 31, 2008.

Audit Findings and Conclusions

The process that the Department of Education followed in awarding Snapple an exclusive vending machine opportunity in about 1,200 City schools was fundamentally flawed. For example, there were minimal solicitation efforts, an inadequate request for proposals package, and a defective bid evaluation and selection process. In addition, although DOE's process for choosing the marketing agent to implement the vendor selection process for the school vending machine opportunity was generally adequate from the announcement of the marketing RFP through to the selection of an agent, the process became questionable in that the ownership of the significant party of the selected marketing agent changed before it was authorized to work for DOE. Furthermore, Octagon, the agent subsequently authorized to handle the marketing of the vending machine opportunity, stands to realize exorbitant compensation for its services.

Audit Recommendations

To address these issues, we make 10 recommendations, among them that DOE should:

Not pursue a school vending machine contract with Snapple in connection with the completed vendor selection process. Rather, DOE should conduct a new process for this opportunity that complies with its own RFP manual and ensures a fair and reasonable result.
Ensure that any concession and sponsorship opportunities be handled through a well-structured request for proposals process in which there is: extensive public notification of potential bidders; an RFP package presenting detailed specifications and clear standards for evaluating the proposals; a pre-proposal conference to ensure that all bidders receive consistent information about the opportunity; and a written assessment of the competing proposals based on the evaluation standards identified in the RFP.
Either reopen an RFP process or, at the very least, require a revised proposal before entering into an agreement with a company that has experienced a change of ownership after being selected through an RFP process. DOE should also prepare a written justification for entering into an agreement with such a company.
Restructure and greatly reduce Octagon's compensation for its marketing and administration work on the school vending machine opportunity.
Not award any new marketing assignments to Octagon in relation to the 2001 marketing RFP.
Before hiring a marketing agent for similar work in the future, seriously consider the benefits of implementing the concession and sponsorship RFP process itself or of seeking the assistance of other City agencies.
Department of Education Response

On February 6, 2004, a draft response was sent to DOE officials with a request for comments. We received a response from DOE officials on February 24, 2004. In its response, DOE challenged many of the audit's findings and recommendations. We address the full scope of DOE's response in a section entitled "Discussion of DOE Response" that we present at the end of this report. The full text of DOE's response is included as an addendum to this report.

View Letter to Mayor Bloomberg
http://www.comptroller.nyc.gov/press/pdfs/mar18-04_snapple-letter-pr04-03-016.pdf

New York City Comptroller William C. Thompson, Jr. today announced that he has rejected the $126 million contract naming Snapple as the exclusive beverage vendor for all City public buildings.

"After thoughtful and thorough review of the matter, I have concluded that Snapple was selected through a tainted process with a predetermined outcome that was not the best deal for the City of New York," Thompson said.

Thompson's decision was triggered by his audit – which also was released today - of the separate agreement to exclusively place Snapple in the City's 1,200 schools. The audit found that the Department of Education (DOE) conducted a flawed and inconsistent selection process.

The audit found that Snapple's monetary offer to the DOE was less than that offered by other beverage suppliers. "Despite the low offer, the DOE continued negotiations solely with Snapple," Thompson wrote the Mayor in a letter of objection to the Citywide pact.

Thompson cited two clauses in the City Charter as additional grounds for his actions. Under Charter Section 328 (b), Thompson is refusing to register the contract because the Administration failed to submit the entire Citywide agreement to the Franchise and Concession Review Committee (FCRC). Instead, only the licensing portion of the agreement was submitted for review.

Charter Section 328(c) allows the Comptroller to object to the registration of a contract if "in the Comptroller's judgment there is sufficient reason to believe that there is possible corruption in the letting of the contract."

Supporting Thompson's citing of Charter Section 328(c) is evidence of misrepresentation by the New York City Marketing Development Corporation (MDC) about its role in the selection of a vendor for the DOE as well as potential conflict of interest issues concerning Octagon, Inc., the marketing agent for the DOE selection process.

"Notwithstanding the gross deficiencies in the DOE process," Thompson wrote, "NYC Marketing selected Snapple for the $126 million Citywide Agreement based solely on the DOE award."

Last year, the MDC signed the Citywide deal with Snapple to exclusively sell water, iced tea, and chocolate drinks in all City buildings. The contract was sent to Thompson's Office on February 20th.

Thompson's letter cites the following problems with the Citywide agreement:

• MDC President Joseph Perello, when testifying before the FCRC, misstated when discussions began on the Citywide deal. Perello at the time said there was no citywide marketing opportunity contemplated prior to the DOE selection of Snapple.

However, email communications reviewed during the audit counter that. On August 21, five days before the MDC's recommendation of Snapple to the DOE, Perello told Deputy Mayor Dan Doctoroff of the "larger City deal."

• Octagon has potential conflict-of-interest issues in its selection of Snapple. Octagon represents Cadbury, which is owned by Snapple's parent company, Cadbury-Schweppes, which stands to benefit substantially through the sale of its products Citywide.

• The Comptroller maintains that the Citywide contract was illegal under the City Charter because it pre-empts the authority granted to the Comptroller and Borough Presidents as members of the FCRC to review all franchises and concessions for City property. The marketing portion of the agreement was never submitted to the FCRC for approval.

Today's audit reviewed the process by which the DOE awarded the vending machine agreement to Snapple. In June 2003, the DOE, based on a 2001 request for proposals (RFP), signed an interim authorization for Octagon, Inc. to serve as the DOE's agent for a vending machine marketing and administration program. Octagon began a process to pick a vendor. In September 2003, the DOE signed an interim agreement giving Snapple the exclusive right to sell water and 100 percent fruit juice products in machines in schools, guaranteeing that Snapple would pay it a minimum of $40.2 million by August 2008.

The DOE is not required to adhere to the New York City Procurement Policy Board or FCRC rules that other City agencies must follow. Instead, New York State Education Law authorizes the Schools Chancellor to establish DOE contract rules. The audit noted that the DOE did not even follow its own rules. The audit found that:

• Snapple's "best and final offer" was not the most lucrative deal for the City: it was the lowest combined juice and water bid placed by an individual company, was lower than three juice only bids and was lower than three possible combinations of juice only and water only bids placed by different beverage companies. Inexplicably, Snapple was the only beverage company given the chance to improve its "best and final offer." (See Audit, Table 1, Page 13)

• There were significant inconsistencies in the information provided to potential bidders. This led to vendor confusion.

• Octagon's evaluation of bids was flawed and led to incorrect conclusions about the most lucrative offer.

• The DOE did not follow a fair vendor selection process. The process for awarding the deal was "fundamentally flawed" and the DOE failed to properly monitor the marketing agent it selected to implement the process.

• Octagon made minimal efforts to solicit bids, prepared an "inadequate" RFP and failed to hold a pre-proposal conference. The DOE's RFP manual states that selection committee members should complete rating sheets on bids received. A summary sheet showing each evaluator's scores also should be prepared; this was never done.

• The process for selecting the marketing agent became questionable when its ownership changed hands prior to the interim authorization. The DOE did not reopen the process or require a revised proposal from Octagon after the ownership change.

• Octagon stands to collect "exorbitant compensation" for its DOE services. The amount initially was $11.6 million, but rose to $15.3 million, according to the DOE's Jan. 29, 2004 contract with Octagon. After the audit raised these concerns, the DOE informed the Comptroller that the contract would be amended. If the DOE does amend the contract, Octagon's compensation could be reduced to a still staggering $7.6 million.

• Thompson called the additional compensation expected to go to Octagon for the Citywide deal "unwarranted." Part of this compensation is an effort by the MDC to assume some of the financial burden of the DOE agreement with Octagon.

"We conclude that the fundamentally flawed DOE vendor selection process did not ensure that the New York City schools received the best offer for the school vending opportunity, and was neither fair nor reasonable," Thompson said. "A better vendor selection process could have led to additional and higher bids.

"A more careful review of the bids that were received could have led to a more lucrative deal for DOE and our schools. This has a direct effect on the level of funding for athletic programs for our children."

Thompson made 10 recommendations, urging the DOE to cancel the school vending machine contract with Snapple and conduct a new process that complies with the DOE's RFP manual and ensures a "fair and reasonable result."

He also recommended the DOE ensure that any concession and sponsorship opportunities be handled through a well-structured RFP process in which there is extensive public notification of potential bidders. Such a process must provide detailed specifications and clear standards to evaluate proposals; include a pre-proposal conference to ensure all bidders receive consistent information, and, include a written assessment of each proposal based on the stated standards.

Additionally, Thompson asked the DOE to: reopen an RFP process or require a revised proposal before entering into any agreement with a company that has experienced a change in ownership after being selected through an RFP process; restructure and greatly reduce Octagon's compensation for its marketing and administration work on the vending machine deal; not award any new marketing assignments to Octagon in relation to the 2001 marketing RFP; and, seriously consider the benefits of implementing the concession and sponsorship RFP process itself or sPÌ"IRÔR'.‚×€{'©|Míity agencies before hiring a marketing agent for any similar work.

The DOE has challenged many of the audit's findings and recommendations. Thompson, however, said the DOE's response contained "numerous falsehoods, misrepresentations, obfuscations and contradictions about our findings."

Background:
Testimony on Proposed Snapple Concessions

Comptroller William Thompson will not go along with the no-bidding process which got Snapple its' huge $126 million deal in New york City

If the contract was won after a no-bid process, there may be several reasons why the City would make sure that the signed contract gave the return promised to the schools. Unfortunately, this is not happening, and this opens up a pandora's box for criticism of "the Snapple Deal".

UFT Website:
[go to http://www.uft.org/?fid=197&tf=1138&nart=1250 for complete article]

The Snapple deal could be in for rough times in the next few months. If Thompson refuses to register the contract, the mayor could sue to force him. However, the details of how the entire deal was stacked to favor one company make it more likely that the issue will not fade away.
As one bidder said, in words that are familiar to New York City educators: "The administration appears unilateral and inexperienced and they seem not to care about the downstream result - only the headline or the press announcement of the day."

Snapple's parent company, Cadbury Schweppes, a London based firm, sold $2 billion worth of bonds just two weeks after the mayoral Snapple announcement. A major aspect of the company's reorganization plans calls for laying off 10 percent of its worldwide work force - 5,500 workers - and closing one-fifth of its 133 factories.

(Snapple moved a warehouse out of the Bronx to Westchester three years ago. It received $640,000 in tax exemptions from the county.)
The job loss related to the Snapple deal hit Local 812 of the Teamsters union pretty hard.

"We lost 10 $60,000-a-year jobs at Coke because of this," said Joel Lefevre, business agent for the union. Coke pulled 400 of its machines from the schools, unaware of the chancellor's rules that they could keep their machines in the teachers' lounges.

New York City Sanitation workers, however, will have a lot more work on their hands: The hidden cost of the Snapple deal is the removal of 120 million empty containers a year, the mayoral prediction of yearly sales in schools and city buildings.

Snapple war escalates

Denying that there is a "sinister explanation" for the awarding of the city's $166 million Snapple contracts, Mayor Michael Bloomberg has ordered Comptroller Bill Thompson to make the citywide deal official.

Despite the comptroller's allegations that the bidding process that made Snapple the exclusive beverage provider in the schools and on city property was "tainted," the mayor says it was flawed but fair. He insists in an April 12 letter to Mr. Thompson that "all legally required steps" to certify the $120 million citywide agreement were taken and that he has ordered the city to implement the vending machine agreement with Snapple within 10 days. The mayor noted in his letter that the Snapple agreements "have not been the product of a perfected process that the city will seek to replicate in the future."

Mr. Thompson said in response that he "remain[s] troubled" by the selection process and is "investigating legal options to ensure that the city gets the best deal." He has recommended that the bidding be redone for the $40 million schools portion of the deal as well but lacks authority over Department of Education contracts.
Copyright 2004, Crain Communications, Inc

Ever defiant, Bloomberg said he would begin putting Snapple vending machines in all city-owned buildings on April 22. "Accepting, as I do, the position that the Department of Education reasonably could and actually did select Snapple as the true winner of its marketing competition, I do not find, contrary to your auditors, a sinister explanation for the eventual outcome of the DOE process," Bloomberg wrote.

But Bloomberg admitted that the process through which Snapple was selected was not "the product of a perfected process that the city will seek to replicate in the future."
----------------------------------------------------------------------------------------------------------------

Controller says Snapple deal milks city

By DAVID SALTONSTALL
DAILY NEWS CITY HALL BUREAU CHIEF

Talk about a juicy fight.
Mayor Bloomberg promised yesterday to start installing Snapple vending machines in government buildings next week - despite serious objections to the deal raised by City Controller William Thompson, a possible mayoral rival.

The squeeze play came after Bloomberg invoked a rarely used section of the City Charter to order Thompson to approve the Snapple deal, under which the juice giant must pay the city $126 million over five years.

ST04-04-005 April 13, 2004

Contact: Press Office 212-669-3747

STATEMENT ON MAYOR'S SNAPPLE APPROVAL – 4-13-04

I have received the Mayor's letter deeming the citywide Snapple contract registered, and I am reviewing that document.

However, I remain troubled by the process by which Snapple was selected. As I stated last month when I rejected the contract naming Snapple as the City's exclusive beverage vendor, Snapple was selected through a tainted process with a predetermined outcome that was not the best deal for the City of New York.

I am investigating legal options to ensure that the City gets the best deal.
-----------------------------------------------------------------------------------------------------------------
New York Times Metro Briefing, May 5, 2004
MANHATTAN: SNAPPLE DEAL TO HELP ATHLETICS Schools Chancellor Joel I. Klein said yesterday that the city would be able to create 120 new athletic teams at 76 public schools using $500,000 in proceeds from the city's deal giving Snapple exclusive rights to sell canned beverages from vending machines in the schools. The 120 new teams will be in 17 different sports, Mr. Klein said. Mr. Klein said the city had used money from the Snapple deal for other athletic initiatives, including a program called CHAMPS, which provides sports programs in 40 middle school.David M. Herszenhorn

But now the City comptroller is concerned with the growth in no-bid contracts:

Mayor blasts comptroller over contracts

By Dan Janisonn NY Newsday
Staff Writer

May 12, 2004, 5:42 PM EDT

As a backlash grows over the Department of Education's unusually broad discretion over contracts, Mayor Michael Bloomberg Wednesday leveled a sharp blast at Comptroller William Thompson Jr. on the issue.

Asked about state legislation backed by Thompson and aimed at formal checks and balances in the $14 billion school system, Bloomberg alluded to the fact that Thompson once headed the Board of Education.

"If I understand it, the bill is being pushed by somebody who used to run the Board of Ed and didn't seem to have any problems back then with one-source contracts," he said. "So maybe there's sort of a short-term memory loss here."

Use of sole-source contracts actually has increased sharply under Chancellor Joel Klein, figures show.

But even as he underscored the need to have shaken up the school system, Bloomberg conceded: "There are going to be lots of stumbles every day. There are going to be mistakes that are made."

When the legislature disbanded the old school system and authorized more mayoral control nearly two years ago, it did not conform the new department to procurement rules that govern other city agencies.

Stephen Morello, an education department spokesman, pointed to an internal control panel that rules on exceptions to bidding.

"We put an emphasis on bidding, and getting competitive bids," Morello said. Exceptions are made, he added, "when we know someone uniquely qualified to provide a service."

The legislature in 2002 recognized a need for the department "to be more nimble and get what we need," he said.

There now is disagreement over how deliberately the lawmakers did so. Either way, veteran Assemb. James Brennan (D-Brooklyn) is scheduled today to press for his bill changing the process and requiring a vote on no-bid contracts by the Panel on Education Priorities.

"Fundamentally, this is about public notice, about sunshine, a vote, and registry with the comptroller," Brennan said. "We created a situation in which DOE contracting is 100 percent internal with no external review of any kind."

One result: a controversial Snapple franchise for schools didn't require contract registration with the comptroller -- yet the same deal for other city buildings did.

Bloomberg tweaked Thompson at a Brooklyn event, leading the comptroller to respond: "This legislation addresses the lack of transparency and fiduciary oversight at the department. It will in no way slow down procurement but instead strengthen accountability.

"I am sure the mayor would want the department to adhere to the principles of open government."
Copyright © 2004, Newsday, Inc.