OAKLAND -- Lax oversight of Oakland's workers' compensation program has resulted in city officials' inappropriately accepting gifts from vendors and spending program funds on office furniture and coffee machine rentals, according to a report released Tuesday by City Auditor Courtney Ruby.
The audit faulted the city's Risk Division and prior administrations for failing to adequately manage a bank account set up to pay for administering the workers' compensation program. Risk management repeatedly exceeded contractual spending limits without obtaining City Council approval and used the account as a "go-to" fund to pay for unrelated expenses, Ruby found.
Ruby also cited JT2 Integrated Resources, the private firm contracted by the city to administer its workers' compensation program, for failing to aggressively target fraudulent claims. The vendor and the city failed to publicly post Oakland's fraud hotline, which went 21 months without getting a fraud tip.
"The city allowed one of its divisions to operate unchecked for years," Ruby said. "It wasn't until my office's examination that this flagrant mismanagement was addressed."
City Administrator Deanna Santana said that she had requested the audit when she arrived in Oakland two years ago and that the city has taken steps to address management issues.
"As I suspected, this program has significant management issues spanning decades of practice which have not been properly administered over time," Santana said in a prepared statement. Recent reforms, she added, include required ethics training for top officials and increased oversight.
One of the more attention-grabbing findings -- that 14 city officials inappropriately accepted more than $23,000 in vendor gifts during two training sessions and failed to report them -- occurred in 2007 and 2008.
The gifts included hotel rooms, food, wine, spa treatments, murder mystery entertainment and a tour of the Monterey Bay Aquarium, the report found.
Recipients, who included directors in the Police Department and human resources, violated a city policy stating that workers must "keep free of obligation by refusing to accept entertainment or gifts if offered by vendors or their representatives," Ruby wrote.
The officials also failed to report the gifts to state regulators as required, according to the audit.
Workers' compensation provides medical care and benefits for workers injured on the job. Oakland, which has more than 4,600 employees, typically spends between $22 million and $25 million on workers' compensation and averages about 600 claims a year, according to the audit.
JT2 Integrated Resources has administered the city's program since 2001.
During the six years covered by the audit, the firm's contract was capped at $13.7 million, but total contract-related payments exceeded $23.8 million, the audit found. The city is required to get council permission to amend contracts. Of the $10.1 million in additional payments, however, $8.4 million was allocated without council approval. Ruby questioned the appropriateness of $1.4 million of the unreported overpayments.
Most of the questionable expenditures went to meet staffing needs after the city shed jobs during the economic downturn. About $30,000, however, was spent on a coffee machine rental and coffee as well as office furniture for Oakland's former Finance and Management Agency director. Another $1,182 went toward holiday and staff parties, including gingerbread house kits.
"It was a culture that was created where the Risk Division felt it could do whatever it wanted with city funds," Ruby said.
The audit found that JT2 Integrated Resources generally had complied with key provisions of its contract. In a written response, the firm challenged several of Ruby's assertions and stated that it has strong spending controls in place and thoroughly investigates fraud allegations.
Contact Matthew Artz at 510-208-6435.