Speaker Miller, Committee Chairs Jackson and Weprin, members of the City Council, thank you for the opportunity to testify today.

I am pleased that the City Council is examining how the Snapple company was selected as the sole provider of fruit juice and water to the New York City public schools, and how this choice led to Snapple's selection as the citywide vendor for other beverages.

The Snapple deal, which involves a 40 million dollar agreement with the Department of Education (DoE) and a 126 million dollar agreement with NYC Marketing, appears to have been brokered in a manner that violated both the letter and the spirit of the DoE's and the City's rules for entering into business agreements.

The City administration maintains that the process was open and fair, but all evidence points to the contrary.

The administration also claims that it got the best offer from Snapple. But since other competitors contend they were given incomplete or inconsistent information, we cannot know that New York got the best possible deal.

I first raised these concerns two months ago, but to date I have not received satisfactory answers - neither from the agencies that were directly involved, nor from the Corporation Counsel.

In fact, my inquiries have resulted in more unanswered questions and conflicting information. The deeper we dig, the more problems we find.

Initially, I wrote to Chancellor Joel Klein, expressing my concern about the Snapple agreement, in a letter dated October 2, 2003.

My letter was based on a preliminary review by my staff, which revealed that the DoE may have failed to conduct a fair and open, competitive process. I was also concerned about a potential conflict of interest issue in light of the fact that Snapple's parent company, Cadbury-Schweppes, is a client of the DoE's marketing agent, Octagon.

I was further concerned that Snapple's products were already in the schools, even though there was no registered agreement in place. Historically, the Comptroller's office registers the vending machine contracts for the schools. Therefore, I requested that the DoE provide my office with all the documentation associated with the selection process.

On October 14th, Corporation Counsel Michael Cardozo replied to my letter to the Chancellor. In his reply, Mr. Cardozo stated that the DoE conducted a competitive process through Octagon which, in turn, had been selected through a competitive process by the DoE.

He further stated that because Cadbury-Schweppes was based in London, there was no conflict of interest and that the DoE's agreement would not be submitted for registration because the DoE never registered such agreements in the past.

Contrary to Mr. Cardozo's assertions, my staff found that Octagon failed to publicly advertise that it was seeking proposals and did not issue a Request for Proposal (RFP) or other bid materials that would have allowed vendors to know what it was they were being asked to provide and how their bids or proposals would be rated.

My office's research also revealed that vendors were not provided a level playing field as they were each told to bid on a different mix of products.

My staff had been informed that Pepsi, for example, was asked to give a price structure for fruit juice, water and snacks. Apple and Eve was told it would be allowed to only propose prices for fruit juice.

Additionally, the conflict of interest problems increased exponentially. Octagon not only represented Snapple's owner, Cadbury-Schweppes, but also was related to Snapple's advertising firm through common ownership by the Interpublic Group.

On November 2, 2003, I wrote to Mr. Cardozo, detailing these concerns and requesting that the City cancel the contracts based upon the numerous apparent violations by the DoE in the process that led to Snapple's selection.

I also highlighted the history of how Octagon was selected to be the DoE's marketing firm. That process was not competitive and raised significant questions.

Mr. Cardozo replied on November 13th. He indicated that the DoE followed a competitive RFP process in accordance with the opinions of the State Comptroller's Office and the State Education Commissioner.

He maintained that the reason vendors were asked to propose prices for different products was that "each vendor was encouraged to propose on any such product in its inventory."

He gave no valid reason for his dismissal of the Octagon conflict issues. Instead he stated, "…. in press reports Octagon officials have responded to this charge by denying that these relationships played any part in the Snapple decision, and by mentioning Octagon had contacts with other vendors that had unsuccessfully participated in the DoE competition."

After two months, and extensive correspondence on the issue, my office still had not received any of the requested documentation, and there appeared to be even more unanswered questions and inconsistencies.

On November 26, I met with the Corporation Counsel in an effort to obtain a more thorough understanding of the process that led to the selection of Snapple by both the DoE and NYC Marketing.

At the meeting, I made it clear to Mr.Cardozo that the DoE did not follow its own published requirements for conducting an RFP. Mr. Cardozo failed to provide any valid justification for this apparent deviation from the DoE's process.

I also questioned his statement that there was a level playing field as vendors were encouraged to propose on any of the specified products in their inventory.

Snapple, in fact, did not have a fruit juice in its inventory at the time it was negotiating with Octagon.

Frankly, it begs the question of why Snapple was approached by Octagon in the first place given its lack of an appropriate product line. I have yet to receive a justification as to why this occurred.

Even if Snapple marketed fruit juice, there would be no basis for providing inconsistent information to potential suppliers.

I also informed Mr. Cardozo that the DoE routinely submitted its agency-wide vending machine beverage contracts to my office for registration.

This departure from a long-established precedent is deeply troubling, and raises serious accountability issues regarding the DoE.

Mr. Cardozo's staff maintained that the DoE was not required to follow any process for this award, regardless of its own rules and practices to date. This assertion contradicted opinions by the State Comptroller and State Education Commissioner - the very opinions Mr. Cardozo had cited -- regarding the need for a fair, competitive process when awarding contracts for these services.

This is simply unacceptable. As Comptroller, I have a responsibility to safeguard the integrity of the City's selection process for private companies that seek to do business with the City, and to ensure that New York gets the best deal possible.

My office cannot and will not let a deal seemingly plagued with so many unanswered questions proceed through the system unchecked.

For two months, I have attempted to clarify this situation. The answers I have received, however, have proven unsatisfactory. Therefore, I have no choice but to invoke the audit powers of my office to shed light on the details, which the administration refuses to disclose, regarding these agreements.

As I indicated in a letter yesterday to Mayor Bloomberg, I have directed my staff to audit the DoE's process that led to its award to Snapple, including the selection of Octagon as the DoE's marketing agent. With the full cooperation of the DoE, my office will be able to complete the audit in 60 days.

In light of Mr. Cardozo's acknowledgement that the DoE and citywide partnership agreements were "separate but related," I urged the Mayor to refrain from presenting the city-wide agreement to the Franchise and Concession Review Committee (FCRC) until completion of this audit.

The audit will allow the members of the FCRC and New Yorkers to know whether or not the selection process was fair and open, and resulted in the best deal for the City.

As I have said repeatedly, I support New York City's entrance into corporate sponsorship. The City is right to explore partnerships that could generate new sources of revenue.
But as the City pursues this type of partnership, it cannot cut corners. These two agreements, the City's first venture into sponsorship and marketing, must be above reproach. In light of how little information has been made available about them, they do not appear to meet this standard.

Thank you once again for the opportunity to testify today. I'd be happy to take questions.

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