Many Mesa contract costs growing large

Mar. 10—Four years ago, the pandemic snarled supply chains and threw labor markets into turmoil.

Businesses needed more cash to cope with a tight labor market and ballooning material costs; local governments, flush with sales tax revenue and pandemic aid, could pay the heftier prices from vendors.

But it's 2024 and by many accounts, inflation is down and the labor market is more stable. Inflation for the 12 months preceding January was 3.1%, according to the latest data from the Bureau of Labor Statistics. The Greater Phoenix Economic Council also reported that new job postings in Arizona are down, signaling a more stable labor market.

Still, City Council continues to grant vendors doing business with Mesa a steady stream of contract increases, often many times higher than the current rate of inflation.

Among the latest contract increases, Council expanded an agreement with Allied Universal Security Services for private security at city facilities from $1.54 million annually to $2.15 million — a 40% increase.

The latest increase is on top of a $240,000 increase in the contract in 2022.

A staff report says the new increase is needed "for security officer salary increases based on industry standards for security guards," as well as adding security to an additional city-owned property — Arizona Laboratories for Security & Defense Research next to Phoenix-Mesa Gateway Airport for $300,000.

The city also approved a $500,000 annual increase on a $1.75 million cooperative contract with four cell service providers serving various city departments, a 28% increase.

Staff reported that, "Fire and Medical requires this increase to cover anticipated wireless expenditures due to the Department's continuing growth with new stations and ambulance expansions."

A review of council agendas as far back as 2016 shows requests like these to pay vendors more mid-contract have been a regular feature of council meetings since well before the pandemic.

The Tribune did not conduct a comprehensive survey of council agendas, but counting dollar-increase requests for the first five council meetings of each year since 2016 suggests contract increases may have become moderately more routine in recent years.

Even though inflation is down, 2024 is starting out similar to the prior two years, with nine contract increases approved through early March, compared with 10 in 2023 and eight in 2022.

It's worth noting, however, Mesa's population and economy have also grown since the start of the pandemic, so it is unclear how much of the contract activity is tied to supply chain and labor issues and how much is necessitated by growth.

Still, the continued requests for Council to increase the value of contracts even as inflation subsides raises the specter of "greedflation," a disputed theory that attributes some price increases to companies padding profit margins rather than covering higher business costs.

According to the theory, companies are able to get away with profit padding because governments and consumers have grown accustomed to constant price increases during the past years of instability.

But if local governments have become desensitized to higher costs, tightening revenue for cities and schools could eventually provide a rude awakening.

Mesa faces a $22 million hit to revenues from the Legislature's abolition of the rental tax. While last year the state enjoyed a massive budget surplus, this year Arizona may face cuts totaling anywhere from $400 million to $2 billion.

The Tribune asked city officials if contract increases are maintaining their pace amid reductions in inflation — and whether it was time to start pushing back on vendors more aggressively when they seek price increases.

In response, Mesa's Chief Financial Officer Michael Kennington issued a statement.

"The City of Mesa makes every effort to bid competitively for its contracts for both services and products," he wrote. "Contract increases may not be due solely to inflation but also to quantity and/or scope increases.

"We saw an example of this with the smart meter agenda item discussed in February with the City Council. Furthermore, there is significant negotiation that occurs with the vendor before an increase to a contract is presented to the City Council."

The $10 million increase to the $76 million smart meter upgrade project, which represents a 13% increase, was approved Feb. 26. It is the granddaddy of contract increases so far this year by dollar amount, not by percentage increase.

The massive meter upgrade project entails replacing all of the city's 200,000-plus water, electric and gas meters with modern smart meters. The city says that among the many benefits, the meters will help conserve water by detecting leaks in real time.

In a study session before the council voted to approve, Councilman Mark Freeman requested a presentation about the increase.

"It seemed like some of our costs were pretty high," Freeman said. "I'd just like a good overview."

A staff report blamed "post-pandemic supply and demand challenges and some unforeseen scope changes" for the higher costs of the smart meters.

The utility meter upgrade is about 10% complete, and according to a detailed breakdown of new costs provided by city staff, projected costs for labor and the replacement meters is $5 million over initial projections.

Another $5 million overage came from an unexpected area: increased costs for plastic meter boxes and lids.

"The lids, the boxes and the risers are all made from ... a polymer that has just risen in price far beyond everybody's expectations," Deputy City Manager Candace Cannistraro told council in a study.

City staffers continue to cite rising material costs for increasing contracts. But many of the contracts that are expanding were originally awarded in the midst of the pandemic, when supply chain issues were at a height.

The city awarded the original $76 million contract to Sensus USA, Inc in October 2021, when the federal government pegged inflation at 6.2%, twice the current level.

So far this year, there has been a particularly large volume of increases for communications equipment for the Fire and Medical Department.

Last week, the council approved a term contract increase with Discount Cell for in-vehicle routers for the Fire and Medical Department, from $50,000 to $800,000, a 1,500% increase.

A staff report said the contract increase is needed to equip new fire trucks arriving in the next two years; last summer, the city approved the purchase of four pumper trucks and one ladder truck for $6.1 million.

Another contract at the same meeting called for a $1 million annual increase in the contract with Motorola and Kenwood for radio parts and service for the next two years, a 50% increase annually.

In a report, city staff wrote that this increase was also needed to service the new apparatus.