Chicago Mayor Rahm Emanuel’s crackdown on spending announced last month after an audit revealed improper expenditures by city employees will result in a dramatic reduction in card payments and a shift back to paper-based processes that likely will be costlier and more time-consuming, observers say.
Broad new city expense-management policies, announced Sept. 15, will slash the number of corporate purchasing credit cards the city uses to 30 from 475 and will require employees to adopt new, multistep processes for approval and expense reimbursements in most departments, according to city documents.
The city has separately hired Accenture to conduct a broad audit of city procurement and spending, which the city estimates will result in a $25 million savings by 2013.
The mayor’s office found in an audit that city employees in various departments had used purchasing cards for a variety of miscellaneous purchases, including payments for traffic tickets, flowers and gifts.
JPMorgan Chase & Co. and Citigroup Inc., two of the nation’s largest commercial card providers, confirmed reports that they are among the issuers of Chicago’s purchasing cards.
Beyond announcing new policies for expenses and credit card use, Chicago officials declined to provide further details on its commercial card vendors.
The new expense-reimbursement policies prohibit city employees from claiming a variety of expense items, including gifts, flowers, alcoholic beverages, entertainment activities, traffic citations, parking violations, fines, penalties, sporting goods and personal car washes.
Specified by each department, the new policies also require new levels of approvals for all expenses, including credit card purchases.
But Chicago’s drastic curtailing of purchasing cards could lead to additional problems, such as potentially costly delays in expense reimbursement and opportunities for new types of fraud to spread, observers say.
Commercial cards, which could include travel-and-entertainment, corporate, fleet, procurement or purchasing cards, such as those used in Chicago, in recent years have emerged as effective tools for tracking and controlling organization spending. The cards’ sophisticated transaction data and card controls help to restrict inappropriate use by enabling program administrators to set specific limits on amount, vendor, type of merchandise and timing of purchases allowed, experts say.
“It appears the city didn’t have any kind of robust administration around its purchasing cards program, when a wide variety of controls are available that are designed to avoid exactly the kind of misuse that occurred,” Nancy Atkinson, a senior analyst with Aite Group, tells PaymentsSource. “Purchasing cards are ideal for miscellaneous expenses, and organizations can typically earn substantial incentives for using them because vendors get paid sooner than through paper processes.
Each of Chicago’s six largest departments for the time being will possess five purchasing cards, according to reports.
The Chicago Housing Authority’s new policy dictates that no employees receive credit or procurement cards, and all department purchases “will be reimbursed through the expense-report process.”
The Chicago Public Schools will restrict purchasing cards to the central office only, and no school or network-level official will receive one.
Chicago City Colleges’ new department policy dictates that employees may not use purchasing cards to conduct routine transactions. Instead, employees may use the only for emergency purchases or for expenditures of $1,000 of more when merchants do not accept purchase orders.
The college department further notes in its new policy that “Limited p-card access may have adverse effects on underbanked employees ... and may also cause an increase in reimbursement processing, which could stress current resources.”
Chicago Park District employees within 30 days of purchases must submit a voucher along with original receipts and supporting documents with every expenditure initiated with a city purchasing card. The park district also plans to upload individual procurement card and employee reimbursement information to its website monthly to increase disclosure and accountability.
This new policy “also serves as a deterrence mechanism for those employees who might otherwise be tempted to engage in inappropriate conduct or spending,” the park district’s new policy states.
The Chicago Transit Authority does not mention credit cards for employees in its new policies. But the authority added a specific new guideline on transportation expenditures: “Taxicabs are to be used as a means of travel only when there are no other practical options.”
Shifting certain expense-management processes from cards to paper undoubtedly will cost the city more in labor, Atkinson suggests.
“Handling expenses through purchase orders is very expensive when you add up the time spent on paperwork to get each expense routed, approved and later matched with an invoice at a time when most corporate expenses are going electronic,” she says.
The card issuer has little say over an organization’s policies, Atkinson says.
“Commercial card issuers these days are pushing virtual card numbers, which are even more effective at blocking fraud. But a purchasing card program is only as good as its organization’s policies and administration,” she contends.
Chicago’s experience with purchasing cards is a perfect example of the inability of technology alone to reduce risk if the cardholding organization lacks appropriate policies, Patricia McGinnis, a director at Mercator Advisory Group, tells PaymentsSource.
“The city’s new policy has gone to the opposite extreme” in cutting purchasing card use, she says. “One can hope that Chicago will return to a more efficient and better-controlled middle ground after the completion of its newly launched citywide analysis of procurement procedures.”
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