By Laurel Rosenhall, CalMatters
At least California didn’t lose its half-billion dollars.
That was the quasi-upbeat message Gov. Gavin Newsom delivered Wednesday over the mounting scandal surrounding a politically-connected medical supply company now reported to be under federal investigation.
On Tuesday, CalMatters reported that California in March wired $456.9 million to Blue Flame Medical LLC — a company that had been in business for just three days — then scrambled to get the money back when the deal mysteriously fell apart.
Newsom offered few specifics Wednesday about what went awry but acknowledged that mistakes were made. California, like other states, was “on a plane that we were building as we were flying” — referring to frenzied attempts by states to secure masks and other gear necessary to protect workers from the coronavirus.
Newsom did not mention Blue Flame by name in his daily briefing but said: “There were some larger contracts that didn’t cost the taxpayers a penny but were cautionary tales.”
“The good news is we learned a lot in that process from those previous contracts and we have partners now that we didn’t have in the past, including the Department of Justice, the FBI and many others that are helping scrutinize these contracts,” the governor said.
The Blue Flame controversy has renewed questions about whether Newsom is providing sufficient transparency to lawmakers and the public at large over how California is spending taxpayer dollars during the pandemic. And it’s raised new questions about whether California is properly vetting vendors who are landing lucrative contracts from the state.
As he acknowledged chaos in the early efforts to obtain protective equipment, Newsom emphasized the success of the deal California eventually reached with a different company called BYD to provide hundreds of millions of face masks. By day’s end, he had released the $990 million contract he’d withheld from the public for weeks.
Earlier Wednesday, the Washington Post reported that the federal Department of Justice had opened an investigation into Blue Flame Medical, a company formed by two Republican political operatives in March that advertises itself as a provider of “healthcare logistics and hard to find medical supplies.” The Post cited two anonymous sources who said prosecutors are focused on contracts the company signed with Maryland and California, both of which were ultimately canceled.
Blue Flame’s lawyer Ethan Bearman did not return messages Wednesday seeking comment about the reports of a federal investigation. But he told CalMatters on Tuesday that “Blue Flame Medical is devoted to getting masks and ventilators to the people in Maryland who so desperately need them” and that the company intends to deliver supplies that state ordered by June 30.
State officials in California still haven’t explained the circumstances of the cancellation. But documents obtained through a public records request paint the picture of a mad dash as California raced, amid a mounting pandemic, to obtain supplies from a brand new vendor with little experience in the medical field.
Mike Gula, a political fundraiser in Washington, D.C., and John Thomas, a political consultant in Southern California, formed the Blue Flame Medical company in Delaware on March 23. Just two days later, emails show, state officials were coordinating the details of a large wire transfer to Blue Flame. And on March 26, the state Treasurer’s Office wired the company $456.9 million — nearly half of what the Legislature had allocated for the state’s pandemic response. The payment was so large that in order to comply with banking regulations, the Treasurer’s office split it into five checks, each under $100 million.
It was a 75% deposit on a $609 million order for 100 million N95 face masks, a deputy director in the Treasurer’s Office said.
Then the deal collapsed even more quickly than it came together. Less than an hour after a bank manager emailed the Treasurer’s Office to say the wire transfer was completed, an official at the Department of General Services emailed his colleagues that the state was “no longer moving forward with this vendor” and asked for paperwork to cancel the wire transfer.
Acting with urgency, or too rash?
The situation sheds light on the chaos many states have confronted in their quests to obtain medical supplies during the coronavirus pandemic. In addition to raising concerns about how the Newsom administration is vetting vendors, it also renews questions about whether the Legislature is being kept sufficiently in the loop.
“We are in a very weird position here where time is of the essence, but he has to find that happy place between urgency and being rash,” said Bill Whalen, who was a speechwriter for former Gov. Pete Wilson. “He tends to lean over his skis sometimes.”
Under the sweeping emergency measure lawmakers passed in March, Newsom’s aides are supposed to give lawmakers 72-hour notice before spending funds allocated for the pandemic response. Letters informing lawmakers of Newsom’s spending plans are posted on the Legislature’s website. But none of them describe a March 26 purchase for masks or other personal protective equipment.
That’s because the money paid to Blue Flame came from a different account focused on disaster relief that doesn’t require notifying the Legislature, said H.D. Palmer, a spokesman for Newsom’s Department of Finance.
But it means that lawmakers were in the dark on the state’s enormous purchase from Blue Flame — as well as its unraveling.
“I wish the governor had been more engaging and forthright in involving the Legislature in the entire process,” said GOP Assemblyman Jay Obernolte, who is the vice-chair of the Assembly’s budget committee.
“I understand that everyone was primarily concerned with addressing the crisis but we would like to be a partner to the administration.”
Obernolte was among many lawmakers who were frustrated that Newsom hadn’t released the state’s $1 billion contract with BYD, a Chinese company that agreed to make face masks for California after the Blue Flame deal collapsed. The governor’s aides had argued that making the details public could imperil the delivery of the supplies in the chaotic marketplace for protective equipment.
Newsom changed gears Wednesday, saying enough of the ordered masks had arrived in California that he felt he could make the details public. He noted that delivery of N95 masks has been delayed because the federal government is taking longer than expected to certify them, but added that millions of surgical masks have arrived ahead of schedule. His Office of Emergency Services released the contract late in the day, and it says BYD will refund California $247.5 million for the delay in certification.
The contract signed on April 7 shows that California paid $3.30 per N95 mask, a price the governor’s office described as an “exceptional value to taxpayers” because the average price at the time was between $6 and $7 per mask. On April 28, Los Angeles Mayor Eric Garcetti announced a deal to buy 24 million N95 masks — at 79 cents each.
CalMatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.
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Author: Laurel Rosenhall, CalMatters