The 2014-15 Budget: 21st Century Project Update

The 2014-15 Budget: 21st Century Project Update MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • MARCH 19, 2014 Summary In 2004, the State Controller’s Office (SCO) proposed the 21st Century (TFC) Project, the information technology (IT) effort to replace the existing statewide human resources management and payroll systems used to pay roughly 260,000 state employees. The new system was intended to allow the state to improve management processes such as payroll, benefits administration, and timekeeping. In February 2013, after the project experienced various problems during the pilot stage, SCO terminated the contract with the vendor and the project was suspended. The Governor’s budget proposes $6.5 million ($3.6 million General Fund) to support ongoing legal activities. The request includes $2.5 million for outside legal counsel, and proposes provisional language that would authorize the Department of Finance (DOF) to augment SCO’s budget for additional litigation and other support activities. The $2.5 million request for outside legal counsel equals roughly one-half of SCO’s estimate of projected costs for 2014-15. We find that SCO’s cost estimate for outside legal counsel appears reasonable, and therefore recommend that the Legislature budget that estimate. In addition, we recommend that the Legislature delete the provisional language, as it is unnecessary. In addition, in our view, an independent assessment of the TFC Project is a necessary precursor to addressing the state’s unmet need for an updated human resources management and payroll system. A timely project assessment could identify the issues that contributed to the suspension of the project, recommend opportunities for improvement, and inform the state’s decision making on a path forward. Furthermore, a timely assessment would move the state towards a modernized payroll system more quickly, reduce the length of time that the state must depend on the aged legacy system, and thereby reduce the risk of a significant legacy system disruption in future years. As the Governor’s proposal lacks an independent assessment of the project, we therefore recommend the Legislature appropriate additional resources to SCO for such an assessment. We provide details on what the assessment should include. 2014-15 BUDGET BACKGROUND Project Suspended Due to from the MyCalPAYS system and what would Problems in Pilot Stage have occurred had the existing functional legacy system been operative during those months. This In 2004, SCO proposed the TFC Project, the process includes recreating past payroll cycles, a IT effort to replace the existing statewide human time-and resource-intensive task that relies on resources management and payroll systems used original source documents—including timesheets, to pay roughly 260,000 state employees. The new employee histories, and other human resource system, also called MyCalPAYS, was intended to documentation—to reenact past payrolls. allow the state to improve management processes Defending the State’s Legal Position. The such as payroll, benefits administration, and 2013-14 budget provided 9.2 positions—mostly timekeeping, and include self-service access for data and systems specialists—to support SCO’s employees and managers, among other capabilities. legal team in preparing for contractually mandated In February 2013, after the project experienced mediation and potential legal proceedings with various problems during the pilot stage, which SAP. In addition, SCO received $1 million included payroll and related functions for about for outside legal counsel. 1,500 SCO employees, the SCO terminated the Project Suspension Activities. Because the contract with the project’s primary vendor, SAP MyCalPAYS system was the “system of record” for Public Services, Inc. (SAP) and the project was SCO employees during the months it was operative, suspended. For a full history of the TFC Project the budget provided resources for preserving data through contract termination in February 2013, and system architecture. In addition, SCO began please see the Appendix. decommissioning system components that were no Close-Out Activities Funded by 2013-14 Budget longer in use to reduce costs. The 2013-14 budget package provided SCO Recent Developments with various resources for close-out activities Below, we describe the major developments associated with the suspension of the TFC Project. since enactment of the 2013-14 budget. Specifically, the Governor proposed and the Reconciliation for Employees Virtually Legislature approved 40 one-year, limited-term Complete; Reconciliation for Other Payroll positions and $14.6 million ($11.9 million General System Payees Behind Schedule. According to Fund) for the activities described below. SCO, reconciliation efforts for employees are Reconciling SCO Payroll. In light of the many virtually complete, while efforts for other payroll errors produced by the MyCalPAYS system during system payees are behind schedule and will not the eight months it was operational, the budget be completed by the end of 2013-14, as originally provided 24.2 positions to ensure that employees estimated. (The SCO explained that many and other payroll system payees—primarily tasks took longer than originally estimated and healthcare providers, retirement savings systems, additional testing was required.) Reconciliation and tax agencies—were paid accurately during the includes: (1) analyzing payroll to identify pilot stage. Reconciliation includes a systematic inaccuracies, (2) notifying the employee or other comparison between actual payroll outcomes 2 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET payroll payee of inaccuracies, and (3) compensating and then towards reconciling payroll for SCO employees and payees or reimbursement of the employees who were overpaid or whose cases state, as appropriate. Analysis regarding employee were particularly complex.) Analysis for other over- and under-compensation is complete. payroll system payees is currently underway— During reconciliation, SCO found that—for SCO has completed reconciliation analysis for 1,542 employees paid during the period for which one-third of approximately 100 payroll system MyCalPAYS was in place—267 employees were payees that required adjustments—and the entire underpaid and 541 employees were overpaid. The reconciliation process is expected to be complete by SCO has notified all employees of the inaccuracies December 2014. in their payroll, compensated most under-paid Mediation Fails, SCO Files Lawsuit. Pursuant employees (with the exception of some whose to the state’s contractual obligation with SAP, cases are particularly complex), and has secured SCO entered into mediation with SAP to attempt repayment plans from those employees that to resolve disputes between the two parties. That were overpaid. (The SCO prioritized efforts mediation was unsuccessful and resulted in SCO towards employees who were underpaid first, filing a lawsuit against SAP last November for breach of contract. 2014-15 GOVERNOR’S BUDGET PROPOSAL Proposal Supports Legal Activities. The that this amount is one-half of the total that SCO Governor’s budget proposes five one-year, estimates it will be required to spend in 2014-15 to limited-term positions and $6.5 million support the legal effort. ($3.6 million General Fund) to support ongoing The administration also proposes provisional legal activities. The positions would be used language that would authorize DOF to augment primarily to support the legal effort, including SCO’s budget “to fund additional litigation and responding to public records and discovery related support efforts associated with the 21st requests and providing technical assistance to Century Project payroll system” following written the outside legal counsel. In addition, the request notification to the Legislature. The provisional includes $2.5 million for outside legal counsel to language includes no cap on the amount that assist with legal proceedings. The proposal states DOF could authorize for the project through this budgeting mechanism. LAO FINDINGS Administration’s Proposal to Fund According to SCO, spending on outside counsel is Legal Activities Underbudgeted estimated to total $5.7 million for 2013-14, exceeding the budget appropriation by $4.7 million. The SCO The 2013-14 Spending on Legal Effort Far is currently assessing whether the additional legal Exceeds Budgeted Amount. As described earlier, costs can be absorbed or if a request for current-year the 2013-14 budget provided SCO with $1 million deficiency funding will be necessary. for outside legal counsel. www.lao.ca.gov Legislative Analyst’s Office 3 2014-15 BUDGET Projected Costs for Legal Effort in 2014-15 online access to payroll and tax information. Exceed Requested Amount. As noted above, the Updating the state’s payroll systems also likely administration’s budget plan proposes $2.5 million could reduce ongoing maintenance costs—as for SCO’s outside legal counsel in 2014-15 and they could be less technically challenging and includes provisional language authorizing DOF to labor-intensive to update—and the likelihood of augment SCO’s budget to fund additional litigation significant payroll disruptions in future years. beyond that amount. The SCO estimates that Continued Need for Comprehensive costs associated with outside counsel will total Independent Assessment. In our view, an between $4.5 million and $5 million in 2014-15. independent assessment is a necessary precursor to That estimate is based on monthly actuals through addressing the state’s unmet need for an updated September 2013, combined with projected costs for human resources management and payroll the remainder of 2013-14. The SCO’s estimate of system. A timely project assessment could identify costs for outside counsel appears reasonable. the issues that contributed to the suspension of the project, recommend opportunities for Administration Does Not Propose improvement, and inform the state’s decision Needed Project Assessment making on a path forward. Furthermore, a timely Legacy Systems Only Alternative in Near assessment would move the state towards a Term. The state’s legacy payroll systems are modernized payroll system more quickly, reduce comprised of numerous individual components the length of time that the state must depend on the that were created to address discrete payroll aged legacy system, and thereby reduce the risk of a needs—such as leave balance management, significant legacy system disruption in future years. basic payroll, and warrants to state vendors—as If the state is to proceed with an independent those needs arose. Although the systems lack a assessment, it will maximize the benefits of such central architecture, including consistent data an assessment by doing certain components methodology and programming languages, they sooner rather than later. Specifically, components have been running the state’s payroll for decades. that draw on the expertise of current or former In general, the legacy systems—though outdated, TFC Project staff—such as the documentation of inflexible, costly to maintain, and at some risk of lessons learned—are best done as soon as possible eventual failure—seem a credible (and, in practice, as staff recollection of events fades with the passage the only) alternative for the state to use over the of time. next few years. Legal Considerations Appear to Take Update to State’s Payroll Process and Systems Precedence. The state faces considerable legal Still Necessary. The current suspension of the TFC uncertainty about its fiscal position as its Project means that the state’s need for an updated contractual disagreements with SAP are litigated. human resources management and payroll system The SCO indicates that the fiscal outcomes of remains unmet. There are numerous functionality the legal effort range from up to $50 million in and stability issues that justify the continued losses—which could result from a finding that pursuit of an updated payroll configuration, the state breached the contract with SAP by including the capabilities to respond quickly terminating the contract “for convenience”—to to payroll changes, issue reports to other state up to $150 million in recovery that could result agencies and stakeholders, and allow employees from a finding that SAP breached the contract. 4 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET Conversations with project staff indicate that the capturing lessons learned that might impact other SCO believes that litigation does not preclude that current and future state IT projects. The state state from moving forward with an independent currently has over 35 approved significant IT project assessment as described above. In contrast, projects. The total cost of completing all of these IT the administration seems concerned that any projects over a number of fiscal years is estimated inward-looking assessment of the TFC Project’s to be nearly $4 billion. While we recognize that failure could endanger the state’s position in the pursuing some aspects of an assessment could legal proceedings, apparently leading it to prioritize result in findings that serve to impair the state’s the state’s legal efforts over such an assessment. position in the SAP litigation, we also think that In our view, however, an immediate and lessons captured from an assessment could increase thorough assessment (which we detail below) is the probability of current and future projects’ arguably at least an equal if not a higher long-term successes, a value to the state that, while uncertain, priority for the state, given the importance of is potentially large and greater than a recovery from the state’s legal effort. ANALYST’S RECOMMENDATIONS Recommend Budgeting Estimated We therefore recommend that the Legislature Costs for Legal Effort budget $4.75 million for outside counsel—the midpoint between SCO’s two estimates. In Budgeting is by its very nature uncertain. Yet addition, because the new appropriation would a fundamental part of the budget process involves fund a reasonable estimate of anticipated costs budgeting the estimate of spending for the coming and the budget process allows the administration fiscal year when a reasonable estimate is available. to later submit a request for contingency funding While actual spending requirements sometime under item 9840 of the annual budget act or a exceed budgeted amounts, the budget process supplemental appropriation, we recommend allows the administration to submit proposals after deleting the provisional language, as it would be the budget is enacted to address these shortfalls. unnecessary. Instead of budgeting estimated costs for the legal activities in 2014-15, the administration Recommend Independent Assessment proposes to budget roughly one-half of SCO’s in Addition to Legal Efforts estimate, and includes provisional language We recommend the Legislature appropriate allowing DOF to augment SCO’s budget without additional resources to SCO for an assessment dollar limitation. While the language requires of the TFC Project. While we think that the notification to the Legislature, we are concerned amount to be allocated should be determined in that spending authorized pursuant to this alternate consultation with project staff and the Department budget process is subject to less public and of Technology, we believe the cost of an assessment legislative scrutiny than spending appropriated could easily be over $1 million. An assessment through the regular budget process. The SCO’s is necessary because (1) development of a estimate of costs for outside counsel is based in part reenvisioned statewide payroll system should not on actual spending levels and appears reasonable. www.lao.ca.gov Legislative Analyst’s Office 5 2014-15 BUDGET commence until a thorough review has concluded work completed by SAP (or any portion thereof) and (2) the state’s other ongoing IT projects may are viable moving forward should the state prove more successful if they benefit from an continue the TFC Project in something like its analysis of what led to the TFC Project’s failure. In prior form. Given the rapid change in technology, addition, we recommend initiating the assessment other software platforms may now be on the market now rather than later to take the best possible that more closely meet the state’s payroll needs. If advantage of tapping into the institutional memory the SAP software is determined to be the best way of current and former staff familiar with the forward for the state, the evaluator should also project. estimate the cost and timeline for completing the In keeping with our recommendation in prior project as most recently envisioned. analyses of the TFC Project, we recommend the Potential Simplification of State Payroll Legislature direct the SCO to contract with an Practices. We recommend that the evaluator independent entity to perform the assessment. complete an assessment, in collaboration with In addition, we recommend that the Health and the California Department of Human Resources, Human Services Agency’s Office of Systems evaluating the state’s current payroll practices to Integration (OSI) be charged with managing the determine if these practices can by simplified. assessment contract. Although OSI currently The potential applicability of commercial payroll provides IT project management and oversight for practices to the state payroll procedures should health and human services projects, its success and also be included in this assessment. Payroll expertise with large-scale IT systems development software packages, like the SAP software, are would likely prove beneficial as SCO undergoes largely based on commercial payroll practices, assessment of the TFC Project. We recommend that which track time and issue payroll differently the assessment include at minimum the following than the state. Incorporating commercial payroll components to help inform the path forward for practices into the state’s payroll procedures may the state’s legacy payroll systems. reduce needed software customizations, thereby Lessons Learned. We recommend the facilitating integration and enhancing the prospects evaluator assess the management of the project of successfully implementing a statewide payroll and document lessons learned and strategies to system. Simplifying the state’s payroll practices prevent a repeat of previous problems. This analysis may reduce needed software customizations, should include, but not be limited to, assessing thereby facilitating integration and enhancing the whether (1) system requirements were identified, prospects of successfully implementing a statewide documented, and incorporated into the system payroll system. Simplifications would likely require design appropriately; (2) the primary vendor statutory changes and modifications through the contract with SAP was managed appropriately; state’s collective bargaining process. We believe (3) quality assurance and control measures were this component of an assessment has merit whether effective; (4) risk and issues were identified and the state decides to move forward with the current managed appropriately; and (5) the testing plan was centralized payroll system using the SAP software appropriate. or moves forward with a different approach, as Viability of SAP Software and Work discussed further below. Completed by SAP. We recommend the evaluator Evaluation of Options to Update Payroll determine if the SAP software solution and the System. We recommend that the evaluator, in 6 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET collaboration with SCO, conduct an analysis that state departments, and some departments, compares the costs and feasibility of several options such as the Department of Forestry and for moving forward to address the state’s unmet Fire Protection and the Department of need for an updated human resources management Corrections and Rehabilitation, have and payroll system, including: particularly complex payroll needs that complicate the state’s ability to integrate • Working Towards Integrated Payroll these systems. This option would assess System Using Incremental Approach. updating payroll systems in a decentralized The TFC Project was a huge undertaking. fashion that integrates less complex payroll The state’s human resource management departments together and considers and payroll systems are very complex alternative approaches for modernizing the and integrating those systems within the payroll systems of complex departments. scope of one project produced a significant level of risk that factored into the project’s • Completing Project Using Existing SAP failure. For this reason, the evaluator Software Solution. In this option, a vendor should assess the merits of integrating the would leverage work completed to date by state’s payroll systems using an incremental SAP and continue to use the underlying approach. In this option, SCO would SAP software—which the state owns—to implement the technical functions of the modernize the state’s payroll system. The TFC Project progressively through a series evaluator would need to consider the of smaller projects with narrowly tailored technical merits of updating a payroll and scopes. For example, one project could human resources management system focus on implementing the personnel with a software solution that was procured administration functions proposed in the nearly ten years ago. TFC Project, while a subsequent project could focus on benefits administration. At • Restart Project, but Using New Software the conclusion of this iterative process, the Solution. In this option, a vendor would state would accomplish the objective of the integrate the state’s payroll and human TFC Project—an integrated payroll system. resource management systems, as Compared with integrating all systems at envisioned in the TFC Project, but would once, this would be a less risky approach, leverage a different—presumably more as the limited scope of each project would modern—underlying software solution. diffuse risk across many projects. Should The findings and recommendations from the any single project face challenges, the independent assessment should be made available negative consequences would be contained. to the Legislature upon completion. • Updating Existing Legacy Systems Using Recommend Self-Assessment by Decentralized Model. Due to recent events, Department of Technology it is unclear whether integrating all of The Legislature vested the Department of the state’s payroll systems, as envisioned Technology with responsibilities to provide greater in the TFC Project, is feasible. Payroll assurances that large IT projects of this type practices can vary significantly across www.lao.ca.gov Legislative Analyst’s Office 7 2014-15 BUDGET are implemented successfully. Managing major recommend that the Legislature initiate a review of projects of this type is inherently difficult. Both the performance of the Department of Technology public and private entities often experience major concerning its oversight role for this major IT delays, cost overruns, and operational problems project. Specifically, we recommend that the when implementing these efforts. Nevertheless, Legislature require the department to undertake a this is now the second time that the TFC Project self-assessment of (1) its current oversight policies has terminated its primary vendor contract, and and practices, (2) how these policies were applied to preventing subsequent delays to this specific project the TFC Project, and (3) impediments—statutory was one of the key objectives behind recent efforts or otherwise—that limit its ability to exercise to focus and consolidate the state’s technology effective oversight in this and other IT projects. The oversight in the Department of Technology. lessons derived from the self-assessment have broad Understanding the shortcomings of the department implications for the success of the state’s other regarding its technology oversight functions and large and complex IT projects—including projects identifying opportunities for improvement are currently under development and future projects. important activities if costly failures of this kind The findings and recommendations from the are to be avoided in the future. Accordingly, we self-assessment should be made available to the Legislature by March 1, 2015. 8 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET APPENDIX HISTORY OF THE 21ST CENTURY PROJECT Modernization of State’s Human Resources caused delays. In October 2007, following multiple and Payroll Management Systems. In 2004, the schedule delays, SCO issued a breach-of-contract State Controller’s Office (SCO) proposed the 21st notice to BearingPoint. The vendor and SCO then Century (TFC) Project, the information technology reached a plan to address project failures and (IT) effort to replace the existing statewide human integration continued. These delays extended the resources management and payroll systems used schedule by two years and raised estimated total to pay approximately 260,000 state employees. costs to about $180 million. The new system, also called MyCalPAYS, was Vendor Contract Terminated. After several intended to allow the state to improve management months, BearingPoint once again fell behind processes such as payroll, benefits administration, schedule, unable to complete project activities and timekeeping and include self-service access for and provide deliverables on time. With the employees and managers, among other capabilities. project’s schedule and development in jeopardy, The existing systems, commonly referred to as the Department of General Services (DGS) issued “legacy systems,” were developed more than 30 a default notice to the vendor on December 3, years ago and are inflexible, fragmented, and costly 2008. The notice stated that the vendor failed to to maintain. In 2005, the Legislature approved the (1) properly manage the project, (2) complete designs project with an estimated total cost of $130 million in a timely manner, and (3) make progress toward with full implementation scheduled for July 2009. development. On January 6, 2009, SCO formally Two-Phase Procurement. In conjunction terminated the contract, and primary work on the with state IT oversight officials, SCO decided to TFC Project stopped. pursue a two-phase, or “unbundled,” procurement Strategy to Move Project Forward Developed. approach. This meant the state sought two vendors Following the termination of the primary vendor and undertook two procurements. The first vendor contract, SCO developed a new strategy. In was to supply the software package, and the second particular, the project scope was narrowed by vendor (the primary vendor) was to integrate the excluding California State University (CSU) software to the state’s business requirements. In from the project. The CSU has different payroll April 2005, SAP Public Services, Inc. (SAP) was requirements from those applicable to state civil selected to supply the software package. The system service employees. The legacy system would integrator contract was awarded to BearingPoint in continue to process payroll for CSU until a June 2006. revised system for CSU employees was completed Early Issues Delayed Project Development. as a separate project. The SCO also decided to During 2006 and 2007, SCO asserted that select a new system integrator using a two-stage multiple problems had emerged with the work procurement approach, discussed below. The new of BearingPoint, the primary vendor hired to strategy was documented in Special Project Report integrate the human resources software to the (SPR) 3. state’s business needs. The vendor asserted that New Contract Procured. In March 2009, DGS issues with the software package and with SCO released a request for proposal for a new system www.lao.ca.gov Legislative Analyst’s Office 9 2014-15 BUDGET integrator. The procurement was conducted as Problems Encountered During Pilot 1. a two-stage procurement approach. Stage I was Although SCO expected minor discrepancies the selection of contractors to evaluate the work during Pilot 1, significant errors surfaced during completed to date and its possible reuse, and to the first payroll cycle and persisted through each better understand the requirements of the project. of the subsequent seven monthly payroll cycles. Accenture, LLP and SAP were selected in Stage I. In particular, incorrect paycheck deductions were Both companies submitted Stage II proposals, made, payroll and pension wages were erroneously which detailed the approach, cost, and schedule calculated, and medical benefits were denied for for completing the project. In February 2010, some employees and their dependents. In one SAP was awarded the contract, at which point case, employees that took vacation time during the the project costs and schedule were revised. The payroll cycle received compensation in addition to project schedule was extended to October 2012, and their base salary. Attempts to correct these errors estimated total costs rose to about $283 million. created further problems in the following payroll Implementation was to occur in five phases— cycle. In early August, project staff determined known as pilots and waves—where Pilots 1 and 2 that the severity for these issues warranted the would bring a small number of employees delay of Pilot 2, an expansion of the new system to into the new system in order to test it prior to 15,000 employees across numerous departments. Waves 3, 4,and 5, which would fully implement Pilot 2 was initially delayed from September 2012 the system in three large and roughly proportional to March 2013. As a result of continued challenges, stages (SPR 4 documents these changes). discussed below, Pilot 2 was not implemented. Subsequent challenges occurred when the Cure Notice Issued to SAP. On project began converting data from the legacy October 25, 2012, SCO issued a cure notice to the system to the new system. Project management system integrator, SAP, expressing serious concern issued a cure notice to the primary vendor, regarding SAP’s ability to successfully implement which then subcontracted with a data migration the new system. According to SCO, SAP’s lack of vendor, BackOffice Associates, to improve the expertise and strategic planning lead to inadequate data conversion process. SPR 5, the most recently scheduling, staffing, knowledge transfer, deliverable approved project plan, accounted for these delays, management, and quality assurance. The SCO and increased the estimated total project costs to also identified concerns regarding design, $373 million and extended the final wave of the testing, organizational change management, and project, Wave 5, by one year—from October 2012 to training weaknesses. In total, the cure notice cited September 2013. 13 grievances and prompted SAP to correct these Pilot 1 Test. On June 11, 2012, the first major problems by November 30, 2012, so that the project test of the state’s new payroll system took place. The could move forward. test, known as Pilot 1, produced payroll, benefits, SAP Responds to Notice. The SAP submitted a timekeeping, and position management activities response to the cure notice on November 30, 2012. for about 1,500 SCO employees. This pilot program In its response, SAP did not assume responsibility tested the new system’s functionality with a small for the grievances outlined by SCO and took no number of employees in an effort to identify and action to resolve the issues. correct potential problems before expanding the Contract Terminated in Early 2013. On number of employees covered by the new system. February 8, 2013, SCO terminated its vendor 10 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET contract with SAP, citing inaction regarding issues process, it would attempt to recover payments listed in the cure notice and a lack of confidence in made to SAP for system integration costs prior to the vendor to implement the project successfully. At project termination. The primary vendor payments the same time, the Technology Agency—currently made to SAP total $50 million of the $90 million the Department of Technology—suspended contract. (A separate payment was made to SAP further work on the project until a new plan could for the software used in the project, which the state be established to address the state’s aged payroll now owns.) The figure shows the timeline of major systems. The SCO indicated that, through the legal events from the start of the project in 2004 through the termination of the SAP contract. Project Timeline • May 2004—The Department of Finance approves the TFC Project FSR and the project begins. • April 2005—The TFC Project procures the SAP Public Services, Inc. (SAP) software solution for a new system and begins a second procurement for an integration vendor to design, develop, and deploy the solution. • June 2006—The TFC Project contracts with BearingPoint, the winning system integration vendor. • January 2009—After experiencing multiple serious problems, the state issues a notice of default to BearingPoint and terminates the contract. • February 2010—After completing a second vendor procurement, the TFC Project contracts with SAP to complete the new system. With the start of the SAP system integration contract, the TFC Project updates its costs and schedule with special project report (SPR) 4. • Spring 2011—Initial data conversion tests between the state’s existing payroll system and the new system are problematic. The TFC Project staff identify additional implementation issues. • August 2011—The TFC Project issues a cure notice to the system integrator, SAP, requiring SAP to improve data conversion, among other requests. The SAP subcontracts with BackOffice Associates in order to remedy the cure notice, and the project continues. • November 2011—Project staff and SAP review data conversion and revise timeline, delaying the first pilot test by nine months. SPR 5 includes new cost and schedule estimates. • June 2012—Pilot 1 goes live, processing payroll for about 1,500 State Controller’s Office (SCO) employees. • August 2012—The TFC Project staff report significant errors during the go-live payroll, including overpayments, incorrect deductions, and leave balance discrepancies. Staff tentatively delays Pilot 2 from September 2012 to March 2013. • October 25, 2012—The TFC Project issues a second cure notice to the system integrator, SAP, requiring SAP to increase personnel on the project, reschedule project milestones, and stabilize the software so that Pilot 2 and Waves 3, 4, and 5 may go forward, among other requests. • November 30, 2012—The SAP issues its response to SCO’s cure notice, denying responsibility for the Pilot 1 payroll inconsistencies and timeline delay. In addition, project staff indicate that SAP denies that its actions breach its contract. • February 8, 2013—The SCO terminates its vendor contract with SAP and returns Pilot 1 employee payroll to the existing legacy system. • February 8, 2013—The California Technology Agency suspends the TFC Project, citing the vendor’s failure to finish the project and unwillingness to remedy the issues SCO presented in the cure notice. TFC Project = 21st Century Project (also known as MyCalPAYS system); FSR = Feasibility Study Report; SPR = Special Project Report; and SCO = State Controller’s Office. www.lao.ca.gov Legislative Analyst’s Office 11 2014-15 BUDGET State Payroll Reverted to Legacy Systems for the $373 million estimated total project cost. Total Now. Beginning in March 2013, SCO returned project expenditures were approximately double the the payroll processing for its Pilot 1 employees to entire project cost as estimated when the project the existing legacy systems. According to project began. Estimated General Fund expenditures staff, SCO began running parallel payrolls on the for the entire project under SPR 5 (prior to the legacy systems in order to identify inaccuracies and project’s suspension) were $180 million, well ensure that no pay or benefits discrepancies were over three times as much as the original plan left unresolved. As a result of this precaution, SCO in the 2004 Feasibility Study Report. Estimated indicated the return to the legacy payroll systems total contract costs with project vendors also for these employees should not pose a problem. increased significantly since 2004, from $59 million Ballooning Project Costs. As of to $193 million. To date, the state has spent January 1, 2013, the state had spent $262 million of $134 million for contracting work completed by various project vendors. LAO Publications This brief was prepared by Lourdes Morales and Ryan Miller, and reviewed by Mark C. Newton. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This brief and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 12 Legislative Analyst’s Office www.lao.ca.gov