The 2016-17 Budget: Evaluating FI$Cal

The 2016-17 Budget: Evaluating FI$Cal M AC TAY LO R • L E G I S L A T I V E A N A L Y S T • M ARC H 2 016 2016-17 BUDGET 2 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET EXECUTIVE SUMMARY An Integrated Financial Management System. Over the last several years, the administration has been engaged in the design, development, and implementation of the Financial Information System for California (FI$Cal) Project. This information technology (IT) project will replace the state’s aging and decentralized IT financial systems with a new system integrating state government processes in the areas of budgeting, accounting, cash management, and procurement. Since the project began, it has changed in scope, schedule, and cost from what was initially anticipated. These changes have been documented in special project reports (SPRs). The FI$Cal Project is currently operating under its fifth SPR. While the project experienced early successes, subsequent challenges have caused the project to fall behind schedule. Ultimately, these challenges caused the project to deviate from the current SPR significantly enough to trigger the need for a new project plan— SPR 6—on which the Governor’s 2016-17 budget proposals are based. Governor’s 2016-17 FI$Cal Budget Proposals. The Governor’s 2016-17 budget includes two FI$Cal-related proposals: the first allows the project to implement the changes proposed in SPR 6 and the second establishes a new state department to maintain and operate the FI$Cal System. The proposed changes to the project reflected in SPR 6 result in a 24-month schedule extension and an increase in the project cost (relative to SPR 5) by $237 million ($125 million General Fund). This brings the total cost of the project to $910 million ($494 million General Fund). The administration indicates that the budget proposals reduce the overall risk associated with the implementation of FI$Cal and sets the foundation for maintaining and operating the FI$Cal System once it is complete. The total cost for the project in 2016-17 is $135 million ($96.3 million General Fund). Governor’s Proposed Project Changes Are Reasonable, but Project Risk Remains and Additional SPR Likely. We find that the Governor’s budget proposal to implement the changes proposed in SPR 6 reflects a reasonable plan to implement the remaining functions and departments in FI$Cal. We therefore recommend approval of this component of the Governor’s budget proposal. However, we note that the FI$Cal Project involves the development of an extremely ambitious and complex IT system and significant work remains before the system is fully implemented. Given the scope of the remaining work and signals from oversight entities that some project activities continue to track behind schedule, we think a future SPR is likely that would further extend the project schedule and increase costs. Should the project make significant changes going forward, a new budget proposal would be submitted for legislative review. Regardless of Entity Selected for Maintenance and Operation (M&O), Accountability Should Be Strengthened. As for the administration’s proposal to establish a new state department for M&O of the FI$Cal System, we agree with the administration that an entity is necessary to maintain and operate FI$Cal. It is unclear to us, however, whether the establishment of a new department is the best way to fulfill this function. Various options of administrative structures for maintaining and operating the FI$Cal System are available for legislative consideration, each with its own potential benefits and costs. Regardless of the entity ultimately selected for M&O, we think that actions are needed to strengthen the Legislature’s ability to hold FI$Cal leadership accountable. We provide options to the Legislature for doing this. www.lao.ca.gov Legislative Analyst’s Office 3 2016-17 BUDGET 4 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET INTRODUCTION Since 2005, the administration has been California Department of Technology (CDT) in engaged in the design, development, and January 2014. While the project experienced early implementation (DD&I) of the Financial successes, subsequent challenges have caused the Information System for California (FI$Cal) Project. project to fall behind schedule. Ultimately, these The FI$Cal Project is extremely ambitious and challenges caused the project to deviate from the complex, resulting in it being the most costly current SPR significantly enough to trigger the state information technology (IT) undertaking need for a new project plan—SPR 6—on which the ever. The FI$Cal Project replaces the state’s aging Governor’s 2016-17 budget proposals are based. and decentralized IT financial systems, with a In this report, we describe the FI$Cal Project, new system that will integrate state government provide an update on the project’s status, and processes in the areas of budgeting, accounting, describe the events that triggered the development cash management, and procurement. Since 2005, of a new SPR. We also describe the Governor’s the project has changed in scope, schedule, and cost 2016-17 budget proposals to: (1) allow the project from what was initially anticipated. These changes to implement the changes proposed in SPR 6 and have been documented in special project reports (2) establish a new state department to maintain (SPRs). The FI$Cal Project is currently operating and operate the FI$Cal System. Finally, we make under its fifth SPR, which was approved by the associated findings and recommendations. OVERVIEW OF THE FI$CAL PROJECT An Integrated Financial Management System. standardize the state’s financial practices. The Over the last several years, the administration integrated system will be utilized in some way by has been engaged in the DD&I of the FI$Cal every state department, the Legislature, and the Project—an IT project that replaces the state’s public, allowing greater transparency of the state’s aging and decentralized IT financial systems with financial data and management. Such transparency a new system that will integrate state government currently does not exist given the state’s fractured processes in the areas of budgeting, accounting, financial management infrastructure. cash management, and procurement. The system Project Has Evolved. The planning for the will eliminate the need for over 2,500 department- FI$Cal Project began in 2005 when the Department specific applications and enable the state financial of Finance (DOF) proposed an IT project that systems and workforce to function in an integrated would implement an internal financial system for environment. The FI$Cal System will also automate the department. The Budget Information System, as processes that are currently highly manual, the system would have been called, was envisioned minimize manual reconciliations among control to better meet DOF’s budget development and agencies and various separate financial systems, administrative needs. In 2006, the administration make information more readily available to the proposed an updated project plan that significantly public and the state’s business partners, generally changed the scope and governance of the project. improve tracking of statewide expenditures, and Rather than building a new system exclusively for www.lao.ca.gov Legislative Analyst’s Office 5 2016-17 BUDGET DOF, the administration recommended that— among these partner agencies and other entities because a majority of state departments were reliant with a formal role in the FI$Cal Project—known on aged and inadequate technology—there was a collectively as “stakeholders” for purposes of this need to modernize and replace the state’s entire analysis. financial management infrastructure. The updated Project Governance Structure. The objective of project plan proposed increasing the scope of the the FI$Cal Project’s governance plan is to delineate project to include developing a single integrated the responsibilities and decision-making authority financial management system for the state. The for key project stakeholders. We discuss the roles project was renamed FI$Cal and would be managed and decision-making authority of key stakeholders by a partnership of four control agencies that would below. comprise the project’s steering committee. After • Steering Committee. The Steering continued planning and a lengthy procurement Committee is the main governing body that used an innovative procurement approach, a for the FI$Cal Project. The Steering contracted vendor—Accenture PLC—was selected Committee has primary jurisdiction over in June 2012 to customize existing off-the-shelf decisions that affect the project’s scope, software to address the state’s financial management schedule, and/or cost. The committee is needs. Since 2012, the project has periodically comprised of the project sponsor (who updated the project scope, schedule, and/or cost also serves as the Chair of the Steering from what was anticipated when the state initially Committee, currently filled by DOF’s contracted with the vendor. These updates have led Chief Operating Officer), representatives to schedule extensions and cost increases, but also from each of the four partner agencies modifications that have mitigated project risk and (DOF, SCO, STO, and DGS), and a state made it more likely that the project will ultimately employee who represents the interest of all meet its objectives. See Figure 1 for a description of state departments. Additionally, the CDT the evolution of the scope, schedule, and cost of the is a nonvoting member of the Steering project since it was proposed in 2005. (Also, refer Committee. The committee operates under to our April 30, 2012 report, The 2012-13 Budget: a consensus decision-making model. If Evaluating FI$Cal, for a more comprehensive the committee cannot reach consensus, description of the project’s history.) the objector may choose to recuse himself Four Control Agencies Manage Project. The or herself, in which case the committee project is managed by a partnership of four control can move forward. Alternatively, the agencies—DOF, State Controller’s Office (SCO), governance structure provides for a process State Treasurer’s Office (STO), and the Department to escalate issues for which the Steering of General Services (DGS). These partner agencies Committee is unable to reach consensus. have unique constitutional and/or statutory responsibilities over the state processes that will be • Project Directorate. While the Steering integrated through FI$Cal—budgeting, accounting, Committee is the main governing body for cash management, and procurement. State law the project, issues that cannot be resolved mandates these partner agencies to collaborate in by the Steering Committee are elevated the development of FI$Cal. The project developed to the Project Directorate—the highest a governance plan to guide the relationships decision-making authority for the project. 6 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET Figure 1 Evolution of the FI$Cal Project Scope, Schedule, and Cost (In Millions) Final Total Estimated Implementation Project Plan Project Cost Date Summary of Project Plan Initial Project $138 July 2011 The initial IT project was much more modest in scope than the current Plan (FSR) project. The Budget Information System, as the project was then July 2005 known, was envisioned to better meet DOF’s budget development and administrative needs. SPR 1 $1,334 June 2015 The administration realized there was a need to modernize and replace December 2006 the state’s entire financial management infrastructure. SPR 1 proposed increasing the scope of the project to include developing a single integrated financial information system for the state. The project would integrate the budgeting, accounting, cash management, and procurement functions of the state. Four partner agencies were identified—DOF, SCO, STO, and DGS—and the project was renamed FI$Cal. The SPR extended the schedule by four years and increased the cost by nearly $1.2 billion. SPR 2 $1,620 June 2017 SPR 2 analyzed advantages and disadvantages of various FI$Cal December 2007 alternatives but proposed maintaining the project’s expanded scope to integrate the state’s financial management processes. The SPR extended the schedule by two years and increased the cost by nearly $300 million, relative to SPR 1. SPR 3 Unspecified Unspecified SPR 3 established the use of a multistage procurement approach. The November 2009 multistage procurement strategy would assist the project in eliciting more qualified vendors and more responsive proposals for building the FI$Cal System. The total cost and schedule for the project was left unspecified. At the conclusion of the procurement, when the software application and vendor would be selected, the project would submit SPR 4. SPR 4 $617 July 2016 SPR 4 updated the project cost and schedule based on the contract with March 2012 the selected vendor. The total project cost for the FI$Cal System was estimated at about $620 million, about $1 billion less than estimated in SPR 2. The cost reduction is attributed to (1) updated estimates and (2) the move to a more phased implementation approach that resulted in lower overall project costs through reduced risk to the vendor and lower state staffing costs. The system would be completely implemented in July 2016. SPR 5 $673 July 2017 SPR 5 made various changes to the project’s implementation approach January 2014 to reflect lessons learned over the two years since the vendor was selected and the development of the system began. The SPR resulted in a 12-month schedule extension and increased the total project cost by $56 million, relative to SPR 4. SPR 6 $910 July 2019 SPR 6 made various changes to the project’s implementation February 2016 approach to reflect lessons learned since SPR 5. SPR 6 resulted in a 24-month schedule extension and increased the total project cost by $237 million, relative to SPR 5. Fi$Cal = Financial Information System for California; FSR = Feasibility Study Report; IT = information technology; DOF = Department of Finance; SPR = Special Project Report; SCO = State Controller’s Office; STO = State Treasurer’s Office; and DGS = Department of General Services. www.lao.ca.gov Legislative Analyst’s Office 7 2016-17 BUDGET The Project Directorate includes the FI$Cal Service Center (FSC) Maintains and Director of Finance, the State Controller, Operates System. There are a total of 195 FI$Cal the State Treasurer, and the Director of Project staff who support various functions—one DGS. Like the Steering Committee, the of which is the FSC. The center, operated by a directorate operates under a consensus combination of state staff and vendor staff, was decision-making model. established in July 2013—after the first system functions of the FI$Cal Project were implemented • Project Leadership Team. The Project in a small number of departments—to (1) perform Leadership Team is led by the Executive maintenance and operation (M&O) for the FI$Cal Partner (like an executive officer) and is System, (2) provide support services to the users of comprised of state staff who (1) review the the system, and (3) manage internal administrative project’s performance, (2) make day-to-day functions. Under SPR 5, the FI$Cal Project and FSC decisions on issues affecting the project operate simultaneously during the implementation or escalate issues to higher levels of the of the system. The FSC will incrementally governance structure if the issue exceeds assume additional responsibility as functions and the Project Leadership Team’s authority, departments come on line. Once the system is fully and (3) oversee all FI$Cal Project staff. The implemented, the project will end and the FSC will Executive Partner is also the key advisor assume complete responsibility on an ongoing basis to the Steering Committee, oversees the for maintaining and operating the FI$Cal System. development of the system, and advocates The FSC is also managed through a partnership for statewide support of the project. among the four control agencies—DOF, SCO, STO, and DGS. The state’s financial management policies • Project Oversight Entities. The project remain within the respective purview of the is independently overseen by CDT and partner agencies, while the FSC operates the system a third-party technical consultant. in accordance with the policies set by the partners. These entities present their findings and recommendations to the Steering Committee. CURRENT PROJECT STATUS Information technology projects often change SPR 5, which was approved by CDT in January in scope, schedule, and/or cost from what was 2014. The associated budget proposal was approved initially anticipated because of the complexity by the Legislature as part of the 2014-15 Budget of such projects. Significant changes to state Act. It calls for the implementation of the FI$Cal IT projects are documented in SPRs. At a high System in a series of “waves” that add departments level, SPRs document a project’s change in and functionality—specific tasks related to scope, schedule, and/or costs to reflect updated budgeting, accounting, cash management, and information. The SPRs are prepared by the project procurement—to FI$Cal incrementally over time. and submitted to CDT for review and approval. (When a department joins FI$Cal, it will be able to The FI$Cal Project is currently operating under access all functionality that has been implemented 8 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET to date. As additional functionality is implemented, ultimately caused the project to deviate from the it will become available to all departments using schedule proposed in the most recent project FI$Cal.) Specifically, SPR 5 calls for the system plan—SPR 5. Compared with Pre-Wave, Wave 1 to be rolled out through a “Pre-Wave” planning and Wave 2 deployed significantly more complex phase followed by four implementation waves over functions to a larger number of departments. five years. While the project experienced early Wave 1. The fifth SPR called for Wave 1 to successes, subsequent challenges have caused the implement in July 2014 a significant portion project to fall behind schedule. Ultimately, these of FI$Cal’s budget functions and some of the challenges caused the project to deviate from the accounting, cash management, and procurement current SPR significantly enough to trigger the functions to the four partner agencies and to need for a new project plan—SPR 6—on which the a limited number of other state departments, Governor’s 2016-17 budget proposals are based. including the State Board of Equalization Before describing the Governor’s budget proposals, (BOE) and the Department of Justice (DOJ). we provide an update on the project’s status and Instead, the FI$Cal Steering Committee made describe the events that triggered the development several significant last minute changes to the of a new SPR. implementation approach just prior to Wave 1 going live that resulted in a substantially reduced Pre-Wave Successful number of departments—and therefore a reduced The project deployed Pre-Wave—the first of the number of system users—and the deferral of five implementation waves—in July 2013. Pre-Wave certain functions and departments to later waves. deployed a portion of the FI$Cal procurement Below, we describe the primary reasons for the functions to a small subset (five departments) of delay in the implementation of Wave 1. Wave 1 departments. The FSC—discussed earlier— • Technical Difficulties Caused Deferral of was established with Pre-Wave deployment. Some Functions to Series of Subsequent All components of Pre-Wave were deployed on Small Deployments—Wave 1.x. Because schedule and without incident. of technical difficulties with completing Although the scope of Pre-Wave was narrow certain FI$Cal functions, the project and only a few departments were impacted, the moved the implementation of certain lessons learned during this planning phase were functions from Wave 1 to a series of of great value to the project and informed future subsequent small deployments, collectively decisions. The activities necessary for deploying known as Wave 1.x. Wave 1.x included FI$Cal to departments are largely consistent across functions necessary for the development the various waves. These activities include engaging of the state’s budget that were not departments, converting data from current immediately necessary in July 2014 when technology systems to FI$Cal, training end users, Wave 1 was scheduled for implementation. and testing the system. Pre-Wave was designed to The Wave 1.x functions were deployed serve as a pilot to test these procedures. in 2014-15. The FI$Cal System was successfully used in the development of the Wave 1 and Wave 2 Encountered Road Bumps 2015-16 budget, making FI$Cal the budget Despite the lessons learned from Pre-Wave, system of record for the state. Despite these subsequent waves encountered road bumps that successes, additional modifications and www.lao.ca.gov Legislative Analyst’s Office 9 2016-17 BUDGET enhancements are planned to improve anticipated. The SCO and STO began usability and end-user satisfaction. using FI$Cal accounting functions in December 2014 and August 2015, • Departments Required More Support respectively. Finally, implementation of Than Anticipated. Even though the the system at the California Department number of system users was reduced of Aging was deferred by one year because significantly—by deferring some the department had not completed tasks departments to later waves—Wave 1 necessary to transition to FI$Cal. departments required more support Wave 2. The fifth SPR called for Wave 2 than anticipated. Most significantly, to implement a significant portion of FI$Cal’s Wave 1 departments needed support procurement functions and some of the budgeting, with month-end and year-end close-out accounting, and cash management functions in activities associated with the new July 2015 to about 50, mostly small, departments. accounting functions. The project Although the development of these functions was provided additional training sessions as falling behind schedule for many months leading well as individual support to the Wave 1 up to July 2015, the project was optimistic that it departments. As of February 2016, all would be able to catch up and meet the scheduled Wave 1 departments have completed milestone. When the project was ultimately unable year-end close-out activities for 2014-15. to catch up, the Steering Committee made a last • Various Challenges Caused Project to minute decision to split Wave 2 into two different Defer Several Departments and Certain releases, scheduled for August 2015 and December Functions to Later Waves. The project 2015. The primary reasons for the delays in Wave 2 went live in July 2014 with only a portion were: of the planned Wave 1 departments and • Concurrent and Competing Priorities functions. The deployment of FI$Cal’s Created Schedule Delays. The project accounting function at BOE and DOJ was planned to transition staff tasked with deferred for three years. Both departments Wave 1 activities to Wave 2 activities cited that the workarounds that the vendor following the deployment of Wave 1 in July proposed for known system defects were 2014. The unanticipated workload resulting too time consuming. The intent of the from the Wave 1 road bumps created deferral was to allow time for the defects concurrent and competing priorities. The to be resolved. Additionally, a decision ongoing Wave 1-related work eroded the was made to delay the implementation availability of staff time originally set aside of the accounting functions for SCO for Wave 2-related activities and caused the and STO in order to perform additional project to miss milestones leading up to the testing. Although the project and the two July 2015 Wave 2 deployment. departments had tentatively anticipated completion of the additional testing • Testing Delays and Requested and deployment of FI$Cal’s accounting Enhancements Caused Splitting of Wave 2 function to SCO and STO by September Into Multiple Parts. In June 2015, testing 2014, testing continued longer than delays and requests for enhancements 10 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET to procurement functions caused the all aspects of FI$Cal to the approximately Steering Committee to approve splitting 70 remaining departments in July 2017. the implementation of Wave 2 into two According to the project’s oversight separate and delayed releases. The first entities, Wave 4 activities were tracking release was scheduled for August 2015 and three months behind the schedule provided rolled out the budgeting, accounting, and in SPR 5 as of November 2015. Given the cash management functions. The second domino effect prior delays have had on the release was scheduled for December 2015 project’s schedule, further delays in Wave 4 and rolled out the procurement functions. seem likely. As in Wave 1, some departments were Large Number of Departments in Final Wave deferred to later waves, resulting in Wave 2 Continued to Create Risk. The fifth SPR deferred bringing 45 of the roughly 50 originally the implementation of FI$Cal for the bulk of planned departments onto the FI$Cal departments until the last wave—Wave 4. Given System. the large quantity of departments transitioning onto FI$Cal in the final wave, we questioned in Challenges in Prior Waves, Issues in Upcoming our analysis of SPR 5 whether the project’s staffing Waves Spur Development of SPR 6 would be at an adequate level to actively engage Past Project Road Bumps Affect Schedule. departments as needed for Wave 4 to succeed The FI$Cal Project—as proposed in SPR 5—has within the proposed time frame. (Please refer to two remaining waves to implement (Wave 3 and our March 26, 2014 report, The 2014-15 Budget: Wave 4). The project anticipated rolling out these Evaluating FI$Cal Project Plan, for additional detail waves in July 2016 and July 2017. However, the regarding our Wave 4 concerns.) Additionally, since delays in prior waves have created significant the approval of SPR 5, the Steering Committee schedule delays for future waves and have made the has taken several actions to defer additional time line proposed in SPR 5 unrealistic. departments (such as BOE and DOJ) until the final wave of the project. While deferring deployment • Wave 3 Delays. Under SPR 5, the third when a department is not ready is prudent, this wave would implement the most significant action has grown the already large, final wave. portion of FI$Cal’s accounting and cash Moreover, the project has witnessed firsthand that management functions to two large departments require intensive support following departments. Wave 3 has fallen significantly their transition onto the FI$Cal System. The behind schedule because the project time-intensive engagement is necessary to ensure redirected resources needed for Wave 3 departments are ready to use the system when development to instead focus on delayed it becomes available. Collectively, these issues Wave 1 and Wave 2 activities. According make the risks associated with the large number to the project’s oversight entities, Wave 3 of departments in Wave 4 more acute today than activities were tracking 14 months behind when we first noted it in our analysis of SPR 5. schedule as of November 2015. Project Staffing Challenges an Ongoing • Wave 4 Delays. According to SPR 5, the Problem. During 2015, the project continued fourth wave would make available the to experience difficulties in recruiting staff for public transparency website and deploy vacant positions and retaining staff. Of particular www.lao.ca.gov Legislative Analyst’s Office 11 2016-17 BUDGET concern, the project experienced turnover in six of service process to hiring qualified staff quickly eight executive positions in 2015. As of December after positions are authorized by the Legislature, 2015, the project reported its overall job vacancy and (3) high turnover rates among project staff rate was roughly 13 percent of total authorized (including at executive levels). Even if the project’s positions, which amounts to 38 vacancies among overall vacancy rate were to remain relatively low, the 288 authorized positions. This is a significant sustained vacancies or high turnover of executive improvement from other periods, when the positions can significantly compromise the success project’s vacancy rate exceeded 20 percent. While of the project. relatively low now, the project’s historically high The schedule delays and these other issues and volatile vacancy rate can be attributed to (1) a facing the project ultimately spurred the relatively limited pool of applicants with necessary development of a sixth SPR, which we describe in skill sets, (2) obstacles inherent in the existing civil more detail in the following sections. GOVERNOR’S 2016-17 BUDGET PROPOSALS FOR FI$CAL The Governor’s budget includes two FI$Cal- for maintaining and operating the FI$Cal System related proposals: the first allows the project to once it is complete. The total cost for implementing implement the changes proposed in SPR 6 and FI$Cal as proposed by the budget in 2016-17— the second establishes a new state department including costs for a new proposed Department to maintain and operate the FI$Cal System. The of FI$Cal discussed later—is $135 million administration indicates that these proposals ($96.3 million General Fund). The remainder would reduce the overall risk associated with the of this report outlines the Governor’s budget implementation of FI$Cal and set the foundation proposals and presents our associated comments. THE FI$CAL PROJECT PLAN—SPR 6 In this section we describe the Governor’s project update was approved in January 2014. The budget proposal related to the changes proposed in last two years have been marked with significant SPR 6 and provide our assessment. activities, most notably the deployment and implementation of Wave 1 and Wave 2. Drawing Governor’s Budget Proposal on on lessons learned over this period, the project Project Changes Included in reports it now has a better understanding of the SPR 6 magnitude and complexity of FI$Cal. Specifically, In February 2016, CDT approved an SPR the administration determined the risk of moving that updates the project plan for FI$Cal. This was forward with an unrealistic project schedule was the sixth update (SPR 6) to the project plan since too large and decided a different approach would FI$Cal began in 2005. The project indicates that be necessary in order to mitigate the risk of a SPR 6 reflects lessons learned since the previous significant disruption to the project in future years. 12 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET The Governor’s budget includes funding to support These principal releases would take place in July the project, pursuant to the changes included in 2016, 2017, and 2018. In contrast to waves, the SPR 6 and as outlined below. release approach allows for functionality and Does Not Propose to Change Project Objectives. departments that are not quite ready to implement The sixth SPR does not propose changes to the at the scheduled date to roll out later. These statutory objectives of the project. The intent of the intermediate releases would take place quarterly, SPR is to mitigate project risk—by changing the as needed, if functionality is not ready at the time implementation approach, discussed below—so that of the principal release. If a department is not the project objectives can be successfully fulfilled. ready to transition onto the system at the time of Extends Schedule and Increases Cost Relative the principal release, the project could have until to SPR 5. The proposed changes to the project October of that year to transition. If the project reflected in SPR 6 result in a 24-month schedule requires additional time, the project would defer extension and an increase in the project cost the department to a later release. Figure 3 (see (relative to SPR 5) by $237 million ($125 million next page) provides a comparison of the FI$Cal General Fund). This brings the total cost of the implementation time lines under SPR 5 and SPR 6. project to $910 million ($494 million General As shown in the figure, SPR 6 allows for the Fund). The increase in project cost is largely deployment of departments and functionality after attributable to increased contract costs and costs a scheduled principal implementation date—we to hire additional staff and retain staff over the refer to this as delayed deployment. additional 24 months that the SPR extends the The release approach is more reflective of what project. The budget-year impact of these changes the project has actually experienced in prior waves. is $92.5 million ($71.9 million General Fund). See In practice, the project has deployed functions after Figure 2 for project costs incurred to date and the Figure 2 future costs proposed in Costs for FI$Cal Under Special Project Report 6 SPR 6. (In Millions) Transitions From Fiscal Year General Fund Total Funds “Wave” to “Release” 2005-06 $0.5 $0.9 Implementation 2006-07 2.2 5.0 Approach. Under the 2007-08 6.2 6.2 new plan, the project 2008-09 2.1 5.6 2009-10 2.1 12.3 transitions from a 2010-11 1.8 25.8 wave implementation 2011-12 1.9 21.8 approach to a release 2012-13 — 82.0 2013-14 3.4 75.3 implementation approach. 2014-15 95.6 100.1 Like waves, releases 2015-16 103.7 153.9 deploy functionality 2016-17 proposed 96.3 135.1 2017-18 proposed 87.7 129.7 and departments to 2018-19 proposed 50.4 85.8 FI$Cal incrementally 2019-20 proposed 40.1 70.4 over time on scheduled Totals $494.0 $909.9 implementation dates. FI$Cal = Financial Information System for California. www.lao.ca.gov Legislative Analyst’s Office 13 2016-17 BUDGET their scheduled implementation date, as is proposed releases. See Figure 4 for a listing of the functions the in the new release implementation approach. project will roll out and number of departments the However, rather than not meeting milestones set project will implement over the remaining releases. in a rigid schedule and having to make last minute Establishes New Program to Ease changes to the implementation schedule, as was the Departments’ Transition. The project proposes case in SPR 5, the release approach anticipates that to establish a new program to ease departments’ additional time beyond scheduled implementation transition onto FI$Cal. The new program Graphic Sign Off dates will likely be needed for some activities. emphasizes communication and collaboration Staffing resources are allocated up front on the between the project and departments. As part of Secretary basis that some staff will be needed to stay on to determining which departments will be included Analyst complete work past a scheduled implementation in each release, the project will spend time to MPA date while other staff are working on the subsequent better understand, analyze, and group state Deputy release. The project’s objective in transitioning from entities into deployment cohorts with similar ARTWORK #160031 a wave to a release implementation approach is to financial management needs. The project will maximize its flexibility, whTielem repdluactien_gL tAhOe pRoetpenotriat_l largaet.taeimtpt to optimize support for departments by for unplanned, negative schedule impacts for future grouping them into implementation cohorts based Figure 3 Comparison of FI$Cal Implementation Timeline Under Special Project Reports (SPRs) 5 and 6 Calendar Years 2012 2013 2014 2015 2016 2017 2018 2019 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Pre-Wave —12 Months Wave 1 — 20 Months Wave 2 — 15 Months Wave 3 — 24 Months SPR 5 Wave 4 — 24 Months Pre-Wave —12 Months Wave 1 — 20 Months Wave 1.x Releases — 32 Months Wave 2 August Release — 17 Months Wave 2 Dec. Release — 21 Months July 2016 Release — 16 Months July 2017 Release — 36 Months SPR 6 July 2018 Release — 30 Months Public Transparency Website — 24 Months Knowledge Transfer — 12 Months = preparing for implementation = go live date = delayed deployment = maintenance and operation FI$Cal = Financial Information System for California. 14 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET on the size of the department, complexity of the schedule by shifting the bulk of the remaining department’s funding structure, and the similarity work to later releases so that the project has more of departments’ financial processes. The project time before certain functions and departments are anticipates that adjustments to the departmental implemented. Specifically, the revised project splits implementation cohorts may be necessary as the the remaining two waves into three releases as project learns more about department needs and follows: challenges. A decision to move a department from • July 2016 Release. The updated project one release to another will include an evaluation plan decreases the scope of what was of (1) the department’s readiness and (2) the previously known as Wave 3 by shifting the project’s ability to manage the release size and most significant portion of the accounting scope. The intent of this process is to help ensure and cash management functions to the that departments transition onto the FI$Cal July 2017 release. Instead, for the July System successfully in all three releases. This 2016 release the project plans to deploy approach will be used to transition the remaining additional budget functions, replace DGS’s 125 departments onto FI$Cal. current internal financial management Revises Implementation Schedule for system (previously planned for July 2015), Remaining Releases. In line with SPR 6, the and schedule software upgrades to the project proposes to change the implementation system. The fifth SPR anticipated some Figure 4 Departments and Functionality of FI$Cal Releases Under Special Project Report 6 Number of Departments Functionalitya Implementation Date Pre-Wave (actual) 5 (a subset of Wave 1) Some procurement functions. July 2013 Wave 1 (actual) 11 Significant budget functions. Throughout 2014-15 Some accounting, cash management, and procurement functions. Wave 2 (actual) 45 mostly CFS Additional budgeting, accounting, and cash August 2015 departmentsb management functions. Remaining significant procurement functions. December 2015 July 2016 Releasec 10 Financial management functions specific to July 2016 the Department of General Services. Additional budget functions. Software upgrades. July 2017 Releasec 50 Remaining significant accounting functions. July 2017 Remaining significant cash management functions. July 2018 Releasec 65 Public transparency website. July 2018 a Functionality implemented in earlier waves is deployed to new departments as they join FI$Cal. Functionality implemented after a department originally joined FI$Cal will be deployed to that department as part of the subsequent wave deployments. b The Department of General Services offers accounting, budgeting, and financial services to state entities on a fee-for-service basis. These departments, typically smaller entities, are known as contracted fiscal service departments. c Per the administration’s proposal, functionality and departments may be deployed in intermediate release over the 12 months following the principal implementation date. FI$Cal = Financial Information System for California and CFS = contracted fiscal services. www.lao.ca.gov Legislative Analyst’s Office 15 2016-17 BUDGET software upgrades in July 2016; however, departments transition onto FI$Cal. The fifth additional upgrades not previously scoped SPR did not include any knowledge transfer after within the project have been identified. the system was fully deployed. The expanded This release also deploys the system to ten knowledge transfer opportunity is intended to departments (one large, two medium, and prepare the state to maintain the system with seven small). (Unlike SPR 5, SPR 6 does minimal support from the vendor on an ongoing not identify the specific departments that basis. To date, the vendor has taken primary will transition onto FI$Cal over the various responsibility for DD&I and M&O. The project releases. Instead, SPR 6 lists the total indicates that during the final year allotted for number of departments and the relative knowledge transfer, the vendor and project staff size of those departments.) It is the intent will switch roles, with the state taking primary of the project to test its new program to responsibility of FI$Cal and the vendor supporting ease departments’ transition onto FI$Cal the project staff. (described above) to a limited number of Does Not Reflect Final Agreement With departments before deploying the system Vendor. While the sixth SPR makes significant to a larger quantity of departments in later assumptions regarding the vendor’s role, it does not releases. reflect a final agreement between the project and the vendor, and instead includes estimates of what • July 2017 Release. The sixth SPR the costs will ultimately be. The SPR assumes that implements the most significant portion the vendor commits to (1) remain engaged on the of the accounting and cash management FI$Cal Project for an extended period of time and functions one year later than what was (2) take on additional responsibilities stipulated in anticipated in SPR 5. The project indicates SPR 6. The SPR also estimates the increased cost that this change will allow more time to to the state for the vendor taking on these new build and test these functions. In addition, commitments. We note that the project has not yet this release deploys functions to 50 state finalized the cost of these new commitments with departments (14 large, 14 medium, and the vendor. 22 small). LAO Assessment of FI$Cal • July 2018 Release. As previously planned, Project Plan and Related the final release includes the development Budget Proposal of a public transparency website. However, Ultimately, we believe that the benefits of the website will not become available to the proceeding with FI$Cal development outweigh public until July 2019, after the system has the risk and therefore recommend approval of captured a full year of financial data. In the Governor’s budget proposal to implement addition, the final release deploys FI$Cal project changes pursuant to SPR 6. (We discuss to the remaining 65 state departments the administration’s proposal to establish the (24 large, 11 medium, and 30 small). Department of FI$Cal in the next section of this Expands Knowledge Transfer Opportunities report.) However, the FI$Cal Project involves From Vendor to State. The sixth SPR provides the development of an extremely ambitious and one full year for knowledge transfer after all complex IT system and significant work remains 16 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET before the system is fully implemented. Given or setting unrealistic schedule expectations, the scope of the remaining work, signals from the release approach provides the project some oversight entities that some project activities flexibility that prior experience has shown is continue to track behind schedule, and the needed. Additionally, prior decisions to stagger inherent risk associated with an IT project of this the deployment of functions after the scheduled complexity, we think a future SPR is likely that implementation date have been the result of last would further extend the project schedule and minute changes to the implementation approach, increase costs. Below, we describe our findings rather than deliberate decisions made in advance. and recommendations related to the Governor’s These last minute changes to the implementation proposal to implement the changes included in approach have proven problematic for the FI$Cal SPR 6. Project and departments. The project was not prepared to keep staff engaged when workload LAO Findings on FI$Cal Project Status persisted beyond the planned implementation and Plan to Move Forward date, as occurred in Wave 1 and Wave 2. These Contract Negotiations May Change Cost delays made it difficult to transition staff to other and Schedule Projections. As noted earlier, the workload, as anticipated, and caused delays in project and vendor have not yet reached final other aspects of the project. Under the new release agreement regarding the cost of various new vendor approach, the project plans to keep resources commitments assumed in SPR 6. The negotiations engaged to support a release after the principal with the vendor may result in significant changes release rather than assume the resources will be to the scope of the vendor’s responsibilities relative immediately freed up and available for subsequent to the scope included in SPR 6. Additionally, the releases. In this regard, SPR 6 reflects lessons project cost estimated in SPR 6 may not accurately learned from prior SPRs—namely that there may be reflect the vendor price for the specific activities some functionally or departments that need to be once final negotiations are complete. Until the delayed—and plans accordingly. The project should project and the vendor reach a final agreement, it therefore be better able to allocate resources more is uncertain if the schedule and cost described in effectively to mitigate negative impacts on future SPR 6 are accurate. If the final negotiations result in releases. significant changes to the scope, schedule, and/or Release Approach Provides Flexibility to costs included in SPR 6, the project will require an FI$Cal Project . . . The proposed implementation additional SPR. approach provides the project the flexibility to delay New Release Approach More Realistic roll-out of functions and shift the implementation Going Forward. Despite SPR 5 setting a strict of added departments based on their readiness. schedule, in practice, the project has begun the Specifically, the new SPR does not identify specific implementation of new functions and departments departments that will transition onto FI$Cal between waves, as is proposed in the new release over the various releases, but instead lists the implementation approach. The release approach is total number of departments and the relative size a recognition by the project that some functions of those departments that are anticipated to be or departments may need additional time beyond deployed on a scheduled implementation date. The the principal implementation date before they are sixth SPR also sets up a new program that supports ready to deploy. Rather than going live prematurely departments leading up to implementation to help www.lao.ca.gov Legislative Analyst’s Office 17 2016-17 BUDGET ensure that departments transition onto FI$Cal with the prior plan. This is because the previous only when they are ready. These new features in plan, which included a more aggressive schedule, SPR 6 help the project maximize its flexibility. could have resulted in rolling out system functions Given the magnitude of the FI$Cal Project, project and adding new departments prematurely. Strictly staff are likely to continue to experience challenges following the aggressive schedule of SPR 5 would developing some functions or engaging some have resulted in costly rework and disruptions to departments. The new implementation approach the state’s financial systems. However, the project gives the project additional time to overcome these did not strictly follow the SPR 5 schedule. Instead, challenges without delaying the progress of the the unreasonable expectations created resulted in project due to staffing being held back to address the project falling behind schedule. The oversight issues from prior waves. entities are already tracking the project’s progress . . . While Maintaining Some Uncertainty based on the SPR 6 schedule. While SPR 6 makes for Departments. The administration’s proposed it more likely that the project will be able to release approach and its new program to ease successfully implement these releases, the oversight department transition allows for the shifting entities have noted that some of these activities are of functions and departments in the schedule, already behind schedule. While a step in the right depending on their readiness. While this flexibility direction, perhaps SPR 6 may not go far enough in provides the project benefits described above, some extending the project schedule. uncertainty remains for departments. Because . . . But Substantial Risk Remains. While we departments do not know when the project will think the modifications to the FI$Cal schedule in exercise this flexibility, departments may be less SPR 6 reduce overall project risk and strengthen able to adjust resources to reflect the change in FI$Cal’s likelihood of success, substantial risk schedule and may find the change disruptive to remains, especially in the final release planned for their workload. July 2018. This is because SPR 6 plans to transition Plan Mitigates Some Project Risk . . . The a large number of departments onto FI$Cal in the revised plan attempts to reduce risks associated with final release. The fifth SPR also anticipated that the the project and improve the likelihood of FI$Cal’s final wave—Wave 4 scheduled for implementation success by allowing additional time to build and test in July 2017—would be large. In our analysis of certain functions. The proposed changes reportedly SPR 5, we raised a concern that the final wave was reflect lessons learned in the two years since the last too expansive in size and may prove too difficult for SPR. Notably, the modifications to the project reveal the project’s resources to implement. Subsequent the project’s improved understanding of the work decisions by the Steering Committee deferred required to implement complex functions specific some departments to later waves, growing the size to DOF, SCO, STO, and DGS while simultaneously of Wave 4. While SPR 6 spreads the transition of addressing the needs of the diverse departments departments onto FI$Cal over more years than currently using or preparing to use the FI$Cal SPR 5, the final release continues to include a System. much larger number of departments than have While SPR 6 is associated with an extension been rolled out at any other time in the project’s of the project’s schedule and an increase in the history. Moreover, the project has previously project cost relative to SPR 5, these changes could delayed departments with issues that make them potentially be less costly than moving forward challenging to transition onto FI$Cal (such as 18 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET BOE and DOJ). These prior actions mean the final Under the prior project plan—SPR 5—many release will be comprised of the largest number of the positions would be eliminated after the final of departments of any wave/release as well as the wave. Under this prior approach, we would expect departments that are most likely to have challenges it to become increasingly difficult for the project transitioning onto FI$Cal. We therefore remain to maintain a constant level of staff as the end concerned that the final release continues to be of the project approaches because (1) employees large, making it potentially difficult for the project would look for other employment opportunities to maintain its proposed schedule under SPR 6. in anticipation of their project job ending and Reasonable to Hire Staff Now to Allow for (2) fewer qualified candidates would apply for Knowledge Transfer. The oversight entities have vacant positions that would soon be eliminated. consistently raised concerns that the state may These staffing difficulties increase the risk that face significant difficulty maintaining FI$Cal after an IT project will not meet key milestones that implementation without the vendor’s or some other affect the project’s schedule and budget and can M&O contractor’s assistance. Extending knowledge ultimately lead to a project failing. For much transfer opportunities enhances the likelihood of the project’s history, FI$Cal management that the state will be fully prepared to maintain has contended with recruitment and retention FI$Cal after its implementation. That being said, difficulties. Transitioning the vast majority of staff the oversight entities report that only a small to the M&O of the system as they are no longer percentage of organizations successfully assume required for DD&I would likely help to mitigate M&O responsibilities of an IT system of this future recruitment and retention challenges. type—that integrates various complex management However, if turnover in executive positions functions—and a majority of organizations continues, it may pose challenges to maintaining ultimately sign long-term M&O contracts with a the continuity and consistency of the vision and vendor. While the additional year of knowledge execution of the project. transfer is a step in the right direction, some Uncertain if Current Facility Can contractual relationship with the vendor or another Accommodate Future Requirements of Project. contractor may be necessary on an ongoing basis to The FI$Cal Project staff and many vendor staff are fill gaps in skill sets not available among state staff. currently located in leased space in Sacramento, New Staffing Plan Seems to Address California. The FI$Cal Project is currently Recruitment and Retention Challenges Associated evaluating if the current facility can accommodate With Limited-Term Positions. The administration the requirements of the project in future years. proposes transferring most FI$Cal Project staff Any facility would have to accommodate the nearly to the Department of FI$Cal as DD&I workload 100 new positions proposed in the Governor’s comes to end. The administration has often budget proposals for the project and department asserted that it is difficult to recruit and retain over the next several years. Additionally, the employees for limited-term positions in part facility would have to accommodate training because workers prefer the security that is afforded space to support current users of the system and employment in a permanent position. Especially the 125 remaining departments. According to in the case of IT projects, the use of limited-term the project, the limited space currently available positions is cited as a major hindrance to recruiting for this purpose may jeopardize the project’s and retaining qualified candidates. ability to support current and future FI$Cal www.lao.ca.gov Legislative Analyst’s Office 19 2016-17 BUDGET departments. This problem would become more significant changes going forward, a new budget acute as additional departments are scheduled for proposal would be submitted for legislative review. deployment in future years. The DGS is currently . . . But Project Still Risky and Significant conducting an ongoing facilities evaluation to Work Remains. The FI$Cal Project involves identify whether changes are needed—either the development of an extremely ambitious and modifications to the current facility or a move to complex IT system and significant work remains a different facility—in order to accommodate the before the system is fully implemented. In its requirements of the project. review of the Governor’s proposal and its ongoing oversight of the FI$Cal Project, the Legislature LAO Bottom Line on Proposed should be aware of and monitor factors that not FI$Cal Project Changes only contribute to general risk inherent in all IT Governor’s Proposed Project Changes Are projects, but also the shifting of risks to the end of Reasonable . . . The Governor’s budget proposal the project schedule due to the substantial number reflects a reasonable plan to implement the of departments rolled onto the system in the July remaining functions and departments in FI$Cal. 2018 release. The Legislature may want to ask the We believe that the time and effort that project project at budget hearings to (1) indicate if the staff has spent in updating the project plan has project is on schedule for the July 2016 release based reduced overall risk and strengthened FI$Cal’s on the scope proposed in SPR 6 and (2) identify the likelihood of success. The administration’s decision steps it is taking to address the risks inherent in the to delay the implementation of some functions and large July 2018 release. departments reflects the project’s commitment Additional SPR Likely. We note that given to a quality product rather than strictly adhering the scope of the remaining work and signals from to predetermined milestones. While this strategy oversight entities that some project activities ultimately does extend the project’s schedule continue to track behind schedule, we think a and increases its cost, we believe this approach future SPR is likely. Additionally, as SPR 6 does is prudent given the negative impacts to the state not reflect a final negotiation with the vendor, should functions and departments be brought additional changes may be necessary once final on line prematurely. On balance, we believe that negotiations are complete. Finally, we note that the benefits of proceeding with FI$Cal development the Legislature may see a facilities-related request outweigh the risks, and therefore recommend in future years based on the findings from the approval of the Governor’s budget proposal in ongoing analysis of the current facilities’ capacity. regards to project changes. Should the project make DEPARTMENT OF FI$CAL In this section we outline the Governor’s Governor’s Budget Proposal to budget proposal to establish a new state department Establish a New Department to maintain and operate the FI$Cal System and In addition to the changes in the project provide our comments on the proposal. described previously, the Governor’s budget proposes to establish the Department of FI$Cal 20 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET to provide the ongoing M&O function for the to meet the needs of departments anticipated in the FI$Cal System and support services for users of three remaining releases, (2) make system changes the system—roles currently provided by FSC. In in response to department needs and/or changes in the following section, we describe the mission, state and federal laws and regulations, (3) engage governance structure, funding mechanism, and deferred departments (see the box below for a staffing for the proposed department. description of deferred and exempt departments), Mission. The Department of FI$Cal would be (4) add new functions to the system as deemed responsible for the implementation and ongoing necessary in future years, and (5) provide a M&O of the FI$Cal System. The Governor’s permanent administrative structure for FI$Cal. proposal indicates that in fulfilling this mission, Governance Structure. The proposed the department would (1) expand support services department would be led by the Director of the Deferred and Exempt Departments The current scope of the Financial Information System for California (FI$Cal) Project excludes deferred and exempt departments. Deferred departments are defined as departments that have implemented or are in the process of implementing their own financial management system. As these departments’ systems require upgrades or as departments desire expanded functionality, they will move onto FI$Cal. Under the Governor’s proposal, the Department of FI$Cal will be responsible for bringing deferred departments onto FI$Cal as needed. Deferred departments will not use FI$Cal in the interim, but will exchange necessary information with FI$Cal to support the constitutional and/ or statutory responsibilities of the partner agencies. Exempt departments have statutory authority to use systems other than FI$Cal Departments Deferred or Exempt From FI$Cal Under Special Project Report 6 for their financial management. Deferred Exempt departments California State Lottery Commission will not use FI$Cal Department of Corrections and Rehabilitation Department of Motor Vehicles directly, but will Department of Transportation exchange necessary Department of Water Resources information with State Teachers’ Retirement System Department of Technology FI$Cal to support Exempt the constitutional and/or statutory Legislature Legislative Counsel Bureau/Legislative Data Center responsibilities of Judicial Branch the partner agencies. State Auditor’s Office See the figure for University of California California State University a complete list of Hastings College of the Law deferred and exempt Public Employees’ Retirement System departments. State Compensation Insurance Fund www.lao.ca.gov Legislative Analyst’s Office 21 2016-17 BUDGET Department of FI$Cal, to be appointed by the • Funding. The cost of operating the Governor and confirmed by the Senate. While the Department of FI$Cal would be funded director would be responsible for overseeing the 57 percent from the General Fund and day-to-day operation of the FI$Cal System, the 43 percent from the Central Service Cost director would have limited authority over policy Recovery Fund (CSCRF). The CSCRF decisions affecting the system. This is because, as portion would be paid for by allocating in the current structure of the FI$Cal Project, the the operational cost to departments based Steering Committee would continue to set polices on their share of use. The annual cost of relative to their constitutional and/or statutory operating the department will increase responsibilities over the state financial management in future years as new functions and processes integrated through FI$Cal—budgeting, departments come onto the FI$Cal System. accounting, cash management, and procurement. The cost of operating the department is Instead, the director’s responsibilities would expected to level off in 2019-20, at which include (1) setting and monitoring administrative point the annual ongoing cost is expected to policies; (2) reporting department achievements be $70.4 million ($40 million General Fund). and status to the partner agencies; and (3) acting • Staffing. As noted above, the proposed as spokesperson for the department to the department would include 122 positions Legislature, external stakeholders, and the public— to support the FI$Cal M&O function. responsibilities that the Executive Partner has This position total for M&O will grow under the existing governance structure. As in over time as the FI$Cal System becomes the current governance structure, issues outside more mature and as other staff working the director’s authority, such as policy decisions on DD&I activities and finishing up the regarding the state’s financial processes, would be implementation work for the project— decided by the Steering Committee. Initially, the totaling 121 under the Governor’s proposal department would report directly to the Governor. and nominally considered to be part of the The project envisions that the Department of department—shift to M&O activities. By FI$Cal eventually would be realigned under the 2019-20, it is estimated that the department California Government Operations Agency. will be comprised of 274 ongoing Department Funding and Staffing. The positions, primarily dedicated to M&O Governor’s budget proposes $42.6 million of the FI$Cal System. The departmental ($24.3 million General Fund) and 122 positions in positions mentioned herein do not include 2016-17 to support the proposed M&O functions positions in the partner agencies dedicated within the Department of FI$Cal. This position to FI$Cal—estimated to be around total includes 99 existing project positions that 60 positions in 2019-20. will shift from DD&I to M&O responsibilities plus 23 proposed new positions. When the department Implementing Legislation Establishes assumes complete responsibility for maintaining Department of FI$Cal. The Governor proposes and operating the FI$Cal System in 2019-20, legislation to update the existing statute for the the department is expected to cost $70.4 million FI$Cal Project to reflect the department-related annually and include 274 permanent positions. budget proposal. Among other things, the language (1) replaces the FSC and the FI$Cal Project 22 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET office with the Department of FI$Cal and makes the Department of FI$Cal will need conforming changes and (2) eliminates the FI$Cal 37 administrative positions for 274 total Executive Partner and establishes the Director of authorized positions. This is a larger the Department of FI$Cal, who would be appointed administrative infrastructure than that and serve at the pleasure of the Governor. found in other similarly sized departments. For example, one department we queried Evaluating Options for an has 22 administrative staff for 285 total Administrative Structure for authorized positions, while another FI$Cal M&O department has 35 administrative positions While we agree with the administration for 340 total authorized positions. That that an entity is necessary to maintain and said, some level of administrative support operate FI$Cal, it is unclear to us whether the will be needed to maintain and operate establishment of a new department is the best the FI$Cal System, regardless of the entity way to fulfill this function. We identify a range of selected for M&O. On the benefits side, options for maintaining and operating FI$Cal and creating a new department to maintain and propose questions that the Legislature may want operate the FI$Cal System would establish to ask the administration in order to get a better a dedicated entity in state government for understanding of the merits and challenges of maintaining and operating the system, establishing the Department of FI$Cal, as proposed increasing its visibility and perhaps by the Governor, versus other options. signaling that maintenance of the system is a priority. Range of Administrative Structure Options for Maintaining and Operating FI$Cal • Preserve FSC. The FSC has maintained and operated FI$Cal since July 2013, when the A range of options of administrative structures first system functions were implemented for maintaining and operating the FI$Cal System in a small number of departments. It is are available for legislative consideration. Below, we unclear why a new state department is describe three options—the Governor’s proposal necessary when an infrastructure already and two other basic options—and discuss the exists to maintain and operate the FI$Cal relative merits and drawbacks of each option. System. The responsibility for FI$Cal M&O • Create a New Department. As the could remain at the FSC. Although this is administration proposes, responsibility an option the Legislature could consider, for supporting the state’s integrated we find it to be substantially similar to the financial management system could be Governor’s proposal to establish a new delegated to a newly created department. department. The main potential difference This approach could be more costly than is that the FSC may be able to maintain other options given the administrative the system with lower administrative costs associated with establishing and costs. This is because the FSC would not operating a department, especially a necessarily have the added administrative department of a few hundred employees. infrastructure necessary to operate a new The administration proposes that department because it could continue to once the system is fully implemented, www.lao.ca.gov Legislative Analyst’s Office 23 2016-17 BUDGET obtain contracted administrative services • What authority would the Director of the from DGS, as is current practice. However, Department of FI$Cal have independent according to the project, the FSC does not of the partner agencies? How would the provide the system with the visibility a authority of the director differ from the department would provide the system. authority of the current Executive Partner at the FSC? How would the Director of the • Delegate Responsibility to One of the Department of FI$Cal be held accountable? Four Partner Agencies. Alternatively, the Legislature could delegate the • Are there any administrative costs M&O responsibilities to one of the associated with the creation of a new four partner agencies. This approach department that would not exist if the utilizes the partners’ familiarity with the M&O for the project continued to be with system, without building an extensive the FSC or were placed within one of the administrative infrastructure to support partner agencies? a new department. Although this option Regardless of the model used to maintain and would be less costly than creating a new operate the state’s integrated financial management department because it would utilize system, the Legislature may wish to take steps to an already existing administrative address the muddled accountability inherent in the infrastructure, partner agencies have current governance structure and likely to continue existing constitutional and/or statutory regardless of the entity selected for M&O unless responsibilities that may result in their addressed. In the next section we present options prioritizing existing responsibilities over for strengthening accountability. FI$Cal M&O. A Need to Strengthen Accountability Questions for Legislative Consideration in Evaluating M&O Options Muddled Accountability Under Current When balancing the benefits and trade-offs of Governance Structure. The current governance these options, the Legislature should consider such model spreads accountability across the Executive criteria as (1) how the option affects accountability Partner and the members of the Steering to the Legislature, (2) the cost and potential Committee, rather than empowering a single point economies of scale of the option, and (3) the of authority for decision making who can be clearly capacity of the entity under the option to maintain held accountable. and operate the FI$Cal System. The Legislature may Accountability Continues to Be Problematic want to direct the following questions to the FI$Cal Under Governor’s Proposal. The Governor’s Project during budget hearings in order to get a proposal does not address the existing muddled better understanding of the merits and challenges accountability and would continue to jeopardize of establishing the Department of FI$Cal versus the Legislature’s ability to hold FI$Cal leadership other options. accountable. As proposed, the Department of • How does establishing a department FI$Cal would not have a single point of authority for decision making. Instead, authority would be improve the services already provided by diffused across the department’s director and the the FSC? 24 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET partner agencies. Typically in state government, generally be making less frequent and less a department director would have authority over critical decisions about the automation of the policy and administrative issues of his or the state’s financial management processes. her department. In the case of the Department As a result, the existing role of the partner of FI$Cal, however, the director would have no agencies—directing the course of the authority over the state’s financial management project through the Steering Committee— policies. These activities would remain within the might no longer be necessary for the respective purview of DOF, SCO, STO, and DGS. success of the system once it enters M&O. The director’s authority would largely be limited to Instead, the leader of the entity selected administrative issues facing the department, even to maintain and operate the system could though changes in the state’s financial management solicit advice from partner agencies on an policies could directly affect the FI$Cal System. as-needed basis. Transitioning the partner Should issues regarding FI$Cal’s performance arise agencies to an advisory role would establish in the future, this governance structure would the leader of the selected entity as the single make it difficult for the Legislature to hold decision point of authority for decision-making over makers accountable for any actions that disrupted issues affecting FI$Cal. The Legislature FI$Cal. would therefore be able to hold the leader Options for Strengthening Accountability, accountable for changes in policies that Regardless of M&O Entity Chosen. Each option threaten the stability of the system. for an administrative structure to maintain and • For the Short Term, Elevate Leader operate the FI$Cal System potentially presents of Entity Selected for M&O to Voting problems with accountability. Therefore, regardless Member of the Steering Committee. of the administrative structure chosen, we Because the FI$Cal System will not fully think that steps should be taken to enhance the enter M&O until 2019-20, the Legislature Legislature’s ability to hold FI$Cal leadership may wish to take incremental steps to accountable. The following options could increase accountability in the short term. strengthen accountability regardless of the entity This would preserve the more formal role chosen to maintain and operate the system, with of the partner agencies until the system the second option being a more incremental step to is fully implemented. The Legislature strengthen accountability for the short term. could increase the accountability of the • Discontinue Formal Role of Partner leader selected to maintain and operate Agencies, Instead Establish Advisory the system by establishing the leader as a Role. During the planning and DD&I voting member of the Steering Committee phases of the FI$Cal Project, intensive and Project Directorate. Because the engagement by the partner agencies was Steering Committee operates under the necessary. Critical decisions were being consensus decision-making model—where made regularly during these phases all voting members must agree to a course regarding the automation of processes over of action—the leader of the selected entity which the partners have constitutional could be held accountable for changes in and/or statutory responsibility. During the policies that threaten the stability of the M&O phase, the Steering Committee will www.lao.ca.gov Legislative Analyst’s Office 25 2016-17 BUDGET system. While this model would empower policy changes he or she believes would the leader to block policy changes that he benefit the system. Instead, the leader or she believes would negatively impact would need to seek the support of the full the FI$Cal System, it would not necessarily Steering Committee. allow the leader to independently pursue 26 Legislative Analyst’s Office www.lao.ca.gov 2016-17 BUDGET www.lao.ca.gov Legislative Analyst’s Office 27 2016-17 BUDGET LAO Publications This report was prepared by Lourdes Morales, with assistance from Nick Schroeder, and reviewed by Ginni Bella Navarre. 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 report 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. 28 Legislative Analyst’s Office www.lao.ca.gov