The 2022-23 Budget: California Department of Technology

The 2022-23 Budget: California Department of Technology FEBRUARY 2022 Summary. In the Governor’s 2022-23 Budget, the Background administration proposes $54.6 million General Fund CDT. CDT is the administration’s main IT entity each year for three fiscal years to (1) shift funding for with broad authority over most aspects of certain internal California Department of Technology technology in state government. CDT is organized (CDT) administrative expenditures and positions into several offices, including the Office of from its cost recovery fund to the General Fund, Technology Services (OTech), as reflected in and (2) cover short-term net revenue losses to the Figure 1. The department’s proposed 2022-23 department resulting from some state entities moving budget is $508.4 million ($96 million General their provision of contracted information technology Fund) and 1,018 positions. The remainder of CDT’s (IT) services from CDT to private vendors. Over the proposed 2022-23 budget is funded through cost three-year period, CDT will re-evaluate its State Data recovery—that is, billing for IT services it provides to Center rates and services and then shift the requested state entities (and others) and using revenues from funding back to cost recovery thereafter. This post those services to cover most of its expenditures. provides background on CDT’s cost recovery model OTech. OTech provides IT services to state and rate development process for IT services, entities (and others) primarily through its State evaluates the proposals and available information Data Center. OTech (and others) also manage on the rate re-evaluation process, and offers our statewide contracts for vendor-hosted subscription recommendations to the Legislature. Figure 1 CDT's Organizational Charta Office of Legal Services CDT's Executive Office EEO Officer Strategic Initiatives Office of... Enterprise Enterprise Information Professional Statewide Administrative Services Architecture Technology Governmental Affairs Security Development Project Technology Services Delivery - Chief Administrative Officer - Communications - Acquisitions and IT Program • Marketing and Event - Executive and Management Management Administrative Support Services - Facility and Administrative Services - Financial Management - Human Resources - Internal IT Services - Rates and Cost Recovery a Each office only includes entities or officers relevant to CDT's BCPs. CDT = California Department of Technology; EEO = Equal Employment Opportunity; IT = information technology; and BCP = budget change proposal. 2022-23 Budget Series 1 services (VHSS)—that is, IT services provided bill language. (Recently, CDT also requested and primarily supported by private vendors, not increased expenditure authority to cover increased CDT—to offer services to entities at a lower cost demand for and expenditures on VHSS.) If demand than they might be able to negotiate with vendors for services is lower than anticipated, however, as individual entities. (State entities, however, may CDT absorbs the associated revenue losses until enter into separate contracts with private vendors its service rates can be increased to account for for IT services—even at a higher cost—because lower demand or its service costs can be reduced. state entities generally are not required to use Net revenue losses—that is, how much lower actual CDT’s IT services.) and projected service revenues are than actual and Rate Development Process for State Data projected expenditures on these services—can be Center IT Services. CDT sets State Data Center covered by CDT more quickly by increasing service IT service rates to recover the cost of services, both rates than by reducing costs because expenditures direct (such as hardware and software) and indirect on direct service costs such as hardware and (such as internal CDT administration). To calculate software are incurred by the department over these rates, CDT generally divides the direct and several years. indirect costs of a service by its projected demand. Governor’s Budget Proposals The department might consider other factors The Governor’s budget proposes $54.6 million when setting service rates such as how costs General Fund each year for three fiscal years, are distributed across state entities (for example, starting in 2022-23, for CDT to (1) reduce State Data to equitably distribute costs across entities with Center IT service rates by shifting funding for some of different budgets) and how simple the billing for, its internal administrative expenditures and positions and collection of, revenues is for the department from cost recovery to General Fund, and (2) cover and state entities. As the projected costs of and short-term net revenue losses in the TRSF resulting demand for services change, CDT re-calculates from some state entities moving the provision of their its service rates and submits them annually to IT services from the State Data Center to private the Department of Finance (DOF) for approval. vendors because of, for example, lower service For example, if demand for a service is projected to rates. CDT proposes that, over the next three fiscal decrease but the costs of the service are projected years, it will undertake a “rate re-revaluation process” to stay the same, CDT likely will propose an to assess (among other considerations) its current increase in the service rate. rate development processes and State Data Center Technology Services Revolving Fund (TSRF). service offerings. The administration’s intent for this The TSRF is CDT’s primary cost recovery fund. re-evaluation is to make CDT’s cost recovery model Revenues from the department’s State Data more sustainable to, for example, avoid additional Center IT services are deposited into the fund, short-term net revenue losses. Once a revamped and expenditures on direct and indirect service cost recovery model and associated rate structure costs are made from the fund. As a cost recovery is in place, the administration would revert the fund, the TSRF does not maintain a balance from expenditures and positions funded by General Fund one fiscal year to the next like, for example, a in these proposals to cost recovery (in 2025-26). special revenue fund. Accordingly, there is no The two components of these proposals are fund balance to provide a cushion for increased discussed further below: expenditures or revenue losses. CDT requests its expenditure authority from the fund through the • Shift Funding for Internal CDT budget process. CDT estimates its expenditure Administrative Expenditures and Positions authority primarily based on projected demand From Cost Recovery to General Fund. for its services at the rates approved by DOF. CDT requests that $41.1 million in expenditures If demand for services is higher than anticipated, and 205 positions shift from cost recovery CDT can request further expenditure authority (TSRF) to General Fund to reduce State Data from DOF through recurring provisional budget Center rates by an estimated 10 percent. 2022-23 Budget Series 2 The department also requests an additional Assessment $3.1 million General Fund for external Governor’s Budget Proposals Raise consulting costs and internal positions to work Questions About CDT’s Business Model for on statewide strategic initiatives, such as the Providing IT Services. One of CDT’s main development of a statewide IT Strategic Plan. responsibilities is to provide IT services to state Figure 2 details the funding and positions in entities. These proposals, however, raise some this proposal. questions about CDT’s business model for • Use General Fund to Cover Short-Term Net providing IT services. This is because the proposals Revenue Losses From Some State Entities seek to address not only revenue losses, but a Moving Provision of Contracted Services declining customer base for CDT’s State Data From CDT to Private Vendors. CDT also Center IT services. Figure 3 on the next page is requests $10.5 million General Fund to cover a sample comparison provided by CDT of State the short-term net revenue losses from state Data Center and private vendor rates for three entities, such as the Department of Child IT services. This comparison appears to suggest Support Services and the Department of Motor that at least some of CDT’s State Data Center rates Vehicles, migrating some of their business are not competitively priced. applications and IT services off the State CDT, however, suggests that some of the Data Center and onto service offerings from benefits of State Data Center services (such private vendors. (CDT estimates total revenue as continuous information security and service losses from State Data Center services at desk support) and other differences between $20.7 million, but projects $10.2 million of these state-hosted and vendor-hosted services make losses will covered by higher-than-anticipated direct rate comparison difficult. Even so, CDT does revenues from other services.) acknowledge that some State Data Center services Figure 2 Governor’s 2022-23 Budget Proposes Shift of Many Internal CDT Administrative Expenditures From Cost Recovery to General Fund (Dollars in Thousands) Office Entity or Officer Expenditures Positions CDT’s Executive Office EEO Officer $355 2 Office of Legal Services 1,682 7 Strategic Initiatives 3,054a 3 Office of Administrative Services Chief Administrative Officer 2,168 2 Acquisitions and IT Program Management 4,187 23 Facility and Administrative Services 4,347 20 Financial Management 3,798 23 Human Resources 4,295 26 Internal IT Services 14,958 67 Rates and Cost Recovery 2,767 18 Office of Enterprise Architecture 1,487 7 Office of Governmental Affairs Communicationsb 664 4 Office of Technology Services Executive and Administrative Support Services 358 3 Totals $44,120c 205 a Total expenditures include $2 million in external consulting costs and $1.054 million for internal positions and related OE&E. Requested funding is additional General Fund, not a shift in expenditures from cost recovery (TSRF) to General Fund. b Communications includes the department’s marketing and event management functions. c Difference between General Fund total in the figure and in the proposal due to rounding. CDT = California Department of Technology; EEO = Equal Employment Opportunity; IT = information technology; OE&E = operating expenses and equipment; and TSRF = Technology Services Revolving Fund. 2022-23 Budget Series 3 cannot be provided at comparable or lower rates on, for example, current demand from state entities than private vendors even if rates are reduced to for the service. Other services might be added cover only direct costs. In other words, despite to complement private vendor service offerings, the 10 percent reduction in fees, the department’s rather than the State Data Center continuing to proposal to temporarily cover some of its indirect offer similar services to private vendors. At the administrative costs outside of the rate structure end of the process, the administration might would not make some of the IT services it provides recommend some services be shifted from cost competitively priced. recovery to the General Fund. Based on this Moreover, the lack of information available for information, both the potential impacts of this rate state entities to make direct comparisons between re-evaluation process on the core services provided private vendor rates and State Data Center rates— to state entities and the anticipated shift of funding including the benefits and costs of the services the for some additional IT services to the General Fund State Data Center provides—makes state entities’ suggest a more active role for the Legislature in its decisions about the provision of IT services more oversight of the process. difficult. The inability of state entities to directly Funding Proposals for Three Fiscal Years compare the benefits and costs of private vendor Limits Legislative Oversight Through Budget and State Data Center IT services and the much Process… Both of these proposals request higher State Data Center rates for at least some IT funding for three fiscal years, starting in 2022-23, services suggest that additional work is needed that is based on forecasted revenues from and not only to re-evaluate rates, but also to re-evaluate expenditures on State Data Center services. the department’s business model for providing However, we understand from CDT that it cannot IT services. accurately forecast either its revenues from or CDT’s Proposals Provide Little Information expenditures on services over a three-year period About Future Rate Re-Evaluation Process. because demand can change significantly year over The proposals as currently presented to the year. By approving funding for three fiscal years, Legislature are missing key information about the the Legislature would limit its oversight through anticipated rate re-evaluation process. For example, the annual budget process to (for example) make the proposals do not provide any details on the appropriate budgetary adjustments based on the methodology for evaluating State Data Center IT changing fiscal condition of the TSRF. services to reduce rates or on the time line for the …And Legislative Involvement in Rate process. We were able to obtain some information Re-Evaluation Process. Multiyear funding of these about the process through our meetings with the proposals also would limit legislative involvement administration. We understand from CDT that, in the rate re-evaluation process. We understand as part of its rate re-evaluation process, the that the administration intends to update the administration plans to assess each State Data Legislature on this process through CDT’s quarterly Center service to identify efficiencies and reduce legislative briefings. These quarterly briefings likely costs. Some services might be eliminated based will cover a wide range of topics from changes in Figure 3 Sample Comparison of State Data Center and Private Vendor Rates Servicea CDT Amazon Microsoft Google IBM Storage (per GB, per month) $0.26b $0.03 $0.02 $0.02 $0.02 Windows Virtual Private Server (per month)c 514.24 181.58 154.08 248.40 253.44 Linux Virtual Private Server (per month)c 540.40 185.76 185.76 159.12 181.44 a Features, levels of service, and other service options not available for comparison. b Lowest end of the range, but can be as high as $1.38 per GB per month. c Rates based on comparable virtual private server configurations. CDT = California Department of Technology; IBM = International Business Machines Corporation; and GB = gigabyte. 2022-23 Budget Series 4 state IT policies and procedures to information • Objectives for the Process. Some of the security updates to state middle-mile broadband objectives for the rate re-evaluation process network developments. These briefings are could include the ability of state entities unlikely to provide the Legislature with the requisite to directly compare IT services offered by information and time to learn about and be involved the State Data Center with private vendors in the rate re-evaluation process. Requests (including benefits and costs that are specific for funding on an annual basis would allow the to State Data Center customers), and the Legislature to decide whether the administration’s elimination of State Data Center services that progress on the rate re-evaluation process warrants cannot be offered at rates competitive with additional legislative involvement and/or oversight. private vendors, particularly if reduced to only cover direct costs. Recommendations • Outcome Metrics for the Process. Approve Only One Year of Funding for Both Some outcome metrics for the process could Proposals. We recommend the Legislature be the percentage reductions in State Data approve only budget-year funding for both Center rates, on average and within different proposals and reject requested outyear funding IT service categories, and projected changes to ensure legislative oversight continues through in IT service subscriptions over the next the annual budget process. Annual funding for several years based on the new rates. these proposals also would allow CDT to better • Evaluation of CDT’s Current Business forecast additional net revenue losses, for example, Model for Providing IT Services. To build and make associated budget requests to cover on the rate re-evaluation process, CDT could them (if necessary). Budget-year funding to shift evaluate whether the State Data Center model some internal administrative costs to the General as operated today is the most cost-effective, Fund also would allow the Legislature to evaluate efficient, and strategic model for providing whether the anticipated reduction in State Data IT services to state entities. The evaluation Center rates changes state entities’ demand for could consider, for example, whether a move IT services from CDT. to additional statewide VHSS contracts, in Direct CDT and DOF to Work With Legislature place of certain State Data Center services, on Trailer Bill Language to Allow More is a viable alternative. Other changes in how Legislative Direction and Oversight of the Rate State Data Center services are administered Re-Evaluation Process. We also recommend the also could be considered as part of the Legislature adopt placeholder trailer bill language evaluation, such as mandatory use of that directs CDT and DOF to work with the some state-hosted services, which might Legislature to define the rate re-evaluation process ensure a certain level of service for critical over the next several years and provide oversight. programs. Lastly, term agreements—as The Legislature could adopt the trailer bill language are standard in private vendor contracts— that is ultimately developed as a means to provide could be considered to improve revenue its policy direction to guide the department’s and expenditure forecasting and make cost rate re-evaluation process. We recommend the recovery more sustainable in the future. language include at least the following components: 2022-23 Budget Series 5 2022-23 Budget Series 6 2022-23 Budget Series 7 LAO PUBLICATIONS This post was prepared by Brian Metzker, and reviewed by Mark C. Newton and Carolyn Chu. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. 2022-23 Budget Series 8