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FI$CAL update

FI$CAL update

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Published by: jon_ortiz on Apr 26, 2012
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04/26/2012

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CALIFORNIA STATE AUDITOR
Bureau of State Audits
Doug CordinerChief DeputyElaine M. HowleState Auditor
555 Capitol Mall, Suite 300 Sacramento, CA 95814 916.445.0255 916.327.0019 ax www.bsa.ca.gov
April 26, 2012 2012‑039Te Governor o CaliorniaPresident pro empore o the SenateSpeaker o the Assembly State CapitolSacramento, Caliornia 95814Dear Governor and Legislative Leaders:Tis letter report provides an update on recent events related to the Financial Inormation Systemor Caliornia (FI$Cal) project. Pursuant to Government Code, Section 15849.22(e), the CaliorniaState Auditor (state auditor) is required to independently monitor the FI$Cal project throughout itsdevelopment, as deemed appropriate by the state auditor. FI$Cal is a business transormation projector state government in the areas o budgeting, accounting, procurement, and cash management. Teindependent monitoring shall include, but is not limited to, monitoring the contracts or independentproject oversight (IPO) and independent verication and validation (IV&V) services, assessing whetherconcerns about the project raised by the IPO and IV&V contractors are appropriately addressed by the FI$Cal steering committee and the FI$Cal project oce within the Department o Finance or itssuccessor entity, and assessing whether the FI$Cal project is progressing timely and within budget. Weare required to report on the project’s status at least annually and this is the seventh report we haveissued since we began our monitoring in April 2007.Te project released its ourth Special Project Report (SPR) on March 1, 2012, to update inormationin prior SPRs regarding FI$Cal’s costs, schedule, benets, and cost savings, and to announce that theproject is ready or implementation. Te project also announced that Accenture plc was the project’swinning t‑gap
 
 vendor
1
and is its selected systems integrator, with a proposed ve‑year contractor $213.1 million. Statute requires the project to submit a report to the Legislature with speciedinormation about the selected system integrator and alternative implementation approaches, 90 daysbeore entering a contract with the system integrator. Te project submitted the FI$Cal legislative reporton March 2, 2012. Te remainder o this letter report provides our review o selected inormation in theourth SPR, including FI$Cal’s updated cost estimates and proposed unding option, projected benets,revised project schedule and implementation approach, and envisioned risks and assumptions. Tisletter report also provides status updates on topics that we have previously reported on.
The Project Reports a Signicant Reduction in Costs and Proposes a Pay-As-You-Go Funding Plan
In the project’s second SPR issued in November 2007, the cost o FI$Cal was estimated to beapproximately $1.6 billion spread over 12 years.
2
Te ourth SPR revises the estimated cost o the projectdownward to $616.8 million. able 1 on the ollowing page shows the change in estimated costs betweenthe second and ourth SPRs among major categories.
1
The other “t‑gap” vendors were CGI Group, Inc. and International Business Machines Corporation. “Fit‑gap” is a process where vendors reviewthe State’s requirements or FI$Cal in detail and compare those requirements to the sotware products that they are proposing to generate a rm,xed‑price proposal.
The project did not update the second SPR’s estimate o costs in the third SPR, which it released in November 2009.
 
Te Governor o CaliorniaPresident pro empore o the SenateSpeaker o the Assembly April 26, 2012Page 2
Table 1
Comparison o FI$Cal Costs Per Special Project Reports 2 and 4(In Millions)
COST CATEGORYSPECIAL PROJECTREPORT 2SPECIAL PROJECTREPORT 4DIFFERENCE
Staf 
 Project staf87.7 .(78.5)Program staf64.4 ‑ (64.4)Administrative staf.1 (.1)
Total Staf Costs581.2
 
209.2
 
(372.0)Hardware, Sotware, and Telecommunications
156.7 1.1 (137.6)
Contract Services
Contract servicessystem integrator37.1.3* (17.)Other contract services5.8 1.4.4
Total contract services432.0
 
299.5
 
(132.5)Data Center Services
8.8 1. (7.8)
Agency Facilities
6. 1. (48.)
Other Costs
81.5 4. (3.5)
Total Project Costs$1,620.1 $616.8 $(1,003.3)
Sources: FICal Special Project Report , released November , 7, and FICal Special Project Report 4, released March 1, 1.* The total system integrator costs, as presented on page 1, are 13.1 million. The 1.3 million represents a large portion o the systemintegrator costs, but another 13.8 million o system integrator costs are included in the Other Contract Services line item.
As shown in able 1, the our largest cost changes are in the categories o project and program sta;contract services; hardware, sotware, and telecommunications; and data center services. For projectsta, which are the sta directly assigned to the FI$Cal project team, the project reduced its estimateo sta needed during the project’s peak activity rom 499 to 304 primarily because the project’simplementation period was reduced by two years, which results in a cost reduction o $78.5 million.For program sta—state department sta that the project plans to engage during implementation—theproject has transitioned to a “subject matter expert” model whereby department sta will be engaged ona part‑time basis as needed, rather than as ull‑time sta dedicated to the project, as it had previously planned. Te project believes that it would have been dicult or departments to assign ull‑time sta to the project and that this model is a more ecient use o state sta resources. Moreover, i the projectchose to reimburse departments or program sta, the project believes that the cost allocation plan itintends to use could create the potential or departments to subsidize each others’ sta costs during theimplementation phase. Because o the reasons described, the project is no longer planning to providereimbursement to any program sta, and thereore such costs are not included in the total cost o theproject. However, by not requiring departments to track and report the cost o subject matter expertsta, the project will underreport FI$Cal’s true cost. Tis cost could be signicant as it was estimated at$264.4 million in the second SPR. We believe it is easible that each department could establish a new program cost accounting code to track its sta’s time spent on FI$Cal‑related activities and report thesecosts to the project.
 
Te Governor o CaliorniaPresident pro empore o the SenateSpeaker o the Assembly April 26, 2012Page 3Additionally, the project reports reducing the cost or contract services by $172.9 million because thet‑gap process allowed bidders to better understand FI$Cal’s areas o complexity and risk. Tus,the project believes that bidders were able to reduce the “risk premium” usually associated with largeinormation technology projects. Likewise, through discussions with the Caliornia echnology Agency (CA) and with the bidders about FI$Cal’s data center requirements, the project indicates beingable to reduce the estimated cost or data center support by $279.8 million. Te project’s costs orhardware, sotware, and telecommunications were similarly reduced by $137.6 million, with the largestreduction attributable to sotware costs. According to the project, the reduction in sotware costs isdue to reducing the estimated number o FI$Cal users by about two‑thirds, negotiating lower licensecosts due to the t‑gap procurement, and decreasing sotware maintenance costs because the estimatedimplementation timeline was shortened rom seven to ve years.
Table 2
FI$Cal Funding Options(In Millions)
OPTIONDETAILSINTEREST*PROJECTIMPLEMENTATION COST
Pay‑As‑You‑GoFICal would receive an annual appropriation to undimplementation cost.5.Vendor FinancingThe system integrator would allow FICal to nance the cost o itscontract (about one‑third o the total cost).73.55.4Bond FinancingIssuance o tax‑exempt bonds to nance cost o the systemintegrator contract and state staf (about one‑hal o the total cost).68.51.1Source: FICal’s Special Project Report 4, March 1, 1.* FICal estimates interest rates o 5 percent or vendor nancing and 4.5 percent or bond nancing.Remaining costs would be unded by an annual appropriation.
o pay or the project’s one‑time system implementation costs, FI$Cal presents three unding optionsas shown in able 2, along with the associated project and interest costs. FI$Cal indicates that the State’sGeneral Fund (general und), special unds, and the ederal und will pay or FI$Cal’s development costs,at an estimated split o 47.11 percent, 39.90 percent, and 12.99 percent, respectively, but the general undwould need to pay the ederal und’s share until the project is successully implemented. Te projectrecommends pay‑as‑you‑go as the preerred unding method citing that this method avoids interestcosts, does not add to the State’s annual debt service costs, and would allow the Legislature to modiy the project’s unding, i necessary, without the risk o damaging the State’s credit rating. Te ourth SPRindicates that both vendor and bond nancing are more expensive due to interest costs, which would beineligible or ederal reimbursement. Further, the project indicates that neither o these methods wouldallow nancing o the ull project cost as shown in able 2 above. In both nancing methods, i theState were to delay or halt the project and not appropriate unds or its nancing, the project believesthere is risk that such an action could create a perception o a deault on the nancing by the investorcommunity, which in turn would negatively impact the State’s credit rating. Finally, the project notesthat legislation would be needed to provide it authority to use vendor nancing.

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