Financial Information System For California (FI$Cal)

Background

Statewide Financial Management System. Initially contemplated in 2005 as a new budget system for the Department of Finance (DOF), by 2007, the administration concluded the state needed to replace its entire financial infrastructure. For 2007–08, the Governor proposed an IT project, the Financial Information System of California also known as FI$Cal, which would create a statewide financial system in all state departments. The new financial system would include budgeting, accounting, procurement, cash management, and financial management and reporting. The project was estimated to take eight years to develop at a total cost of $1.3 billion. The project would be based on the same type of software as the 21st Century Project. The administration proposed for it to be managed by a partnership of DOF, DGS, SCO, and the State Treasurer’s Office. The Legislature appropriated about $7 million for the FI$Cal system for further planning in the 2007–08 budget and requested the administration deliver a series of reports to the Legislature addressing implementation issues.

Administration’s Updated Proposal. In November 2007, the administration submitted a revised project report extending the schedule by two years and revising costs from $1.3 billion to $1.6 billion. The report proposed to finance most costs through bond financing, indicating debt service would begin in 2012–13 and be paid by departments based upon their share of use.

Legislative Concerns. In the Analysis of the 2008–09 Budget Bill (see page F–97), we expressed two major concerns regarding the administration’s updated proposal: (1) risks around the project’s scope and (2) the heavy reliance on bond financing. We recommended a two–phase implementation with a pause in between for legislative review. The initial phase would implement FI$Cal to a limited number of departments, followed by a pause when the administration would submit a status report to the Legislature. Only upon legislative approval would the project proceed to phase two and implement FI$Cal to the remaining state departments. We also proposed limiting borrowing to $250 million during the first few years of development.

The Legislature concurred and during 2008–09 spring hearings approved the development of FI$Cal in two phases. Both subcommittees authorized $40 million for support of FI$Cal for 2008–09 ($2 million General Fund and about $38 million from a General Fund loan). Trailer bill language provided the State Public Works Board authority to issue debt in the form of bonds (up to $277 million initially) to finance the early year costs of FI$Cal. Because the bond financing was expected to be in place by June 2009, the General Fund loan was scored as a cash–flow loan and not as a budgetary expenditure.

Change in Procurement Strategy. During 2008–09 spring budget hearings, project staff explained they would follow a bundled procurement approach, meaning they would seek one vendor to provide the financial software and configure it to the state’s business requirements. However, in June, FI$Cal staff notified the Legislature of its decision to change to an unbundled procurement approach—seeking two separate vendors for the software package and for software integration through two separate procurements (as was done for the 21st Century project). The administration stated this approach would increase competition and enhance opportunities to secure the best software package and integration vendor.

Legislative Response. The budget conference committee expressed significant concerns about the project’s decision to change procurement approaches after the Legislature had approved the original plans. Moreover, the administration could not justify its decision to change to an unbundled procurement and, when questioned, volunteered to return to the original bundled approach. As a result, the committee reduced funding to $2 million for 2008–09 and required the project to further review procurement approaches. During late summer budget negotiations, however, the Legislature restored funding to the FI$Cal project, including the authority to issue bonds, consistent with subcommittee approvals of a two–stage project.

Return to Bundled Approach. By mid–November, project staff decided to return to the original bundled procurement approach. Upon further review, they concluded conducting two procurements for an unbundled approach would take longer than they expected and place the project further behind schedule and increase costs significantly.

Current Status

Project Delays. Procurement approach issues and a late budget enactment have resulted in delays to the project. The RFP, originally slated for release in November 2008, will not be completed until June 2009. The project is experiencing hiring delays as well. At the time of this analysis, only $2.4 million of the $40 million budget for the current year has been expended, and it is likely the project will spend less than one–half of its authority by the end of the current year. Project staff plan to update costs and schedule changes in the spring through a project report.

Bond Financing in Jeopardy. Given the state’s current fiscal condition, there is significant concern over the state’s ability to sell bonds. Even if the Legislature adopts a budget solution and national credit markets unfreeze, borrowing for state cash flow and infrastructure development could crowd out the ability to issue bonds for FI$Cal development—at least in the short term. In all likelihood, any General Fund loan would not be able to be repaid for the initial years.

Analyst’s Assessment. We support a bundled procurement approach for the FI$Cal project. This approach limits the number of vendors that project staff must manage and keeps the vendor accountable for their work, rather than allowing them to blame another vendor for any system failure, as was partially the case with 21st Century project. Altogether, a bundled procurement approach appears to reduce project risk for FI$Cal development.

Despite the costs of development and initial project setbacks, we continue to recognize the state’s needs to update its financial systems. We doubt that bonds can be issued in the current or budget year. Therefore, any project costs through 2009–10 should be scored as General Fund costs rather than a loan. The question is how best to proceed in this difficult fiscal environment.

Options for Legislative Consideration

Below, we provide possible options for the Legislature to consider in regards to the future of the FI$Cal project.

Option #1: Halt the Project for Now. The Legislature could halt FI$Cal development. The RFP could be shelved and project staff transferred to other projects. Any products the project has completed thus far, including the RFP, system requirements, and a schedule of accounts, could be used as groundwork to reestablish a FI$Cal system in the future. This option essentially means starting a new project during a more fiscally sound time.

Option #2: Delay Development. An alternative option is to delay FI$Cal development and the majority of initial costs until the state’s fiscal condition begins to improve. The project staff could postpone release of the RFP and delay procurement, avoiding significant vendor costs in 2009–10. Some project staff could work on contingency plan development for the project, including funding options, while others could be loaned–out to other departments or projects temporarily.

Option #3: Phased Functionality. Financial functions could be implemented in a phased approach. Rather than integrating and rolling them all at once to departments, the FI$Cal system could be scaled back to initially include only core financial functions, such as accounting and budgeting. Additional functions could be added later. This option would lengthen the total time for full implementation of FI$Cal and increase overall project costs. However, it would decrease up–front development costs.

Option #4: Proceed With Governor’s Approach. The project could proceed as planned and release the RFP in late June with the hope that the state’s financial condition improves and bond financing becomes available.

LAO Approach: Delay and Reduce Initial Scope

We believe the risks of halting FI$Cal development outweigh the risks of continuing. Halting the project would essentially push development of some type of FI$Cal system into the future and result in significant duplication of effort. However, the state’s current fiscal condition calls into question the feasibility of the Governor’s approach. Instead, we recommend a combination of options two and three from above—delay and reduce the scope of FI$Cal.

Recommend Delaying and Reducing Project’s Scope. Specifically, we recommend the Legislature delay the FI$Cal RFP release by six months until January 2010. This would push most vendor costs to 2010–11. Second, we recommend that the FI$Cal project report by May 1, 2009 on a revised plan that would reduce the initial scope of FI$Cal. This report should include the costs and benefits of delaying certain functionality, such as procurement.

Advantages of LAO Approach. There are several advantages to this approach. First, there are reduced initial development costs. Second, the initial reduction in scope could decrease the project’s complexity and mitigate risks during development and implementation. Third, it minimizes disruptions to departments as they transition from the old legacy systems to the new system. Department staff would not have to learn new processes for all financial functions at the same time. On the other hand, we note that this approach would extend the length of the project and delay full implementation of all financial functions statewide. It would also result in greater total project costs.

Merging FI$Cal With 21st Century

As described earlier, we have advised the Legislature to require 21st Century project staff to provide, by May 1, 2009, a cost–benefit analysis which compares (1) hiring a vendor to complete the software integration started by the prior vendor and (2) hiring a vendor to start clean on software integration. We have also recommended a report on slowing FI$Cal’s development during 2009–10. In assessing the two struggling projects at this critical juncture, we suggest the Legislature consider merging 21st Century staff with the FI$Cal project.

Potential Advantages of Merger. Merging the two projects would better leverage existing resources within both projects and potentially reduce some need for new staff in the budget year. The 21st Century staff have gained experience and knowledge in working with the vendor community and could apply both as they assist FI$Cal staff with their own procurement and project planning. Moreover, the 21st Century system will interface with FI$Cal and merging the two projects during the initial phases of FI$Cal development could assist in planning for this interface.

Other Major Issues. The merger approach would make more sense to the extent that the Legislature opts to move the two projects away from the administration’s current plans. For instance, if the 21st Century project proceeds with the clean start approach, the potential merger makes more sense than if the project moves more quickly to hire a vendor to complete the integration started by the prior vendor. (In other words, we would not want a proposed merger to delay completion of the 21st Century project.) While the advantages of a merger could be significant, we note that combining staff from the two separate projects could create logistical issues and cause further project delays. For this reason, we believe further analysis of this merger is necessary.

Reports to Legislature. We have already recommended that, by May 1, 2009, the two projects report to the Legislature on their status and options for improving their completion. As part of these reports, both staffs, in consultation with the Chief Information Officer, should evaluate the advantages and disadvantages of a merger.