LAO Contact

Budget and Policy Post
May 14, 2018

The 2018-19 Budget: The May Revision

California State Payroll System


State Controller’s Office (SCO) Issues Payroll for State Workforce. SCO is responsible for issuing pay to the state workforce, including state employees, California State University (CSU), and Judicial Council. In 2004, SCO proposed the Twenty-First Century (TFC) project, the information technology (IT) replacement for its existing human resources management and payroll systems. In February 2013, after the project experienced various problems during its pilot stage, SCO terminated its contract with the project’s primary vendor. Since then, SCO has entered into a settlement agreement with the vendor for its lawsuit related to the TFC project, resolved the various problems created by the pilot, and closed out the project. All told, the state spent, on net, about $200 million of the nearly $375 million in estimated project costs for the failed TFC project. (For a full history of the TFC project through the settlement agreement in June 2016, refer to our February 2017 report The 2017‑18 Budget: California State Payroll System.) SCO recently renewed its effort to replace the state’s human resources management and payroll legacy systems. The new project is known as the California State Payroll System (CSPS).

State IT Project Approval Process Has Four Stages. Since the termination of the TFC project, the state has implemented a new IT project approval process—known as Project Approval Lifecycle (PAL)—with the goal of helping to bolster project planning and reduce the likelihood of project challenges or failure. SCO is using this process to plan CSPS. PAL divides the state’s approval process into four stages: Stage 1 business analysis, Stage 2 alternatives analysis, Stage 3 procurement analysis, and Stage 4 bid analysis and finalization of project details. Collectively, the planning documents from the four stages create a comprehensive plan for implementing the proposed IT project. Departments cannot begin their projects without receiving administration approval for each of the four stages. (Please refer to our February 2017 report, The 2017‑18 Budget: The New IT Project Approval and Funding Process, to learn more about the PAL process.)

2017‑18 Budget Included Resources to Begin Second Stage. SCO used previously approved resources to support its initial planning activities, including Stage 1 of PAL. Most recently, the 2017‑18 Budget Act provided nearly $3 million to begin Stage 2 of the PAL process for CSPS. At the time, SCO anticipated it would complete Stage 2 of PAL in August 2018. In the 2018‑19 May Revision, which we discuss below, the administration revises the schedule.

Improving the State’s Payroll System

Past Statements of Project Objectives. Fourteen years ago, when the TFC project was first proposed (in 2004), SCO stated that the legacy system was at “significant risk of system failure.” Additionally, SCO stated that limitations of the legacy systems prevented improvements, such as easily modifying the system to address changes in law or bargaining contracts, and employee self-services options. For these reasons, the TFC project was planned to be a wholesale replacement of the state’s human resources and payroll systems.

Recent Statements of Project Objectives. As part of Stage 1 of PAL, SCO was required to provide a justification for the CSPS project. In the Stage 1 document, SCO outlines 11 objectives for the new system, which we have categorized into the three areas: (1) technology stability and security, (2) operations and administration, and (3) state employee experience (see Figure 1). Notably, SCO is no longer warning that the state’s legacy human resources management and payroll systems are at risk of failure. Instead, the objectives SCO identified in Stage 1 focus on improving the operations and administration of the legacy systems. We discuss each of the three categories in turn below.

Figure 1

State Controller’s Office’s 11 Objectives for a New State Payroll System

Technology Stability and Security

Operations and Administration

State Employee Experience

Update technology infrastructure.

Automate validation of payroll data.

Provide online viewing capabilities.

Improve information security.

Implement new laws and rules more quickly.

Provide online update capabilities.

Provide a systems transaction log.

Improve access to payroll data.

Integrate business processes.

Provide more user‑friendly features.

Reduce reliance on paper.

Technology Stability and Security

Update the Technology Infrastructure. SCO’s legacy human resource management and payroll systems were mostly built in the 1970s. Most of these systems were developed as the business needs presented themselves and without an overall architecture. As a result, most of the applications only address a single organizational need. A new payroll system could provide SCO with an opportunity to integrate the system into a more modern, unified system.

Improve Information Security. While we are not aware of any acute issues with the security of the state’s legacy payroll systems, SCO indicates a new payroll system would have enhanced security features. These features could reduce the risk of the system being compromised and better protect the personal information of state and CSU employees. We also note that SCO received resources in 2017‑18 to strengthen information security across several areas of its operations, including personnel and payroll, but also other areas such as audits and disbursements.

Operations and Administration

Key Reasons for Improving Operations and Administration. With a new payroll system, SCO aims to improve the system’s functionality and usability for operations and administration. In some cases, a new system could help improve the timeliness and accuracy of SCO’s personnel and payroll systems (although errors in payroll are relatively rare). In addition, many aspects of operating and administering the current payroll system are time-consuming and complex. SCO states that hiring technical staff can be difficult, and once qualified staff are hired, training them to fully understand the complexities of the legacy system can take up to three years. As such, improving the usability of the system could improve the work experience for SCO staff and potentially create efficiencies that reduce training time or staff resources. Some of the features of a new payroll system that would improve SCO’s operations and administration include:

  • Automating Validation and Verification Checks of Data. A new system could allow SCO to automatically validate payroll and personnel data. For example, SCO would no longer have to manually verify whether employees have enough leave for a two-week vacation.
  • Automating Implementation of New Laws and Rules. SCO’s legacy system is complex and implementing new laws or bargaining agreements often means SCO must make system updates manually. With a new system, SCO aims to more easily automate new processes that result from future changes to law or policy.
  • Providing a Systems Transaction Log. Currently, SCO cannot identify the system user who entered changes into an employee’s personnel or payroll data. In a new system, SCO aims to be able to identify them, creating an “audit trail” that allows SCO to more efficiently review departmental transactions.
  • Providing Additional Features. A new system could also: (1) integrate time and payroll data in to one system (they are currently separate); (2) include more user-friendly options for system operators, such as point and click and drop down menus; and (3) help SCO reduce its reliance on paper-based sources of information by transitioning more processes to electronic formats.

State Employee Experience

In its Stage 1 analysis, SCO identified a few objectives that would improve the experience of state employees who need to access or update their own personnel and payroll data. We describe these objectives below, as well as some recent progress SCO has made in addressing these objectives.

Provide Online Viewing and Update Capability of Payroll Data. State employees cannot currently view their own data on payroll, employment history, leave balances, and tax information online. Instead, SCO prints and distributes paper checks, direct deposit advices, and W-2s. SCO would like a payroll system that allows employees and their managers to view and update their personnel and payroll data online. SCO states that these functions would make state workforce management less burdensome. For example, under the current system, SCO must update the system when an employee wants to change her banking information or address. In a new system, the employee could update this information directly online.

Improve Access to Aggregated Payroll Data. The current system does not have a centralized database with all personnel and payroll information. As such, if SCO needs to create a report with payroll data, staff must manually access and pull information from various sub-systems and applications. Under a new system, SCO could compile all of its personnel and payroll data into a centralized data warehouse, which would allow it to share aggregated data with other users, such as the California Department of Human Resources, the Legislature, and other state departments.

CalEmployee Connect Will Allow State Employees to View Data. In fact, SCO is already making progress on offering employees self-service options. Since completing Stage 1 of PAL, SCO has unveiled a pilot of the CalEmployee Connect application. CalEmployee Connect is a statewide employee self-service portal that interfaces with SCO’s legacy system to allow users to view some of their personnel and payroll data, such as recent paystubs and leave balances. SCO has built this application using existing resources. SCO is currently piloting the application among its own staff.

Governor’s Proposal

The Governor’s May Revision budget proposes multiyear funding to (1) complete the PAL planning process and (2) finish developing and implementing CalEmployee Connect. In total, the proposal requests 24 positions and $4.6 million (General Fund) in 2018‑19, 17 positions and $3.4 million in 2019‑20, 11 positions and $2.6 million in 2020‑21, and 11 positions and $1.9 million ongoing starting in 2021‑22. (Also included in these totals are costs for various contracts, including a procurement consultant.) Below, we describe the two major components of the Governor’s request.

PAL Planning Resources. The vast majority of the personnel and funding requested would be dedicated to the PAL process. Specifically, these resources would develop detailed system requirements, perform market research, identify opportunities to simplify state payroll processes, analyze various alternatives for the system, develop a procurement strategy for the project, and respond to the PAL documentation requirements.

SCO Would Complete PAL Process With Requested Resources. Based on the Governor’s request, SCO now anticipates completing Stage 2 of PAL in March 2020, about 1.5 years later than previously expected. SCO also anticipates it will complete Stage 3 in 2020‑21 and Stage 4 in 2021‑22. As such, with these requested resources, SCO plans not only to finish analyzing the alternatives under the PAL process, but also to move on to procuring a vendor that would deliver on the selected alternative. The development of the new payroll system would begin upon completion of Stage 4 (at which point, SCO would be likely to return to the Legislature with a request for project funding).

SCO Would Also Implement CalEmployee Connect Statewide With Requested Resources. SCO’s request also includes two years of funding to support five new positions to complete the statewide development and implementation of CalEmployee Connect. As noted previously, the initial portal was developed within SCO’s currently authorized resources. The resources requested in the May Revision would allow SCO to (1) make modifications to the portal based on feedback from SCO employees currently using the portal; (2) deploy the portal so that state and CSU employees can use it; and (3) develop the portal to include additional capabilities, such as allowing employees to adjust their own tax withholdings.

LAO Assessment

The Proposal

Critical Decision Point Occurs Between Stage 2 and Stage 3. The transition between the second and third stage of the PAL process will be critical. Upon completion of Stage 2, SCO will have finished evaluating the various project alternatives and will identify its recommended alternative. As such, once this analysis is complete, moving to the third stage requires departments to begin procuring a solution for the project based on the alternative selected in Stage 2.

Governor’s Proposal Limits Legislature’s Ability to Weigh In at Critical Decision Point. The Governor’s May Revision proposal asks the Legislature to fund the procurement-related activities in PAL (Stage 3 and Stage 4), despite the fact that Stage 2 is still in progress. Under the Governor’s proposal, SCO would have the resources necessary to begin procuring a new system in Stage 3 of the PAL process without a new funding request. As such, the proposal eliminates the Legislature’s opportunity to use the budget process to weigh in on which alternative should be selected. IT project procurement is complicated, time consuming, and costly. If the Legislature were not given an opportunity to review the alternatives before procurement began, SCO may invest significant time and resources on a procurement that does not align with legislative priorities.

CalEmployee Connect Significantly Improves Employee Self-Service Capabilities. CalEmployee Connect, the employee self-service portal, makes significant strides toward meeting a major objective of the CSPS project, enhancing the experiences of state and CSU employees. As SCO adds features to CalEmployee Connect, it could eventually achieve many of the online viewing and update capabilities envisioned by SCO in a new payroll system.

The New Payroll System

CSPS Could Be a Major, Costly IT Project. Replacing the state’s legacy system with a new IT project would likely cost the state hundreds of millions of dollars over many years. Moreover, as the state’s experience with the TFC project suggested, replacing the state’s payroll system carries many risks. While SCO has learned lessons from its experience with TFC and is carefully considering and preparing for problems that are likely to arise, planning for every possible scenario is impossible. As a result, in addition to the monetary costs of the system, the Legislature should consider potential risks to the payroll system as it makes a decision about whether to fund a future project.

Rationale for IT System Has Evolved Substantially. Figure 2 compares the three major rationales that SCO has cited as the reasons the state should replace its IT system. As the figure shows, the rationale for the project has changed substantially. When the TFC project was introduced, the major reason for replacing the system was stability: SCO cited the aging infrastructure as a potential source of a major payroll disruption. However, the department has now suggested that the system remains stable and viable for the foreseeable future (and it did not mention these fundamental risks in its Stage 1 analysis). As we discussed above, SCO’s ongoing CalEmployee Connect project can likely address many of the goals for state employees to access and update payroll data. This leaves administration and operations concerns as the main underlying motivation for a new IT system.

Figure 2

Rationale for Information Technology System Has Evolved Substantially

Technology Stability and Security

Operations and Administration

State Employee Experience

Past Statements (TFC)

✓ Principal rationale for replacing the system.

Added rationale.

Added rationale.

Recent Statements (CSPS)

No longer a driving concern.

✓ Principal rationale for replacing the system.

No longer a driving concern.a

aWhile the State Controller’s Office cites the state employee experience as a rationale for the project in its Stage 1 analysis, it would also achieve many of these objectives with its new initiative, CalEmployee Connect.

TFC = Twenty‑First Century project and CSPS = California State Payroll System.

Past IT Systems Offer Improved Functionality, but No Net Cost Reductions. In discussing its goals for the system, SCO often notes that it could achieve efficiencies or reduce staff resources. While these efficiencies are possible, they are unlikely to outweigh the costs of the new system, on net. However, a new system also could have other benefits, such as improving the accuracy of payroll data. This is consistent with many state IT projects which offer new functions, but rarely achieve net cost savings. In the coming years, the Legislature can assess whether these benefits outweigh the system’s costs.

Legislature Will Face Decision to Fund Payroll System in a Few Years. As we noted earlier, the project will face a critical decision point at the end of Stage 2 in a couple of years. However, the Legislature will have another important opportunity, at a later stage, to make a decision about whether or not to approve the project. That is because, even if the Legislature approves the May Revision proposal as it is, funding the PAL process would not mean committing to funding the entire CSPS project. Once SCO completes planning the project (after Stage 4), we expect the next Governor will request funding to begin designing, developing, and implementing the IT project. This will be an opportunity for the Legislature to review the complete project plan. At that point, the Legislature can determine if the project objectives and approach have merit given the benefits (which will largely be concentrated as improvements in operations and administration), cost (both monetarily and in terms of risks), schedule, and the Legislature’s own priorities.

LAO Recommendations

Recommend Approving Funding for the CalEmployee Connect Resources. We recommend the Legislature approve SCO’s request for funds to finish piloting and implementing the CalEmployee Connect project. This employee self-service portal makes significant strides toward meeting a major objective of the CSPS project and enhancing the experiences of state and CSU employees. It also may accomplish all this at a relatively low cost.

Recommend Approving Funding for Stage 2, but Not Yet Stage 3. It makes sense for SCO to continue evaluating its current payroll processes and systems through the comprehensive planning process it is currently undertaking. As such, we recommend the Legislature continue providing funding for Stage 2 of the PAL process. As noted above, however, the Governor’s proposal prevents the Legislature from using the budget process to weigh in on the selected alternative in Stage 2 before proceeding with Stage 3. As such, we recommend the Legislature direct SCO to present its full findings from the Stage 2 alternatives analysis, alongside its preferred alternative, before it receives funding for Stage 3. This would provide the Legislature with a clear opportunity to provide meaningful input and weigh in with its own priorities for the CSPS before a solution is procured. Specifically, the Legislature could implement this recommendation by:

  • Rejecting Ongoing Resources, Approving Two-Year Resources. First, the Legislature could reject the Governor’s proposal to approve the PAL-related resources on an ongoing basis. Instead, we recommend the Legislature approve the PAL resources as two-year, limited-term positions until the end of 2019‑20, when SCO anticipates completing its Stage 2 analysis.
  • Adopting Trailer Bill Language. Second, we recommend the Legislature adopt trailer bill language that requires SCO to come before the Legislature with its initial results from the Stage 2 analysis and its proposal alternative in January of 2020. If SCO is unable to meet this deadline, the Legislature could approve these planning resources for one additional year (until the end of 2020‑21) and SCO could return in January of 2021 with its proposal.