The 2025-26 Budget

The California State Payroll System IT Project

Summary

Replacement of State’s Aging Payroll Systems Soon Underway. In a few months, the State Controller’s Office (SCO) and the California Department of Human Resources (CalHR) will start development and implementation of the California State Payroll System (CSPS) information technology (IT) project. After over two decades of failed efforts and subsequent planning activities, the CSPS IT project will replace the state’s current payroll system—an amalgam of 12 different aging systems, some of which are nearly 50 years old—with a new payroll system. This replacement, however, will cost an estimated $1.2 billion and take six years to complete. Initial funding for the primary vendor costs was requested shortly after the project was approved through the state’s IT project approval process in January 2025, but a larger budget change proposal is expected at May Revision.

Complexity and Cost of New Payroll System Necessitates Legislative Oversight. The CSPS IT project is one of the costliest and most complex IT projects in the state’s current IT project portfolio. Moreover, nearly every state department as well as upcoming state collective bargaining efforts will be impacted by the development and implementation of this project. Risks associated with both the continued failure to replace the state’s aging payroll systems (such as future litigation) and the development and implementation of the new payroll system (such as cost increases and schedule delays) suggest continued and possibly heightened legislative oversight of the project will be necessary.

Several Issues for Legislative Consideration Ahead of May Revision Proposal. Issues for legislative consideration and questioning include: (1) the adequacy of the change management activities required to prepare departments for future onboarding to a new payroll system; (2) the additional costs to departments to implement CSPS not captured in the approved baseline project cost; (3) the composition and timing of departmental onboarding waves during the last three calendar years of the project schedule; (4) the impacts of collective bargaining on project activities; and (5) the level of legislative oversight needed to ensure the project remains on time, on track, and within budget.

Background

CSPS IT Project Will Replace State’s Aging Payroll Systems. The state’s current payroll system—known as the Uniform State Payroll System (USPS)—is an amalgam of 12 different systems, all of which are aging and some of which were developed nearly 50 years ago. These aging systems make it difficult for the state to, for example, change how state employee payroll is calculated and disbursed based on updates to federal and state law. For over two decades, SCO—which is responsible for issuing pay to the state workforce—has led state efforts to plan, develop, and implement a new state payroll system. An initial effort—the 21^st Century (TFC)/MyCalPAYS IT project—started in 2004 and was suspended in 2013. (For more information about the TFC/MyCalPAYS project, please see the appendix to our March 19, 2014 report—The 2014-15 Budget: 21^st Century Project Update.) In 2016, SCO—together with CalHR, which supports state human resources (HR) and labor relations policies and practices—started planning the current effort, the CSPS IT project.

SCO and CalHR Planned CSPS IT Project Through State’s IT Project Approval Process. SCO and CalHR worked with the California Department of Technology (CDT), in consultation with the Department of Finance (DOF), to plan the CSPS project through the state’s IT project approval process—the Project Approval Lifecycle (PAL). The primary purpose of the PAL process is to improve the planning of state IT projects through four discrete stages, all of which taken together create a complete project plan with a baseline cost, schedule, and scope that is approved by CDT and DOF. The four stages of the state’s PAL process, and some of their associated activities, are briefly described below:

• Stage 1 Business Analysis. The project identifies its sponsors and stakeholders, justifies its business case, provides the potential outcomes of the project, and initially identifies the project funding source(s) and start date.

• Stage 2 Alternatives Analysis. The project evaluates a number of solutions using market research, and then identifies a recommended solution with a preliminary baseline project cost, schedule, and scope.

• Stage 3 Solution Analysis. The project creates a procurement plan as well as primary vendor and ancillary vendor (if needed) solicitation documents.

• Stage 4 Project Readiness and Approval. The project completes its procurement activities, awards a contract(s), and completes a final review of the project plan with an updated baseline project cost, schedule, and scope.

$88.3 Million Spent on CSPS IT Project Planning Through PAL. As of January 2025, the CSPS IT project had spent $88.3 million of the $128.7 million budgeted for the project through June 2025. The $40.4 million balance is expected to be used in 2024-25 for any remaining planning activities and to start development and implementation of the project. Provisional budget bill language in the 2024-25 Budget Act also makes available an additional $10.4 million for development and implementation costs in 2024-25 once the project is approved by CDT through the PAL process and provides a written notification to the Joint Legislative Budget Committee (JLBC) for review over the next 45 calendar days.

CSPS IT Project Affects Nearly Every State Department. One of the important reasons the CSPS IT project went through the PAL process is that nearly every state department will be impacted by the project. The project will affect both civil service state departments that process their own HR and payroll work (that is, “processing departments”) and departments that do not and instead rely on a processing department for such work (that is “non-processing departments”). (Non-processing departments may, however, perform other work impacted by the system, such as processing of travel advances and expense reimbursements.) As of December 2022, there are 158 civil service state departments—91 processing departments and 67 non-processing departments. For CSPS to be successful, processing departments will need to consider how to adjust their HR and payroll processes and train existing and new staff based on the requirements of the new system. To help with business process changes and staff trainings, CSPS anticipates that a significant amount of change management will be necessary. (Change management is how a department prepares for and implements the business processes, functionalities, and other changes that come from a new IT system. For example, change management includes creating or modifying department workflows based on the capabilities of the new system; training new and existing staff how to use the system; and updating existing IT systems, as needed, to interface with or provide data to the new system.)

Department/Agency Readiness Teams (DARTs) Created by SCO and CalHR to Facilitate Change Management Activities. SCO and CalHR will coordinate change management efforts for the CSPS IT project using DARTs, which are individual teams of department staff assigned different roles and responsibilities for project-related communication, subject matter expertise, and training. Only one out of six roles on a DART—the liaison, which is CSPS’s single point of contact with the department for change management efforts—requires a department staff’s full-time commitment. The remaining five roles—the reporting coordinator, scope/capability subject matter experts, sponsor, technical coordinator, and training coordinator—require partial time commitments by one or more staff that vary between several hours per calendar quarter to up to 50 percent of available time. SCO and CalHR will provide funding for DARTs using an allocation methodology first introduced in the 2023-24 May Revision. A nearby text box provides an overview of this methodology.

CSPS IT Project Also Affects Collective Bargaining. In addition to its departmental change management efforts, the CSPS IT project will communicate with 21 state bargaining units about the business and process changes associated with the new payroll system. Some of these changes also may go through the collective bargaining process, such as changes in pay frequency. For CSPS to be successful, CalHR (as the state’s representative at the bargaining table) and the unions representing bargaining units will need to agree on any major changes from the new payroll system that impact most of the state workforce.

Current Project Status

CSPS Recently Completed the State’s IT Project Approval Process… In January 2025, CDT approved the CSPS IT project through the final stage of the PAL process—the Stage 4 Project Readiness and Approval. This approval by CDT allows the project to begin development and implementation of the project after the contract award to the primary vendor. (The primary vendor is the vendor tasked with development of the new IT system.) The approved baseline cost of the CSPS IT project is about $1.2 billion, of which roughly 60 percent (or $700 million) is General Fund and 40 percent (or $450 million) is from the Central Service Cost Recovery Fund—a fund that recovers the costs incurred by certain agencies and departments for services shared by nearly all departments. Specifically, $171 million of the project cost is for DART funding. The approved baseline project schedule anticipates project completion in September 2031, meaning the development and implementation of the new payroll system is expected to take about six years. The onboarding of departments onto the new payroll system, which will occur in waves, could begin as early as May 2028.

…But Must Submit Revised Cost Documents, a Detailed Project Schedule, and Updated Project Plans to CDT. Approval of the CSPS IT project through the PAL process includes a number of conditions that require the submission of revised cost documents, a detailed project schedule, and updated project plans to CDT within a certain time frame. Some of these conditions attempt to align the forthcoming May Revision budget proposal (which we discuss later) with the project cost documents or incorporate additional information that is only available once the primary vendor contract is awarded (such as updated project management and testing plans). As a result, the Legislature can expect at least the approved baseline project cost of about $1.2 billion and the specific amounts from each funding source to be further refined after the revised cost documents are submitted to CDT.

JLBC Received Written Notification of CDT Project Approval to Access 2024-25 Funding. Shortly after CDT approved the CSPS IT project through the PAL process, DOF notified the JLBC of the project’s approval through PAL and its authorization of the $10.4 million available for development and implementation costs in 2024-25. SCO and CalHR expect the $10.4 million to cover some primary vendor costs from March 2025 to June 2025. Over the past 45 days, the JLBC has reviewed the requested allocation alongside the most current project documentation, gathering some of the information shared in this post. This post, however, does not raise any concerns with the requested $10.4 million.

Forthcoming May Revision Proposal Will Request Annual CSPS IT Project Development and Implementation Funding. We understand that SCO and CalHR plan to submit a budget change proposal for the CSPS IT project at May Revision that will request the first full year of project development and implementation funding (as well as other project-related funding). This budget change proposal will be informed by additional information from the primary vendor and revised cost documents. We will review the proposal at that time, and provide our assessment and recommendations to the Legislature.

Issues for Legislative Consideration

As discussed previously, at an estimated cost of about $1.2 billion and a schedule requiring about six years of development and implementation, the CSPS IT project will be one of the most costly and complex IT projects in the state’s current IT project portfolio. Furthermore, the project will impact nearly every state department, as well as upcoming state collective bargaining efforts. Given the short time frame in which the Legislature will be able to review the administration’s May Revision proposal on this project, we raise a number of issues for legislative consideration as well as potential questions to ask the administration about its forthcoming proposal.

Project Success Will Hinge on Robust Change Management Activities. The success of the development and implementation of the CSPS IT project will depend on whether or not change management activities sufficiently prepare departments to onboard onto the new system. Very few IT projects impact nearly every state department. Past examples of such projects include the Financial Information System for California and underscore the need for significant and thorough planning and execution of change management activities from the outset of the project. The Legislature will need to understand and monitor how DARTs and other change management activities are preparing departments for adoption of a new payroll system. Questions for the Legislature to ask include:

• How will SCO and CalHR work with DARTs to ensure their department’s business processes align with the new requirements and technical implementation of CSPS?

• How will SCO and CalHR work with DARTs to provide the requisite training for existing and new departmental staff to effectively use CSPS?

• What other alternatives to DARTs did SCO and CalHR consider when planning the change management efforts for this project? Would SCO and CalHR consider any of the alternatives if DARTs prove to be ineffective at coordinating change management activities for CSPS?

Departments Will Need Additional Funding to Implement CSPS. The breadth of departmental impacts from the CSPS IT project means at least some departments will need additional funding to adopt the new payroll system. Departmental costs to build interfaces from existing internal HR and payroll IT systems to CSPS, hire additional staff (if, for example, information is required by the new payroll system that was not required by USPS), and modify or replace existing internal IT systems (among other costs) are not included in the total project cost. Based on experience with other IT projects with statewide impacts, it is likely these costs will total tens of millions of dollars. Funding for these costs would be individually requested by departments alongside the annual development and implementation funding request from SCO and CalHR for the project. Questions for the Legislature to ask include:

• How will SCO and CalHR, in coordination with DOF, track the additional funding requests from departments for activities related to this project to better understand the true total project cost?

• Will CSPS require additional detail or information that is not currently required by USPS? If so, how will existing and new departmental staff be prepared for these new requirements?

• Will SCO and CalHR help departments develop and implement interfaces between their existing HR and payroll IT systems and the new payroll system? If so, how?

Timing of Department Onboarding to New Payroll System Matters. The current project schedule (which will be further refined after the primary vendor is onboarded) anticipates at least a dozen different waves of departments will onboard to CSPS over almost three calendar years, starting in May 2028. At least 91 processing departments (and, for some processes, nearly all state departments) will need to onboard to CSPS, but there is currently no information about which processing departments will be included in each of the waves. It is important for the Legislature to understand both the composition and the timing of this onboarding process. If, for example, most “medium,” “large,” and “mega” processing departments are deferred to later onboarding waves, there is a substantial risk of a delay in the project schedule (and an increase in project costs) if at least some of those departments’ onboarding is unsuccessful. Questions for the Legislature to ask include:

• How will the CSPS IT project assess the risk associated with onboarding each of the departments? Will any assessment of risk primarily rely on the size-based processing department classifications, or will other information be considered?

• What criteria will SCO and CalHR use to determine which departments to include in each of the onboarding waves? What feedback will be solicited from departments, the primary vendor, and other project stakeholders to inform this determination?

• When will the Legislature know the final composition of the onboarding department waves and their onboarding schedule?

Impacts of Collective Bargaining on Project Activities Needs to Be Well Understood. There are some HR and payroll changes in the development and implementation of the CSPS IT project that will need to be negotiated through collective bargaining. While we understand that CalHR is engaged in this work, there will need to be continued engagement with bargaining units and their unions over the next several years. Any disagreements between CalHR and unions representing bargaining units over project-related changes could delay the project and increase its costs. Also, the project’s risk register—a tool to identify potential risks to the completion of a project—cites upcoming collective bargaining in 2026 as a potential risk to the project schedule. A majority of state bargaining units must renegotiate new agreements that year, which is a significant amount of work for both CalHR and the unions representing bargaining units. This work could delay the other work CalHR and others need to do to complete the project. Questions for the Legislature to ask include:

• How does CalHR communicate with unions representing bargaining units on project-related changes to their departments’ HR and payroll work? What has been the initial response from unions about these changes?

• How do SCO and CalHR plan to mitigate the collective bargaining risk in 2026 to avoid a potential delay in the project schedule?

• What additional efforts will be made to prepare unions representing bargaining units as onboarding of departments begins in early to mid-2028?

Legislative Oversight of Complex, Costly IT Projects Is Critical. Historical experience with complex, costly state IT projects like the CSPS IT project suggests legislative oversight of CSPS will be critical going forward. Currently, the primary legislative oversight mechanism for this IT project is quarterly meetings between legislative and project staff to review monthly executive status reports with updates on the project’s accomplishments and work in progress, issues and risks, and schedule. As the project begins development and implementation, CDT will provide monthly independent project oversight reports (focused on the project’s progress according to its baseline cost, schedule, and scope) and a third-party vendor will provide monthly independent verification and validation reports (focused on the primary vendor’s technical implementation of the new payroll system). If the project meaningfully deviates from its approved baseline cost, schedule, and scope, additional legislative oversight mechanisms might be required. Questions for the Legislature to ask include:

• How will SCO and CalHR modify the quarterly legislative staff meetings once the primary vendor is onboarded and project development and implementation begins? Will additional information be shared about, for example, the change management activities led by DARTs or vendor contract amendments and their associated cost?

• What information will the CSPS IT project provide through the budget process to the Legislature to support annual requests for development and implementation funding?