Our continued review of the Department of Child Support Services and Franchise Tax Board's (project team) procurement of a single, statewide automated child support enforcement system revealed the following:
In 1988, Congress passed the Family Support Act (act) requiring each state to establish a single, statewide automated child support enforcement system to track and collect court-ordered child support payments and to locate nonpaying parents. Although California has made two attempts in the last 10 years to meet the requirements of the act, its failures have resulted in the federal government imposing penalties on the State that may cumulatively total approximately $1.2 billion by federal fiscal year 2006. To relieve itself of the mounting penalties, in 2000 California began a project called the California Child Support Automation System (project) using a procurement approach intended to maximize vendor commitment to the project's success and minimize the risk to the State. On July 14, 2003, the State signed a contract with the IBM Group to design, develop, and implement the major component of the project, the child support enforcement system, for a total of $801 million.
Chapter 479, Statutes of 1999, one of several laws passed by the Legislature to restructure the State's child support enforcement activities, assigned the responsibility for procuring, developing, implementing, and maintaining the single, statewide automated child support enforcement system to California's Department of Child Support Services (department), with the Franchise Tax Board (board) as its agent. The legislation also requires the Bureau of State Audits (bureau) to monitor the evaluation and selection process for any signs of bias or favoritism toward any bidder.
In 2000, the project team, made up of staff from both the department and the board, began the procurement process by separating the project into two parts: a main system, referred to as the child support enforcement system, and a state disbursement unit, a separate system for collecting, disbursing, and recording child support payments. In December 2002, we reported on the project team's progress toward procuring the child support enforcement system through June 2002. That report discussed the project team's evaluation of the single bid it received, which was from the IBM Group and had a proposed contract price of almost $1.2 billion. According to the project team, this bid met the requirements outlined in the solicitation document. We also noted that during our evaluation of the process the team used to score the proposal, nothing came to our attention to cause us to conclude that the project team had deviated from the predefined evaluation criteria.
The project team's next step involved negotiating the terms of the contract. Because it had received only a single bid, it engaged a consulting firm to examine the reasonableness of that bid's costs. The consulting firm reported that the IBM Group's proposal might contain a premium of up to 25 percent for some of the contract costs to minimize its risks related to the project. The project's negotiation team negotiated a reduction in the contract price from the proposed $1.2 billion to $900 million. During this stage of the process, nothing came to our attention to indicate that the project team deviated from its predefined negotiation process. In addition to observing the contract negotiations, we also compared the business requirements and compensation approach included in the contract to the terms outlined in the solicitation document. We did not identify anything during our review that would cause us to conclude that the project team deviated from the requirements for these areas of the solicitation document.
Once the negotiating team and the IBM Group had agreed on a draft contract, the project team submitted a funding request to the federal Office of Child Support Enforcement (OCSE) in order to receive federal funding for the project at the maximum rate of 66 percent. The funding request included the draft contract and a feasibility study developed by the project team. Since the project team only received one proposal, it hired a consultant to develop an alternative for comparison purposes to select the child support enforcement system solution that presented the best value to California's Child Support Program. This alternative solution involved modifying Texas's child support enforcement system to meet California's needs. After comparing this alternative to the IBM Group's proposal, the project team concluded that the proposed solution from the IBM Group was the most cost-beneficial to the State.
Upon reviewing the funding request, the OCSE outlined a few conditions before granting its approval to the project team to execute the contract with the IBM Group. Most significantly, the OCSE stated that it would not provide its share of funding on $98.8 million of the contract cost. This amount represented what it felt were high labor costs and duplicative overhead costs. As a result, the project team presented a contract priced at $801 million to the IBM Group, which the IBM Group accepted. Once the project team resolved this and the other conditions imposed by the OCSE, the OCSE granted permission to the project team to execute the contract.
In addition to seeking federal approval, the project team also submitted the feasibility study to the Department of Finance (Finance). Within Finance, the Technology Investment Review Unit (TIRU) is responsible for ensuring that expenditures for state information technology proposals represent a prudent investment of resources while meeting the State's business needs. Like OCSE, TIRU placed certain conditions on its approval of the feasibility study, requiring, for example, that the project team submit a benefits measurement plan developed in conjunction with Finance within one year following the contract's signing. As required by the Budget Act, Finance also notified the Legislature that it felt the project was ready to move forward. In response, the Joint Legislative Budget Committee directed Finance to keep the Legislature informed of significant project developments and to provide the Legislature with annual progress reports.
Although the project team has now executed the contract for the child support enforcement system, it is still more than a year away from procuring a contractor for the state disbursement unit. By 2008, the project team anticipates full implementation of the single, statewide system.
The department and the board agree with the information contained in this report and feel that it accurately describes the progress made and the processes used for this procurement.