Cal State Over Budget on Software

A large new computer system being developed by California State University exceeds projected costs by at least $200 million and may have been poorly conceived from the outset, the state auditor said Tuesday.

In a sharply critical report, California Auditor Elaine M. Howle said the cost of the management software system, intended to track personnel, financial and student records on the 23 campuses, is expected to reach $662 million, dwarfing an estimate of $440 million in 1999.

In addition, she said, Cal State launched the project without properly justifying the need for the system, one of the largest software projects ever undertaken in higher education.

“We didn’t see any indication that they established a clear business case that this would be a good thing,” Howle said in an interview. “They didn’t put together a feasibility study and say, ‘OK, what are we hoping to accomplish with this system, and what will be the benefits and what will be the costs?’ ”

Howle’s office also found what it termed an apparent conflict of interest related to the purchase of the new software system involving David J. Ernst, Cal State’s chief information officer and assistant vice chancellor.

She said Ernst, while on the Cal State payroll as a technology strategist from 1996 to 1998, received at least $20,000 in fees for travel and consulting work from the company that in 1998 won the main contract for the project, PeopleSoft Inc. of Pleasanton, Calif.

The auditor’s office has asked the Fair Political Practices Commission to review whether Ernst violated state law.

“We think he was involved in some key activities related to the selection of the vendor [PeopleSoft], and that’s why we’re raising the concern that there’s certainly an appearance of a conflict of interest,” Howle said.

Ernst denied any conflict, saying Tuesday that he was “totally upfront” with the university about his ties to PeopleSoft. He said he had informed Cal State officials that PeopleSoft had hired him to serve as moderator at a series of six or seven conferences for top officials at other universities doing business with the company.

When it looked like PeopleSoft was going to bid on the Cal State contract, Ernst said, “I excused and recused myself from all the meetings where decisions were made or decisions were recommended. When people asked why I wasn’t attending the meeting, I said it was because I didn’t want there be an apparent conflict of interest. Everyone knew.”

PeopleSoft officials said they could not immediately confirm whether they had made any payments to Ernst and that they would review their records to determine what happened.

Cal State Chancellor Charles B. Reed said CSU was vindicated by the audit in that it found no criminal wrongdoing and mostly focused on procedural matters that the university agrees need improvement.

“Nowhere in the audit did they find any wrongdoing, as far as procurement, bidding and selection,” said Reed, who began as chancellor in March 1998, just after Cal State began work on the software system. The development of the system, on a campus-by-campus basis, is expected to continue until the 2006-07 fiscal year.

“We can improve on what we’ve done and, if we had to do things over again, we would probably do, procedurally, some of the things differently,” Reed added, citing management and accounting practices.

Reed acknowledged that Ernst participated in the initial work on the project, and “the auditor said he should not have participated. I understand that.” He pledged to begin ethics training and to adopt procedures recommended by the auditor to prevent a recurrence.

Other university officials protested that the auditor was using an unorthodox approach to tally costs for the project, including expenses for maintenance and operations that normally aren’t counted in a new project. They and the auditor said that accounted for most of the $200-million gap.

But Cal State faculty and staff unions have complained that spending on the software is diverting badly needed money from academic programs at a time when the state is in the midst of a budget crisis, student fees are likely to rise and colleges are facing cutbacks.

At the unions’ prodding, Howle’s office was asked to review the project by state Sen. Richard Alarcon, an east San Fernando Valley Democrat and member of the education committee, and Assemblyman Manny Diaz (D-San Jose), who heads the budget subcommittee on information technology and transportation.

“For us, the issue has been a deep concern about basically robbing students in the classroom to pay for a project that the auditor suggests may not have been the best idea to begin with,” said Susan Meisenhelder, president of the California Faculty Assn.

“As we’re facing reduction in classes, laying off of professors and lecturers, it becomes even more troubling to think we’re not being more careful” with money, she said. Diaz and Alarcon plan to hold a news conference today to call for a legislative hearing to explore Cal State’s software system deal.

“We’re talking about a major investment here of taxpayer money, and when I read [in the audit] that there was no cost-benefit analysis, and that there was no business model that was looked at, and yet the decision was made to go ahead with this system, it raises a lot of concerns for me,” Diaz said.

Alarcon said he also was worried that the alleged conflict of interest involving Ernst might amount to criminal wrongdoing and that he may call for an investigation by law enforcement authorities.

“The fact that the chief information officer for the Cal State University system was receiving money from a prospective contractor to set up meetings with people in the Cal State University system and claims to have recused himself from the process when, in fact, it’s his job to manage this system -- what are we paying him for?” Alarcon said. “I’m not concerned about recusing as much as I question why he took the money in the first place.”

Cal State chose PeopleSoft for what is known as the Common Management System to replace a mishmash of incompatible software systems dating back in some cases to the 1970s.

According to the auditor’s office, the new system was informally projected by Cal State in 1998 to cost in the range of $332 million to $400 million. The following year, according to the auditor, Cal State issued the official estimate of $440 million.

The auditor said Cal State failed to include in its official estimate spending by campuses on maintenance, operations, implementation and other work by their employees.

Howle said it was important in this case to account for these additional expenses because Cal State’s computer-related expenses grew by the introduction of the new system.