Hearing Set on Oracle Deal

SACRAMENTO -- State lawmakers will delve into the details of California’s controversial computer contract with Oracle Corp. today, hoping to learn more about a $95-million deal that gave the state more software licenses than there are state employees and that is turning into a major embarrassment for the Davis administration.

State officials are already moving to undo the contract after a scathing audit last month that concluded that there was little demand for the software, and that the deal would actually cost California taxpayers up to $41 million, a far cry from the $111 million in savings promised by a state consultant.

But lawmakers--particularly Republicans--want to know more, in light of subsequent revelations of document shredding at the technology department at the center of the probe, and an admission by Gov. Gray Davis’ e-government czar that he accepted a $25,000 check for Davis’ reelection from an Oracle lobbyist while the deal was being negotiated.

The tenor and scope of the hearings remain uncertain; Assembly Speaker Herb Wesson (D-Culver City) and Minority Leader Dave Cox (R-Fair Oaks) are scheduled to discuss the issue today in hope of reaching a bipartisan consensus.

But already, the Oracle flap has put the Democratic governor on the defensive and provided new fodder for his Republican opponent in November, businessman Bill Simon Jr., who has continually accused Davis of mixing fund-raising with the business of government.

It has also placed Sacramento’s Democrats in a precarious position, requiring them to react forcefully or face Republican criticism that they are protecting the governor. GOP lawmakers have already asked the federal government to conduct its own Oracle investigation, arguing that Democratic Atty. Gen. Bill Lockyer, whom Davis asked to investigate the matter, cannot be impartial because he accepted $50,000 from the software maker in recent months.

Davis has tried to distance himself from the Oracle deal, saying last week that he knew nothing of it before it was consummated, was moving swiftly to ferret out the bad actors, and that he was as “mad as anyone” about it.

Simon, who spent the last few weeks deflecting criticism over his refusal to publicize his tax returns, has in turn questioned Davis’ claims of ignorance and remarked that the “scent of scandal surrounding the administration is growing.”

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Audit Finds Little Scrutiny of Deal

The Oracle deal--which has already led to the resignation or suspension of three top Davis administration officials--took place last year with little legal scrutiny and no competitive bidding, according to the state audit released last month. Its roots go back to 2000, when the Department of Information Technology, a new agency created in response to the state’s costly computer boondoggles of the early 1990s, hired a consultant to explore better ways of buying software.

Logicon Inc. advised state officials that by agreeing to purchase computer software en masse through long-term contracts, the state could capitalize on economies of scale and supply thousands of state employees at far lower rates than departments could individually obtain. The so-called enterprise licensing agreements provide large packages of software, technical support and maintenance at a bulk rate, which can result in significant savings for large companies or governments with many computer users. Logicon, a reseller of such software, put together a draft “white paper” for the state on how to enter into the arrangements, which the state had never done before, without overpaying.

A survey of 127 state entities found that only five were potentially interested in banding together to purchase more Oracle software. Nonetheless, officials approved a contract for 270,000 software licenses last May--more than the state’s 234,000 employees--in part because of a Logicon projection that the state would save as much as $111 million over time.

The six-year contract was endorsed by Finance Director Tim Gage and General Services Director Barry Keene before it was approved in the governor’s office by Davis Cabinet Secretary Susan Kennedy, on May 31. A memorandum from the governor’s office that same day stated the deal had to be approved immediately because Oracle had to report fiscal year profits as of May 31, “and was therefore motivated for a limited time to offer the aggressive pricing,” which “would save the state an estimated $111 million, conservatively.”

The contract allows all state departments and employees to use Oracle’s database software, which can store, update and analyze complex reams of raw information. It also allows state and local government officials to purchase other Oracle products at a 50% discount through 2006. And it includes complimentary maintenance and technical support, which the state can opt to extend for four additional years.

Logicon’s savings estimate was never independently verified by the state, however, despite red flags thrown up by a unit of the Finance Department, and the audit concluded that rather than saving money, the deal would cost taxpayers as much as $41 million. A subsequent state survey determined that several large agencies, including the Justice Department, already had separate computer contracts with Oracle, and many, if not most, state employees will never use the new software.

“Without knowing the true costs and benefits of the contract, the state committed millions of taxpayer dollars to a questionable technology purchase,” state Auditor Elaine Howle concluded.

Moreover, under a side deal with Oracle, Logicon stands to make $28million from the contract, something state officials apparently did not know before signing it, the audit concluded. As a result, Lockyer charged Friday that the company may have violated state law by “serving two masters” in the negotiations.

Representatives of Logicon, which now goes by the name of its parent Northrop Grumman, dispute that contention, saying some state officials understood the company’s role well.

Though the Logicon consulting contract was not formally canceled until November, well after the Oracle deal was made, company representatives say the firm had stopped doing work for the state much earlier. Logicon never completed its original duties and was never paid for the work.

Oracle representatives, meanwhile, defended the contract last week as a good one for the state, even as they offered to rescind it. To support their position, the firm hired former state Auditor Kurt Sjoberg, who maintains that his successor’s audit is wrong and that the state would in fact save up to $110million over time as a result of the deal.

Howle stands by her figures.

“We are willing and able to rescind the offer from our perspective,” Oracle spokesman Jim Flinn said.

“However, we continue to believe it is a good deal for the state, but others are going to have to make a judgment about that.”

“If we sell that software on an annual basis or if we wrap it up in an enterprise license agreement, we just want to do what makes sense for our partner, the state of California,” added Ken Glueck, Oracle’s vice president of government affairs.

Davis’ reelection campaign reported receiving a $25,000 donation from Oracle on June 5, days after the contract was finalized. But Arun Baheti, the governor’s director of e-government, told top Davis aides that he accepted the $25,000 check from an Oracle lobbyist before the negotiations were complete and mailed it to the campaign. The check had a March date.

Glueck, who is responsible for all political contributions made by Oracle, said the company had agreed to give Davis the money as part of an April technology event hosted by Davis that was attended by roughly 30 companies. Delivery of the check was apparently delayed, he said, and was unrelated to the state contract.

“I simply had no knowledge that an enterprise license agreement was pending in any form or shape whatsoever,” Glueck said. “The fact is that we’re a major employer in the state, we’re the largest software company in the state, we have an interest in the political process and we participate, and it’s our right to do so.

“With 20/20 hindsight, could the timing have been better? Perhaps,” he added. “In hindsight, I understand how this could be interpreted.”

Baheti, a former Democratic Party official who worked on Davis’ 1998 election campaign, was forced to resign last week. His resignation followed that of Keene, the General Services director who was faulted for signing off on the deal without more careful review.

Elias Cortez, the embattled Information Technology director who is widely seen as the biggest booster of the Oracle pact, has been indefinitely suspended. And the Legislature is considering abolishing his department over the very type of computer fiasco it was created to avoid.

The California Highway Patrol rushed to department headquarters last week amid reports of document shredding in Cortez’s office, and authorities confirmed some shredding had taken place, though a spokesman for the department called it a routine disposal. Justice Department officials, who had already seized trash and computer files at the offices, plan to interview technology officials today about the shredding.

Not a single state employee has used the Oracle software to date, largely because the state has not developed procedures to bill departments for doing so. By the time it does in June, the audit concluded, the state will have racked up $17 million in costs and interest related to the deal.

“This whole thing is just astounding,” said Sen. Debra Bowen (D-Marina del Rey), a leading critic of the technology department.

Bowen is pushing a bill to ensure technology purchases go through the same conflict-of-interest checks as other state contracts. Davis and former Gov. Pete Wilson previously vetoed similar bills by Sen. Steve Peace (D-El Cajon).

“I tend to believe more in the incompetence theory than the conspiracy theory,” Bowen said, “but at some point you’ve got to wonder just how incompetent a state agency can be.”

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Point of Hearing May Soon Be Moot

The hearing today by the Joint Legislative Audit Committee is expected to attract hordes of reporters, but its ultimate purpose is now in question.

Assemblyman Dean Florez (D-Shafter), the head of the panel composed of lawmakers from both houses, says his goal has always been “to build a foundation for the unwinding of this contract.” That, however, is already underway.

Oracle and Logicon have both expressed a willingness to rescind the deal in light of overwhelming negative publicity, and the Davis administration is pressing to do so, which may soon make the actual contract a moot point.

Florez said he also wants to review the “mistakes that were made” to avoid repeating them.

Among the witnesses summoned to testify are Cortez--though Florez indicated late last week that he may no longer appear--and Debbie Leibrock, the finance official who raised objections to the deal. Florez also wants Oracle and Logicon officials to testify at some time in the future.

But some Republicans want to carry the inquiry much further--to assess possible criminality and ties to the governor’s office. They want to hear testimony from top Davis administration officials, including Kennedy, the Cabinet secretary.

Simon said he wants to see Garry South, the governor’s campaign manager, on the witness stand regarding the timing of the $25,000 contribution, an idea Florez quickly dismissed as ridiculous and politically motivated.

“If they pursue this with the same vigor they pursued [former Insurance Commissioner Chuck] Quackenbush, I think we could compliment them and say they did good work,” Sen. Ray Haynes (R-Riverside) said of the Democrats. “If they don’t, then we go through a partisan drill that is nothing more than window dressing. That’s going to be the test.”

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Times staff writers Tim Reiterman, Nancy Vogel and Mark Z. Barabak contributed to this report.