Despite string of problem projects, firm continues to win state work
SACRAMENTO — When state officials wanted a computer system to track the cost of therapy, transportation and other services for 240,000 disabled Californians, they hired Deloitte Consulting.
After four years, the Department of Developmental Services decided the new system didn’t work as needed and canceled the project after paying Deloitte $5.7 million.
That same month in 2006, the Department of Industrial Relations hired the New York-based company to computerize its monitoring system for workers’ compensation claims. Deloitte struggled to get a package of off-the-shelf software to work for the mammoth bureaucracy. The project was eventually completed at twice the $24 million it was budgeted for.
In the costliest collapse of a state computer project, Deloitte received $310 million before the state pulled the plug in March on a project to link every court computer in California. The system was supposed to cost $33 million.
Despite its record, Deloitte has continued to win contracts, in part, critics say, because of its adept lobbying of state and local officials.
The company, its affiliated firms, employees and a political action committee they formed have spent nearly $2.2 million on lobbying, campaign contributions and gifts to officials in the last 10 years. Over the last two years, the company has spent more on influencing legislators than any other competing firm in its field.
Deloitte spokesman Jonathan Gandal said problems on projects were often the result of costly design changes by state agencies.
“Because of the quality of Deloitte’s work, the expertise of our people and the value of our services,” he said, the company is asked “to provide additional features and services beyond the scope of our original contract.”
He said the firm has met the requirements of its various contracts and helped California “deliver higher-quality services at lower cost to taxpayers.”
But Bob Stern, the former head of the nonprofit Center for Governmental Studies in Los Angeles, said Deloitte’s troubles can’t be all blamed on the capriciousness of state agencies.
The company’s projects have sparked critical audits and legislation designed to prevent it from winning new projects. The firm’s efforts to keep its contracts also triggered a state ethics investigation.
“It’s amazing to me, given past performance, that this company keeps getting contracts,” Stern said.
In the last decade, state agencies have awarded the company — one of the nation’s largest management and information-technology consulting firms — more than $540 million in contracts, making it the third-highest-paid IT contractor hired by the state, behind IBM and Electronic Data Systems Corp.
The firm is one of just a handful that government agencies say can handle large information technology projects and so, the state has gone back to the company for many of its projects.
The company is currently working on three projects — a child support enforcement system, prison health tracking system and disability insurance automation system — that were approved in the last two years and have not suffered significant problems.
In 2003, Deloitte secured the court system contract by beating out bidders such as Northrop Grumman Corp., Sierra Systems Group Inc. and ACS Government Systems. Other companies submitted lower bids, but Deloitte had secured a top rating on technical prowess.
As the project developed, the software had to be replaced nine times at six civil courts using the system because of defects. System crashes would intermittently paralyze those courthouses. Deloitte’s contract, however, did not require it to fix all of the defects because the warranty expired before the system went online.
Those problems prompted a legislative committee to order an audit in 2011. The review found that the computer network, which was supposed to be finished in 2009, might not be finished until 2016 and could cost up to $1.9 billion.
Deloitte executives lobbied to keep the project going.
Among them was Alfonso Salazar, a former undersecretary for the California Trade and Commerce Agency. Salazar had been the agency’s second-in-command when it hired Deloitte in 2001 to create an international trade website.
Just before the state audit was released, Salazar and two other Deloitte representatives visited key lawmakers. The executives argued that court officials had repeatedly changed the project and were responsible for the delays and cost increases, according to legislative aides who were present.
“They were saying, ‘We are not the problem,’” recalled Craig Reynolds, chief of staff for state Sen. Lois Wolk (D-Davis), a member of the legislative committee that ordered the review.
Salazar did not return calls seeking comment.
Unable to afford to complete the more expensive project, the state halted deployment of the system after it had been partially installed in seven of California’s 58 counties. Deloitte agreed to repay $16 million to compensate for delays caused by “numerous quality issues,” a state report said.
Deloitte mobilized its lobbyists in 2008 to fend off a bill intended to punish the company for cost overruns and delays.
The company was building a mammoth $95-million computer payroll system for the L.A. Unified School District. But when the system was unveiled in 2007, it didn’t work. Tens of thousands of teachers were overpaid by a total of $60 million; many others received too little pay.
Gandal said the district’s payroll requirements were labyrinthine, and the system’s problems were “a direct result of the uniqueness and complexity of the contracts negotiated by the school board with the teachers’ union.”
School officials, however, said the company did not deliver what it promised. The district demanded millions to fix the system.
Kevin de Leon, then an Assemblyman from Los Angeles, introduced a bill that would impose a five-year ban on government contracts for IT companies that were sued successfully for breach of contract.
The company hired lobbyist Frank Molina, a former legislative chief of staff, to fight the legislation.
State Sen. Lou Correa, a Democrat from Santa Ana, said Molina — a former legislative ally — met with him before the vote and shifted the blame to the district. “He said there were other issues … that did not have to do with Deloitte,” Correa recalled.
The bill failed. “They flexed their muscle,” De Leon said.
Deloitte ultimately agreed to repay L.A. Unified $8.25 million and forgave $10 million in unpaid invoices to cover about half the cost of fixing the payroll system.
The company paid Molina $122,000 over two years to fight De Leon’s proposal and help the firm land another government project, according to its state filings.
A state ethics investigation found that Deloitte failed to disclose the lobbying to the public, as required by law, and fined the company $8,000 in April 2011. Molina was fined $30,000 for not reporting his lobbying and payments from the firm.
Deloitte officials said they had asked Molina to handle the filings and issued a statement offering “regret that this situation occurred.”
A current lawsuit, filed in state court last year, claims that Deloitte tried to improperly influence a Marin County manager who was overseeing the construction of an $11-million financial management and payroll system.
On a November evening in 2006, two Deloitte executives treated the manager to dinner at a San Francisco restaurant as they weighed what to do about the system’s problems. Assistant Auditor-Controller Ernest Culver recorded the occasion in a log: “After a really hard day, it was a great finish. 5 hours, $200 each!”
Culver also wrote of other dinners with Deloitte executives, including one a month later at which an executive supposedly had said that Culver would be an “excellent fit” for a job with the firm.
In the three months that followed, Culver moved to expand the contract and signed off on 22 payments and change orders for Deloitte’s work on the system, which county officials allege in the lawsuit was riddled with malfunctions and has to be replaced.
Culver himself had described the project in a document as a “shopping cart careening down the hill” — but successfully pushed county supervisors to increase its budget by $3 million, according to court documents.
The lawsuit alleged that Deloitte’s work was “defectively designed” and “deficiently installed.” It accused the company of “corruptly enticing” Culver so he would sign change orders to boost the project’s cost.
In 2007, Culver was hired by SAP Public Services, which had partnered with Deloitte on the project.
Culver and Deloitte representatives have said they did nothing wrong.
Gandal, in an email, called the lawsuit “frivolous” and said the allegation “that we attempted to improperly influence a County official is utterly without merit.”
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