Upgrade to state payroll system hurt by lax oversight, report says

SACRAMENTO — An expensive upgrade to the state payroll system was undermined by lax oversight and unrealistic expectations from the controller’s office, according to a legislative report Monday.

Officials also sent rosy updates to lawmakers even as the $373-million project was faltering, the report said.

The botched undertaking was years overdue and three times its original cost when it was halted in February after testing revealed serious problems. By then, the state had sunk $254 million into the effort, with $50 million going to the contractor, SAP Public Services.

Controller John Chiang’s office has blamed SAP for the stalled project and on Monday released its own review accusing the company of delivering “an unstable payroll system.”

But the report, issued by the Senate Office of Oversight and Outcomes, says state officials are also at fault.

“The project suffered from lapses in due diligence, a failure to resolve core issues raised early and often, chronic turnover in leadership and what may have been unrealistic expectations,” it said.

Lawmakers have scheduled a hearing Thursday to review the project.

An independent review promised by officials earlier this year was put on hold as the state prepared for a possible court fight with SAP, a decision that has troubled legislative analysts.

They point out that the state is pursuing dozens of other technology projects worth $5 billion, and lessons from the failed payroll upgrade could help save taxpayer money elsewhere.

“The dollar value of that benefit … could vastly outweigh the dollar value of the legal stakes we see right now,” said Chas Alamo, an analyst at the nonpartisan Legislative Analyst’s Office.

Known as the 21st Century Project, the overhaul of the decades-old payroll system was intended to unify and improve the way paychecks are issued to 240,000 employees across 160 state departments, agencies, boards and commissions.

The project’s complexity required hundreds of modifications to SAP’s software, increasing the project’s “difficulty and likelihood of failure,” the report said.

Jacob Roper, a spokesman for the controller’s office, said the customization was part of the contract reached with the company, which said it could get the job done.

Lawmakers requested regular updates on the 21st Century Project after it stalled for the first time in 2009.

However, “the quarterly reports often lacked candor, sugar-coating some problems and ignoring others,” the report said. “This failure to be transparent compromised legislative oversight and stymied accountability.”

Roper disputed the report’s finding, saying officials in the controller’s office held frequent meetings with legislative staff to provide updates on the project’s progress and setbacks.

The report said there were signs staff members were unwilling to learn a new system. After one training session, an official in the controller’s office sent an email to a contractor saying the “general feel in the class is one of negativity and hostility,” and “one participant slept quite a bit.”

“We believe we upheld our end of the bargain,” said Andy Kendize, a spokesman for SAP.

Roper said SAP failed to adequately train state employees, frustrating the controller’s office with inadequate and incorrect instructions.

The upgrade was tested on 1,300 employees for several months last year, with disastrous results. Many workers were paid too much or too little. Money was not sent to retirement accounts and health coverage was improperly canceled.

After SAP was fired from the project, the controller’s office assigned about two dozen workers to fix the errors, a process still underway.

chris.megerian@latimes.com