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Report Number: 2016-125.2
The University of California Office of the President The University of California Office of the President Increasing Costs and Scheduling Delays Have Hampered the UCPath Project and Originally Anticipated Savings Are Unlikely to Materialize

Introduction

Background

Founded by the Legislature in 1868 as a public, state‑supported, land‑grant institution, the University of California (university) is an extensive business enterprise. It has 10 campuses, five medical centers, numerous auxiliary organizations, and more than 200,000 employees. It is also involved in the management of three national laboratories and several research centers. Each year, it receives more than $30 billion in revenues from a variety of public and private sources, including $3 billion in state funding and $10 billion generated from its medical centers.

The California Constitution established the university as a public trust to be administered by the University of California Board of Regents (regents). As a result, the Legislature’s oversight of the university is limited to certain circumstances, such as specifying provisions that the university must meet before it can spend state appropriations. The head of the university is the president, to whom the regents have granted full authority and responsibility over the administration of all the university’s affairs and operations. In 2010 the regents passed a policy directing the president to achieve administrative efficiencies which included, among other initiatives, designing and implementing new information technology (IT) systems, such as student information systems, financial systems, human resources systems, and payroll systems. The California Department of Technology does not oversee development of the university’s IT projects. Rather, the university follows its own policies.

The Office of the President Intended UCPath to Replace the University’s Outdated Payroll System and Achieve Significant Cost Efficiencies

The Office of the President intends for its Payroll, Academic Personnel, Timekeeping, and Human Resources project, or UCPath, to integrate numerous payroll and human resource functions into one system. The Office of the President conceived UCPath in 2009, and it became a part of its Working Smarter initiative, an effort led by the Office of the President to achieve administrative efficiencies systemwide by reducing costs or increasing revenues. As Figure 1 shows, the Office of the President anticipated that when fully operational, UCPath would replace its existing Payroll/Personnel System (legacy payroll system), which has evolved into 11 variations in use across the campuses. In its 2011 business case supporting the implementation of UCPath, which was created two years before the current university leadership took office, the Office of the President noted that the legacy payroll system was more than 30 years old and was at significant risk of breakdown because of its aging technology. The legacy payroll system also has serious limitations, including high maintenance costs, limited reporting functions, reliance on manual processing, and inadequate capability for the university’s current payroll environment. In 2011 the university awarded a contract to Oracle Corporation (Oracle) to develop UCPath. At the time, the Office of the President estimated that development of UCPath would take three years and would cost $170 million to implement, and with other related costs, the project would total $306 million.

Figure 1
The Office of the President Envisioned UCPath as a Systemwide Payroll and Human Resources IT Solution

The Office of the President also envisioned that UCPath would allow it to restructure the number of staff handling payroll and human resources tasks systemwide. Specifically, the Office of the President assumed that UCPath would allow it to reduce the number of employees performing those tasks from 2,743 to 1,224 full‑time employees, which would result in significant savings for the university. In fact, 90 percent of UCPath’s projected $753 million in savings was based on this staff reduction and on the creation of a shared services center, known as the UCPath Center. The Office of the President intended the UCPath Center to take over payroll and human resources functions for all university employees from all university locations.

The Office of the President Has Repeatedly Delayed Implementation of UCPath, and the Project’s Estimated Cost Has Increased Significantly

The UCPath project has experienced several setbacks that have delayed the system’s planned implementation and increased its cost significantly. Figure 2 depicts a timeline of some of the events and decisions related to UCPath’s implementation. In early 2012, the Office of the President informed the regents that the first phase of UCPath’s rollout would begin in January 2013 with Wave 1¹ —the system’s deployment to the Office of the President, the Los Angeles campus and its medical center, and the Merced and Santa Cruz campuses as well as the deployment of the UCPath Center. Instead, in 2013 problems with UCPath’s development led the Office of the President to extend the project’s timeline by 12 months and to increase its budget to $221 million. Later that same year, the initial project leader left for reasons unrelated to the project. According to the UCPath’s current project director, the Office of the President released Oracle from its role as the implementation lead on the project in 2013 for failure to perform under its implementation contract and the Office of the President took over management of the project. Figure 2 also shows that once the Office of the President took over leadership, it extended the project implementation date three times.

Figure 2
The Office of the President’s Timeline for UCPath Has Been Affected by Leadership Changes and Schedule Slips

Various Office of the President executives and staff, and campus‑based leadership form a governance structure for the UCPath project. As Figure 3 shows, the Office of the President maintains a project management office and under the leadership of the project director, it oversees the day‑to‑day management of the UCPath project. The UCPath steering committee is responsible for making decisions on issues related to systemwide business processes. The steering committee refers issues that materially impact UCPath’s scope, cost, timeline, or deliverables to UCPath’s executive leadership team, which includes the chief financial officer and chief operating officer who are also the UCPath project sponsors, other Office of the President staff, and representatives from each campus. In their role as project sponsors, the chief financial officer and chief operating officer are the executives with overall accountability for the project.

Figure 3
The Office of the President Has Established a Governance Structure for the UCPath Project

The Office of the President has delayed UCPath’s deployment several times. Although the Office of the President originally projected that it would accomplish Wave 1 by 2013, it did not complete this deployment until November 2015 and then only to the Office of the President’s employees, as Figure 4 shows. The Office of the President currently plans to deploy UCPath at four university locations by the end of 2017 (Wave 2)—which our IT project management expert indicates will be an important milestone in the project’s ability to meet its cost and schedule goals. Currently, the Office of the President anticipates that it will complete the UCPath project by June 2019, after providing post‑deployment support for the university locations. It estimates that the project’s implementation cost will be $504 million, $334 million above its original cost estimate. We discuss the reasons for the project’s cost increases and schedule delays in the Audit Results.

Figure 4
The Office of the President Plans to Deploy UCPath in Waves

As UCPath’s Cost Has Increased, the Office of the President’s Project Funding Strategy Has Evolved

The Office of the President has employed a variety of funding sources to pay for the UCPath project as its cost has grown over time. Initially, the Office of the President borrowed $131 million through an internal loan program called CapEquip, which allows the university to finance capital projects; however, its maximum repayment period is seven years because CapEquip is a short‑term financing option. As UCPath’s cost escalated and its implementation schedule was delayed, the Office of the President required a longer repayment period and greater flexibility in structuring the project’s financing. Consequently, in 2014 the Office of the President received the regents’ approval to obtain $221 million in external financing for the project through a bond issuance in 2016. The Office of the President used a portion of the bond proceeds to repay CapEquip for early UCPath project costs and used the remainder to fund the ongoing project cost. As Table 1 shows, the university will pay bond interest and principal from fiscal year 2019–20 through fiscal year 2035–36, for a total of $331 million.

Although the Office of the President anticipated that the bond financing would be adequate, UCPath’s cost has far exceeded those available funds. To make up the funding shortfall, in fiscal year 2015–16 the Office of the President created an assessment to charge the campuses for project implementation funding and the debt associated with the $221 million bond. Beginning in fiscal year 2016–17, the Office of the President created a second assessment on the campuses. The UCPath operations assessment is for the cost to operate the UCPath Center and to maintain the legacy payroll system as the various waves deploy UCPath. Previously, these costs were included in a general assessment the Office of the President charged the campuses. As Table 1 shows, the Office of the President had assessed the campuses a total of $174 million to pay a variety of UCPath project‑related costs through fiscal year 2016–17. Through June 2019, the Office of the President has planned to assess the campuses an additional $252 million for project costs, bond interest, and operations costs. If the Office of the President moves forward with this plan, its current project forecasts show that the assessment for implementation costs will end in fiscal year 2018–19 with only bond principal and interest payments remaining.

Table 1
The Office of the President Has Levied Assessments on the Campuses for UCPath’s Implementation and Operations Cost
(In Millions)

	Assessments Charged Through Fiscal Year 2016–17	Assessments Projected Through Deployment (Fiscal Years 2017–18 and 2018–19)	Bond Repayment After Deployment (Fiscal Years 2019–20 to 2035–36)	Total
Assessment—Project Implementation	$143	$122	—	$265
Assessment—UCPath Center*	31	125	—	156
Bond Interest†	—	5	$110	115
Bond Principal	—	—	221	221
Totals	$174	$252	$331	$757

For fiscal year 2019–20 and beyond, the Office of the President has planned that the campuses will pay the UCPath Center’s ongoing operations cost through an additional assessment. This cost is estimated to start at a total of $74 million a year in fiscal year 2019–20 and increase by approximately 3 percent annually. However, the Legislature recently made changes to the way it provides funding to the university that may affect the Office of the President’s plans. Specifically, the State’s Budget Act of 2017 (Budget Act) directly appropriates funds to the Office of the President, including an appropriation for UCPath of $52 million. That appropriation was contingent on the university president certifying in writing that the campuses would not be assessed to support the Office of the President’s operations for fiscal year 2017–18 and that overall campus revenues would be greater than the previous fiscal year.² The UCPath project’s 10‑year cost forecast shows that the Office of the President estimates it will cost $52 million in fiscal year 2017–18 to operate the UCPath Center, provide system support, pay for software license and maintenance agreements, and operate the legacy payroll system for those campuses that have not yet deployed onto UCPath. The Budget Act provides an appropriation for the UCPath Center operations, and according to the UCPath financial analyst and the project director, the Office of the President will continue to assess the campuses for project implementation funding and the debt associated with the $221 million bond.

Scope and Methodology

The Joint Legislative Audit Committee (Audit Committee) directed the California State Auditor to conduct an audit of the university’s contracting practices. The analysis the Audit Committee approved contained eight separate objectives, one of which focused on the university’s management of UCPath and IT contracts. This report addresses that one objective. We list that objective and the methods we used to address it in Table 2. This audit did not require a data reliability assessment. We report on the other audit objectives in our report The University of California Office of the President: It Has Not Adequately Ensured Compliance With Its Employee Displacement and Services Contract Policies, 2016‑125.1.

Table 2
Hallmark’s Program Manager Does Not Appear to Possess the Qualifications That DWR Required When It Selected URS

	AUDIT OBJECTIVE	METHOD
1	Review and evaluate the laws, rules, and regulations significant to the audit objectives.	We identified and reviewed the relevant university policies and procedures, state guidelines, and industry best practices pertaining to IT project management.
2	Determine whether the university and its campuses’ contracting policies and procedures are in compliance with applicable federal and state laws and regulations as well as with best practices for procurement.	See The University of California Office of the President: It Has Not Adequately Ensured Compliance With Its Employee Displacement and Services Contract Policies (Report 2016‑125.1).
3	For a selection of services contracts, determine the university’s compliance with applicable laws, regulations, policies, and procedures.	See published report 2016‑125.1
4	For the past five years for the Office of the President—and to the extent possible for its campuses—determine the types of contracts, procurement methods, and types of goods and services purchased via contracts.	See published report 2016‑125.1
5	For services contracts, to the extent possible, compare the compensation and benefits of university employees to those of service workers in comparable positions and identify trends. Include an analysis of per‑employee cost based on the total contract amount.	See published report 2016‑125.1
6	Analyze how the university is managing IT contracts, including the contract for UCPath, by doing the following:	We obtained and reviewed a list of IT projects with costs of $10 million or more that each of the 10 university campuses and five medical centers had undertaken. We selected a total of three IT projects from the Berkeley, Irvine, and Riverside campuses. In making our selections, we considered factors such as the projects’ location, the value of their contracts, and their current implementation phases. For the selection of the three IT projects, we did the following: Obtained and reviewed the related IT contracts and various project documents, including vendor milestones and vendor payment approval processes. Selected five vendor payments for each IT project and assessed whether those payments adhered to the projects’ established payment approval process. In consultation with an IT project management expert, assessed whether the campuses had established adequate vendor milestones that aligned with industry best practices. For UCPath, we did the following: Interviewed university officials, UCPath project leadership, and UCPath Center staff. Obtained and reviewed project budget and cost summaries and forecasts, as well as various project planning documents, to determine the cost reasonableness of the UCPath project and the UCPath Center. Used an IT project management expert to assess the Office of the President’s project management practices related to UCPath’s schedules, planning, change management, risk management, and adherence to industry best practices. Reviewed the minutes, videos, and discussion documents from the regents’ meetings as well as UCPath’s budget, cost schedules, and deployment schedules to determine the frequency with which the Office of the President updated the regents about the UCPath project’s cost and schedule changes.
	a. Determine what contract oversight exists to ensure IT projects are delivered on time and on budget.
	b. For UCPath, assess the reasonableness of the project’s increased cost and schedule delays.
	c. Determine if UCPath is adequately communicating project risks, costs, and delays to the regents.
7	To the extent possible, assess actions the university is taking to overcome contracting challenges and cost efficiencies.	See published report 2016‑125.1
8	Review and assess any other issues that are significant to the audit.	None noted.

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Footnote

¹ The Office of the President refers to the four deployments of the project as Office of the President, Pilot, Deployment 1, and Deployment 2. However, we use the term wave for clarity. Go back to text

² In our report April 2017 titled The University of California Office of the President: It Failed to Disclose Tens of Millions in Surplus Funds, and Its Budget Practices Are Misleading, Report 2016‑130, we describe the Office of the President’s process for levying on campuses an annual financial assessment to support its operations. Go back to text

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