1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION 2 450 N STREET 3 SACRAMENTO, CALIFORNIA 4 5 6 7 REPORTER'S TRANSCRIPT 8 DECEMBER 15, 2011 9 10 ITEM P 11 OTHER ADMINISTRATIVE MATTERS 12 ITEM P1.2 13 CROS PROJECT UPDATE AND ACTIONS 14 15 16 17 18 19 20 21 22 Reported by: Juli Price Jackson 23 No. CSR 5214 24 25 26 27 28 1 1 P R E S E N T 2 3 For the Board Jerome E. Horton of Equalization: Chairman 4 5 Michelle Steel Vice-Chairwoman 6 7 Betty T. Yee Member 8 9 Marcy Jo Mandel Appearing for John 10 Chiang, State Controller (per 11 Government Code Section 7.9) 12 13 Diane G. Olson Chief, Board 14 Proceedings Division 15 16 For the Staff: Liz Houser Deputy Director 17 Administration 18 Eric Steen CROS Project 19 Director 20 21 ---oOo--- 22 23 24 25 26 27 28 2 1 450 N STREET 2 SACRAMENTO, CALIFORNIA 3 DECEMBER 15, 2011 4 ---oOo--- 5 MS. OLSON: Our next item is P1.2, CROS project 6 update and actions. 7 MR. HORTON: Welcome. 8 MR. STEEN: Hello. Mr. Chairman, Honorable 9 Members, it's a pleasure to provide for you today an 10 update on the Centralized Revenue Opportunity System 11 project. 12 I -- before I get to -- actually, where's my 13 presentation over -- I mean, it's supposed to be on the 14 screen as well or -- 15 MS. DELGADO: Just advance the slides. 16 Steen I am a tech guy, so -- 17 MR. HORTON: I tell you it was very tempting. 18 MR. STEEN: You're sure you want me in this 19 role? 20 MS. DELGADO: You use that to advance it. 21 MR. STEEN: Gotcha, thank you very much. 22 All right, before I get to my presentation I 23 wanted to address one of the questions you had asked at 24 the last hearing, Mr. Horton. 25 And you had asked a question about the E-Reg 26 system and how it pertains to the CROS project. And, 27 so, I just briefly wanted to address that. 28 The E-Reg undertaking is an effort that 3 1 Technology Services Department is doing, along with 2 Sales and Use Tax to essentially harvest functionality 3 that exists on the legacy assets, the existing 4 infrastructure and exposing that via the internet to the 5 customer base. 6 And, so, it's a great way to expand customer 7 self service, as well is extend the life of our existing 8 systems. It really doesn't have a lot of -- much to do 9 with CROS other than whatever is deployed, whatever is 10 provided to the customers, we need to make sure, as the 11 CROS project, to at least do that and more, of course. 12 So, unless you have any other questions about 13 E-Reg, I'd like to move on. 14 MR. HORTON: No, thank you very much, please 15 continue. 16 MR. STEEN: So, the first item is the Request 17 for Proposal, RFP. We are about 48 percent complete 18 with the RFP. Most of the effort that goes into that 19 right now is the requirements, define the requirements, 20 which is the primary input to the -- to the vendor 21 communities so they can craft their solutions that will 22 brought to bear to the CROS project. 23 We've also continued interacting with the 24 control agencies. We've submitted our information 25 technology procurement plant to General Services, which, 26 essentially, lays out the scope and approach to the 27 procurement process. 28 We have met -- we submitted our California 4 1 Technology Agency Status Report, that says this week -- 2 but it was actually submitted last week, so, we have 3 provided our first status report to them. We don't 4 anticipate any issues with that. 5 We've met with the Department of Finance last 6 Friday, on December 9th, to discuss the compensation 7 model. They were primarily -- or they are primarily 8 interested in understanding the variables that go into 9 the compensation model that are tough to account for, 10 such as changes in CPI, swings in the economy, if we 11 adjust the tax rates or anything like that -- how do we 12 -- how do we adjust the -- how do we measure the revenue 13 comes in from the resulting system against the baseline 14 revenue, given those variables. 15 So, that's something that we've talked with 16 them about and we will continue to discuss until we've 17 resolved those matters. 18 We've also crafted our statement of work for 19 the California Technology Independent Project Oversight 20 consultant. We've sent that off to CTA and we're going 21 to discuss that with them tomorrow. So, it'll define 22 the scope of their oversight as it pertains to the 23 procurement. 24 We've also -- moving on to the revenue agency 25 collaboration, one of the stipulations, as you'll 26 recall, for the approval the FSR was that we collaborate 27 with the revenue agencies -- Franchise Tax and EDD. 28 We've met with both of those organizations, met with EDD 5 1 a couple of times. They have been very helpful, very 2 cooperative. 3 And, so, we've discussed, not just issues 4 pertaining to technology, but also issues pertaining to 5 procurements because they both have been through 6 benefits based procurements as well. So, we continue to 7 have that dialogue. 8 Probably the most significant issue -- or one 9 of the most significant issues to discuss with you today 10 is that we are going to be crafting a Budget Change 11 Proposal for the spring finance letter. And the 12 rationale there is that historically what we've done for 13 this project is to borrow from Departments within the 14 Board of Equalization so, Departments have provided 15 resources, funding, so that we could move forward with 16 the procurement. 17 We want to take a step back from that and 18 approach the Department of Finance and ask for funding 19 to do this because, ultimately, this is a revenue 20 generating project, but we're borrowing from ourselves, 21 we will be paying back the General Fund, based on the 22 revenue realization. And we'd like to, essentially, 23 shift that change -- change that approach. 24 Moreover, continuing to borrow from existing 25 Departments can potentially impact what they're 26 attempting to do with -- what their mission is in the 27 organization. So, we'd like to -- we want to avoid 28 impacting them at all and, ultimately, be funded by the 6 1 Department of Finance for this effort. 2 Are there any questions on anything I have 3 presented so far -- especially the idea about the BCP? 4 We'll be bringing to you the details individually and 5 working through the BCPs with you and, hopefully, at the 6 next Board hearing we'll get approval for that. 7 MR. HORTON: Members? 8 I would encourage us to -- to expedite the 9 resolution discussion about the revenue compared to the 10 baseline and where the revenue sources will exist as a 11 result of this project. 12 And -- and I think that's extremely important 13 to the ultimate funding of the project. And I also 14 believe that several of the Members have some concepts 15 we need to flesh out relative to the revenue and what 16 will be the revenue sources as a result of the CROS 17 project. 18 And I would just encourage us to make that a 19 priority, as we are currently utilizing existing funding 20 to accomplish that. In order to make that transition, 21 we have to identify the incremental change that will 22 occur in order to make a position -- or to take a 23 position relative to Finance in the budget process. The 24 sooner the better. 25 MR. STEEN: Okay. Duly noted. Thank you. 26 The last item that I'd like to address is that 27 we have changed our approach slightly to the CROS 28 effort. 7 1 So, we are still moving forward with the 2 procurement -- I mean, that's -- we're going forward 3 with that. But we've decided to also take on some -- 4 address some issues that historically have posed 5 significant risks to IT projects. 6 So, we surveyed the landscape across California 7 historically regarding large IT projects and we 8 identified two risk areas that we want to get in front 9 of right away. And those two risk areas are data 10 conversion and external interfaces. Those two issues 11 tend to really result in schedule slippage, cost 12 overruns. And, so, we felt it important to address 13 these as soon as possible. 14 And, so, what we -- we have a couple of 15 different systems in-house with -- with data that need 16 to go into the new system that we implement. What we 17 want to do is synthesize those data and cleanse them and 18 get -- stage them, if you will, so that when the new 19 system comes in, it'll be easier to move those data 20 from -- from the staging area, if you will, into the new 21 system. 22 And second to that -- secondly, we also deal 23 with a lot of external interfaces. There are number of 24 -- data that come in from Franchise Tax Board, the IRS, 25 Social Security Administration, EDD, the DMV and many -- 26 many times these are manual -- people bringing floppy 27 disks or e-mailing us something or magnetic tape. We 28 want to automate that as much as possible and transform 8 1 those data and apply them to the staging area as well, 2 or even, perhaps, the legacy systems. And these are 3 things that we're going to be doing anyway. We -- we 4 desire to do those things up front. 5 And I'll -- the next slide speaks to the 6 benefits to that. One of the items I already identified 7 is to mitigate risk. As I mentioned, these two areas do 8 pose large risks to significant IT modernization 9 efforts. If we do them now, we'll get in front of those 10 risks. 11 Secondly, I believe it'll accelerate the 12 progress once the system integrator is -- is on the 13 ground and actually implementing his system. We won't 14 have to -- we won't start at that point, we'll -- we'll 15 already have started. 16 Thirdly, the data that we cleanse and 17 synthesize will help us achieve revenue lift sooner. 18 The -- much of the information -- much of the revenue 19 lift that we hope to attain through this effort has to 20 do with mining our data. And, so, the more we get in 21 front of this now, the more quickly we'll be able to get 22 answers to questions that result in revenue realization. 23 Fourthly, it'll accelerate opportunities for 24 the revenue agency data mining collaboration. As soon 25 as we get our house in order in terms of our data, we'll 26 be that much more capable of sharing those data with 27 Franchise Tax Board and EDD. 28 Fifthly, if we start now, we'll be able to 9 1 undertake these efforts at a lower cost. We've already 2 decided that this is something that needs to be done and 3 this is part of the CROS effort. And, ultimately -- the 4 original plan is to have the system integrator perform 5 this work. 6 If we start now, we can actually do it with a 7 collaborative group of State staff and a few handpicked 8 contractors that are -- that specialize in these types 9 of tasks. And we can get it done at a much lower cost 10 than we would otherwise. 11 And then, if we -- lastly, if we do this now, 12 with a handpicked team of State staff and a handful of 13 contractors, we'll insure that we have the right 14 resources to bring to bear here. So, we'll be able to 15 control this ourselves and insure that the proper 16 knowledge transfer occurs with -- with our staff. And 17 we'll just be able to bring the right resources to bear 18 to this problem. 19 Any questions about the benefits that I'm 20 laying out here? 21 MR. HORTON: Members? 22 Couple of questions. The data conversion, 23 external interfacing and data mining, is it possible 24 that we could perform or -- some of this activity 25 currently or with our current system? 26 MR. STEEN: We already are performing some of 27 it. I mean, the question -- I mean, if we look at data 28 and there's a metaphor, if we look at our data -- 10 1 MR. HORTON: And let me add a caveat to it if I 2 could. 3 MR. STEEN: Sure. 4 MR. HORTON: And is it possible that we 5 could -- we could -- we could formulate a separate 6 budget proposal that deals with that activity currently? 7 MR. STEEN: It's certainly possible. 8 MR. HORTON: As part of the transition into the 9 CROS? I mean, will we see that there is a value or a 10 potential revenue benefit from us creating or 11 establishing or the ability to convert our data, our 12 various different sources of data and interface 13 currently with other -- 14 MS. HOUSER: Mr. Horton, Liz Houser, Deputy for 15 Admin. 16 We're working with Eric and his team. And the 17 spring finance letter we're putting together is 18 identifying those early revenue lists. 19 MR. HORTON: Okay. 20 MS. HOUSER: That this will -- but we're using 21 those revenues and then we're going to be looking at 22 revenues from other sources, similar to how FTB funded 23 their EDR project. Because our goal is to get a 24 break-even revenue. So, we're looking for various 25 efforts that we could put into that spring finance 26 letter that would show revenue to support our project. 27 So, the two proposals that Mr. Steen is going 28 over this morning for this early start will have some 11 1 revenue lift that we're going to tie to the spring 2 finance letter. 3 MS. YEE: But it's -- Mr. -- 4 MR. HORTON: Please? 5 MS. YEE: -- I think your question was more 6 about, perhaps, outside of the context of the 7 procurement and the project, whether with what our 8 capacity is currently? (Unintelligible) 9 MR. HORTON: It was -- sounded as if, though, 10 we have the current capacity or the current need, if you 11 will, to be able to convert existing data using our 12 existing system and, in doing so, we may very well be 13 able to leverage that experience to benefit CROS, 14 because it is the philosophical aspect of that or the 15 intellectual aspect of that that identifies best 16 practices and most effective way to accomplish that once 17 we merge into the CROS arena. 18 I don't really know. I'm just asking. 19 MR. STEEN: Well, I guess what I'd say is we 20 have a limited capacity to be able to do this work now. 21 And what we need to do is enhance our abilities. And 22 the way we do that is bringing on a few specialists to 23 help us with this activity, to bring in some -- to raise 24 up some staff, train them to conduct these activities, 25 put together a plan, maybe purchase some tools and move 26 forward with this effort, which we really don't -- like 27 I said, we really -- we're doing it somewhat now, but 28 we're not doing it as as well as could be. And we're 12 1 certainly not equipped at this point to get all of the 2 data synthesized and cleansed and staged, if you will, 3 to be able to get the revenue lift right away. 4 This is something that needs planning, tools 5 and resources. 6 MR. HORTON: My second question is -- the FTB 7 is currently -- they've gotten an agreement with the 8 legislature to proceed with their program. And, so, I'm 9 curious if there is some lessons learned or some 10 potential collaboration with them, where we may very 11 well be able to share with them what we anticipate the 12 two greatest challenges as presented. 13 It's going to be a challenge to them as well. 14 And, so, it would be incumbent upon them to begin to 15 work on that and addressing those challenges. 16 And, so, it -- a collaboration with them on 17 those -- on that effort might very well provide us a 18 benefit and an opportunity to leverage their 19 expenditures in that particular area. 20 MR. STEEN: And we -- we have had some dialogue 21 with Franchise Tax Board about their data conversion 22 efforts. I believe they've already brought on a vendor 23 to assist with those efforts. And I'm certainly more 24 than willing to continue the dialogue with them and see 25 if there's ways that we could find synergies in these 26 data readiness efforts. 27 MR. HORTON: Okay. Thank you. 28 MR. STEEN: Certainly. 13 1 The last -- 2 Did you have more you -- 3 MS. HOUSER: No. 4 MR. STEEN: The final slide is -- I attempted 5 to anticipate any concerns that we might have with 6 moving forward with these initiatives that run in 7 parallel with the procurement activities. 8 The first objection I came -- thought of is why 9 not rely exclusively on internal resources? We want to 10 rely heavily on internal resources. But we do want to 11 bring in some specialists that will help us with the 12 activity. 13 Secondly, how is -- how is the cost of this 14 effort justified? I would say it's going to cost us 15 less to do it now. It's going to mitigate risk and it 16 ultimately is going to result in a revenue lift sooner 17 than later. 18 Thirdly, isn't the CROS vendor supposed to take 19 on this work? The current approach, yes. We anticipate 20 the CROS vendor to do it, but there's no reason why we 21 can't be self sufficient in this area. So, I strongly 22 advocate that we do that. And then what is the impact 23 on the -- to the compensation model if we do this now? 24 The answer is I don't know for sure. We clearly want to 25 fairly compensate the vendor for the work they do at 26 fair market value. They would expect nothing less, nor 27 should we. But I want this problem. I want us to have 28 the problem that we're having revenue lift sooner than 14 1 we would later. I think we would all agree with that. 2 And then, lastly, are we duplicating effort? 3 At the end of the day, we do bring on a system, we have 4 to get the data into that new system. Is there some 5 overlap there? Certainly, but it would be much easier 6 to get the data from our staging area or our transition 7 database to the new system than it would be if we were 8 starting from scratch trying to get it from the legacy 9 systems. 10 That's -- that ends my report. 11 MR. HORTON: Thank you. Member Yee? 12 MS. YEE: Thank you, Mr. Chairman. 13 I want to applaud Mr. Steen and his team. I 14 think one of the -- really the most important benefit of 15 moving in this direction is the risk mitigation. And -- 16 I mean I think for as large of a project as this and to 17 kind of get out ahead of that -- obviously, the added 18 benefit of accelerating any revenue potential is great, 19 but the -- I think just with the eye on mitigating risk 20 is such key component with respect to the success of the 21 entire project. 22 So, I appreciate the thoughtfulness with 23 putting this piece out in front. 24 MR. STEEN: Thank you, Ms. Yee. 25 MR. HORTON: Further discussion, Members? 26 Thank you for the presentation. 27 ---o0o--- 28 15 1 REPORTER'S CERTIFICATE 2 3 State of California ) 4 ) ss 5 County of Sacramento ) 6 7 I, JULI PRICE JACKSON, Hearing Reporter for the 8 California State Board of Equalization certify that on 9 DECEMBER 15, 2011 I recorded verbatim, in shorthand, to 10 the best of my ability, the proceedings in the 11 above-entitled hearing; that I transcribed the shorthand 12 writing into typewriting; and that the preceding pages 1 13 through 15 constitute a complete and accurate 14 transcription of the shorthand writing. 15 16 Dated: JANUARY 20, 2012 17 18 19 ____________________________ 20 JULI PRICE JACKSON 21 Hearing Reporter 22 23 24 25 26 27 28 16