Arik Hesseldahl

Recent Posts by Arik Hesseldahl

Bloomberg to SAIC: New York City Would Like Its $600 Million Back, Please

Like so many cities and states around the country, New York City, America’s most populous, has been struggling with a budget gap. Without enough money coming in, the city council and Mayor Mike Bloomberg have been forced to make difficult and painful choices concerning what the city will do without in 2012.

The result is a $66 billion budget, approved this week. Before that, a $600 million deficit had been projected. The budget assumes that some 2,600 teachers will quit their jobs this summer and won’t be replaced, meaning the pool of teachers will ultimately shrink. Schools citywide will have to trim a combined $178 million from their budgets. Twenty firehouses that had been threatened with closure will remain open, though there will, however, be some painful cuts at the Administration for Children’s Services. Some workers there will lose their jobs, and the budget for child care vouchers will be cut.

Not that there’s any direct connection, but oddly enough $600 million is the same amount Bloomberg has just demanded from the IT company SAIC, an $11 billion (2010 sales) concern that specializes in government work. It reported a $618 million profit for the year ended Jan. 31, and as of that date had $3.8 billion in cash on its balance sheet.

SAIC was the lead contractor on a years-long project to supply the city with a timekeeping and payroll system used by 160,000 city employees. The system works just fine now, but it took 12 years to get it up and running, and ultimately cost $738 million, nearly 11 times the initial estimate of $68 million. It’s called CityTime, a word that has become synonymous with the kind of outrageous scandal that would make any taxpayer’s blood boil.

In May, a former project manager for SAIC, Gerard Denault, was arrested on charges of receiving more than $5 million in illegal kickbacks, federal authorities said Friday. Before Denault, six others — four of them consultants to the city’s Office of Payroll Administration, two of them relatives of those consultants — were charged in an elaborate scheme to defraud the city of $80 million.

Nine days ago, Reddy and Padma Allen — a married couple and the two top executives of TechnoDyne, a New Jersey-based subcontractor on the project — were indicted by a federal grand jury. They have not been located. Naturalized U.S. citizens from India, the Allens are thought to have returned to that country. Another former SAIC employee, Carl Bell, who was the chief systems engineer on the project, pleaded guilty to charges including wire-fraud conspiracy, wire fraud, and money-laundering conspiracy.

Federal prosecutors say the scheme was hatched by Mark Mazer, a consultant to the city’s Office of Payroll Administration. Mazer was close to that agency’s executive director, and thus had what amounted to carte blanche in approving additional city contracts on the project. The executive director, Joel Bondy, resigned last year and isn’t charged with any crime.

All the defendants stand accused of committing fraud against the city, essentially by hiring numerous unneeded consultants at inflated rates averaging out to $160 an hour, and — oddly enough, given the project they were working on — fibbing on their time cards by billing the city for hours they didn’t actually work.

The federal indictment says Denault and Bell fed $400 million from SAIC to TechnoDyne in exchange for $15 million in kickbacks. Technodyne then paid $75 million to two smaller subcontractors who then provided $25 million to Mazer, the indictment says. One of those subcontractors pleaded guilty in the scheme and is cooperating with prosecutors.

It’s a tremendous mess, and has been described as one of the most brazen frauds ever committed in the city of New York. For the city that was home to Tammany Hall, that’s saying something. Before its name became associated with fraud, CityTime was at heart an IT project meant to streamline the costly and complicated process of tracking the comings and goings of city workers in hopes of squeezing some cost savings out of it. The system was declared fully operational last month.

What I always fail to understand in cases like this is the disconnect between technology and services used in government and those in the private sector. I spend my days writing about and talking to companies large and small whose very reason to exist is to make some business process easier. Payroll and timekeeping are business processes that most companies farm out to third parties that specialize in them. It comes down to doing math. A person gets paid at a flat salary or by the hour at a specified rate, and checks in when he or she is working, then checks out when the shift is over. Computers can do the math easily enough. The complexity comes from making the system universally accessible across multiple agencies with different working conditions and different kinds of jobs, and having them all feed in to a single system.

I’ll admit it’s a complex problem, but I’m still left scratching my head. By the end of the month, New York City will have some 165,000 employees using CityTime. With a little Googling I can find 25 large U.S.-based companies who have more employees than that. Companies with large work forces as varied as Yum Brands, FedEx, Verizon, UPS and Wal-Mart have all cracked the payroll and timekeeping nut, and they’re not exactly using abacuses. I’m forced to wonder: What was so hard about this that so many consultants were thought to be necessary without anyone wondering why?

Mayor Bloomberg has asked for the city’s money back. All $600 million of it. Given all that’s happened, it seems a reasonable request. His letter to SAIC is below. SAIC has said that it voluntarily paid the city back $2.5 million for the work done by Denault. It also said that in light of the circumstances it’s willing to “discuss appropriate resolution of this matter.”

2011 06 29 Michael Bloomberg Letter Saic Citytime 600M Refund

(Image from the NYC Mayor’s Office Flickr stream.)

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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik