In a Budget and Policy Post Tuesday, the state Legislative Analyst’s Office (LAO) examines “The 2022-23 Budget: California Department of Technology,” noting that Gov. Gavin Newsom’s administration, in its FY 2022-23 budget released last month, proposes $54.6 million in General Fund monies annually for three fiscal years to “shift funding for certain internal CDT administrative expenditures and positions” from its cost recovery fund to the General Fund to cover short‑term CDT net revenue losses “resulting from some state entities moving their provision of contracted IT services” to private vendors. During those three fiscal years, the LAO said, CDT will “re‑evaluate its state data center rates and services and then shift the requested funding back to cost recovery thereafter.”
The department’s FY 2022‑23 proposed budget is $508.4 million, with $96 million in General Fund monies and 1,018 positions, per the LAO, and with the rest of that budget paid for via cost recovery, “billing for IT services it provides to state entities (and others) and using revenues from those services to cover most of its expenditures.” Among the takeaways:
- CDT could reassess how it sets service rates. CDT sets the state data center IT service rates to recoup direct service costs like hardware and software; and indirect costs like “internal CDT administration. To calculate these rates, CDT generally divides the direct and indirect costs of a service by its projected demand,” the LAO said in its post. The department, it indicated, “might consider other factors when setting service rates such as how costs are distributed across state entities ... and how simple the billing for, and collection of, revenues is for the department and state entities.” CDT submits its service rates annually for approval to the California Department of Finance (DOF), the LAO said — and if demand for a service is expected to lessen but the cost of that service is anticipated to remain constant, “CDT likely will propose an increase in the service rate.” The department typically refrains from commenting on the governor’s proposed budget.
- The Technology Services Revolving Fund (TSRF) is CDT’s “primary cost recovery fund,” the LAO said, home to revenue it realizes from providing state data center IT services and the payment source for its expenditures on those service costs. The TSRF is a cost recovery fund and doesn’t maintain a constant balance like other funds. Therefore, there’s “no fund balance to provide a cushion for increased expenditures or revenue losses.” The department seeks “expenditure authority from the fund through the budget process,” estimating that “primarily based on projected demand for its services.” But if demand is lower than expected, “CDT absorbs the associated revenue losses” until service rates can be revised. “Net revenue losses — that is, how much lower actual and projected service revenues are than actual and projected expenditures on these services — can be covered by CDT more quickly by increasing service rates than by reducing costs” as the expenditures generated by direct service costs are typically borne out over more than one year.
- The intent of Newsom’s administration, according to the LAO is “to make CDT’s cost recovery model more sustainable” by, in one example, avoiding “short-term net revenue losses.” Once a “revamped cost recovery model and associated rate structure” is available, expenditures and positions proposed to be funded by the General Fund would revert to “cost recovery” in FY 2025‑26. More specifically, CDT seeks to shift “$41.1 million in expenditures and 205 positions” from TSRF to the General Fund, to cut state data center rates “by an estimated 10 percent.” It seeks another $3.1 million from the General Fund for “external consulting costs and internal positions to work on statewide strategic initiatives.” The department seeks $10.5 million from the General Fund for “short‑term net revenue losses from state entities” like the Department of Child Support Services and the Department of Motor Vehicles, “migrating some of their business applications and IT services” to private companies. CDT estimates total revenue losses from state data center services at $20.7 million, “but projects $10.2 million of these losses will (be) covered by higher‑than‑anticipated revenues from other services,” the LAO said.
- The LAO recommends approving “only budget‑year funding for both proposals ... to ensure legislative oversight continues through the annual budget process.” This, it said, would let CDT “better forecast additional net revenue losses,” and make the requests to cover them. This would also let the Legislature assess whether the anticipated rates reduction changes “state entities’ demand for IT services from CDT.” The office also recommends directing CDT and DOF to work with the Legislature on trailer bill language that would bring more legislative “direction and oversight of the rate re-evaluation process.” That language should include objectives for the process; outcome metrics and an evaluation of CDT’s business model for IT services, it recommended. The governor’s budget proposals, the office said, raise questions about CDT’s business model with respect to revenue losses and a declining customer base for state data center IT services. CDT, the LAO said, “suggests” that some of the benefits of those services and “other differences between state‑hosted and vendor‑hosted services make direct rate comparison difficult” — but acknowledges some services can’t be provided at rates comparable or lower than the private sector. Further, CDT’s funding proposals have “little information” on a future rate re-evaluation process, limit legislative involvement in that process, as well as oversight via the budget process.
