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District Settles Payroll Dispute

Deloitte will pay L.A. Unified $8.2 million and forgive up to $10 million after glitch hampers payments.

November 27, 2008|Mitchell Landsberg | Landsberg is a Times staff writer.

A costly, 20-month saga of futility and frustration came to a formal close Wednesday when the Los Angeles Unified School District announced that it had settled a dispute with the contractor that installed its payroll system, which overpaid and underpaid tens of thousands of teachers and other employees by tens of millions of dollars.

The district said the company it had hired, Deloitte Consulting, agreed to pay $8.25 million and forgive $7 million to $10 million in unpaid invoices, for a total settlement that was roughly half the amount the district said it spent to fix the rogue system. In addition to those costs, the district sustained many millions of dollars in other losses related to the payroll problems.

The meltdown inconvenienced and infuriated L.A. Unified employees, bogged down new Supt. David L. Brewer and -- fairly or not -- contributed to the district's reputation for managerial blundering.

"This brings closure to an unfortunate chapter in our history," said the district's chief operating officer, David Holmquist, who said L.A. Unified now has "a world-class payroll system in place" and has reduced its paycheck problems to a minimum. Holmquist and the district's chief counsel, Roberta Fesler, praised the settlement as the best possible under the circumstances.

Others criticized it, however. A.J. Duffy, president of United Teachers Los Angeles, called it "outrageous," and said the district should have gotten at least $20 million to $30 million from Deloitte, a subsidiary of Deloitte & Touche USA.

"This is what we've come to expect from Supt. Brewer," Duffy said, "shortchanging members and employees and having no sense of responsibility for the harm that Deloitte . . . has done to his employees."

David Tokofsky, a former school board member who voted for the initial contract with Deloitte but later was critical of the company, also said the firm had gotten off cheap. "I guess this is one major company the federal government doesn't have to bail out, because the district just did," he said.

Brewer, who was at his home in Virginia for Thanksgiving, did not return a call seeking a response to Duffy's criticism.

But Fesler said that, under contract law, the district could not have sought damages for the suffering of its employees, and calculated that the most it could have gotten in a lawsuit would have been $30 million. Considering the substantial attorneys fees and other employee costs involved in such litigation, she said, the district figured it was better to reach a settlement.

By any method of accounting, however, the payroll imbroglio was costly to the district.

The payroll system, based on software designed by a German company, SAP, and tailored to the district's needs by Deloitte, cost $95 million. It was a disaster from the moment it went online in January 2007, spitting out checks that were wildly inaccurate, including $53 million in overpayments to Los Angeles Unified employees. Although the employees were ordered to return the extra money, many had already spent it or simply balked. Holmquist said the district has yet to recover $19 million in overpayments.

The district, which issues 120,000 paychecks a month, eventually paid $37 million in repairs and delays, but did not get the system working to its satisfaction until January, a year after it was launched. Fesler said that she could not estimate how much the district spent on attorneys in its negotiations with Deloitte, but said the settlement did not require the consulting company to pay any of those costs.

Tokofsky, for one, rued the day the district signed the contract with Deloitte, which he said "gave us their C players instead of their A or B players to implement this."

"They outbid IBM and its subcontractors," he said, "and in the end, the district and Deloitte had to retain IBM subcontractors to complete the work."

A Deloitte official did not return a call seeking comment.

Holmquist emphasized that the computer software the district installed was far more than a payroll system.

He said that it was an "enterprise resource planning system" designed to consolidate approximately 70 financial and data functions, including budgeting.

However, the system was rolled out in phases, and the district eventually suspended "Phase 3," which would have consolidated procurement and accounts payable functions.

That phase also would have established an employee self-service computer system, in which district workers would have online access to their benefits and vacation information.

"We wanted to achieve stability . . . in the payroll piece before we even contemplated moving on with another piece," Holmquist said. But he added that the difficult economy made it unlikely that the district would move ahead with the final phase of the new system any time soon.

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mitchell.landsberg@latimes.com

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