March 14, 2012 Contractor Strikes $500 Million Deal in City Payroll Scandal By MICHAEL M. GRYNBAUM
A major government contractor agreed on Wednesday to pay a record $500 million to avoid federal prosecution for its role in the scandal-tarred CityTime project, an effort at modernizing New York’s payroll system. The project was plagued by widespread fraud and weak oversight and became a lingering embarrassment for Mayor Michael R. Bloomberg’s administration.
Under an agreement with federal prosecutors, the contractor, Science Applications International Corporation, will reimburse the city for about 80 percent of the money it spent on the project, whose budget ballooned to nearly $700 million, from $73 million, and was described by the United States attorney in Manhattan, Preet Bharara, as “a fraudsters’ field day that lasted seven years.”
The $500 million, in restitution and penalties, is believed to be the largest amount ever paid to resolve an accusation of contract fraud involving a state or local government, said Mr. Bharara, who announced the agreement at a news conference.
Mr. Bloomberg hailed the deal as “a major victory for taxpayers,” but the scandal remained a potential taint on the legacy of a mayor who prides himself on managerial efficiency and the power of the private sector to reform government operations.
The CityTime project, with its promise of millions of dollars in cost savings thanks to newfangled technology like biometric readers, epitomized Mr. Bloomberg’s technocratic approach to governing. City Hall officials say the payroll system, which was put in place despite the fraud, has improved a timekeeping operation once dependent on pen and paper. But the kickbacks and the ballooning costs raised doubts about the administration’s ability to police its many outside contracts.
“CityTime is an example of how an allegiance to the notion that outside people are always better can be faulty,” said Susan Lerner, the executive director of Common Cause New York, who added that the Bloomberg administration had been overly eager to outsource projects to high-priced contractors rather than handle them in house.
“This administration has erred on the side of ‘somebody outside will always be better,’ and that’s not always the case,” Ms. Lerner said.
The federal government agreed not to press fraud charges against Science Applications International, a Fortune 500 company, if over the next three years the company complied with a series of reforms, including whistle-blower protections and the hiring of an independent monitor.
But the government’s broader investigation into the CityTime scandal is continuing. Mr. Bharara’s office has indicted 11 people working for private contractors in connection with the fraud: Two have pleaded guilty, and one has died. Prosecutors said Wednesday that they would seek to seize millions of dollars’ worth of assets from the primary subcontractor on the project, TechnoDyne.
On Wednesday, Mr. Bloomberg said that his administration had “zero tolerance for corruption,” while conceding, in a phrase he used twice during the news conference, that “there will always be one or two bad apples.”
“Should we have known? Could we have known?” the mayor asked. “We keep strengthening all our surveillance, and, hopefully, we’ll catch anything that happens again.”
The United States attorney’s office began its investigation into CityTime after receiving evidence of criminal activity from the city’s Department of Investigation, which collaborated on the ensuing case.
The City Council approved a bill on Wednesday that required the mayor to notify lawmakers about significant cost overruns on certain large city contracts. And late last year, the Council overrode a mayoral veto to enact a measure requiring City Hall to provide a cost-benefit analysis before it outsourced certain city projects.
“What we all have to learn from CityTime is we have to do a better job monitoring contracts every step of the way,” the Council speaker, Christine C. Quinn, said.
The CityTime project began in the Giuliani administration as an effort to modernize an onerous payroll system then managed entirely by hand. The Police Department, for instance, was generating 1.5 million sheets of paper each month for timekeeping.
Science Applications International took over the project in 2000, when it was worth $73 million, and prosecutors say that an elaborate kickback scheme emerged soon after, involving TechnoDyne, that provided staffing for the project in return for millions of dollars in kickbacks. In 2005, the company failed to report a whistle-blower’s complaint to the city. Science Applications later hired hundreds of consultants from TechnoDyne for the project, significantly increasing costs, to $620 million as of last year. On Wednesday, the city said it had paid a total of $652 million for CityTime and had refused to pay an additional $41 million sought by Science Applications.
Throughout the project, the Bloomberg administration said that CityTime would be worth the growing cost. The system was finally started last year, and officials say it has saved the city tens of millions of dollars in annual costs, although the city could not provide an exact figure.
Mr. Bloomberg has demonstrated a proclivity for relying on outside expertise, particularly for projects involving modern technology. A study by the Fiscal Policy Institute, a research group partially backed by unions, found that costs for contractual services had risen significantly during his administration, although labor costs for city employees have increased, as well.
Marc LaVorgna, a spokesman for the mayor, said in a statement that the city looked at every project individually to determine whether a contractor or an outside consultant was necessary.
“We evaluate each goal and make a decision on how to achieve it effectively and efficiently,” Mr. LaVorgna wrote. “Sometimes that means completing the work internally; sometimes it means using external support.”
Carol Kellermann, a former deputy commissioner of finance in the Koch administration, said outside contracts were unavoidable for a sprawling city government, particularly in major products involving technical expertise. But, she added, “It is important to maintain very tight and sophisticated internal controls over the management of such projects.”
Despite the record agreement on Wednesday, one financial observer said the penalty would not create much of a problem for Science Applications International, whose numerous government contracts generate annual revenue that has exceeded $11 billion.
“It has a lot of happy customers across the government-contracting world, so it’s hard to burn your reputation with a single incident,” said Tim Quillin, a research analyst at the investment bank Stephens, based in Arkansas.
The $500 million payment, Mr. Quillin added, “is a big settlement relative to the economic damage they may have done to the City of New York.”
“But in terms of S.A.I.C.’s ability to pay, this is not meaningful.”
And John C. Coffee Jr., a law professor at Columbia University and an expert on corporate governance, said the agreement would spare Science Applications International “the collateral consequences of a criminal conviction,” which could include not only the bad publicity of a trial, but also civil liability, the loss of licenses and a ban on access to public contracts.
Shares of Science Applications International Corporation closed at $12.84 apiece on Wednesday — up 0.7 percent on the day.