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CGI facing state probe

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The state auditor will soon begin looking into an information technology company that played a key role in developing Hawaii’s computerized tax system and a separate disease surveillance system.


Montreal-based CGI Group Inc. installed a delinquent tax collection system for Hawaii that is credited with increasing tax collections by $66 million since 2008.

The state Legislature called for an audit of CGI to look into the $25 million contract the company got for the delinquent tax system and several other contracts.

A former Tax Department employee raised what appear to be legitimate concerns about the department’s relationship with CGI, said House Finance Chairman Marcus Oshiro (D, Wahiawa), who voted for the audit. Those concerns include the way CGI contracts were awarded and a revision of the delinquent tax contract, relieving CGI of some its original commitments, Oshiro said.

"The way that the contract was renegotiated and reformulated raises some questions," Oshiro said. The revised contract "tended to be a benefit more to them (CGI), rather than the state of Hawaii."

Also of concern is the relatively large amount of money that CGI receives from contracts that were not subject to competition, Oshiro said.

CGI installed the Tax Department’s $53 million Integrated Tax Information Management System between 1999 and 2004. That contract was competitively bid, but it was followed by nearly $35 million in noncompetitive contract awards to CGI by the Tax Department since 2004.

Overall, the cost of CGI’s work has averaged about $8 million a year since 1999. For comparison, the Tax Department’s annual budget is about $20 million.

"It’s a significant amount of money involved," Oshiro said.


» 1999-2004: $53 million to build an Integrated Tax Information Management System (ITEMS). This contract was competitively bid.

» 2005-2006: $3.5 million in imaging, cashiering and electronic filing cost enhancements

» 2006-2009: $3 million in production improvements

» 2006-2008: $3 million to upgrade ITEMS and allow for the collection of a half-percentage point excise tax for rail

» 2008-2011: $25 million to collect delinquent taxes, integrate all taxes into one system and train staff

» 2003-2004: $1.4 million to assess and implement a National Electronic Disease Surveillance System. This contract was competitively bid.

» 2006: $469,580 to assess and enhance the disease surveillance system. The contract was not competitively bid.

» 2006: $1.8 million extension of the prior contract to provide information technology supporting the state Pandemic Flu plan. The contract was not competitively bid.

» 2008: $975,000 extension of the prior contract to provide information technology supporting the state flu plan. The contract, which ends in 2010, was not competitively bid.

» 2010: The Department of Health attempts to award a one-year $2 million contract to CGI to replace the disease surveillance system without going through a competitive bidding process. The state Procurement Office denies the request.

The audit was driven by testimony from former tax research officer Tu Duc Pham. In his April 7 written testimony before the Senate Ways and Means Committee, Pham said administration officials usurped Tax Department Director Kurt Kawafuchi’s authority by preventing him from renegotiating the delinquent tax contract. Other Tax Department officials negotiated the revised contract with CGI that significantly favored CGI, Pham said.

"All CGI obligations regarding their work in the original contract were forgiven," said Pham. "The new re-scoping contract releases CGI from performing millions of dollars of services."

That testimony, along with e-mail communication sent by CGI to Kawafuchi, indicates considerable friction existed between CGI personnel and some state employees. One solution proposed by CGI in an October 2008 e-mail was removing oversight of the project from Kawafuchi.

Kawafuchi, who officially leaves office today, was relieved of oversight of CGI work by the administration of Gov. Linda Lingle in early 2009. Kawafuchi declined to comment for this story.

"On the advice of counsel, I have no comment at this time," he wrote in a text message to the Star-Advertiser.

In a written statement released to the Star-Advertiser, CGI said its partnership with the Tax Department has generated more than $327 million in added delinquent taxes since 1999.

"This new revenue has helped the state save local state jobs, maintain constituent services and provided the state with much needed new revenue – revenue that would have gone uncollected," the company wrote.

Overall, the state’s total delinquent tax balance was $375 million as of June 30, 2008, according to the latest available figures. There is no time limit on how long the Tax Department has to collect back taxes.

Under its contract signed January 2008 and amended in June 2009, CGI Group paid all upfront costs associated with running the delinquent tax collection proj-ect, including computer upgrades and postage fees. In return, the company gets one-third of those collections up to a ceiling of $25 million through June 30, 2011. The delinquent tax project now is expected to generate $110 million before fees.

The company noted that its compensation comes from the added tax income generated.

"For the current assignment, CGI is paid for its services from a portion of the additional revenue collected. If the project does not generate any collections, CGI does not receive payment for services," CGI said.

Lowell Kalapa, head of the Tax Foundation of Hawaii, said CGI’s fees seem reasonable. CGI is a member of the Tax Foundation of Hawaii.

"I don’t know if the fee is appropriate, but it is what the department negotiated," Kalapa said. "If they were hoodwinked … that’s the department’s fault."

Separately the Department of Health also may be faced with severing its relationship with CGI. Earlier this month the state Procurement Office denied a request by the Health Department to award CGI a $2 million, noncompete contract to replace a disease surveillance system the company helped create.

Overall the state Tax and Health departments have awarded CGI contracts worth about $90 million since 1999 – $38 million of which was awarded as follow-on, or sole-source contracts that were not subject to competitive bidding processes.

The Health Department has been contracting with CGI and its predecessor since 2003. That was when CGI received a contract worth $1.4 million to assess and implement an electronic disease surveillance system. That contract was competitively bid. However, CGI subsequently received $3.3 million to upgrade and expand the system via follow-on, noncompete contracts.

None of the Health Department contracts are being audited under the recently passed resolution.

The Health Department now plans to replace the disease surveillance system via a competitive process, said agency spokeswoman Janice Okubo.

She said the department relied on CGI because of its familiarity with the systems it installed.

The company originally "was selected through competitive bid to define, design, and implement the current DOH Disease Surveillance Monitoring System and would be the only vendor that can enhance the system in a timely manner to address this public health and safety need," Okubo wrote in an e-mail to the Star-Advertiser.


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