A $63 million contract to modernize the District's tax collection system has grown to $105 million, including more than $30 million that city officials spent without legal authority, according to an analysis of financial records and an internal city review.
The extra spending on the biggest computer contract in the District's history was approved after the fact without a vote by D.C. Council members, who said last week that they were unaware of the increased costs. Because city administrators sent the paperwork to the council during its summer recess, the contract expansion never appeared on the council's agenda.
The now-dormant D.C. financial control board hired the contractor, Accenture, in 1998 to overhaul the District's chaotic system for collecting income, business and real estate taxes . Aware of the city's history of failed technology projects with burgeoning price tags, the control board negotiated a contract with firm deadlines and price ceilings for each task. The agreement barred payments for any additional work without a formal modification of the contract.
But administrators in the office of District Chief Financial Officer Natwar M. Gandhi asked for extra work that pushed the price far above the contract's ceiling, according to internal records obtained under the Freedom of Information Act. Gandhi formally delegated oversight of the contract to members of his staff because his son works at Accenture, though not on this project.
Council members last week expressed surprise about the extra spending and said they will ask Gandhi's office to account for the expenditures and to seek financial and performance audits by independent agencies. They also said they found it suspicious that Gandhi's office sought retroactive approval of the spending during the council's 2002 summer recess.
"I am a very engaged council member, and I have no knowledge of this," said Carol Schwartz (R-At Large). "Great efforts were made for us not to have knowledge of it."
Gandhi vehemently denied that he tried to hide the unauthorized spending from the council.
"In retrospect, it does make sense that I should have had our tax people go there and explain what we were doing," he said. "But to suggest that we were trying to deceive is entirely unacceptable. I would never do that. My credibility depends on the confidence I enjoy from the council. I would never jeopardize that."
Project Defended
Gandhi and members of his staff said the additional services Accenture provided were urgently needed. They also said the project has been a resounding success and is critical to putting the District's financial affairs in order.
"If you are looking for wasteful spending, this is not it," Gandhi said. "If you are looking for a system with all the money spent that doesn't work, this is not it. We were a joke. Now we are a shining example."
Officials in the Office of Tax and Revenue, which is part of Gandhi's agency, said the system would pay for itself by next year through improved collections and reduced staffing.
Accenture spokesman Jim McAvoy called the tax project "something that really delivered great benefits for the city," and company officials said they are charging the District standard rates. This month, Gandhi's office denied a Freedom of Information request by The Washington Post for Accenture's invoices on the grounds that the bills contained proprietary information that belonged to the company.
The District government has not asked for a full outside audit of Accenture's bills and expenses and its purchases on behalf of the city, although the original contract included a provision allowing such a review.
There has been no outside review of the new tax collection system's performance since a study in August 2000, when the project was in its first phase. Numerous glitches have occurred since then, including millions in tax payments that were not processed on time or not credited correctly to taxpayer accounts, according to an internal audit and other city records obtained by The Post. City officials say those mistakes have been corrected.
Accenture will have a long-term role in running the system. The company's contract to finish building it, which originally ran through September 2001, now stretches to 2005. And two weeks ago, Accenture received a $2.6 million contract to keep running parts of the system through 2007.
Safeguards in Contract
Before the original contract was signed in November 1998, the control board went to considerable lengths to keep the project costs from spiraling out of control. The District paid International Business Machines Corp. $3 million to research the project before it began and to negotiate terms aimed at preventing cost overruns and delays, down to the dollar amounts of daily penalties for missing deadlines.
Accenture, an international consulting firm with 75,000 employees, was the only company to bid for the contract in March 1997.
Herbert J. Huff, who directed the city's Office of Tax and Revenue until a year ago, said he always anticipated spending much more than $63 million on the project. "I was in on the negotiations for the contract," he said. "I knew the contract was up around $108 million or $120 million. It's sad that people are looking at the $63 million."
The contract and other records from the negotiations, however, all specify the $63 million amount. John W. Hill Jr., who was executive director of the control board and signed the agreement, said in a recent interview that the price was firm.
Repeated Warnings
When Accenture's bills hit the $63 million ceiling in June 2001, Coleta Brueck, project supervisor for the city, wrote a request to expand the contract by $32 million. Gandhi's staff mistakenly thought her request had been approved, said Paul C. Lundquist, the controller for the chief financial officer, and Phil Brand, who became director of the Office of Tax and Revenue in March 2003.
In monthly spending reports, Accenture repeatedly told the tax office that the contract's spending limits had been exceeded. Accenture's program manager, J. Christian Stauffer, said in a recent interview that the firm received repeated assurances from Huff and Brueck that the city would pay the bills. Brueck declined to be interviewed.
By the spring of 2002, Accenture had run up bills of more than $93 million. At that point, Lundquist said, Gandhi's staff realized that the contract modification had not been approved, and it slammed on the brakes. Brueck issued a stop-work order that sent some Accenture employees off the job. City employees had to take over parts of the system on which they had not been trained.
Gandhi's office submitted a request for D.C. Council approval to lift the contract ceiling to $105 million to cover spending already done, as well as expenditures planned through 2003.
"We said, 'Let's come clean, go to the council, give them the whole story and get it taken care of,' " Lundquist said.
But the council's secretary received the documents Aug. 9, 2002, in the middle of a 10-week council recess. Contracts that are not acted on within five days receive "passive approval." Council members said that this rule is aimed at preventing delays in routine contracts and that they expect to be alerted to anything that is not routine.
"It's bizarre that it came down in August," said council member Jack Evans (D-Ward 2), chairman of the council's Finance and Revenue Committee. "We're not in session. Technically, we're not here. I'm sure if somebody told me about it, I'd remember it. This doesn't ring a bell with me at all."
An internal audit completed in July by Gandhi's office called the unauthorized spending "financial mismanagement." It said the council approval retroactively made the spending legal. The audit was not publicly released.
Skill Deficit Cited
The biggest increase in cost was $16 million that Accenture received for day-to-day operations of the computer system, according to monthly spending reports. Although the original contract had called for city workers to be trained to run the system right away, Huff said they were not capable of learning the new technology quickly, so he decided to postpone training. "The talent-skill level is not there," Huff said. "We found ourselves wed to the contractor."
While Accenture operated the new system, city workers continued to run the old system so they could compare results. In addition, the tax office spent $6 million for temporary employees in 2001 and 2002 to keep from falling behind.
The price tag also grew because the charge for computers tripled to $12 million. Stauffer and Richard Sella, the tax office's technology chief, said the system would not run at all without the upgrade, despite the extensive analysis done before the contract was signed.
Three features, costing a total of $9 million, were added to the project without competitive bidding.
Brand said the contract was managed with a sense of urgency to correct a desperately bad situation. "The world was burning. Forms were not being processed. Checks were not being deposited," he said.
The tax office requested two limited outside reviews of the project in August 2000. A financial review by the federal Defense Contract Audit Agency found that Accenture was doing the work for which it was billing. But it said the company's hourly rates were too high. A technical review by an ad hoc group of federal agencies praised Accenture's work on the first phase of the project but warned of inadequate contract management and of the failure to train District employees to take over the job.
Gandhi's staff completed an internal review of the collection system's performance in January 2003. It was triggered when $68 million in unprocessed tax payments was discovered at the end of fiscal 2001. The review found that payments continued to slip through the cracks in 2002: $31 million in March and $11 million in June.
In other cases, taxpayers were not given proper credit when their checks were cashed. Millions of dollars in excess credits were awarded to some taxpayers, while other taxpayers where shortchanged millions, said the report, which was not publicly released.
"In any new system there's a shakedown period," Sella said.
While the errors were being catalogued, the District was contesting $8.5 million in Accenture bills, alleging defects in the company's work. According to correspondence obtained under a Freedom of Information request, Brueck complained in the spring that 600 direct-deposit tax refunds were misrouted because the new system did not capture bank account information correctly; that thousands of forms were mismailed; and that the District was losing money because some bills were not being sent out.
Accenture responded that some errors were made by District employees who took over the system without sufficient training after Brueck's stop-work order. It also noted that Brueck had failed to object to problems within deadlines specified in the contract.
In the end, the District agreed to pay all the bills in exchange for a $120,000 credit for future work.
The New Deal
The city's two new agreements with Accenture -- the contract extension through 2005 to finish building a real estate billing system and the contract through 2007 to keep running parts of the tax collection system -- were placed on the council's agenda and received passive approval when no council member objected. The extension was approved Friday and the other agreement Nov. 26.
The second agreement lists hourly rates ranging from $93 for a programmer to $285 for a manager. Sella and Brand said the D.C. government pay scale makes it impossible to hire city workers able to perform those duties.
Gandhi noted that the new system allows taxpayers to file returns on the Web and stores all returns, checks and correspondence as images that can be called up on employees' computer screens, avoiding the need to have couriers running to the file room. It won a national award last year from the Federation of Tax Administrators.
"I'm not going to make any excuses for whatever lapses may have happened," Gandhi said, "but this is a spectacular system."
Researcher Bobbye Pratt contributed to this report.
