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State officials downplayed Oracle settlement to avoid federal 'clawback.' Will new administration want more?

Call it the debacle that would not die.

An effort by Gov. Kate Brown's office to deny the federal government any share of the $100 million-plus settlement with Oracle over the Cover Oregon website fiasco now looks like it may not succeed.

Top state officials are engaged in talks with their federal counterparts over how much Oregon should repay Uncle Sam in light of the Oracle pact — despite efforts by the state to structure the deal to avoid any reimbursement whatsoever of the $305 million in federal grants Oregon had received for the website.

The discussions, revealed by the Bend Bulletin last week, are occurring as the state faces a $1.4 billion budget hole. And the new Trump administration that takes office in less than two months could be far more demanding, reflecting repeated calls by Congressional Republicans for Oregon to repay the staggering sum wasted on the project.

The ongoing discussions with the federal government reflect an effort to recoup "its fair portion" of the proceeds, as Andy Slavitt, acting administrator of the Centers for Medicare & Medicaid Services, promised Congress his agency would do when states won settlements from exchange contractors.

The unresolved issues mean that the state may yet have to shell out more funds.

David Friedman, a Willamette University College of Law professor who tracked the Oracle litigation, says he had assumed the state would have obtained a level of federal buy-in before signing the deal. He says he spoke about the potential clawback issue with a high-ranking state official before the settlement was reached. He says of the conversation, "I was left with the impression that this would all be nailed down."

Friedman recalls his response, which now seems prophetic: "You better do it quickly because there is an election coming up."

So far, the state has offered the feds used servers purchased from Oracle. But no final decision has been reached, according to a state spokeswoman.

Oregon a punchline

The Cover Oregon story made the state a punchline on national comedy shows three years ago.

Oregon was one of about a dozen states to build their own Obamacare websites intended to allow one-stop shopping, enrollment and qualifying for tax credits to reduce health insurance premiums.

Despite millions spent on slick advertising and a "go-live" date of October 2013, the state website was never unveiled to the public to allow enrollment in health coverage as planned. Instead, a jerry-rigged system involving hundreds of temps entering data manually led to thousands of lost applications and countless errors — even enrolling U.S. Sen. Jeff Merkley, a millionaire, in the low-income Oregon Health Plan.

Attorney General Ellen Rosenblum filed suit against Oracle in August 2014 accusing the company and its top officials of shoddy work, fraud and racketeering while collecting $240 million from the state.

Oracle counter-sued and blamed Oregon for managing the project itself rather than hiring a general contractor to oversee Oracle's work.

After suing, the state obtained Oracle internal emails in which a company employee indicated the firm had been "raping" the state. In one, a top company troubleshooter said Oracle performed so abysmally in Oregon that those responsible should be "publicly flogged."

Settlement in September

The settlement announced Sept. 15 allowed both sides to claim victory. Oracle paid out $25 million to cover legal costs incurred by the state and promised to pay another $10 million in Oracle-branded education grants to a nonprofit. It also gave Oregon what amounted to a coupon for an all-you-can-eat technology binge: an unlimited license agreement that gave the state five years to stock up on free Oracle software as well as complimentary tech support that the state valued at $60 million.

The agreement made Oracle the centerpiece of Oregon's efforts to overhaul antiquated state software systems and repudiated the state's earlier vilification of the California software giant — constituting a major public relations victory.

The deal drew criticism for including so little in the way of cash and ensuring that Oracle's minimal payout would be more than made up in future years with the boost in revenue it would enjoy from future sales to Oregon state agencies. "Oracle made out like a bandit with this," said Dave Welch, chief technology officer for House of Brick Technologies, an Omaha firm considered a leader in advising Oracle clients.

At the time of the announcement, Oregon officials declined to provide a formal valuation of the settlement or put a dollar amount on potential savings.

Secret talking points

Internally, however, documents show that Gov. Brown's office released a far more detailed and expansive list of potential benefits — totaling $300 million or more — for sharing with select government officials in advance of the settlement. The email appeared to caution against discussing the potential value publicly to avoid triggering a federal demand for reimbursement.

The Oregon Legislature would need to approve new spending to trigger the full value of the deal, and "such a characterization also might trigger the feds to seek reimbursement (claw-back)," Kristen Grainger, a Brown spokeswoman, wrote in the Sept. 13 email distributed to the governor and other top staff. The email was posted on Brown's public records web page weeks ago in response to a records request from the Portland Business Journal.

Click here to read Brown's talking points

"The safest dollar amount we could use today is, 'The estimated value of the agreement at signing is well over $100 million. If the Legislature maximizes its investment in modernizing the state's IT systems, the value of the license agreement could be multiples of that,' " Grainger added.

In the end, the official press release was far more conservative, characterizing the settlement simply at "more than $100 million" and failing to provide many of the dollar-figure valuations shared internally.

Asked whether Brown had intentionally downplayed the settlement's potential benefits publicly to avoid a federal clawback, Grainger replied:

"It's a matter of simple addition. We totaled up those elements of the settlement determined to have actual market value, and did not include in that calculation those that were speculative, that required future legislative action. To do otherwise would have been both presumptuous and a potentially misleading characterization of the settlement's value."

A spokeswoman for Rosenblum, Kristina Edmunson, similarly said, "When the settlement was announced, we did not want to overstate the value. The ultimate value of the settlement will depend on a combination of factors that are yet to be determined."

Grainger in her Sept. 13 talking points email echoed a statement she made to the Portland Tribune two days later that the Oracle pact was "carefully" and "creatively" structured to avoid repaying any money to the federal government.

"These are unusual circumstances, so the settlement agreement had to be crafted creatively so as to address all relevant interests, and therefore hopefully will avoid triggering a claw-back of funds by the federal government," she wrote.

The Oregon approach comes in contrast to that of Maryland, which reached an out-of-court settlement with its contractor for $45 million, about 60 percent of what the company was paid, with federal officials included in the negotiations. Of that figure, the federal government clawed back $32 million, or 70 percent of what Maryland won. The sum kept by Maryland more than covered the state's legal expenses, according to a spokesman for the Maryland attorney general.

In Oregon, however, if the feds do demand cash, the only clear place it can come from is the $25 million Oracle provided to cover the state's legal costs.

Friedman says that the state should nail down the terms of any federal clawback before Trump takes office Jan. 20. "There's still some time for this to be worked out," he said.

Brown's budget to offer clues on software use

Oregonians will get an idea on Thursday of whether the touted benefits of the Oracle settlement over the Cover Oregon debacle will soon come to pass.

Gov. Kate Brown is scheduled to release her plan to cover a $1.4 billion budget gap over the next two years.

An internal Sept. 13 email sent to Brown called for spending between $40 and $60 million in 2017-19 to implement free Oracle software included in the settlement that's worth $110 milion or more, and a similar amount over the following two-year budget.

The software-heavy deal was structured to avoid receiving cash from Oracle that could then be "clawed back" by the federal government, documents show.

Brown has vowed to preserve health care and other essential services, raising the question of whether the state's hoped-for tech revamp using Oracle software will proceed.

Grainger said Brown does not regret the settlement terms: "The litigation was costing the State a million dollars a month with no end in sight. Turning off that spigot and recovering the State's costs — plus, the potential for huge savings in the future — obviously makes a lot of sense in light of the projected budget shortfall."

By Nick Budnick
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