Not sure, but these two articles do a quite good job of explaining the intricacies of the City of LA's contracts with both Google and CSC. This has been a very high profile contract and I wouldn't be surprised if the issue was primarily that not all of the right people on both sides had a good enough understanding of the current architecture and capabilities of Google/Apps going in, and someone was surprised. It could have been something simple, like the fact that Google doesn't encrypt user data (it obfuscates it), or that they can't guarantee US citizenship of support staff, even if the data is stored within the contiguous 48.
http://www.infolawgroup.com/2010/05/articles/cloud-computing...
http://www.infolawgroup.com/2010/06/articles/cloud-computing...