INDIANAPOLIS (AP) — A judge on Wednesday spurned Indiana's efforts to recoup roughly $170 million from IBM Corp. over its failed effort to overhaul the state's welfare system as part of a broader privatization push that was an early hallmark of Republican Gov. Mitch Daniels' tenure.
Marion County Judge David Dreyer said in a 75-page order that neither side deserved to win the dispute, and awarded IBM only a small fraction of what it was seeking.
The 2006 decision to outsource the intake of welfare clients to a team of private contractors led by IBM, along with other efforts at privatization, such as leasing the Indiana Toll Road to a private company, drew national attention and inspired imitation around the country. The changes also enhanced Daniels' conservative image to the point where he was seen as a Republican presidential contender.
"Mitch Daniels is beyond question one of the champions of privatization," said Donald F. Kettl, dean of the School of Public Policy at the University of Maryland, who has studied privatization for more than 20 years.
The IBM-led team of vendors was awarded a 10-year, $1.37 billion contract to process applications for food stamps, Medicaid, and other public safety net benefits. The project introduced call centers, the Internet and fax machines as means by which residents could apply for benefits, and it removed specific state case workers assigned to each household.
But the new system quickly became mired in complaints from lawmakers, welfare clients and their advocates that it lost necessary documents, left callers on hold for long periods and reduced or eliminated face-to-face contact with case workers. Daniels killed the deal in 2009 after less than three years.
Dreyer blamed "misguided government policy and overzealous corporate ambition" for the failure of the system, which he called an "untested theoretical experiment."
Indiana initially sued IBM for the $437 million it paid the company, a figure that before the trial was reduced to about $170 million, said Peter Rusthoven, an Indianapolis attorney who represented the state in the case. IBM countersued for about $100 million that it claimed it was owed.
Dreyer said Indiana failed to prove that IBM breached its contract, and he denied the state any of the money it sought. While calling most of IBM's claims for damages "unreasonable," he awarded the Armonk, N.Y.-based company $12 million, mostly for equipment the state kept. IBM previously had previously received $40 million in a summary judgment ahead of the trial.
"This case seems to have backfired" for Daniels, said Darrell West, vice president and director of Governance Studies at the Brookings Institution. "So it puts a dent in his reputation and it means people will take a closer look at how he is approaching the delivery of government services."
Kettl said many efforts at privatization of state-level services have run into problems due to the complexity of the centralized systems.
"It's not like going to Home Depot and buying a welfare system off the shelf," he said.
David Sklar, president of the Indiana Coalition for Human Services, a nonprofit coalition of about 25 service providers and advocacy groups, said the organization had always been concerned about the effect privatization would have on low-income families, but said the new, hybrid system generated far fewer complaints.
"It's a shame that this endeavor in the end will probably cost the taxpayers more money," he said.
House Minority Leader Pat Bauer said in a statement that the lawsuit stood to cost taxpayers about $65 million, counting the judgments and outside legal fees.
"Privatizing welfare didn't work. It was a complete disaster," said Bauer, D-South Bend.
Since Daniels fired IBM, a group of subcontractors led by the Family and Social Services Administration has introduced a new hybrid welfare system that maintains elements of the IBM project but includes more face-to-face caseworker interaction with clients during the application process
Even if Dreyer's ruling is upheld on appeal, Daniels said the state made the correct decision in firing IBM.
"We now have a system that is very dramatically better than before and of course better than what IBM could do," he said, calling Indiana's welfare intake system now one of the best in the nation.
In response, the company issued a statement in which it said Daniels "chooses to ignore the fact that the modernized system is based on IBM technology and efforts while it led the program."
Rusthoven said the government would appeal Dreyer's finding that IBM hadn't broken its deal. He said federal regulators found IBM's performance "abysmal" and the company's own chief executive called it an "abomination."
Kettl said the outcome of the dispute likely would not change anyone's mind about privatization, since supporters and opponents alike tend to be adamant in their beliefs.
But, he added, "The pragmatists in between will have to see this as sign that big problems have to be solved to make this thing work."
Associated Press writer Rick Callahan contributed to this report.
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