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."

Governor Daniels issued this statement about the ruling:

“Here’s what matters: Indiana, which eight years ago had the nation’s worst welfare system, now has its most timely, most accurate, most cost effective and fraud free system ever. That was always the goal, and changing vendors was essential to achieving it. We’ll seek and expect a reversal, and either way, it’s all been well worth it to solve the problem we set out to fix.”

The U.S. Department of Agriculture (USDA) recently recognized Indiana’s Family and Social Services Administration (FSSA) for its second straight year of achieving payment accuracy and negative error rates that are better than the national average in both categories. A year ago, Indiana was the second most improved state for payment accuracy and earned a $1.6 million bonus. 

Among other improvements since the state terminated its contract with IBM in 2009 and turned to other private vendors to modernize the delivery of welfare services throughout the state:

  • Timeliness to process applications within required standards for all programs is now 93 percent compared to 65.6 percent in 2009 under IBM, and 74 percent in 2005. This includes applications for Medicaid, the food stamp program known as Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance to Needy Families (TANF).
  • The error rate for individuals incorrectly denied SNAP benefits is well below the national average and has plummeted since the IBM contract was terminated. The error rate was 5.64 percent for federal FY 2011 but was 13.69 percent in 2009 with IBM and 6.58 percent in 2005.
  • The SNAP error rate for payment accuracy has been reduced by nearly half from the IBM contract period to federal Fiscal Year 2011 (7.13 percent to 3.29 percent). The error rate was 6.58 percent in 2005.
  • Timeliness for eligible recipients to receive benefits more quickly and accurately has improved despite a nearly 90 percent increase in application volume since 2005. The state processed about 696,000 welfare applications in 2005 and is expected to process more than 1.3 million applications this year.
  • The state’s case backlog has dropped 81 percent since the IBM contract was terminated.

Adam Horst, the director of the Office of Management and Budget, said “Even if this ruling stands, it will have zero impact on the state surplus. The state sets aside funds for exactly this type of lawsuit contingency. Taxpayers are way ahead because of the decision to modernize our eligibility system.”

If the state had taken no action to change its welfare system, the cost to operate the old system just this year would have been $61 million more than the system now in place. Since the state began using different private vendors in early 2010, savings versus the old welfare delivery system have been $129 million, according FSSA Secretary Michael Gargano.

Ind. Democratic Leader B. Patrick Bauer of South Bend on IBM decision:
"And the price tag for the governor's failed social experiment just keeps going higher and higher and higher for the taxpayers of Indiana."
"In addition to the $12 million owed to IBM as a result of today's decision, this judge ruled earlier that the state must pay $40 million in subcontractor fees. Don’t forget that we also owe at least another $13 million in outside legal services.
“That means Indiana taxpayers will be footing the bill to the tune of somewhere in the area of $65 million, simply because this governor operated under the misguided belief that private contractors could handle public services better.

“Privatizing welfare didn’t work. It was a complete disaster."

“We wasted three years to prove the point that many of us said would happen when this miserable idea was first launched. That meant three years of delays in processing applications and delivering services, which meant needy Hoosier families were deprived of assistance that could help them survive."

“After three years, even the governor finally got the point that it wasn’t working and ditched it in favor of another system that includes government oversight."

“In their usual efforts to avoid responsibility for anything they have done wrong, the governor and his minions will claim that this ruling is beside the point. They will say their decision-making was right all along."

“But this is yet another example of an administration that continues to screw up at every conceivable opportunity in its final days in office."

“Fortunately, their end is in sight."

“Unfortunately, they will be long gone when the final bills come due for the taxpayers of Indiana.”