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Indiana's bumpy road to privatization

After the private sector took over the state's public assistance program, services were disrupted while politically connected firms benefited. The state's experience underscores the risks of such handoffs — and the issue is likely to persist nationwide.

June 24, 2011|By Matea Gold, Melanie Mason and Tom Hamburger, Los Angeles Times

ACS — via several political action committees — donated nearly $50,000 to Daniels' gubernatorial campaigns and his state leadership PAC between 2003 and 2010. Barnes & Thornburg gave Daniels almost $120,000 between 2004 and 2010.

Daniels began pursuing the idea of privatizing Indiana's welfare eligibility system soon after his 2005 inauguration. The idea was taken up enthusiastically by Roob, whom Daniels had brought over from ACS, and who repeatedly described the failings of Indiana's social services agency, which serves more than 1 million needy residents.

But advocates for the poor and disabled said that although Indiana residents often had to wait long hours to see government caseworkers, the system reliably delivered benefits — something that would change when private companies took over.

In the case of food stamps, for example, the state's negative error rate — how often cases are incorrectly closed or denied — was below the national average from 2001 to 2007, according to the U.S. Department of Agriculture, which oversees how states manage the program. In the 2008 fiscal year, one year after private firms took over, the error rate jumped to just over 13%, more than double the previous year's and the largest rate increase in the nation.

Even before Daniels signed off on the privatization effort, the little-known Lucas Group started reaping benefits. Its role was not publicized at the time, but the consulting firm had a nearly $4-million contract — signed by Roob — to write the specifications by which the bidding companies would take over the system.

Like ACS, the Lucas Group had ties to former mayor Goldsmith: He served for a time as a senior consultant for the firm, which is run by a longtime associate. Goldsmith, now a deputy mayor in New York, said in an interview that he had nothing to do with the state's awarding of contracts to the Lucas Group or ACS.

When states look to privatize, they frequently turn to ACS, a powerhouse known for exercising political muscle in pursuit of government contracts.

The Dallas-based company, which was purchased by Xerox in 2009, is one of the country's biggest providers of government services, currently working with more than 25 federal agencies, all 50 states and many major cities. In the last decade, Los Angeles has paid ACS nearly $56 million to administer parking tickets, among other services. This fall, ACS is slated to begin operations on a 10-year, $1.6-billion contract in California to process claims for Medi-Cal, the state's Medicaid program, which serves more than 7 million beneficiaries.

During Indiana's deliberations, ACS was under fire from federal regulators examining backdating of stock options, as well as from officials in several states who complained of delays, technical problems and, in one case, manipulation of data to justify bonus payments.

Ken Ericson, a spokesman for ACS, said the company remained in good standing with its government clients, continuing to provide services in all 50 states.

Despite its troubles around the country, ACS — as a subcontractor to IBM — ended up with the biggest piece of the contract in Indiana. The company hired 1,500 former state workers, built the system's call center and provided the staff that did the initial processing of welfare applications. It was also poised to make a minimum of $596 million in fixed fees, according to documents obtained by the Tribune Washington Bureau/Los Angeles Times.

Roob, whose agency solicited bids for the project, did not return calls for comment. But aides to Daniels said the former Family and Social Services Administration secretary played no role in the selection process.

They noted that the winning consortium, then led by IBM, ended up being the only bidder for the deal after another group led by Accenture dropped out in May 2006. An interagency review committee studied the proposal by the IBM-led consortium and recommended that the governor move forward with the project.

"No one ever said, 'We want to make sure ACS is part of this,'" said Earl Goode, Daniels' chief of staff, who chaired the review committee. "It was looking at the best solution and what's best for the taxpayers of Indiana."

In late November 2006, Daniels announced he had accepted the review committee's recommendation. A week later, the state held the only public hearing on the proposal. He signed the deal with IBM a month later, declaring the move would save taxpayers $1 billion.

Under the privatized system, clients applied for benefits online and through call centers, rather than by waiting to see a caseworker. ACS employees screened applicants before state caseworkers would determine their eligibility.

From the beginning, however, there were problems: According to the state's lawsuit, documents were lost, cases piled up and workers started routinely denying applications just to reduce the backlog.

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