LA Times' Look At The Corrupt FSSA Privatization Deal Indiana Media Refused To Do

Taking a look at today's LA Times article discussing Gov. Mitch Daniels administration's failed FSSA privatization deal, it's no small wonder he decided against running for president. Reporters from the newspaper came to Indianapolis to investigate the deal while Daniels was still being encouraged to jump into the 2012 GOP presidential race. Reporters Tom Hamburger and Melanie Mason spent several days in Indianapolis in May digging for information on the deal in the days leading up to Daniels' surprise announcement that he would not run due to family considerations. The two reporters met with me for several hours back in May to ask questions and discuss my reporting on the subject (even though there's no attribution in their story). They were surprised the botched privatization deal hadn't received more coverage by the Indiana media, particularly given the ties of key players in the deal to ACS, the big benefactor of the deal. I thought the story would be dropped after Daniels decided not to run, but the material they uncovered was just too good to pass up.

Here's some of what the reporters had to say on those corrupt ties that seemed to drive the deal from the beginning:

Though the $1.37-billion project proved disastrous for many of the state's poor, elderly and disabled, it was a financial bonanza for a handful of firms with ties to Daniels and his political allies, which landed state contracts worth millions . . .

Critics say that in Indiana, the privatization process barreled forward with little public input and was marred by the appearance of conflicts of interest. Despite the massive nature of the changes he was proposing, Daniels insisted he did not need legislative approval. And the only public hearing occurred after he announced he would proceed with the project.

Key players involved in the process had ties to Affiliated Computer Services, the company that benefited the most from the deal. Mitch Roob — a Daniels appointee who ran the state's Family and Social Services Administration when it awarded the contract — was a former ACS vice president. As the state began the project, Roob occasionally sought advice from former Indianapolis Mayor Stephen Goldsmith, a political ally of Daniels and fellow privatization advocate who also had been an ACS vice president . . .

In a brief interview, Daniels called "completely bogus" the suggestion that his administration was too close to companies that won lucrative contracts.

"There is no evidence of that," he said. "Our approach was either firms perform well — or we will get rid of them and try someone else."

Yet it took two years before the governor acknowledged that replacing caseworkers with centralized call centers "just didn't work." In October 2009, Daniels canceled a 10-year contract with an IBM-led consortium of companies that included ACS among its subcontractors. IBM and Indiana are now engaged in dueling lawsuits scheduled to go to trial next February.

After IBM was fired, ACS — which was blamed by welfare advocates for many of the problems — was given a new eight-year contract worth $638 million to continue its work, according to state records.

All told, three politically connected firms gained from the welfare privatization effort in Indiana: ACS; the Lucas Group, a Boston-based firm that wrote the specifications for the contract; and Barnes & Thornburg, the Indianapolis law firm that lobbies for ACS and is representing the state in its suit against IBM.

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 . . .

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 . . .

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 . . .

IBM said the problems were due to an unexpected surge in applications.

"Our contention has always been there weren't enough caseworkers," said IBM spokesman Clint Roswell.

The state said the issue was IBM's oversight of ACS.

"The state is now managing them and they're doing fine," said Peter Rusthoven, one of the lawyers representing the state in its suit against IBM.

When the state decided to sue, the Daniels administration opted to hire Rusthoven's firm — Barnes & Thornburg, which also represents ACS — to handle the case, rather than rely on the state attorney general. One of the Barnes & Thornburg partners listed on the $5.25-million contract is Brian Burdick, the brother of Daniels' deputy chief of staff.

Mark Massa, who was Daniels' general counsel at the time, said hiring outside counsel was necessary because of the complexity of the case.

"I just wanted to hire the best litigators I could find," Massa said. "The decision was solely mine and I didn't take political considerations into account." . . . 

The LA Times reporters missed one big item: the hiring of Mike Gargano as FSSA's new secretary to oversee ACS. Gargano is a former consultant for ACS who is married to Ann Lathrop, another former member of the Goldsmith administration who worked as an executive at ACS, alongside Goldsmith, Roob and Skip Stitt. The reporters had access to documents prepared by former FSSA employee Carl Moldthan, now deceased, who warned Daniels and legislative leaders the privatization of the FSSA services was misguided and being done for all of the wrong reasons. Moldthan's critique included an admission by Roob that the privatization would not save taxpayers one dime despite Daniels' public claim that it would save $500 million over ten years.