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As states outsource, debate about it grows

Like the auto industry, the computer programming field and the customer-service business, the state of Indiana is outsourcing.
Betty Bledsoe
Betty Bledsoe of Indianapolis, holds a box containing daily medications for her children. All 12 of Bledsoe's children receive Medicaid for various disabilities and she worries about Gov. Mitch Daniels plan to automate the processing of food stamps, Medicaid and other benefits.Tom Strattman / AP file
/ Source: The Associated Press

Like the auto industry, the computer programming field and the customer-service business, the state of Indiana is outsourcing.

In the two years since Republican Gov. Mitch Daniels took office, the state has leased the 157-mile Indiana Toll Road to an outside company for the next 75 years for $3.8 billion, hired vendors for $1.16 billion over 10 years to process welfare applications, and brought in a company to serve food at a mental hospital. And now Daniels wants to lease the Indiana lottery for at least $1 billion over 10 years and put the money toward education.

Daniels is leading the way among cash-strapped governors who are contracting out services states historically have handled themselves. The primary goal of these deals: saving tax dollars, or generating quick cash that can be used to fix roads, reduce debt or provide college scholarships.

"All over America, leaders of both parties are now undertaking projects like Indiana did, to solve their crises and their own shortfalls without raising taxes," said Daniels, who was nicknamed "The Blade" for cutting taxes and spending as President Bush's first budget director.

But some legislators and government-watchers warn that some of these privatization deals have yielded shoddy service. And some fear that in leasing toll roads and lotteries, politicians are signing away a reliable, long-term stream of revenue for a big lump sum of money they might squander on some short-term ideas.

"There's a real danger you end up mortgaging your future," David Schulz, an infrastructure expert at Northwestern University. "You've got 50 or 60 years of lottery payments, but you've used it in the first couple of years."

Elsewhere around the country, Chicago in 2005 signed a 99-year lease of its 7.8-mile Skyway toll road for $1.83 billion, and Illinois Gov. Rod Blagojevich is one of several governors proposing to lease their state lotteries. New Jersey Gov. Jon S. Corzine, whose state has the highest property taxes in America, wants to outsource the New Jersey Turnpike. And several states have hired outsiders to run welfare operations.

"Doing nothing is not an option," said Pennsylvania Gov. Ed Rendell, who is considering leasing the Pennsylvania Turnpike to a private operator to help pay for $1.7 billion in transportation improvements.

Many of the deals have drawn criticism.

Retired University of Notre Dame economics professor Roger Skurski, testifying last year in a court case that failed to block the leasing of the Indiana Toll Road, calculated the state could have earned $1.5 billion to $8 billion more over the 75 years of the term than the $3.8 billion it collected in a single upfront payment.

"The state is forgoing the opportunity to make these numbers," he said.

The toll road lease was blamed for the November defeat of several GOP incumbents, and Daniels' lottery plan has met resistance from both parties.

"The rush to privatization is like driving too fast on a foggy morning. We risk collision if we go too fast," said Tom Tokarski, an Indiana highway activist.

Texas' welfare system fell into disarray during its first year of privatization. An audit there found more than 81,500 children over eight months lost health insurance because of problems with the new system.

Georgia and North Carolina complained about poor customer service, Medicaid claims being paid improperly or not at all and other problems after hiring a company to manage welfare operations.

"You have to be open to the possibility that things won't go as well as planned," said Celia Hagert of the Center for Public Policy Priorities, author of a report criticizing Texas' welfare changes. "You have to put client interests ahead of the desire to save money quickly."

Betty Bledsoe, 44, of Indianapolis, is watching Indiana's changes closely. The single mother of 12 children worries about a deal signed with an IBM Corp.-led partnership for $1.16 billion over 10 years to automate the processing of food stamps, Medicaid and other benefits.

Bledsoe's children — nine of whom are adopted — all receive Medicaid for disabilities that include autism, seizures and fetal alcohol syndrome. One received $77,000 in Medicaid-funded services last year.

"If one of my kids lost Medicaid, we would go under. I'd have to sell my home," Bledsoe said.

Mitch Roob, who leads Indiana's social services agency, said the state would have otherwise had to spend nearly $500 million upgrading its system for delivering benefits.

Some Indiana lawmakers are demanding more say over the signing of big outsourcing deals.

"This governor should remember that he is a guest in the people's house," said House Speaker Pat Bauer, a Democrat. "He doesn't have the right to come in and sell off all the furniture."