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Saturday, November 22, 1997

Operators of Lone Star Card threaten to bail out of contract with state

HOUSTON (AP) -- Operators of the Lone Star Card, which replaced paper food stamps in Texas, have threatened to sue the state and bail out of their contract on short notice, state officials say.

The reason? The operator of the card -- Transactive Corp. -- has its profits tied to the number of welfare recipients and there's been a sharp decline in the number of poor Texans receiving welfare.

Fewer poor people means less profit for Transactive, which is owned by GTECH Corp., the company that runs the state's lottery.

State budget leaders are angered by the threat, and officials at the Texas Department of Human Services say even a temporary return to paper food stamps could disrupt benefits to poor people.

"There is only one problem here. The Lone Star card works so well, has cut so much fraud and has dropped so many people off of welfare that the contractor is losing money," said John Sharp, Texas comptroller. "That's tough."

Transactive signed a seven-year contract with the state in 1994. The state has the right to quit the contract on 90 days notice, DHS officials say.

The company is claiming a breach of contract under the deal and is threatening a lawsuit, Texas Human Service Commissioner Eric M. Bost told the Houston Chronicle.

Transactive would say only that it is reviewing all remedies to the situation and that includes legal ones.

"We are considering all of our options," said spokesman Marc Palazzo.

The Lone Star Card, which looks like an ordinary credit card, transfers both food stamp and cash welfare benefits to merchants electronically.

The company, which is paid according to the number of people using the card, is demanding an immediate change in contract terms.

"Transactive nor the state of Texas is in fault in this matter. The responsibility for this matter lies with the federal government," Palazzo said. "There are onerous federal rules that require that the contractor be compensated on a per case per month basis and the federal laws do not allow for any kind of sliding scale in relation to these contracts."

Should the state offer a safety net to contractors for times when welfare rolls are on the decline?

"It's instances like this that raise questions about privatization," said state Rep. Robert Junell, D-San Angelo, chairman of the House Appropriations Committee. "What the Lone Star Card did is exactly what we wanted it to do, which was to reduce fraud and if that means less welfare recipients, then so be it."

Gov. George W. Bush was en route to the Republic Governors Association meeting in Florida and could not be reached for comment, Bush spokesman Ray Sullivan said.

"I know the decision to negotiate was DHS' to make," he said.

Transactive President Gregory L. Coler told DHS officials in a letter in September that a 39 percent drop in combined food stamp and cash welfare rolls has meant the company is short $1 million a month and had endured an overall shortfall of $17.4 million through August of this year.

The company believes DHS is "in breach of the contract" because, at the time the contract was put up for bids, the state erroneously projected monthly payments of about $2.6 million.

GTECH Corp. has sued the Texas Lottery Commission in a separate contract dispute.