Pa. sues IBM, alleging $60 million in cost overruns in unemployment-system contract

HARRISBURG — The Wolf administration on Thursday sued IBM over an attempted upgrade of Pennsylvania's unemployment compensation system that the state says went millions of dollars over budget and years beyond schedule before it stopped the project.

The lawsuit says Pennsylvania paid International Business Machines Corp. nearly $170 million but never received the modern and integrated system it promised. By the time the Department of Labor and Industry allowed the contract to lapse in September 2013, the project was more than three years behind schedule and $60 million over budget, the lawsuit claims.

Lawyers for the state wrote that IBM, "much like a general contractor on an office building project," was responsible for the various phases of the project and its overall management.

"IBM repeatedly failed to live up to these commitments and made decisions that thwarted successful completion of the project," the lawsuit says.

How to deal with problems in the software overhaul has become a high-profile political dispute at the state  Capitol.

After Senate Republicans declined to renew funding for the system, the Department of Labor and Industry in December closed three call centers and laid off nearly 500 employees. About 100 of those workers have since been placed in state jobs, and 30 have retired, said Sara Goulet, spokeswoman for the department.

Funded by taxes on employees and employers, the state's unemployment compensation trust fund provides benefit payments for up to 26 weeks to people who have lost a job through no fault of their own.

The lawsuit, filed in Dauphin County, accuses IBM of breach of contract and misrepresentation, among other claims.

IBM spokesman Clint Roswell said in a statement that the state's claims "have no merit" and that the company would "vigorously" defend itself.

"All told, Pennsylvania taxpayers paid IBM nearly $170 million for what was supposed to be a comprehensive, integrated, and modern system that it never got," Gov. Wolf said in a statement. "Instead, the Department of Labor and Industry has been forced to continue to support many of its UC program activities through a collection of aging, costly legacy systems, incurring tens of millions of dollars in server, support and maintenance costs."

The legal complaint states that for decades, the department has used a collection of "increasingly outdated" computer systems to assist in its unemployment compensation work. A lack of integration of the systems led to inefficiency, it says.

But hiring IBM, in 2006, brought its own problems, the lawsuit says. The Department of Labor and Industry complained, for example, that "frequent IBM personnel churn came to be a defining feature" of the project.

IBM also pushed to have components of the project declared complete when they still had code defects, the lawsuit says. It claims that the state relied on misrepresentations by IBM that the project was almost complete to continue paying the company "in what proved to be a futile attempt to obtain a complete and fully functioning system."

In 2013, Carnegie Mellon University assessed the project and recommended the state should not continue it because of a high risk of failure, the lawsuit says.

Jennifer Kocher, spokeswoman for Senate Majority Leader Jake Corman (R., Centre), said the filing of the lawsuit validates Senate Republicans' questioning of the Department of Labor and Industry about the system.

"It just underscores the concerns we have had all along and the questions we have been asking about how [Labor and Industry] is using and spending the resources that have been allocated," Kocher said.