This failure is due to the field names INDEX in the contour feature classes is a reserved field name within SQL Server. The contour feature classes can be found within the Elevation feature dataset within this model.
Solution or Workaround
There are several options for working around this error so that the Local Government model can be utilized within an ArcSDE SQL Server database. Please choose from one of the following options.
Create a new, empty file geodatabase. Once completed, import the Local Government.xml into the file geodatabase, and copy and paste all the data into an ArcSDE geodatabase.
Import the Local Government.xml into a file geodatabase, create an XML export and exclude all data within the Elevation feature dataset. After the newly created .xml file has been successfully imported into an ArcSDE geodatabase, copy and paste the Elevation feature dataset from the file geodatabase into the ArcSDE geodatabase. This automatically changes the INDEX field name to INDEX_.
From within a file geodatabase, navigate to the contour feature classes located within the Elevation feature dataset, delete those fields named INDEX, and use the fields called ELEVINDEX instead. Once completed, a new .xml can be exported from the file geodatabase and can be imported into an ArcSDE SQL Server geodatabase.