Privatization of Welfare Services:  A Review of the Literature

Chapter II:
The Current State of Social Service Privatization

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Contents

1. Survey Findings on the Extent of Social Service Privatization
2. Types of Services Privatized
   1. Department of Labor Employment Services
   2. Child Welfare
   3. Child Support Enforcement
   4. TANF Services
3. Types of Nongovernmental Organizations That Provide Welfare Services
   1. For-Profit Organizations
   2. Large Nonprofit Organizations
   3. Community-Based Nonprofit Organizations

Endnotes

State and local governments have turned to private providers for a wide range of services, from routine matters such as road maintenance and garbage removal to sensitive undertakings such as fire protection and the operation of corrections facilities (Sclar 2000). A 1997 survey by the Council on State Governments documents the use of privatization by state agencies of at least 15 different types, as varied as environmental protection, education, and the treasury (Chi and Jasper 1998).

This diversity of privatization experience applies within the sphere of welfare and related services as well. Under contract with public agencies, private organizations and corporations supply job training and placement, child support enforcement, child care and child protection, the administration of cash assistance programs, and other services.

This chapter describes the current state of social service privatization. It first reviews data from surveys on state and local contracting. It then highlights the types of social services privatized and, finally, describes the types of nongovernmental organizations that provide these services.

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A. Survey Findings on the Extent of Social Service Privatization

While a number of surveys have collected information on state and local governments' use of privatization, few focus specifically on social services. These assessments employ a variety of methods and definitions, making comparisons among them difficult. They do reveal, however, a general trend toward increasing privatization for social service delivery. The findings of three previous studies are particularly informative:

• Survey data collected in 1992 and 1993 by the Reason Foundation summarize the extent of social service privatization in the period before welfare reform. Agencies in 29 states and 15 counties responded to the survey, with almost all (94 percent of state agencies and 88 percent of county agencies) confirming that they used some form of privatization in providing social services. Nonprofit organizations were the usual provider of these services, receiving about 80 percent of all contracts. Services most commonly privatized included day care, drug and alcohol treatment, child welfare and adoption, programs for the elderly, and employment training (Eggers and Ng 1993).
• Although the Council on State Governments 1997 privatization survey elicited responses from social services agencies in only 27 states, more than half of those who responded indicated that they had privatized at least 15 percent of their programs and services, and nearly nine out of ten reported that privatization activity had increased since 1992. Indeed, an analysis of the survey's findings concluded that "social service agencies were the most likely to raise their level of privatization" among the 15 types of agencies covered by the study (Chi and Jasper 1998). Only three state agencies reported that they had privatized "welfare services," but eight said they had contracted for "client assessment" and 10 or more had outsourced services such as child care, drug and alcohol treatment, employment, and Food Stamp issuance. Three-quarters of the agencies responding to the survey expected the trend toward increased contracting out to continue.
• Research by the GAO (1997b) also found increased privatization of social services. Experts from organizations such as the National Governors' Association, the National Association of Counties, and the National Conference of State Legislators told the GAO that the percentage of state and local social service budgets paid to contractors had grown in recent years. Representatives of state and local governments concurred, noting that since 1990 contractors had both received an increased share of social service budgets and performed a greater number of government functions. The GAO report highlights wide variation in the share of specific program budgets paid to contractors, however, because individual localities operating similar programs make different decisions regarding the extent of privatization.

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B. Types of Services Privatized

A review of state and local governments' experience with privatization suggests that outsourcing of social services takes place, broadly, in two forms. Under one method, government agencies contract with private providers to deliver single components of a larger program--job training and placement for TANF recipients, for example. Alternatively, agencies may look to private contractors to deliver a comprehensive set of program services in a specific location--a full-service operation for child support enforcement, for instance, or a complete TANF program, including intake and assessment, eligibility determination, and case management. To date, governments have employed the former strategy more often than the latter. The rest of this section describes privatization in individual service areas.

1. Department of Labor Employment Services

Contracting out service provision has been common in the U.S. Department of Labor's employment and training (E&T) programs since the 1960s (Nightingale and Pindus 1997). Most of the contractors have been nonprofit or public entities (such as community colleges, the employment service, or public school districts), although in some localities, for-profit companies have also provided services. Job Corps--a residential program for disadvantaged youth--is operated by both private entities under contract to Job Corps regional offices and by federal government entities under interagency agreements with the U.S. Department of Labor.

Nonprofit organizations and private companies have also taken a role in developing and operating the system of one-stop career centers required under the Workforce Investment Act. Affiliated Computer Services, Inc., a large for-profit corporation, manages the operation of several career centers in Polk County, Florida, for example, while the Educational Training Institute, also a for-profit company, provides similar services in Massachusetts (Graham 2001; Roper 1998). More frequently, this function is contracted to public-private consortia or nonprofit organizations.

2. Child Welfare

Child welfare functions, such as foster care, adoption, family preservation, and mental health treatment, have long been candidates for privatization. The City of New York began contracting with nonprofit agencies more than a century ago to provide services for the children in its custody, who now number in the tens of thousands (Bernstein 2001). As of 1998, child welfare agencies in at least 29 states had implemented privatization initiatives of various scales and types (McCollough and Schmitt 1999).

While the involvement of private contractors in child welfare has a long history, new forms of privatization have emerged in recent years. In 1996, Kansas drew national attention by adopting a managed-care system for its child welfare program statewide. Under this system, private-sector organizations were paid a set fee for each child referred, intended to cover the cost of all foster care, family preservation, or adoption services provided. However, the state's Department of Social and Rehabilitative Services recently terminated the managed care approach after discovering that it created significant financial difficulties for contractors. Private providers continue to play an important role in the state's child welfare system but are compensated with a per-child, per-month payment (Kansas Action for Children 2001). The Kansas experience notwithstanding, a number of other states, such as Tennessee and Ohio, have employed managed care as a privatization strategy for child welfare (Kamerman and Kahn 1998).

3. Child Support Enforcement

A marked increase in privatization of child support enforcement has occurred over the past decade. While contracting for functions such as the collection of past-due support was frequent in the 1980s, states and localities have since expanded privatization to include tasks such as payment processing, paternity and order establishment, parent location, and customer service (GAO 1995). Moreover, some governments have opted to turn entire child support operations over to private contractors, who take responsibility for providing all program services. As of 1996, one or more fully privatized local offices existed in 15 states (GAO 1997a). Today, a single provider of full-service privatization, Policy Studies, Inc., operates such offices in 16 states.

Among the factors that have encouraged this movement towards privatization in child support enforcement are increased caseload size, new program mandates, and performance incentives implemented by the federal government. As child support agencies have become responsible for a growing number of clients, some have turned to private contractors to address the excess workload without adding to the government payroll (GAO 1997a). In addition, PRWORA has placed new requirements on state and local child support agencies, including the creation of technology-intensive systems to centralize state case registries and implement enforcement techniques, such as automatic income withholding. To fulfill these obligations, many government agencies have tapped the expertise of private-sector organizations. Finally, federal regulations for child support now include specific incentives, in the form of increased funding, for states to improve the efficacy and cost-efficiency of their child support enforcement STYLE="font-size: 8pt">

systems. Private contractors, who can sometimes quickly implement strategies for program improvement, offer state and local governments one possible means of accomplishing these goals.

4. TANF Services

Contracting for services related to public assistance was not uncommon even before welfare reform. Some AFDC agencies contracted with employment and training service providers for the operation of all or part of their JOBS programs. However, as discussed in Chapter I, PRWORA has facilitated the growth of contracting out by fundamentally changing the mission of the welfare system, by giving states substantial leeway in formulating programs, and by increasing incentives for placing welfare recipients in jobs. The law also has encouraged outsourcing by lifting restrictions that had placed eligibility determination off-limits for privatization (GAO 1997b; Sanger 2001).

To examine the privatization of TANF services, it is useful to divide them into four categories:

1. Case Management. This can include intake and diversion activities, TANF eligibility and benefit determination, the development of the individual responsibility plan, assessment of the need for services, case monitoring and tracking, and sanctions for noncompliance with TANF requirements.
2. Employment Services. These include services to link TANF recipients with employment, such as job search and placement assistance, as well as more specialized employment programs, such as work experience, education, training, supported work, and job retention and advancement services.
3. Support Services. These include child care, transportation, mentoring, and other assistance for TANF recipients who are working.
4. Specialized Services. These include services such as mental health and substance abuse treatment, as well as initiatives to prevent teen pregnancy and programs to promote family formation.

Although the forthcoming GAO report will provide the first detailed national picture of the extent to which these services are contracted out, we do know that each of these service types is contracted out by some TANF agencies. The literature suggests, however, that contracting out case management, especially eligibility determination, is much less prevalent than contracting out other services.

At least three states--Wisconsin, Arizona, and Florida--have contracted out the administration of all aspects of TANF, including TANF eligibility determination, in some locations:

• Wisconsin. In 1997, Wisconsin put out a request for proposals to operate its TANF program, W-2, in 12 counties that had either chosen not to run W-2 or had not met state performance standards. The contracts were awarded to both for-profit and nonprofit agencies.
• Arizona. Arizona operates a demonstration project, Arizona Works, under which TANF services, including eligibility determination, are privatized in Eastern Maricopa County. ⁽¹⁾ In January 1999, a four-year contract was awarded to MAXIMUS, Inc., to administer the TANF program in the demonstration site, while the Arizona Department of Economic Security administers the food stamp and Medicaid cases. ⁽²⁾
• Florida. In 1997, the Palm Beach County Workforce Development Board contracted with Affiliated Computer Services, Inc. to provide TANF services. Since 2000, the contract has included all TANF services, including eligibility determination.

Other TANF agencies, however, contract out only a subset of their case management functions. For example, some agencies contract out assessments, the development of self-sufficiency plans, and case monitoring but maintain direct responsibility for eligibility determination and sanctioning for noncompliance. These include agencies in San Diego, California; Jacksonville, Florida; Aiea, Hawaii; and the District of Columbia. In many cases, contractors provide job search assistance, job placement assistance, and retention services as well as case management (Pavetti et al. 2000). Some TANF agencies maintain separate contracting arrangements for each of these functions, however. The city of New London, Connecticut, for example, contracts with one organization for assessment and the development of a self-sufficiency plan and with another organization for other aspects of case management.

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C. Types of Nongovernmental Organizations that Provide Welfare Services

State and local agencies are contracting with a variety of organizations to provide welfare services and related employment and ancillary services. The types of nongovernmental organizations providing these services fall into three main categories: (1) for-profit corporations, (2) large, national nonprofit organizations, and (3) small community-based nonprofit organizations.

1. For-Profit Organizations

Two large, for-profit corporations dominate the market for providing welfare and related services:

• MAXIMUS . In business since 1975, MAXIMUS provides program management, information technology, and consulting services to government agencies. Its Government Operations Group administers and manages government health and human services programs, including welfare-to-work programs, job readiness, child support enforcement, managed care enrollment, children's health insurance, and disability services programs. It was the first for-profit organization to receive a contract to provide welfare services when it was awarded a contract by Los Angeles County, California in 1988. It was awarded contracts to administer the W-2 program in District 6 in Milwaukee, Wisconsin, to administer the Arizona Works pilot demonstration in Maricopa County, Arizona, as well as to provide case management or employment services in several localities including California, New York, and the District of Columbia (Sanger forthcoming). It currently holds 15 TANF contracts worth a possible $56 million (Sanger forthcoming).
• Affiliated Computer Services, Inc., (ACS). In July 2001, ACS, a for-profit information technology provider, agreed to purchase Lockheed Martin IMS Corp. Lockheed Martin had contracted with state and local governments to provide TANF services, child support collection, electronic benefit transfers, as well as electronic toll collection, and the processing and collection of parking tickets. Its first employment-services contract, with Dallas, Texas, was awarded in 1996 (Sanger forthcoming). ACS now administers the entire TANF program in Palm Beach County, Florida. It also administers Florida's welfare reform program, Work and Gain Economic Self-Sufficiency (WAGES) program in 13 regions and employment services in 12 workforce board regions in Texas. It currently holds 26 TANF contracts worth a possible $108 million (Sanger forthcoming).

Other for-profit corporations that provide TANF services include:

• Curtis and Associates. Established in 1985, Curtis and Associates provides employment services, including self-sufficiency and job training and welfare-to-work programs, as well as intensive case management. The firm received its first employment services contract with the Nebraska Department of Health and Human Services in 1985. Curtis has also undergone recent ownership changes. In July 2000, it merged with Benova, Inc., a subsidiary of AFSA Data Corporation, a financial services company.
• Policy Studies Inc. Established in 1984, it provides consulting on child support enforcement. In 1991, it began the direct administration of child support programs. It currently directs 43 child support programs in 16 states.
• America Works. Formerly a nonprofit organization, it became a for-profit in 1984. America Works provides employment services for welfare recipients in locations in New York, Maryland, Florida, and Indiana. It also provides intensive case management.
• Association for Research and Behavior (ARBOR) Inc. A Philadelphia-based firm, ARBOR has contracts serving disadvantaged clients (not all TANF) in 30 locations, including a large contract in New York City.

In addition, DynCorp, Anderson Consulting (now known as Accenture), and Electronic Data Systems (EDS) also provide some human services, such as child support enforcement, child welfare activities, and management information systems, but as yet do not provide case management or employment services. Smaller for-profit companies also have contracts. For example, The Training Institute has provided job placement services in Marion County, Indiana.

2. Large Nonprofit Organizations

Several large nonprofit organizations have won contracts to provide case management, employment services, and support services under a wide range of funding streams both government and philanthropic. These organizations are large, national, and have stable and diversified funding. Most have been providing social services for many years. Sanger (2001) argues that they more closely resemble the for-profit organizations than the small community-based organizations in terms of their financial stability. These organizations include:

• Goodwill Industries. Through a network of community-based, autonomous affiliates, Goodwill operates human services support programs throughout the United States and Canada. These programs include job training and employment services, including short-term and long-term training, welfare-to-work programs, and job readiness programs.
• Catholic Charities. Catholic Charities also provides services through a network of independent, nonsectarian, multi-service agencies across the nation. Although sponsored by the Catholic Church, it offers its services to all people in need.
• AFL-CIO. The community services branch of this labor organization is providing job-training services under contract with state and local governments.

3. Community-Based Nonprofit Organizations

Throughout the nation, nonprofit, community-based organizations (CBOs) that have provided social services for many years are now entering into contracts with state and local governments to provide case management, employment services, and other welfare-related services. Some of these organizations (like the New Community Corporation in Newark, New Jersey, and the Urban Leagues and Opportunities Industrialization Centers in many communities) provide an array of social and economic development services. Others provide specialized services or services to a specialized population (such as the Chinese Community Center in Houston). In Broward County, Florida, the Parents Information and Resource Center--a CBO that had experience with substance abuse prevention and HIV services--won the award to provide TANF case-management services in that county.

Although local CBOs do win contracts on their own, they frequently bid as partners or subcontractors with for-profit organizations. The larger for-profits or not-for-profits bring capital and management and financial expertise, while the CBOs provide specialized knowledge of the needs of the clients and the resources in the communities and may provide political legitimacy in communities where contracting with for-profits is controversial. For example, in Broward County, Lockheed Martin IMS won contracts to provide occupational skills training, grant diversion, on-the-job training, and community work experience, in partnership with local nonprofit organizations and another for-profit organization. In Milwaukee, the YWCA won a contract to administer TANF in District 1 by joining with two for-profit organizations (Kaiser Group and CNR Health) to form YW-Works, a limited liability, nonprofit organization.

Nonprofits have also formed collaboratives to bid for government contracts. For example, Seedco, a medium-sized nonprofit agency, has built a collaborative with eight CBOs that provide employment training and placement services in New York City. Seedco provides technical assistance, stable financial support, and a well-developed management structure.

Some CBOs have also formed for-profit subsidiaries. For example, the Nonprofit Assistance Corporation (N-PAC), a subsidiary to Seedco, has structured a limited liability corporation, EarnFair. Earnfair operates as a temporary employment service, hiring disadvantaged workers and then placing them with business and nonprofit organizations for a fee. Because Earnfair is a for-profit corporation, employers can take advantage of tax credits for employing welfare recipients.

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Endnotes

1.  Excluding Guadalupe and the reservation areas.

2.  An impact and implementation analysis is being conducted of this demonstration (Kornfeld 2001; Porcari and Peck 2001).

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