Private provision of publicly funded social services is not new in the United States. Private religious and secular organizations have delivered welfare services for over a century (Smith and Lipsky 1993). During the 1960s and 1970s, however, spending on social services provided by private agencies increased (Brodkin et al. 2002). This increase was fueled in the 1960s by new federal spending (Young et al. 1981) and in the 1970s by the search for ways to reduce costs in light of fiscal strains (Kramer 1994).
Since the passage of PRWORA, both the scale and scope of privatization of welfare services has changed. The GAO found that contracting for TANF-funded services occurs in the District of Columbia and every state except South Dakota (GAO 2002). Prior to welfare reform, welfare agencies mainly contracted out direct services, such as job training, job search instruction, and child care provision. Some Aid to Families with Dependent Children (AFDC) agencies, for example, contracted with employment and training providers for the operation of all or part of their Jobs Opportunities for Basic Skills (JOBS) programs. While these types of services are still often contracted out, private agencies are now more likely to provide case management and job placement or retention services. Another recent change is the increasing role of large, national for-profit organizations in the provision of welfare services.
Welfare reform provided an impetus to privatization in several ways. First, it signaled a growing frustration with the old AFDC system, seen as geared more toward ensuring eligibility and compliance with rules than helping clients become self-sufficient (Bane and Ellwood 1994). As private agencies were seen as less entrenched in the old ways than the public welfare agencies, privatization appeared to be a way of making fundamental changes to the welfare program (Diller 2000).
Second, the change to a work-oriented assistance program meant that TANF programs needed to provide new services to move welfare recipients into jobs as quickly as possible and provide the supports necessary to maintain employment. Some states and localities believed they lacked the capacity to provide the services, and contracting out allowed them to "buy" this capacity quickly (Sanger 2001).
Third, unlike AFDC, TANF no longer prohibited private organizations from performing eligibility determination for cash assistance. This opened up the possibility of privatizing the entire TANF program. Public employees are still required, however, to determine food stamp and Medicaid eligibility in 1997, DHHS denied Texas a waiver to privatize these functions. As TANF recipients are frequently also eligible for food stamps and Medicaid, being unable to privatize eligibility determination for these benefits may reduce the advantages of privatizing TANF eligibility determination. A recent waiver granted to Florida may spur new interest in privatizing TANF eligibility determination. In July 2002, six counties in Florida received permission for private contractors to determine food stamp eligibility. The Senate Appropriations Committee, however, directed that no additional waivers be granted until the effects of privatizing food stamp eligibility determination in Florida are evaluated.
Fourth, changes in the federal financing of cash assistance gave states broad new discretion and new incentives to pursue potentially cost-saving methods of service delivery (Winston et al. 2002). By switching from unlimited matching funds under AFDC to a fixed block grant under TANF, the federal government encouraged states to investigate new options for increasing efficiency, including privatization.
PRWORA also expanded states ability to contract with faith-based organizations through its "charitable choice" provisions. These organizations are now allowed to provide TANF-funded services without removing religious symbols from their facilities or religious content from their services. These provisions, however, have not been viewed as a significant factor in the increase in privatization of welfare services.
Privatization of welfare services is controversial. Proponents view privatization as a means to improve services, reduce costs, increase the flexibility of the public sector, and provide opportunities to meet more needs of welfare recipients. Opponents are skeptical that privatization results in an improvement in services, citing lack of competition (Sclar 2000) and the pursuit of profits leading for-profit organizations to reduce service quality (Service Employees International Union 1997; Rodrigue 1997; Hartung and Washburn 1998). Some remain unconvinced that privatization reduces the costs of service provision once the costs of administering and monitoring the contracts are taken into account. Others are concerned that community-based organizations may be unable to compete for contracts with large, for-profit organizations, and may no longer be viable (Sanger 2001). Further concerns include the loss of public employee jobs (SEIU 1997), the loss of talented staff from the public sector (Sanger 2001), and the potential for conflict of interest in the procurement process (Berkowitz 2001; Hartung and Washburn 1998).