Privatization of Welfare Services: A Review of the Literature. Passage of PRWORA


Welfare reform provided an impetus to privatization in several ways. Its work requirements spurred states and localities to find new ways to deliver employment services. By dropping the requirement that eligibility for cash assistance be determined by public employees, it encouraged contracting out of a broader set of services. And the change to funding through block grants gave new incentives for privatization.(2)

a. Need to Emphasize Work

In response to growing frustration over the lack of focus on work in the AFDC program, the new welfare system shifted to an emphasis on "work first" rather than the verification of eligibility. Initiatives were developed to divert applicants into jobs before they reached the rolls, to move welfare recipients into employment as quickly as possible, and to support their efforts while in work. Although many states had begun such efforts under waivers before the passage of PRWORA, their efforts accelerated after the law's passage. While all states had provided some employment programs for welfare recipients through the Job Opportunities for Basic Skills (JOBS) program under AFDC, the new requirements for work programs far exceeded the old. PRWORA mandated sharp increases in recipient work participation, requiring that states rapidly gear up their employment programs. The new law mandated that states place at least 25 percent of household heads in all families in work activities by 1997, increasing to 50 percent by 2002. For two-parent families, the required rate reached 90 percent in 1999.(3) In addition, as welfare caseloads declined, many believed that a larger proportion of those still on the rolls were "hard-to-employ" clients who would require more intensive assistance to leave welfare for work.

Public officials in many states believed that they lacked the capacity to meet these demands and to meet them quickly enough, without contracting with private organizations. Contracting out allowed them to "buy" new capacity and come up to speed quickly, while giving them the flexibility to get rid of this additional capacity if needs changed (Sanger 2001).

b. Requirement that Welfare Eligibility be Determined by Public Personnel Only Dropped

Unlike AFDC, TANF no longer prohibited states from using personnel from private organizations to perform eligibility determination for cash assistance (Title I, Section 104). This opened the possibility of contracting out welfare services broadly and created a potential new market for private providers (Nightingale and Pindus 1997; Sanger 2001). Possibilities for wide-scale privatization of welfare services were limited, however, by the continued requirement that only public workers determine eligibility for Medicaid and Food Stamps. States that wanted to privatize TANF eligibility determination but also wanted to preserve or increase integration of services either would have to receive waivers from the Medicaid and Food Stamp Program requirements (which to date have not been granted) or would have to choose between privatization and service integration for eligibility determination.

In a widely publicized effort at broad privatization of welfare services, Texas attempted to privatize its entire welfare system statewide, including the determination of eligibility for TANF, Medicaid, and Food Stamps. In 1997, however, the federal DHHS denied the state the necessary waivers. Instead, Texas opted to pursue integration of eligibility determination across programs, while keeping that function in the state Department of Human Services (Center for Public Policy Priorities 1997). At the same time, it moved to privatize other functions, such as job search and placement, through a system of decentralized workforce development boards that contracted with a range of private providers (Policy Research Project on Workforce Reform in Texas 1997; Pavetti et al. 2000). In contrast, Arizona elected to privatize eligibility determination of TANF on a pilot basis in one county, but left eligibility determination for the other programs under the auspices of the state welfare agency (Kornfeld 2001). Wisconsin began pursuing wide-scale privatization efforts under federal waivers that allowed the privatization of eligibility determination for cash assistance before passage of PRWORA. The state did not, however, also privatize eligibility determination for Medicaid and Food Stamps.

c. Change to a Block Grant

Under AFDC, the federal government provided unlimited matching funds to states, while under TANF, each state is given a fixed block grant. This has given states broad new discretion and new incentives and opportunities to change their service approaches. Under the TANF block grant, states have a new incentive to pursue cost-saving methods of service delivery. The block grant allows them to transfer limited amounts of their TANF surpluses to other social services, and state funds that have been spent on those services can be freed up for other priorities, including service enhancements or tax cuts. Because a common goal of privatization is cost savings, the chance to reap some of their TANF savings and use the funds for other purposes might have contributed to states' interest in contracting out. States' discretion has also freed them from the federal oversight entailed in the AFDC quality control (QC) system, and allowed them greater flexibility to set their own rules and measures of program success.(4)

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