Welfare Privatization

Sandy Felder, Public Sector Coordinator for SEIU, a union representing public employees, told Covert Action Quarterly in 1996, “This [welfare reform] is one of the biggest corporate grabs in history. Welfare reform was the most powerful bomb yet to be dropped on America’s already shredded social safety net. Mark Dunlea, executive director of the Hunger Action Network of New York, predicted, “The privatization of welfare-related social services…will mean a massive handoff from government to the private sector.”

“The federal government turned over $16 billion in TANF money to the states without setting any federal standards for privatization,” Cecilia Perry, public policy analyst for AFSCME, told me in late December. The early contracts in Wisconsin were particularly egregious in that they were based on setting “perverse incentives aimed at reducing caseloads and making huge profits.”

Privatization, as touted by its supporters, was to be the guiding hand of welfare reform. It was supposed to convert bloated federal and state bureaucracies into streamlined and cost-effective corporate providers of services. Privatizers held that private companies would also administer welfare regulations more stringently and accurately, deliver more timely and efficient services, and only to the “deserving” poor. At the same time, the private sector would save money for taxpayers. Private companies competing for contracts promised states they would dramatically reduce welfare rolls. Indeed, this is the one area they have been successful. But at what cost, and to whom?

Welfare “Reform”: What’s Going On?

Learning about the impact of the privatization of welfare is extremely difficult. Even Congress has little idea what’s really been going on with these programs. The scarcity of government-supplied information has made it incumbent upon welfare rights groups, human rights organizations, and independent research groups to take on the task of gathering data and drawing conclusions about the first few years of welfare “reform,” especially in terms of the impact of privatization.

Welfare “reform” has been particularly difficult for single mothers and their children. The Impact Research Team at the Oakland, California-based DataCenter looked at two studies, Health Care After Welfare: an Update of Findings from State-Leaver Studies from the Center on Budget and Policy Priorities, August 2000, and A Status Report on Hunger and Homelessness in America’s Cities 1999, by the United States Conference of Mayors, December 1999, and discovered that:

• In most states roughly one out of every two parents in families that left welfare, and more than one of every three children in these families, have lost Medicaid
• In most states, more than one in five children is uninsured after leaving welfare
• Fewer than half the families that leave welfare for work are offered the opportunity to purchase health coverage through their employers
• Welfare recipients often have a pressing need for ongoing health coverage due to mental health issues, physical impairments that limit their ability to work, and substance abuse problems
• In many states, families’ unmet medical needs increased markedly after leaving welfare
• The demand for emergency food assistance grew in 1999 to the highest level since 1992
• 21 percent of requests for emergency food assistance were unable to be met
• 67 percent of adults requesting food assistance were employed—city officials identified low-paying jobs as a leading cause of the need for aid
• The demand for emergency shelter grew at the fastest rate since 1994
• About 37 percent of the requests by homeless families for emergency shelter were unmet
• 21 percent of the homeless population is employed
• The homeless population is estimated at 50 percent African American, 31 percent white, 13 percent Hispanic, 4 percent Native American, and 2 percent Asian
• Requests for assisted housing by low-income families and individuals increased in 1999—only 21 percent of those eligible are currently being assisted

Families USA, a national health consumer group, reports that the majority of those thrown off the welfare rolls were children under 19. A September 14, 2000 news release from the Institute for Public Accuracy, a Washington, D.C.-based group making progressive viewpoints available to the mainstream media (www.accuracy.org), cited comments from longtime welfare activists. Frances Fox Piven notes, “It is really no feat, and no accomplishment, to cut the welfare roles unless poverty among single mothers and their children is also reduced.” Gwendolyn Mink, professor of Politics at the University of California at Santa Cruz and author of Welfare’s End, said “three years after leaving welfare, the median income even among employed former recipients was only $10,924—well below the poverty line. The hardest hit, are women of color and their children: welfare Reform has had an unmistakable disparate racial impact,” she added.

In What Government Can Do: Dealing With Poverty and Inequality (University Chicago Press), political scientists Benjamin Page and James Simmons, write: “An analysis of 21 state reports found that most former welfare recipients—even those who were working—were still poor; many had trouble paying for food and utilities.” Citing an Urban Institute study, Page and Simmons report that “about one-third were back on welfare within a year or two. About 25 percent of those who stayed off welfare had no one in the family working, one-third had to skip meals or cut back on food.” The Children’s Defense Fund and the National Coalition for the Homeless also found “only a small fraction (8 percent) of former welfare recipients’ new jobs paid above poverty wages—most paid far below—and extreme child poverty was increasing even at a time of economic expansion.”

In their haste to cleanse their welfare rolls, states are failing to fulfill their legal obligations to inform the poor of their rights. Author Karen Houpert, writing in the Nation, examines this dirty little secret: “Safeguards written into the law—like making sure a family has health insurance, food stamps and daycare…have gone largely unenforced. What has evolved instead is a system that pretends to offer such things but in practice withholds them with alarming frequency, vastly expanding the ranks of the working poor.” In states like South Carolina, Mississippi, Florida, and New York abuses of the law are so egregious “former welfare recipients and applicants have filed lawsuits against them for refusing to give Medicaid and food stamp applications to eligible families.”

The privatization of welfare services has resulted in numerous examples of the erosion of services. Many programs are seriously under-staffed and there is a woeful lack of public accountability. There are an increasing number of local stories exposing corporate misdeeds under the “cost of doing business”—the amount of money corporations spend to wine, dine, and pay off principles involved in making decisions about awarding contracts. The public gets what its paying for—poorly run welfare services in the hands of large corporations.

Maximus Inc.

When the 1996 welfare reform bill was signed, it set off a welfare privatization gold rush. Privatization of government programs is not a new phenomenon—in the early 1960s the Ross Perot-founded Electronic Data Systems (EDS), won the contract to manage the Texas Medicaid program. As Adam Cohen pointed out in Time, EDS made its fortune by “crunching financial data for agencies like the Social Security Administration.”

One of the first companies to stake its claim was the McLean, Virginia-based Maximus, Inc. City Limits Weekly wrote that “Maximus was no stranger to privatization, having been the first company to privatize a welfare system—Los Angeles County’s, from 1988 to 1993.”

Founded in 1975 by David Mastran, a former Defense Department analyst who worked for the Department of Health, Education, and Welfare during the Nixon administration, Maximus officials were optimistic about the profit potential. Welfare reform “is, as yet, an undetermined revenue pool,” company spokesperson Kevin Gedding told the Los Angeles Times in 1997. “But there are billions of dollars in potential project work that need to be done in the next four to five years.” Bernard Picchi, an analyst of growth stocks for Lehman Brothers, told Time the potential market could easily be more than $20 billion a year.

If there is any doubt that welfare “reform” has become a fruitful business, check out these numbers—Maximus has grown from a $50 million operation in 1995 to $105 million in 1996, to $319.5 million in 1999.

Maximus has more than 3,700 employees, located in more than 130 offices across the country. It has recently renewed or signed new contracts in a handful of states including Alaska, Illinois, Tennessee, South Carolina, New Jersey, Kansas, Michigan, Pennsylvania, and Texas. According to the AFSCME Leader the company also has operations in Buenos Aires, Argentina and Cairo, Egypt. Maximus has done so well financially that Forbes magazine selected it as one of the ten Best Small Companies in America in 1999.

Will the Real Welfare Cheats Stand Up

Although the bottom line has been soaring, it hasn’t been all good news for Maximus. Negative headlines in newspapers around the country have highlighted a series of corporate bad practices including the misappropriation of funds, poor service provision, discriminatory practices at company offices, and financial irregularities. The AFSCME Leader found that in 1994, during the pre-welfare “reform” era, “Mississippi froze a child support collection contract with Maximus when costs nearly doubled what the state had spent previously.” In West Virginia the company was disqualified from bidding on a state contract “after a state employee was convicted of taking a $20,000 payment from Maximus,” which was not charged in the case.

Maximus went public in 1997 and the following year the company came under fire in Connecticut over a $12.8 million dollar contract to run the program providing childcare for working welfare recipients. Within months Maximus found its operations in disarray. Time reported, “More than half of the 17,000 thousand bills submitted by child-care providers were over 30 days late in being paid. Day-care centers were confronted with decisions about turning away children and parents trying to contact the company found that the telephone system had virtually collapsed. “In terms of service here, they’ve been abysmal,” noted Rick Melita, a spokesperson for the Connecticut State Employees Association. “They underbid, over-promised, and they didn’t deliver” he told Ethnic NewsWatch.

The breakdown in Connecticut was a harbinger of things to come. Significant complaints against Maximus surfaced in other states as well. Privatization advocates have long considered Wisconsin, where Maximus provides a complete spectrum of Wisconsin Works (W-2) programs, the showplace of welfare “reform.” Since 1997, Maximus garnered more than $100 million in contracts in Milwaukee for welfare related services. During the past several months, The Milwaukee Journal Sentinel has reported on growing dissatisfaction with and rampant improprieties in the way Maximus is running its contracts. A coalition of Milwaukee-area church groups, representing 50 churches in the city and suburbs, and 6 state lawmakers, including supporters of “welfare reform,” have called for the termination of a $46 million Maximus contract that provides job training and other services to welfare recipients.

The Milwaukee Journal Sentinel cited a late-July 2000 audit by the Legislative Audit Bureau that “found nearly $800,000 in questionable spending by Maximus.” This included “thousands in W-2 funds spent on soliciting contracts in other states, concerts for W-2 clients by Broadway singer Melba Moore and a holiday party for Maximus employees.” Jennifer Reinert, who heads the state agency that oversees W-2, said auditors found no evidence of fraud, and she blamed the problems on “sloppy bookkeeping.” Maximus has agreed to pay back $500,000 for “improper spending of taxpayer W-2 money,” and to spend another $500,000 on “extra services for the poor in Milwaukee County to try to make amends.”

Milwaukee Journal Sentinel columnist Eugene Kane wondered how “a large sophisticated company like Maximus—with welfare reform contracts in more than two dozen states—could have made so many glaring mistakes.” Maximus, “one of five agencies hired to help create a welfare ‘reform’ system here that ended up being so confusing and poorly run that in little more than three years, loads of frustrated poor people opted out of the system. Cutting poor families off the dole proved so successful, W-2 enjoyed a huge surplus of funds, mainly because the program was drastically overbudgeted in the first place.”

While the Wisconsin situation was unfolding, Maximus was also under siege in New York. According to the Mason City Iowa Globe-Gazette, New York City comptroller Alan Hevesi refused to certify $104 million in welfare-to-work contracts with Maximus, charging that the contract by Mayor Rudolph Giuliani’s administration raised the appearance of “corruption, favoritism and cronyism.” Hevesi concluded that Maximus was given an unfair head start in preparing its bid. In April, a New York State Supreme Court justice blocked the contract because of “compelling evidence that the contracting process has been corrupted.” The Manhattan district attorney’s office launched an investigation into the hiring by Maximus of a father-in-law and a family friend of New York City’s welfare commissioner, Jason Turner, as the company was preparing to bid on the city’s welfare contracts. (Turner was the architect of Wisconsin’s welfare programs). However, in late October 2000, a state appellate court overturned the decision blocking the contract. It was a victory a beleaguered Maximus spokesperson called “vindication.”

In addition to financial shenanigans, the Milwaukee Business Journal, on the basis of interviews with current and former Maximus employees, reported, “16 formal gender or racial discrimination complaints have been filed with the Milwaukee office of the Equal Employment Opportunity Commission, filed against Maximus or one of its subsidiaries. In addition…as many as a dozen internal grievances were filed with the company’s human resources office related to unfair promotion practices.”

Lockheed Martin

Lockheed Martin is probably the biggest and most well known company involved in welfare privatization. In the Nation, William D. Hartung and Jennifer Washburn describe how America’s largest weapons manufacturer designed a division of the company—Lockheed Martin Information Management Services (IMS)—“to run full-scale welfare programs in Texas and Arizona.” Coming on the heels of the company’s $885 million Pentagon contract, Lockheed Martin’s grand strategy includes allowing private companies “to run entire government programs; in the case of welfare and Medicaid, moreover these are essential services, affecting the most disenfranchised members of the population, who are least able to defend their rights.”

Lockheed Martin’s controversial and checkered history makes Maximus Inc. look like a Girl Scout troop. Hartung and Washburn: “This is, after all, one of the companies whose fondness for doling out bribes moved Congress to pass the Foreign Corrupt Practices Act in 1977; the company whose multibillion dollar overcharges on the C-54 transport plane made ‘cost overrun’ a household phrase; and the company whose 1971 government bailout—a $250 million loan guarantee with no strings attached —inspired former Senator William Proxmire to coin the phrase ‘corporate welfare’.” Of course, there’s the legendary $600 toilet seat Lockheed produced for the Navy.

In May 1995, Dan Shelley, then-Governor Bush’s legislative liaison, quietly slipped a proviso “into the state’s welfare reform bill requiring a study on privatizing public assistance.” From that point, the governor and a number of his aides got involved; campaign donations were made by Lockheed to Congressperson Dick Armey and Senators Phil Gramm and Kay Bailey Hutchison; “an unprecedented (and some believe unconstitutional) public-private partnership with the Texas Workforce Commission” was created; and, the unions initiated a campaign accusing Lockheed Martin of “improper lobbying,” and “revolving door hires.”

In the end, Lockheed Martin’s bid to completely overhaul Texas’s welfare system was rejected. However, the company received several major contracts. It has been quick to take credit for finding jobs for thousands of Texans who had been receiving welfare. As it is with many other states, it’s difficult to measure the long-term effects of Lockheed’s programs since, as Miriam Rosen reports in the Dallas Observer, the state legislature doesn’t track them. Rosen says, “the chief concern of many frontline poverty workers…is the lack of research on the consequences of welfare reform. No one knows whether Lockheed Martin’s success stories will end up back on the dole in a few years.”

Kim Olsen, an organizer at ACORN, told Rosen she had informally interviewed some 700 welfare recipients since the reforms took effect. Olsen “believes that Lockheed Martin’s tactics have left many aid recipients in the dark about benefits for which they are eligible—including educational and child- care subsidies.”

Lockheed has won more than two dozen contracts providing several states with case management, skills training, and job placement assistance. However, its reputation as a service provider has come under criticism. In Baltimore, Maryland, for example, where the company won a three-year contract to collect child support, Lockheed “failed to meet performance goals” in its first year. In California, the company and the state “mutually agreed to cancel a contract for Lockheed Martin to build a computerized tracking system for collecting child support…[when] the system’s projected costs had skyrocketed—from $99 million to $277 million.”

America Works…But Does It Really?

Founded in 1984 as a private for-profit company by Peter Cove and Lee Bowes, America Works has become another company eagerly sharing in the privatization of welfare boom, with contracts in New York City, Albany, New York, Baltimore, Indianapolis, and Miami. According to its website, its mission is to “change peoples lives by lifting them from welfare dependency into the productive world of employment.”

The company’s founders believe that poor work habits are major obstacles to the long-term unemployed. Attaining and keeping jobs requires knowing how to be “on time and reliable, take direction and behave appropriately.” It is this “tough love” approach or “boot-camp-style job readiness” welfare-to-work services that has made America Works the darling of Mayor Rudolph Giuliani (NY), who made cutting the welfare rolls the centerpiece of his Administration. Giuliani “raised some eyebrows a year ago,” according to the New York Times’ Jason DeParle, by bringing the above-mentioned Jason Turner “one of the nation’s most uncompromising critics of public assistance,” on board to run the city’s welfare agency. “Turner, a veteran of Wisconsin’s anti-welfare campaign, designed his first welfare plan in junior high school, and he has been refining his craft ever since.” America Works’ approach has also received considerable positive coverage in the mainstream media.

The Hunger Action Network’s Mark Dunlea says that the company “focuses on finding entry-level positions such as receptionists, secretary, mail-room clerk, word processor, cashier, security or warehouse worker…[with] a typical annual salary…rang [ing] from $15,500 to $18,000.” An often-voiced criticism about America Works is that it skims off the best potential clients and disregards the hard-core cases. “For example,” says Dunlea, “a worker who has a family emergency and fails to comply with an attendance policy—far stricter than in most workplaces—is typically kicked out of the program.”

A 1996 audit by New York State Comptroller H. Carl McCall pointed out that America Works was under contract with the state to place AFDC recipients in private sector, unsubsidized jobs. The company was paid by the state when a client either: “(a) enrolled in the program, or (b) was placed in a job by the program, or (c) retained the job for at least 90 days.” Dunlea cites an AFSCME report claiming that America Works has received more than $1 million from New York State “for people who never found jobs and for placements that never became permanent.”

Transforming Nonprofits

An unintended consequence of welfare “reform” has been the transformation of the nonprofit sector—particularly the better-funded national organizations—from community assets to market-based competitors. The traditional distinction between nonprofits investing in people and communities, and for-profit entities that make money for their owners, is becoming blurred. In some areas, for-profits and nonprofits are now in direct competition; in others, they are creating partnerships to secure government contracts.

In the Harvard Business Review, William P. Ryan, a Cambridge, Massachusetts-based consultant to foundations and nonprofit organizations, looks at the changing landscape for nonprofits forged by government willingness to contract with for-profit corporations to administer government services. Ryan points out: “By playing in the new marketplace, nonprofits will be forced to reconfigure their operations and organizations in ways that could compromise their missions. The danger,” writes Ryan, “is that in their struggle to become more viable competitors in the short term, nonprofit organizations will be forced to compromise the very assets that made them so vital to society in the first place.”

At the most elementary level, welfare reform allows nonprofits unprecedented access to cheap labor. Steve Williams, executive director of the San Francisco, California-based People Organized to Win Economic Rights (POWER), observes that both for-profit and non-profit sectors derive this benefit from SFWorks, the city of San Francisco’s welfare-to-work program. According to Williams, private companies hire at “just above the minimum wage.” Companies like United Airlines and Burger King place workers in short-term, low-paying, dead-end jobs that require a minimum commitment on the part of employers. When they hire welfare workers, SFWorks reimburses them for a major part of their salary outlay.

One of the most insidious consequences of the San Francisco County’s welfare-to-work program is that local nonprofits and private businesses are able to “steal jobs from low-wage workers, for whom these jobs no longer exist.” This short sighted pitting of low-wage workers against welfare workers threatens to create a new group of unemployed workers, who may find themselves applying for welfare benefits.

To compete in the marketplace, nonprofits are adapting to its new realities in a myriad of ways, “from subcontracting to partnership to outright conversion to for-profit status,” writes Ryan. He points to the YWCA of Greater Milwaukee, which although “large and sophisticated by any nonprofit standard…could not go it alone.” In order to deal with the “demand of a comprehensive, $40 million welfare-to-work contract, it created a for-profit limited liability corporation [called YW Works], with two for-profit partners.”

In addition to unleashing predatory corporate forces, and the ongoing transformation of nonprofit organizations into high stakes competitors for government contracts, the Personal Responsibility and Work Reconciliation Act of 1996 contains the first enactment of a concept known as “charitable choice.” Far from expanding anyone’s choices, “charitable choice” mandates that state and local governments include religious organizations in their pool of bidders for service-delivery contracts.

On the face of it, this is nothing new. As Cathlin Siobhan Baker, Co-Director of the Employment Project, explains, for years religious organizations have received government funding for emergency food programs, child care, youth programs, and the like. However, they were expressly prohibited from religious proselytizing.

Now, Baker writes: “Gone are the prohibitions regarding government funding of pervasively sectarian organizations. Churches and other religious congregations that provide welfare services on behalf of the government can display religious symbols, use religious language, and use religious criteria in hiring and firing employees.”

President George W. Bush has been a big-time supporter of charitable choice and faith-based initiatives. If his faith-based initiative, announced to great fanfare in late January, ever gets back on track, it will allow for a bunch of social services to come under the control of faith-based organizations.

During the presidential campaign, Bush repeatedly called for “armies of compassion” fielded by “faith-based organizations, charities and community groups” to help aid America’s poor and needy. In a USA Today opinion piece he laid out his plan for taking “the next bold step in welfare reform,” proposing $80 billion over 10 years in tax incentives to “help our nation’s most heroic armies of compassion.” He also proposed a federal initiative to “support community and faith-based groups that fortify marriage and champion the role of fathers.”

Right-wing ideologues find charitable choice attractive because it not only deflates government services, but it injects a “moral framework” into the welfare debate. Welfare is no longer a question of poverty or the economic inequities in our society. Charitable choice frames the debate within such time-honored moral hodgepodge as the proverbial “epidemic of out-of-wedlock births,” or the “lack of personal responsibility”—behaviors that conservatives claim, contribute to the general moral breakdown of our society.

Since 1996, responsibility for welfare services has shifted from the federal government to the states and the states have contracted many services out to for-profit corporations and non-profit organizations. Under President Bush’s faith-based initiative, religious organizations will become a major player in the service provider mix. However, in addition to the bevy of objections raised by liberals and conservatives that have stalled the implementation of Bush’s faith-based plan, many people of faith do not believe that they can shoulder such a burden.

In Religion-Sponsored Social Service Providers: The Not-So-Independent Sector, independent researchers Jim Castelli and John McCarthy of Pennsylvania State University, conclude that it is mistaken to believe that faith communities can take on the burden of expanding their provision of social services as a substitute for government efforts. “Not only is there no infrastructure at the national, state, or local levels to administer programs and large amounts of funding, but such expansion would require faith communities to wholly change their funding priorities in order to build their capacity.”

Privatization as the engine powering welfare reform was supposed to replace federal and state bureaucracies with streamlined, cost-effective corporate service providers. Privatizers believed that private companies would administer welfare regulations more stringently and accurately, deliver services more efficiently, and focus on only those who really deserved benefits. Saving the taxpayers money was another appealing promise. Companies competing for contracts assured states that they would dramatically reduce the welfare rolls.

Has the privatization of welfare delivered on its promises? Have private companies and enterprising nonprofits transformed the old welfare system with the outcome of long-term employment with decent pay for former welfare recipients? Max Sawicky, economist at the Washington, DC-based Economic Policy Institute, is troubled by the fact that the so-called “success [of welfare privatization] was announced before the results are in.”

In a 1997 speech, Lawrence W. Reed, President of the conservative Midland, Michigan-based Mackinac Center for Public Policy, touted privatization as the wave of the future: “The superiority of [privatization]…is now approaching the status of undisputed, conventional wisdom: the private sector exacts a toll from the inefficient for their poor performance, compels the service provider or asset owner to concern himself with the wishes of customers, and spurs a dynamic, never-ending pursuit of excellence - all without any of the political baggage that haunts the public sector as elements of its very nature.”

After four years of welfare reform there is evidence that privatization has been successful, not for the people who were supposed to be moved out of poverty, but for corporate profiteers.

• While welfare privatization has delivered drastic reductions in caseloads and welfare rolls, it has not moved recipients from the “underclass” to the working class. Privatization is not efficiently delivering job training and support services to those who need them.
• The financial bonuses privatizers receive for reducing caseloads create an incentive to terminate clients’ benefits, not to assist them in climbing out of poverty.
• As in the case of Curtis and Associates, staff working for private companies often have neither the credentials nor the training to handle their caseloads. Consequently, clients do not receive services they need, and to which they are entitled, such as childcare, transportation subsidies and medical care.
• As Wisconsin, New York, and Texas have learned to their chagrin, companies like Maximus and Lockheed Martin blithely spend public money from other jurisdictions to wine, dine, and pay off decision-makers in the pursuit of new contracts.
• The states and local governments that contract with corporations for welfare services have not instituted any form of systematic oversight.
• Because information about large private contractors is not centralized, it is not unusual for a company in hot water one place to pick up new contracts at the same time in another state—or in another county in the same state.
• Ultimately, for-profit corporations are accountable to their shareholders, not to the communities they are hired to serve.

Spurred by revelations of Maximus’s questionable activities, Milwaukee-area Democratic Congress- people Jerry Kleczka and Tom Barrett, are hoping the federal General Accounting Office will fully investigate the practices of private companies hired to manage welfare services. As we move closer to welfare reauthorization, the GAO needs to vigorously take on the Congresspeople’s request. In the meantime, corporations will continue prospecting for gold among the poor.                                          Z

Bill Berkowitz is an Oakland, California-based writer covering the religious right and related conservative issues. Thanks to the staff of the Applied Research Center, and Gale Bataille, for her editorial and moral support.