(en)CAQ #59: Privatizing Welfare

The Anarchives (tao@lglobal.com)
Tue, 10 Dec 1996 16:54:50 +0000 (GMT)

** Written 10:30 AM Dec 3, 1996 by caq in cdp:covertaction **
The Poverty Profiteers Privatize Welfare
By Mark Dunlea

"This is one of the biggest corporate grabs in
history," charges Sandy Felder, public sector
coordinator for SEIU, a union representing
public employees. *1 She is referring to the
aftermath of the welfare "reform" passed by
the 104th Congress. While the bipartisan
coalition that pushed through the legislation
raked political hay by scapegoating the poor,
the jobless, single mothers, and children,
corporations preferred their profits in cold
cash. They understand that one consequence of
the downsizing of"big government" is the
upsizing of big corporations.

The privatization of welfare-related social
services now underway will mean a massive
handoff from government to the private sector.
According to an industry survey, 49 states
have already privatized some welfare functions
and many are considering further outsourcing.
"Obviously, [firms] are not going into it with
altruistic motives and the intent of losing
money. The profit motive is foremost," said
John Hirschi, a state legislator in Texas,
where the first major contract is on the
block. *2 The corporations believe Texas "will
be a model for the rest of the country," said
Bruce Bower, a lawyer who specializes in
welfare issues at the Texas Legal Services
Center. "They're licking their chops." *3

And the feast they are anticipating is
tempting indeed. The recent federal
legislation mandating block grants to states
to replace the welfare system is the biggest
overhaul of a federal program since the New
Deal. Up for grabs is much of the $28 billion
a year that governments now spend nationwide
to distribute $250 billion to welfare
recipients. *4 With welfare comprising 6-30
percent of state budgets, the changes will be
radical. The new legislation, in addition to
opening the door to corporate profiteers, will
by conservative estimate push an
additional 1.5 million adults and 1.1 million
children into poverty. Most of the children
affected live in families with a working
parent. *5

It will also offer unprecedented opportunities
for corporate profitmaking as major firms
engage in high-stakes bidding for the
potentially lucrative contracts. One of the
most aggressive is Lockheed Martin, the $30
billion defense contractor which made billions
selling weapons to the very "big government"
it is now trying to supplant. Ironically,
although Lockheed has little experience in the
social services, it does know welfare from the
inside. In the 1970s and '80s, Congress
approved a massive bailout for the failing
weapons manufacturer. Also trying to win
contracts are: Electronic Data Systems (EDS),
the $12.4 billion information-technology
company founded by presidential candidate Ross
Perot; Andersen Consulting, a $4.2 billion
sister company of Arthur Andersen, the
accounting firm; Unisys; and IBM.

One strategy the corporations are using to
gain an inside edge is to aggressively recruit
federal and state welfare officials,
especially from states where contracts are up
for bid. *6 In October, the Texas State
Employees Union asked for an investigation of
eight high-ranking state officials who took
jobs with companies bidding for the state's
contract. *7 Another man who stepped through
the revolving door is Gerald Miller, former
director of Michigan's welfare program. As
Lockheed's new head of "welfare initiatives"
division, he quickly predicted that "[t]he
private sector will ultimately run these
programs, the era of big government is over."

The initial areas of welfare privatization are
child support collections and job placements.
Lockheed already has more than 200 state and
municipal clients. It collects delinquent
child support payments in 30 states and gets
about 19 cents from the government for each of
the $1.15 billion it recovers annually. *9 The
new law expands the opportunities for business
by allowing states to: contract out the
administration of the block grants program
(now renamed Temporary Assistance to Needy
Families, or TANF); contract with charitable,
religious, or private organizations to provide
TANF services; and contract out the
administration of child care funds. Private
companies are also seeking to take over
eligibility and benefit determinations, thus
becoming the new gatekeepers to welfare

Many politicians around the country are eager
to cooperate. While elected officials at all
levels of government have long called for the
overhaul of the system, the reality is that
few are willing to get involved in the
day-to-day details of moving low-income
households which often present a wide range
of economic, educational, and social
challenges from welfare into jobs. Nor are
they eager to take the consequences for
failure. When Congress transferred
responsibility for the design and operation of
these welfare programs, it also imposed
financial penalties for states that fail to
meet such targets as the number of welfare
participants engaged in "work" activities. An
attractive solution for local politicians is
to pass the buck by awarding a low-bid
contract and letting private industry worry
about making the system work.


This handover of sensitive social issues to
corporations is raising concerns. "As
companies like Lockheed adjust to the end of
the Cold War," said union spokesperson Sandy

"they're looking around to see where they can
grab some extra money. You really need the
individuals who are making decisions about who
receives government benefits to be held
accountable to the taxpayers, not to some
private company whose main concern is its
profit margin. A public employee is more
likely to be concerned about moving a welfare
participant into a long-term employment
situation, because that will save the most tax
dollars in the long run. A worker for a
private company is going to focus on how to
get individuals off welfare in the shortest
time, no matter what happens to them later,
since that is what increases their company's
profits and keeps the worker employed."

If profits increase when companies reduce
caseloads, they will have a high incentive to
deny or terminate assistance. "It's the same
problem we are seeing with health maintenance
organizations," said Henry Freedman, executive
director of the Center on Social Welfare
Policy and Law. "While the companies contend
they can save money through increased
efficiency, they can also do it by reducing
services, which is much easier. We need to
examine how the contracts are structured, so
that profits are tied to increases to
long-term employment. Unfortunately, it's
usually simpler to measure performance by
reduction in caseloads."

"Traditionally," even under public
administration, which has less incentive to
deny benefits, "many low-income individuals
have had a difficult time obtaining the public
benefits they are entitled to," said Rachel
Leon, who works for the Hunger Action Network,
a statewide anti-hunger organization in New

"Legal aid attorneys and advocates constantly
plead with, cajole, and sue state and local
officials to force compliance. When these
services are contracted out to a private
agency, not only is there another layer of
bureaucracy to contend with, but for-profit
companies have no experience with anti-poverty
law or negotiations. I don't look forward to
arguing on behalf of a client in front of a
hearing officer on Lockheed's payroll."

Involving private companies also threatens to
further erode client privacy. "The welfare
system asks far more personal questions than
the average American would tolerate," stated
Ron Deutsch, associate director of the
Statewide Emergency Network for Social and
Economic Security, an economic justice
organization based in New York State. Once
collected, the information "can also be used
in paternity suits, abuse and neglect cases,
and custody cases. The more entities that have
access to this data, the more difficult it is
to ensure confidentiality."

Another area of potential abuse isthe
increased possibility of political corruption;
lucrative contracts often attract
patronage,kickbacks, and bribes. It was such
corruption scandals earlier in the century
that led efforts to professionalize the public
workers in the 1920s, enabling them to perform
services that were previously contracted out.

Those who favor the transfer contend that
benefits will outweigh problems since
privatization saves money by bringing
cost-cutting and efficiency and allows
government to take advantage of innovations
and expertise developed by the private sector.
Critics counter that savings are often
illusory or short-term, with costs rising
after the private companies have established
themselves. And once they get in, argues
Freedman, "a lot of these private companies
will have a stranglehold. ... When a public
agency doesn't perform, you improve the
training or replace the people who aren't
performing. At least you already own the
hardware and infrastructure. It will be much
more difficult for the government to start
from scratch if the private company walks away
with everything when their contract is

And finally, those adding up the advantages of
privatization fail to factor in related costs
such as contract preparation, administration,
and monitoring as well as the frequent free
use of government facilities, equipment, and
materials. They also completely ignore long-
term social costs such as reduced salaries for
workers and smaller staffs.

Welfare "reform" is only the latest
manifestation of a major trend toward the
privatization of formerly public functions.
Elected officials of both major parties are
rushing to outsource everything from social
security, to trash collection, to dispensing
fines for delinquent parking tickets, to fire,
ambulance, and policing services. Private
prisons now house almost 80,000 people.11

This drive to privatize gained political
currency as "big government" replaced big
corporations as public enemy number one. The
US has always had strong populist movements,
but historically they targeted the powers of
robber barons and corporations.12 However, one
of the legacies of Barry Goldwater's failed
presidential election besides paving the way
for Ronald Reagan was to enable
conservatives to redirect anger away from
corporations and onto government. With
ever-increasing corporate ownership of the
media, it may be a long time before
corporations replace government as the focus
of populist enmity.

Big business, which has benefited mightily
from the shrinking of government, has not been
a passive bystander. Unlike welfare moms,
corporations have the resources to lobby
legislators and to feed the campaign coffers
that are the way to many a politician's vote.
The pattern of their buying influence and
shaping legislation is well documented. *13 A
few years ago, for example, an advocate on
welfare issues for the Hunger Action Network
of New York state was startled when she ran
into lobbyists for Shea & Gould at the state
legislature. The powerful New York law firm
was pushing for the expansion of
fingerprinting of welfare participants.
Previously, the fine details of welfare policy
had only attracted the interest of government
officials and a few underpaid and overworked
advocates. Even the utility companies,
landlords, and supermarkets that receive
almost all of the welfare payments seldom paid
much attention to the annual fight over
benefit levels. Why then was one of the
highest priced law firms in the state suddenly
involved? Shea & Gould was representing one of
the companies interested in the "fingerimaging
technology" designed to prevent fraud even
though there was no documented evidence that
there was a problem with individuals using
multiple identities to cheat the system. (The
welfare system already had one of the most
rigorous application and documentation
processes of any government benefit program.)
*14 The manufacturer had invested in the
lobbyists with the expectation that once
welfare participants had been used as the
guinea pigs to develop a statewide system,
fingerimaging technology could be sold for
wider commercial applications, such as hotel
rooms, car rentals, and automated teller

Maximus Inc., one of the largest private
company's involved in running welfare systems,
is represented by two major PR firms
well-known for lobbying in state capitals and
in Washington: the Jefferson Group and Wexler
Group.15 With $100 million in various
government consulting contracts, Maximus has
welfare-related contracts with a dozen states
and the District of Columbia, including a $10
million contract in California to recruit
Medicaid recipients into HMOs and $7 million
in job placement contracts in Boston; Fairfax,
Virginia; and two California counties.16

Maximus also takes advantage of the revolving
door. Its founder and president, David V.
Mastran, served as acting director of research
for the Department of Health,Education and
Welfare under Presidents Nixon and Ford.
Several other company officials have strong
governmental backgrounds, including John
A.Svahn, its former chair, who worked for
Ronald Reagan for more than 18 years. He was
instrumental in securing Maximus' first big
welfare contract from Los Angeles County in
the late 1980s.17

The company has had a history of problems with
its contracts. In West Virginia, Kenneth
Roberts, a former project director at the
Department of Health and Human Services, was
jailed in 1996 for illegal activities
involving Maximus' bid on a child welfare
services contract. Maximus lost the contract
to Lockheed. *18 In 1993 in Arizona, after
child support workers charged that Maximus had
made data entry errors, the state had to
return $250,000 in incorrectly assessed child
support payments. In Nebraska,in June 1995,
following a dispute over the company's fees
and a debate over privatization, the state
legislature terminated its contract. *19

America Works, another major player,
specializes in job placement and related
services for welfare participants. It bills
itself as the "first private company dedicated
to the public cause of putting people to
work." Founded in 1984, it lost several of its
contracts in Buffalo and Ohio in its early
years after complaints about excess costs. *20
The company, which now receives generally
positive media coverage, focuses on finding
entry-level positions such as receptionist,
secretary, mail-room clerk, word processor,
cashier, security, or warehouse worker. A
typical annual salary is supposed to range
from $15,500 to $18,000. *21 Advocacy and
watchdog groups have accused it of working
only with people who require little more than
help polishing their rsums and job leads
while summarily weeding out those in most
need. For example, 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

America Works receives fees from two sources.
It charges the welfare agency approximately
$5,000 for each client, and it keeps a
significant portion of the salary its clients
earn during their first four months on the
job. During this time, while monitoring
performance, America Works reaps $6-9 an hour
from the employer, which pays the trainee
minimum wage. It further boosts profits by
collecting various government incentives and
tax credits for hiring welfare participants.
Because of a three-stage funding contract, New
York state has paid America Works more than $1
million for people who never found jobs and
for placements that never became permanent.

Non-profit organizations are also lining up
for a piece of the welfare pie. United Way,
one of the country's oldest philanthropies, is
playing a key role in Mayor Giuliani's plans
to privatize much of New York City's welfare
system. *23 Since 1993, it has been under
contract to the city's welfare agency to
provide data on a wide range of social, health
care, and neighborhood issues. In 1995, United
Way completed a quarter-million dollar study
on how the city could privatize income support
centers where people apply for benefits and
meet with caseworkers. The plan, based on the
HMO model, would base payment to agencies on
the number of people they got off public

In late 1995, after United Way of New York
state joined with the Business Council and
several large human service agencies to
endorse a welfare reform plan, many advocacy
organizations accused it of supporting
measures that would hurt many of its member
agencies and their clients. After public
employee unions threatened to boycott payroll
deduction programs, the charity was forced to
back off from supporting the scheme which
called for cuts in benefits and a four-year
time limit on welfare. At the time, United Way
was desperate for new sources of money.
Following a 1992 scandal involving its
national president, donations had dropped by
$8 million in NYC alone.

Nor are non-profits immune from the
temptations of patronage and graft. Earlier
this year, NYC signed a $43 million deal with
the Hellenic American Neighborhood Action
Committee to supervise Home Relief recipients
and try to move them off welfare. The FBI
investigated the committee after learning that
it had submitted the highest bid and had
several well-connected former city employees
on its payroll. After the publicity, the mayor
canceled the contract. The city also
terminated a $3.4 million welfare contract
with United Way when the city comptroller
charged that it should have gone to the lowest
bidder. *24

As the clock ticks, states are scrambling to
put people to work any work. Under the new
law, 25 percent of adults must be in a "work"
program by August 1997; within five years the
quota rises to 50 percent. With about 10
million Americans out of work, no money in the
welfare legislation allocated to job creation,
and a system that does not even aspire to full
employment, welfare participants are far more
likely to end up in these workfare positions
than in a real job. In these publicly
subsidized jobs (New York, for example, puts
up $3,500 a year for each slot), former
welfare recipients perform low-level, dead end
labor, "working off" their welfare and food
stamp checks for the minimum wage or less.
They do not qualify for unemployment and
Social Security and lack the grievance and
organizing rights of other workers.

Previously, federal law limited workfare to
public sector or non-profit positions that
provided community service. New York City, for
example, replaced many parks department
employees with workfare participants and is
now looking for slots in the subway system.
Now, the new law removes the community service
restriction. Facing the federally imposed
deadline, states and cities are increasingly
looking to the private sector, both to accept
workfare participants and to participate in
wage subsidy and on-the-job training programs.
Workfare participants can now be placed in
fast food restaurants, home health care
agencies, and janitorial services. President
Clinton is also pushing for expansion of wage
subsidy programs for welfare participants. *25

So far, workfare's rate of success in moving
people into real employment is not good; it is
about 8 percent in New York state. The program
is rapidly creating a large subclass of
workers with subminimum wages and poor working
conditions. It is also pitting desperate
former welfare clients against other low paid
workers in a job market which cannot sustain
them both.

Meanwhile, corporations are rushing in to bid
on newly privatized services and profit from
the misery. They are unlikely to be
disappointed by any lack of entrepreneurial
opportunity. "The new welfare law has many
corporate welfare provisions. The changes open
up new markets for companies to sell their
services, while providing a pool of free
labor. As the government moves to restrict
welfare for poor people, they're expanding it
for the corporations," stated Cecilia Perry,
public policy analyst for AFSCME. The dangers
are substantial. Despite the inefficiency and
opaque bureaucracies that mark most
government-run programs, they provide
mechanisms for accountability and public
input; they also weigh the public good when
designing and assessing success. The private
sector, on the other hand, looks only to the
bottom line. --end--

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