Privatization Emerges as New Welfare Option

Gov. Pete Wilson, in the fine print of a welfare reform plan he issued earlier this month, quietly opened the door to a striking new idea of hiring private corporations to run public assistance programs.

The proposal has scarcely been noticed in the Capitol, where lawmakers are still focused on questions such as how much care the state should provide--and to whom.

But elsewhere, California is being closely watched by a fledgling industry of conglomerates, major charities and venture capitalists that are banking on welfare reform to become a multibillion-dollar enterprise nationwide.

“We are positioning ourselves to do everything we can in California,” said Robert Stauffer, a vice president in the human services division of Electronic Data Systems Corp. in Dallas. “We want to be involved.”

The governor’s privatization idea stems from his attempt--encouraged by the counties--to provide local government with substantial discretion over how they will meet strict schedules for moving hundreds of thousands of welfare recipients into the work force.

Wilson would like the state to set the rules--such as standards of care and caseload reduction goals--then get out of the way and allow counties to design their programs.

The governor’s plan would allow counties to “enter into performance-based contracts with nonprofit or for-profit” companies to operate nearly all or parts of their welfare programs.

“The governor has said many times that government alone is not the solution,” said Lisa Kalustian, deputy press secretary to the governor.

The idea is welcomed by county officials. “They should be allowed to contract out as much as they deem appropriate,” said Frank Mecca, lobbyist for the County Welfare Directors Assn. of California.

But privatization of any government function has been hotly contested in Sacramento. And officials expect that welfare will be even more complex since there are huge consequences for thousands of poor families.

For government officials who are intimidated or confused by welfare reform, the idea might offer relief. But labor unions, fearing the loss of jobs, are planning to oppose the idea. And community advocates say they are concerned about the ethics of injecting profits into the government’s traditional role as caretaker of the poor.

“I still have trouble with the whole concept of making a profit on the backs of the poor,” said Anne Arnesan, director of the Council on Children and Families in Wisconsin.

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Private contractors already have been used in many California welfare offices for limited assignments, such as bookkeeping, delinquent child support collection, computerized record keeping or work training. But the governor’s proposal is potentially far more sweeping.

Wisconsin is implementing a plan that is similar to Wilson’s proposal. There, in one county, state authorities are studying proposals from companies about how they would run the welfare program.

When the contract is awarded, welfare applicants in Milwaukee County will be screened, trained and placed in jobs by the employees of a private company--some of whom may be former welfare recipients themselves.

Texas is also poised to offer at least a $500-million contract that could transfer the majority of care for its 690,000 welfare recipients to private control.

Already, in both states, the opportunities have sparked intense competition among a range of small to giant corporations--both profit-making and nonprofit ones.

In Texas, the major bidders include two consortia. One represents Lockheed Martin Corp., IBM and the Texas Workforce Commission. Another is composed of Electronic Data Systems Corp., Unisys Corp. and the state Department of Human Services. A third major bidder is the giant accounting firm of Arthur Anderson & Co.

In Wisconsin, the bidding has attracted major charities, including United Way and Goodwill Industries.

Since the contracts being awarded are unprecedented, industry officials said, the potential for profit is still speculative. Privately, though, officials said most companies expect a profit of at least 3% to 4% of the contract value. In Wisconsin, the maximum profit is being written into the contracts.

The strongest attraction, however, is the potential for billions of dollars in new business. And the gold rush already has begun.

Maximus Corp. in McLean, Va., has worked exclusively as a private contractor in welfare offices nationwide for more than 20 years. But in the last year, the company has doubled in size, going from a $50-million operation in 1995 to $105 million in 1996. It expects to do the same this year.

Welfare reform “is, as yet, an undetermined revenue pool,” said Kevin Gedding, a Maximus spokesman. “But there are billions of dollars in potential project work that need to be done in the next four to five years.”

The intensity of the competition is reflected in some of the buyers-market contract proposals.

Maximus told officials in Wisconsin that it can run the welfare office at a 10% to 40% savings and guarantee a significant caseload reduction. It promised to pay a year of welfare benefits to each extra recipient if it fails to reach the goal.

Maximus, like other companies, has also sought openings to government by hiring some of the top talents in public welfare offices.

Just more than a year ago, it recruited Larry Townsend from Riverside County after he became something of a celebrity in national welfare reform circles for his work in creating a widely acclaimed jobs program.

“This will be one of the greatest challenges ever given to local government,” said Townsend. “We have something really interesting to offer in California.”

Electronic Data Systems also has been working with welfare offices for nearly 35 years, starting when Ross Perot founded the company in 1962 with a contract to manage the Texas Medicaid program. EDS, no longer headed by Perot, has held contracts in California for more than 20 years and is now running the state’s Medicaid billing.

“We are bringing in the best of the public sector and the private sector,” Stauffer said. “We bring ideas from the commercial world as well as things done well in other countries or other states.”

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Despite the opportunities, California officials predict that extensive privatization will be a difficult sell here.

For one thing, new legislation is required to clear the way for the extensive privatization that Wilson’s proposal would allow. Similar legislation has already been rejected by lawmakers for the last two years.

“In the past, we have had a very cautious eye toward privatization,” said Pat Leary, analyst with the Democrat-controlled Senate Budget Committee. “But with as many new members as we have, I have no idea how it will do.”

Mecca predicts that there could be a wide range of interest from counties. So far, he said, the county experience with private contractors in welfare has been generally favorable. But it has not always proved to be better than government.

Orange County, for example, has split its territory in half so the government welfare staff could compete with Maximus to see which operation could move more people into the work force.

Both sides have exceeded their job placement goals. But in the fiscal year that ended in June, county workers won the competition. They found jobs for 3,679 welfare recipients compared to 2,473 for Maximus.

So far in this fiscal year, officials say, the two groups are running about even.

“Part of that is no doubt due to a learning curve as Maximus came up to speed,” said Jerry Dunn, who oversees the county’s work placement program.

Maximus also was hired in Los Angeles County to operate a work training program. Its contract was dropped in 1993, when the county’s interest in privatization cooled and critics questioned the amount of savings generated. Maximus left with a letter of commendation from the county welfare office.

Today, Los Angeles officials are uncertain about their future privatization plans.

“In general, the county favors programmatic flexibility,” said Phil Ansell, welfare reform strategist for the county social services department. “The question of how the county would utilize that flexibility is a downstream decision.”