Los Angeles Times Monday, January 27, 1997
PRIVATIZATION EMERGES AS NEW WELFARE
OPTION
By Dave Lesher, Times Staff Writer
SACRAMENTO--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.
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."
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."
