From Welfare to Profit Shares

Capitalizing on the "opportunity of a lifetime"

By Christopher Cook


The four qualifying words in President Clinton’s pledge to end welfare—"as we know it"—are proving to be the ultimate twist of the dagger in the heart of public assistance. While ending AFDC, America’s 61-year-old guarantee of aid to poor families, Clinton’s reforms extend $28 billion worth of new contract opportunities to for-profit firms.

Before the new law’s ink was dry, corporations began jockeying to capitalize on what many called "the business opportunity of a lifetime"—the transfer of welfare programs to profit-making businesses. Sporting "welfare initiatives" divisions, powerful lobbyists and big-time political connections, corporations such as IBM, Lockheed Martin Information Management Systems (IMS, a subsidiary of the $30 billion Defense Department contractor), and Electronic Data Systems (EDS, Ross Perot’s old firm) are now poised to cash in.

States and localities have already begun outsourcing aid to the poor. In Texas, state and corporate officials have collaborated, often in secret, on a five-year, $2 billion statewide welfare privatization project—the most expansive in the nation. Milwaukee County, Wisconsin recently opted to privatize many of its welfare functions. In Massachusetts, two job-training centers for welfare recipients and the unemployed are now run by for-profit firms.

Riding the crest of this privatization wave, corporations are seeking to expand their welfare enterprise portfolios. "The federal government is under pressure to waive Medicaid and Food Stamps" from privatization restrictions so that for-profit firms can take over these functions, says Cecilia Perry, a public policy analyst with the American Federation of State, County and Municipal Employees (AFSCME).  A similar flurry of waivers preceded Clinton’s 1996 repeal of AFDC. The ultimate aim, says Perry, is to create corporate-run, one-stop shopping, in which "you go to Lockheed for every type of government assistance you need. How does that sound to you?"

Corporations are hardly bashful about their aim: to reap new profits by running welfare programs. At a World Research Group conference in Washington, DC this March, titled, "Welfare Privatization: Government Savings and Private Earnings," corporate executives received advice on how to "capitalize on the massive growth potential of the new world of welfare reform," and "gain a leading edge in the market while it is still in its early stage." Executives forked over $1,295 apiece for the opportunity to, as a brochure put it, "establish a solid network with key [government] players and decision-makers," and "identify future strategies in this new booming market." The conference also counseled government officials on how to "identify ‘targets’ for privatization," and develop strategies to "manage union opposition."

Indeed, unions and anti-poverty groups are up in arms. They warn that profit-minded corporations will lay off public welfare workers and deny benefits in order to enhance their bottom line. "Welfare is a program to benefit poor people," says Perry. "If you’re going to take that money and give it to large corporations that are designed to make profits, there’s a huge contradiction."

Less is More

Critics cite caseload-reduction incentives in the 1996 welfare reform law, which they say invite corporations to "cherry-pick" recipients who are easiest to employ in order to maximize profits. These inducements coincide with an intensifying push by federal, state, and local officials to reduce the rolls. While expanding "states’ rights" through flexible welfare block grants, the law requires states to reduce their caseload numbers in order to continue receiving federal funds—compounding the pressure to push people off the dole as quickly as possible.

States such as Arizona and Pennsylvania are taking a similar tack, offering financial incentives and penalties to coax private welfare operators to reduce caseloads. The Arizona Legislature proposed, for example, that "The state shall contract with an outside vendor to operate the Arizona works program." The bill included performance-based incentives for "reductions in the length of stay on assistance," as well as reductions in caseloads. In Missouri, a welfare-to-work bill defeated in the legislature this year proposed offering pay bonuses to case managers who reduced their caseloads. The measure promised managers up to $2,000 a year in bonus pay for reducing their caseloads by 25 percent.

In the context of tight job markets, rewarding welfare administrators for reducing the rolls will push recipients into low-wage and temporary jobs, and discourage some from applying for benefits altogether. "The jobs aren’t there and the companies are going to be rewarded on the basis of reduction in caseloads," says AFSCME’s Perry. "There are reverse incentives to helping people." Ellen Bravo, executive director of the National Association of Working Women (known as 9 to 5), puts it even more starkly. "There should be incentives for getting people employment," she says, "but instead there are incentives for throwing people on the street."

According to Maurice Emsellem, staff attorney with the National Employment Law Project in New York City, these "reverse incentives" are already coming home to roost. At a privately run job center in Boston, he says, "they’re not serving the people with the greatest needs because it’s just more expensive...It has to pay for them to do it. There’s no financial motivation for them to serve those who are hardest to serve, who need lots of education, who have disabilities, who need transportation from the inner city."

Inner-city welfare recipients aren’t the only ones likely to be left out in the cold. Texas State Representative John Hirschi (D-Wichita Falls), who represents a mixed rural-urban district where 10 percent of the population is on food stamps, worries that for-profit welfare firms will avoid rural recipients who are more difficult to reach. "When you contract out to somebody who’s doing this for profit, there’s an inclination to make convenient services available. There’s a disincentive to serve rural areas," where transportation is more costly, says Hirschi, who has opposed a massive privatization push in Texas. "There’s some concern that these for-profit companies would tend to skim those that are most easily employable, and would be less interested in taking care of special needs clients, who we worry would fall through the cracks."

Also at risk of falling through the cracks are tens of thousands of public-sector workers (the most highly unionized in the country), who will likely lose their jobs due to welfare downsizing and outsourcing. In the name of "efficiency," private firms will severely reduce staffs, putting many public workers on the unemployment lines—and, possibly, on welfare.

The arrival of corporate titans on the welfare scene also threatens to drive away non-profits which have historically been the government’s welfare subcontractors of choice. "Non-profits can’t compete with these corporations on bids," Perry observes, noting that huge corporations boast state-of-the-art technology and superior economies of scale—not to mention heavyweight political connections. Beyond the prodigious competition, some non-profits and charities may be dissuaded by federal rules promoting speedy caseload reduction. "Non-profits aren’t necessarily going after the eligibility [review] function," Perry says, "because they don’t want to turn people away."

Texas: Privatization Battleground

The debate over privatizing welfare has, until recently, been a war between glowing promises and dire warnings. Now, a sprawling privatization effort in Texas, involving well-connected corporations vying for mega-bucks contracts, provides a troubling glimpse into this emerging "brave new world." The Lone Star state is the first to attempt welfare privatization on a statewide basis. Seeking Texas-sized profits, the bidding corporations have hired top former state officials as lobbyists—prompting an investigation into possibly criminal conflicts of interest.

The prize is considerable: a 5-year contract worth an estimated $2 billion is up for grabs in the nation’s largest welfare auction to date. Up for sale is the Texas Integrated Enrollment Service (TIES), a statewide system designed to determine eligibility for nearly a dozen welfare-related programs. TIES would coordinate and computerize eligibility reviews in "one-stop shopping" centers where people would apply for several benefits at once. Texas Health and Human Services Commissioner Dr. Michael D. McKinney glowingly asserts TIES is "a program which will serve as a model for the rest of the nation."

Unions and anti-poverty groups say it’s a "model" for mass layoffs of public workers and diminished access for the poor. "We feel that a corporation who’s chief motive is profit won’t be hiring the people with the right skills," says Lynn McCray, organizing coordinator of the Texas State Employees Union, "and won’t pay well enough to attract people who are trained enough to know what welfare recipients need and what they can get." McCray’s union represents some 5,000 welfare-system employees who could lose their jobs due to privatization. "We envision people getting $7 an hour with few benefits and no training, under pressure to push through as many people as possible and give out as few benefits as possible."

Charles Stuart, spokesperson for the Texas Health and Human Services Commission, insists there is "absolutely no financial incentive" for corporations to reduce benefits or deny recipients. But he can’t document exactly how the state will ensure this—details of the program are confidential since the program is up for bid. Stuart concedes, however, that "efficiency" innovations will involve layoffs: "The majority of the savings are in personnel."

No minor bureaucratic reshuffling, TIES—the brain-child of the Texas Council on Competitive Government—is aimed at "streamlining" services and cutting costs through layoffs and competition between public agencies and private firms. According to U.S. Department of Health and Human Services documents, "the TIES project contemplates a restructuring of the administrative methods...that is broader than an acquisition of automatic data processing equipment and services"—in other words, a revamping of both the ways and means of welfare eligibility review in Texas.

This May the Clinton administration rejected the Texas proposal, saying its plan to integrate and privatize cash assistance, Food Stamps, and Medicaid (which must be administered publicly) pushes the envelope too far. Beyond its concerns about Food Stamps and Medicaid, the Administration said TIES threatened to turn key eligibility decisions over to private hands: "Activities in which specific eligibility criteria are discussed with an applicant or eligibility-related information is collected and evaluated, must be performed by a State merit system employee."

But all is not lost for would-be welfare profiteers. Clinton’s DHHS assured Texas officials that the state "has very broad authority to administer the Temporary Assistance for Needy Families (TANF) program and, with respect to the administration of TANF, can use non-public employees without limitation...significant opportunities exist for the State to take advantage of the efficiencies and expertise available through the vendor [business] community."

Automated Welfare

One TIES "restructuring" plan parallels a nationwide trend that further distances government from the poor: the automation of welfare eligibility reviews and benefits payments. For example, TIES planning documents call for "Automated screening for programs for which an individual or family may be eligible," and for "Automated financial assessment across programs that require financial information to determine eligibility."

One of the major bidders for TIES, Lockheed Martin IMS, brings related experience to the table. Cities in 26 states now dispense welfare and food-stamp funds through ATM-style cards and cash machines known as "electronic benefit transfer" (EBT) systems—most of which are operated jointly by Lockheed Martin IMS and Citibank EBT (a Citibank spin-off focusing on EBT business ventures).

On several occasions, EBT snafus have left welfare recipients with no access to cash or food stamps. One day in 1995, half of the computers in Texas went down, recalls Bruce Bower, staff attorney with the Texas Legal Services Center. Suddenly, tens of thousands of people using the Lone Star Card couldn’t get their benefits. "When people got a message saying there was no money in their account and called the help desk, that help desk didn’t respond." As it turned out, the "desk," run by Transactive Corp., had moved to Florida—ironically, taking Texas jobs with them.

Regardless of how smoothly they are run, the EBTs mark a departure from hands-on, interpersonal assistance. "It’s this whole reliance on technology as a cost-cutting mechanism," says Rick Levy, legal director of the Texas AFL-CIO. "The ultimate goal is to have welfare recipients get all their assistance from an ATM machine, which is absurd given the client population you’re dealing with...The whole notion of serving this population is not just to get them on a computer screen. You really have to work with people."

Revolving Doors

But corporations seeking lucrative contracts have chosen a different crowd to work with—hiring former top Texas officials to lobby state agencies for privatization contracts, and prompting a storm of protest and allegations that once-public officials are engaging in illegal corporate lobbying. The Travis County Attorney’s Office is investigating whether any of these officials are violating state ethics and revolving-door laws.

According to Mack Martinez of the Travis County Attorney’s Office, the investigation is ongoing and hinges on how closely the officials were connected to the programs they are now lobbying. But, he muses, Texas’s revolving-door law "is not as tight as we’d like it to be."

In response to growing complaints about the backroom deals, Governor Bush signed a law this June requiring public hearings and legislative oversight of the TIES planning process. Privatization critics, including unions and public-interest groups, say the measure should slow the privatization rush and democratize decisions.

Legal or not, state Representative Hirschi finds this public-private hop-scotch disturbing. "These high-ranking officials would be of great value to these companies...I just don’t know about the propriety of this situation, where officials are trying to leapfrog from a destructing state agency into profitable firms."

In their aggressive campaigning for the TIES contract, Lockheed Martin IMS, IBM, and EDS hired former high-ranking Texas officials who, critics charge, helped pass legislation promoting welfare privatization. Indeed, several of these corporate lobbyists and advisors once worked as top aides to political heavyweights who orchestrated privatization—and who will now make pivotal decisions about who wins the contracts.

At front and center is the Texas Council on Competitive Government (CCG), a six-person super-agency that promotes privatization. The council includes the state’s most powerful politicians, such as Governor George W. Bush, Lieutenant Governor Bob Bullock, and Comptroller John Sharp. Former top aides to Bush, Bullock and Sharp now work as lobbyists for corporations bidding for the TIES contract. Until recently, the Texas Workforce Commission, a state agency with a seat on the CCG, was teamed with Lockheed Martin and IBM in a public-private bidding "consortium."

To get a leg up on the competition, Lockheed Martin IMS assembled a Dream Team, including Texas Governor George W. Bush’s chief welfare lobbyist and legislative director, Dan Shelley. Now a lobbyist for Lockheed, in 1995 Shelley was Governor Bush’s point man in convincing the Texas Legislature to pass measures that created strong incentives for contracting out welfare to private firms. "As soon as the bill was passed, Shelley went to work for Lockheed," according to Lynn McCray, organizing coordinator for the Texas State Employees Union (TSEU), which has vigorously opposed privatization.

A call to Shelley’s lobbying office produced a revealing response from Lockheed consultant Bill Miller: "Welfare reform, of course, is privatization. That was part of the governor’s initiative. As his legislative director, of course, it was [Shelley’s] responsibility to get the bill passed."

Public Funds, Private Plans

Equally troubling is the privatizing of once-public information—a problem critics say is inherent to the outsourcing of welfare. The companies in Texas are holding their plans close to the vest, and state and federal agencies refuse to provide details of the soon-to-be-privatized programs. In response to a Freedom of Information Act request, the U.S. Department of Health and Human Services released just 15 of 686 pages relating to the Texas RFO, claiming the bulk of the records contain "proprietary" and "confidential" information.

The implications of privatizing welfare information are far-reaching, according to Bruce Bower, an attorney with the Texas Legal Services Center in Austin. Even under public oversight, "There is an enormous amount of misinformation that results in recipients being disqualified," Bower says. "This will be exacerbated by private corporations...Rather than state officials accepting responsibility, they’ll say it’s the contractor’s problem, it’s not our doing.

"This is all about outsourcing. The state will not have the same first-hand knowledge of what’s going on in these programs that it used to have. One of the problems with privatization," says Bower, "is that once you dismantle the system, it’s gone.


Christopher D. Cook is a freelance writer from San Francisco who has written for The Nation, In These Times, and the San Francisco Bay Guardian.