Commentary: Why Privatizing Welfare Could Actually Work

The clock is ticking. On Oct. 1, the federal government began its retreat from 60 years of guaranteeing a minimum standard of living for poor children. By July, states must enforce strict federal guidelines that tell parents to seek work or face benefit cutoffs--and they must find jobs for millions of recipients.

It's already clear that states can't possibly handle this job alone --which is why a throng of companies, including Lockheed Information Services, IBM, and Electronic Data Systems, are eyeing the potential business. Ultimately, most aspects of the $20 billion system are likely to be privatized, from job training to cash disbursements.

Over the past few years, cities have privatized such services as fire protection and trash hauling with considerable success. Predictably, and justifiably, the prospect of for-profit companies caring for the poor has triggered much more angst. "Our idea of positive welfare reform is not the auctioning off of the social safety net to the lowest bidder," says Gerald W. McEntee, president of the American Federation of State, County & Municipal Employees, who fears for his members' jobs.

INNOVATION. Given the right controls, though, privatization could turn out to be a boon both for the poor, who depend on public help, and for taxpayers, who foot the bill. As it is, welfare offices aren't equipped to find people jobs; recipients typically fill out forms at local centers, check yellowing employment listings, then wait for a check. Private companies, on the other hand, bring innovation and flexibility; they're not bound by hoary work rules and civil service protections.

The key lies in implementation. Sure, there is opportunity for abuse when the profit motive meets public policy. When incentives and regulations are poorly designed, the poor can suffer. Contractors should be rewarded for recipients' successful efforts to find and hold jobs--not simply for slashing expenses. States' critical role in welfare's new world, then, is to devise rules that let business build a better system, make money at it, and still treat the poor like human beings.

Consider the example of Lori Emerson. The 32-year-old mother of four boys had been on welfare for six years when state social workers in Casper, Wyo., referred her to Curtis & Associates for a motivational program geared to chronic recipients. "I was lazy, I guess--I knew I didn't have to work if I could get welfare," Emerson says. After 15 months of counseling from Curtis and training at a community college, Emerson works as a hospital lab technician and takes home three times as much as when she was on welfare. "Now I can't imagine just sitting around home and doing nothing," she says.

Curtis has a stake in such success: In many cases, it gets paid based on how long ex-recipients stay on the job. Likewise, in dozens of states' pilot projects over the past five years, private contractors have helped recipients move off the dole with innovative approaches seldom tried by government. Kelly Services Inc. placed a recruitment center in a Detroit welfare office and offered free computer software training. The company hired and placed 288 welfare recipients in temporary jobs in one year. More than a third have worked 90 days or more.

4EFFICIENCIES. Eventually, companies will handle far more than training. States such as New York already have privatized food distribution, housing coordination, and medical care. Next up: electronic benefit transfers, required by 2002. Welfare recipients will get a debit card to replace welfare checks, food stamps, and rent subsidies. In time, such cards may even disburse Social Security, unemployment compensation, and veterans benefits. Citicorp has contracts to provide card services in 27 states.

The potential for efficiencies is huge. So, too, is the potential for counterproductive cuts. Governments must devise performance-based contracts to encourage the first without allowing the second. To even qualify for payment, contractors should have to graduate a high number of recipients from rigorous training courses. Beyond that, governments should replicate Hudson County (N.J.)'s contract with Curtis, which pays bonuses each time a recipient finds a job and keeps it for two months. "If these contracts tell companies they can make money by improving service, that's fine," says Elizabeth Krueger, associate director at New York's Community Food Resource Center.

Business, notes Krueger, is neither compassionate nor heartless--it just responds to whatever stimuli are offered. Welfare privatization will amply test that idea. If Lori Emerson's experience can be repeated several million times across the country, Washington's 10-year struggle to reform welfare will have been worthwhile.

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