A Background Paper

Author(s): Demetra Smith Nightingale, Nancy M. Pindus

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Posted to Web: October 15, 1997

Permanent Link: http://www.urban.org/url.cfm?ID=407023

This paper was prepared at the Urban Institute for U.S. Department of Labor, Office of the Assistant Secretary for Policy, under DOL Contract No. J-9-M-5-0048, #15. Opinions expressed are those of the authors and do not necessarily represent the positions of DOL, the Urban Institute or its sponsors. The views expressed are those of the author and do not necessarily reflect those of the Urban Institute, its board, its sponsors, or other authors in the series

1. Introduction

The purposes of the paper are to provide a general overview of the extent of privatization of public services in the areas of social services, welfare, and employment; rationales for privatizing service delivery, and evidence of effectiveness or problems. Examples are included to highlight specific types of privatization and actual operational experience. The paper is not intended to be a comprehensive treatment of the overall subject of privatization, but rather a brief review of issues and experiences specifically related to the delivery of employment and training, welfare, and social

services.

The key points that are drawn from a review of the literature are:

• There is no single definition of privatization. Privatization covers a broad range of methods and models, including contracting out for services, voucher programs, and even the sale of public assets to the private sector. But for the purposes of this paper, privatization refers to the provision of publicly-funded services and activities by non-governmental entities.
• Privatization is not a new concept. The current rationales for privatization and their implementation strategies differ very little from earlier privatization initiatives (even as early as the 1930s). Perhaps the biggest single change in the current privatization environment in the area of social and human services is the possibility of private companies being contracted with to administer entire public-funded systems (e.g., all of welfare, all of child support, all of workforce development).
• The real issue is not so much public vs. private–it is monopoly vs. competition. A key issue in the current trend towards what is commonly referred to as “privatization” is the introduction of competition (e.g., public-public competition, public-private competition, competition between public-private ventures, public-nonprofit competition) to increase efficiency, reduce costs, and improve quality and customer satisfaction.
• Privatization is not inherently good or bad–the performance or effectiveness depends on implementation. The little empirical analysis comparing the effectiveness of public versus private service delivery shows no clear evidence that private service delivery is inherently more effective or less effective than public service delivery, although the public, private, and nonprofit sectors each have their own relative strengths and weaknesses. There are examples of success and failure in both sectors. Most of the research suggests that the key factor is whether there is clear accountability for results, clear criteria in contracts, and clear public objectives. The government is responsible for assuring that public services are effective, whether or not the services are publicly delivered.
• Privatization does reduce the number of public employees if services formerly performed in the public sector are shifted to the private sector. But it is not clear that workers are necessarily worse off in terms of employment, wages, morale, or job satisfaction. There are many examples of negotiated arrangements for transferring public employees to private employment or to other public agencies. There is undoubtedly, though, a clear reduction in public employee members of unions, although some number of privatized workers may join other unions.
• It is still too soon to know whether the most recent and highly-publicized privatization efforts will be effective or not. There are, however, many potential problem areas (e.g., profit motivation to cream and minimize costs) that, if unaddressed in the public contracts, could reduce service quality. There are many reasons for cautiously scrutinizing the process.

2. Current State of Privatization

Similar to trends in the private sector, there is some indication that public agencies are increasingly considering downsizing and outsourcing as ways to address both financial constraints and a desire to improve performance. The Government Management Reform Act of 1994 (P.L. 103-356) states:

To be successful in the future, government must, like the private sector, adopt modern management methods, utilize meaningful program performance measures, increase workforce incentives and flexibility without sacrificing accountability, provide for humane downsizing opportunities and harness computers and other technology to strengthen service delivery.

However, privatization is not a new phenomenon. Gurin (1989) notes that privatization of government social services has, in fact, increased at major watershed points in the history of social policy (the Progressive era in the late 19th century, New Deal, Great Society, and Reagan years), both at times of expansion and during contraction of government services. For example, during the 1970s, federal funding for social services increased greatly under Title XX of the Social Security Act, and for human development and employment services under the Economic Opportunity Act and the Comprehensive Employment and Training Act (CETA). Nonprofit organizations and for-profit businesses both emerged to fill the need for government contracted service providers. In contrast, during the early 1980s when federal funding for social programs was dramatically reduced, there was also some increase in contracting out services (in some locales) as one way to reduce unit costs and gain efficiencies despite reduced overall funding.

More recent interest in privatization of public social services is stimulated by both expansion and contraction of publicly funded programs. Federal funding for employment and training declined during the early 1990s, and this was one motivation for workforce development system redesign, which includes considering new ways to deliver services. At the same time, the 1996 welfare reform legislation increases the responsibility states have for redesigning their welfare systems and, at least in the short run, provides more federal funding for both income support and programs that promote employment. Privatization is one of the various welfare system redesigns that are being considered.

The recent dramatic emergence of large private corporations into the welfare field (discussed below) has raised many concerns about the appropriateness of this degree of privatization. The traditional approach to contracting in social services had been noncompetitive, quasi-grant arrangements, primarily with non-profit organizations (Hatry and Durman 1985). The increased emphasis on competition and performance contracting for the delivery of social services is consistent with private sector initiatives focusing on efficiency and customer service. Some organizations, such as the Reason Foundation, have been promoting the benefits of privatization for decades, and recently their efforts are gaining new momentum, providing technical advice and guidance to businesses and public officials on how to develop business ventures and effective public/private partnerships. In addition to welfare reform, several other recent federal initiatives also encourage more privatization, most notably in one-stop career centers and child support enforcement.

One-Stop Career Centers

The federal One-Stop Career Center initiative encourages an expanded use of vouchers and competitive selection of administrative entities (e.g., for one-stop centers). Although national regulations do not specifically endorse privatization of services, they do encourage expanded competitiveness for the selection of center administrative and service delivery agents, allowing public and nonprofit organizations as well as private for-profit companies to compete openly for one-stop service contracts.

The Massachusetts’ One-Stop Career Center Initiative is a current example of the trend toward privatization in the one-stop and workforce development area. The state plan allows private firms to compete with public agencies for contracts to manage career centers, which serve as gateways to the states’s new workforce development system. However, the initiative has run into opposition on several fronts due to competition for funds among rival employment and training agencies, high demand for services at the career centers, and concerns expressed by public employee unions (Boston Globe, 2/11/97).

Child Support Enforcement

Federal child support enforcement legislation also supports an expanded role for non-profit and private contractors. The 1986 child support legislation specifically encourages states to consider contracts with private companies for technical activities such as locating absent parents and maintaining tracking and payment systems. The Reason Foundation reports that, in 1995, there were twenty states and dozens of local governments that had privatized one or more child support services, and that five more states were planning to do so in 1996. These states contract out for activities such as location, collection, payment processing, distribution of payments, and fully privatized offices. Georgia and Virginia give full caseload responsibility to private providers.

The success of the private sector in increasing collections of child support payments is attributed to several factors: first private firms can bring technology and equipment to the tasks that governments typically cannot afford; second, private firms can expand or contract operations quickly as they are not bound by government personnel systems; and private firms use performance incentives, such as bonus pay, to increase collections per employee. (Reason Foundation pp 45-46)

A 1996 General Accounting Office Report (GAO, October 1996) found that in the fifteen states with some privatization of child support, there was a tendency to especially contract out collections of child support payment from hard to locate absent parents and parents with past-due support.¹ Many contractors receive payment only if they collect, often retaining a percentage of the collection (ranging from 8 to 24 percent). In general, GAO found that both the federal and state governments benefitted financially (net) from contracts that were targeted on cases that might not otherwise be worked–in effect, the private contracting supplemented what the public agency could do. The net benefit is derived from collections on AFDC cases and from federal performance incentives attached to child support collections for both AFDC and non-AFDC collections.

Welfare Reform

Increased requirements under welfare reform, coupled with spending restrictions that limit the amount of hiring that can occur in public agencies, have led some states to more seriously consider outside service contractors for welfare service delivery functions. For example, welfare officials in Nebraska and Arizona plan to increase their use of outside contractors (both for-profit and non-profit) to deliver services such as job placement and parenting skills training. (ETR 11/27/96) Other states