Corporate Welfare for Welfare Corporations

Karyn Rotker

This article is from the January/February 2001 issue of Dollars and Sense: The Magazine of Economic Justice available at

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This article is from the January/February 2001 issue of Dollars & Sense magazine.

Sandra (not her real name) is a Milwaukee woman in her early thirties who suffers from three separate mental health conditions. Two of her children are disabled; several are in foster care. Last July, one of the children in her custody got sick and lost his day-care slot. Without child care, Sandra couldn't show up for the work assignment her welfare agency sent her to. Because she didn't immediately turn in paperwork proving she had a good reason for her absence, the agency slashed her meager monthly check in half.

In the same month that Sandra's child lost day care, an independent state audit revealed that Maximus, a for-profit corporation, had misused public funds. Maximus, which receives millions of tax dollars to run welfare programs in Milwaukee, couldn't document nearly three-quarters of the expenditures the auditors reviewed. Officials at the Wisconsin Department of Workforce Development (DWD), the state agency that oversees welfare programs and sets the rules that women like Sandra are forced to follow, explained away the record-keeping lapse: Responsibility for monitoring Maximus' spending, they said, had been "hazily defined."

Welcome to welfare reform in Wisconsin, the nation's leader in running experiments on recipients of public assistance. For poor families—mostly single mothers and their children—the last 14 years have brought benefit cuts and behavior control. But welfare reform has been a bonanza for bureaucrats and private contractors, who get the public money once reserved for needy families—though with far less monitoring than those families receive.

A Boon for Bureaucracy

In 1986, about 100,000 Wisconsin families were receiving Aid to Families with Dependent Children (AFDC). In keeping with the state's tradition of clean and efficient government, Wisconsin boasted the lowest AFDC administrative costs in the nation, $3.46 per recipient per month. A mother and two children—the most common family size—got about $500 a month. It wasn't much, but it kept a roof over their heads. And AFDC benefits increased slightly each year.

Then Tommy Thompson came along. In November 1986, Thompson, the Republican minority leader of the Wisconsin Assembly, was elected governor. (He is now in his fourth term.) Almost immediately, he cut monthly AFDC benefits, which remained frozen at 1987 levels for the next ten years. Also in 1987, he became the first governor to exploit the availability of federal waivers, which permitted states to override specific AFDC requirements with experiments of their own. Through the waiver system, Wisconsin was able to impose more stringent criteria on AFDC recipients than federal law allowed. Among its initiatives, the state adopted new methods of modifying AFDC recipients' personal behavior; moved ever-increasing numbers of families into job search, training, or unpaid "work experience"; and set time limits for receipt of AFDC benefits. By the mid-1990s, Wisconsin was operating more welfare experiments than any other state.

Under Thompson, Wisconsin's welfare bureaucracy flourished. For example, "Learnfare," a program that penalized AFDC families whose children missed school, cost more to run than the state saved in reduced benefits. By 1994, the number of households receiving AFDC had fallen by more than 20% from 1986 levels. During that same period, administrative costs per recipient soared by more than 600%, reaching $21.01 per month.

In 1993, Wisconsin became the first state to call for substituting AFDC with a state-created program, and in mid-1995, Thompson unveiled Wisconsin Works (W-2) as his replacement plan. W-2 required virtually every AFDC household to work off its grant. Following the largest welfare-rights demonstrations in 30 years, some of W-2's harshest provisions were ameliorated; for example, recipients could count up to 12 hours of education and training toward their 40-hour "work" week. But the cornerstones of W-2—mandatory workfare for families with children more than 12 weeks old, and lifetime limits on assistance—remained. In mid-1996, the state requested federal approval to implement the program. Soon after, Congress passed the welfare reform act, which not only replaced AFDC with block grants to the states, but also imposed restrictions at the national level—such as time limits—that Thompson and other governors had previously proposed. Once President Clinton signed the legislation in August, Wisconsin no longer needed federal permission to adopt W-2.

In September 1997, Wisconsin began operating W-2, and the privatization process began. AFDC rules had required state or local government agencies to be involved in running the program. Under W-2, those rules were gone. Counties did get to bid first on W-2 contracts—but only if they'd already pushed a sufficient number of families off AFDC. Milwaukee County—Wisconsin's largest—had not thrown people off the rolls fast enough. The state handed Milwaukee's W-2 program over to five private contractors.

During the first year of W-2's operation, DWD and its W-2 contractors spent about $145 million—more than 30% of total W-2 expenditures—on three line items: state administration, W-2 office costs, and W-2 start-up funding. That same year, the state paid out just $78 million in W-2 benefits to poor families—or a little more than half of what it spent to operate the program.

Money for Contractors, Not the Poor

Last summer's revelations about Maximus, which arose from an inquiry by Wisconsin's nonpartisan Legislative Audit Bureau (LAB), shed light on the kinds of "administrative" costs private W-2 agencies incur. The LAB found that Maximus improperly billed W-2 for time its staff spent working on projects in New York, California, Pennsylvania, Arizona, Michigan and Illinois. It charged W-2 for social events for Maximus employees and lunches for its director. It even spent welfare money on fanny packs sporting the Maximus name. Altogether, the LAB found more than $400,000 in questionable or disallowed charges, and $1.6 million in expenses that Maximus couldn't properly document.

Lest it appear that the problem is confined to Maximus, in August the LAB launched an investigation of a second Milwaukee W-2 contractor. Employment Solutions—a non-profit created by Goodwill Industries, whose executive director is a former Thompson aide—reportedly billed the state for expenses its employees incurred while trying to get a welfare contract in Arizona (apparently the same one Maximus was seeking). In late September, Employment Solutions' own auditors reportedly found that the contractor had improperly used W-2 funds for lobbying and to help finance a survey of Goodwill retail store customers.

Violations also exist outside the financial realm. Last August, the Equal Employment Opportunity Commission charged Maximus with discrimination, for placing a woman in a job for which men earned higher pay. Also, a state commission found that Opportunities Industrialization Center, another welfare contractor in Milwaukee, failed to stop sexual harassment of one of its own staff by a supervisor. Meanwhile, DWD had not bothered to make sure that all its W-2 contractors submitted civil rights compliance plans.

Of course, these are just the abuses we've heard about. Since the state allowed private welfare contractors to audit themselves, no one really knows how these agencies used hundreds of millions of dollars in public funds. DWD is so obsessed with controlling the behavior of poor families that, until she left her position, former W-2 administrator J. Jean Rogers personally reviewed each request for an extension of benefits beyond W-2's 24-month time limit. Yet according to the LAB, DWD didn't begin to scrutinize welfare contractors' activities until New York media published reports of Maximus' alleged improprieties in connection with welfare contracts.

It's not only the disallowed charges that siphon money away from poor families. For example, from 1997 to 1999, Maximus used more than $6 million in W-2 money to cover indirect costs for its national operations—expenditures the LAB found "reasonable." In addition, Maximus poured an estimated $1.1 million in welfare money into advertising. Due largely to Maximus' poor documentation, LAB was "unable to determine the appropriateness" of many of those expenditures.

And then there's the original contract structure itself. Official DWD policy directed contractors not to give families any assistance unless they specifically asked for it—and to try to "divert" those who requested help. At the same time, DWD's initial two-year contracts allowed W-2 agencies to profit from unspent funds. Under the state's formula, an agency could keep up to 7% of the total contract payment as unrestricted profit. For example, if a contract was for $1 million and the agency spent $500,000, it could keep 7% of $1 million ($70,000). Of the remaining $430,000, the contractor could keep 10% ($43,000) as additional unrestricted profit, with the balance ($387,000) divided between the agency—to use as it saw fit for "community reinvestment"—and the state. If the contract was for $1 million and the agency spent $950,000, it could keep the remaining $50,000. If the agency spent the entire $1 million, its profit was $0. To put it simply, the less the contractors spent on poor families, the more money they made for themselves.

In this way, the system poured millions of tax dollars into the coffers of private contractors. This is especially true in Milwaukee, where more than 85% of W-2 families live and where W-2 is run entirely by private contractors. Outside Milwaukee, where most W-2 programs are operated by counties, the "profit" structure gave local governments the ability to use welfare funds as a source of unrestricted revenue. In response to criticism of the profit structure, DWD's subsequent contracts imposed some performance criteria. But since 1986, the number of Wisconsin families receiving welfare has dropped by more than 90%; today, fewer than 6,000 families receive W-2 cash assistance. For most poor households, the changes are too little, too late.

Contractors Gain, Families Lose

The more profound issue, which auditors have not addressed, is the quality of services private contractors provide with public funds. Many families who remain on assistance have multiple and severe barriers to employment, including mental health problems, homelessness, domestic violence, and disabled children. The state, however, refuses to impose educational requirements on the caseworkers who deal directly with W-2 participants, so few have meaningful training in fields like mental health, vocational rehabilitation or social work.

Instead, agencies focus on making sure that no one who might be capable of working is enrolled in W-2 or allowed to stay a day longer than necessary. DWD has gone so far as to instruct contractors that they can deny W-2 cash assistance to families whose household heads are unemployed—as long as the contractor thinks they can find jobs. W-2 contractors have placed thousands of people into this "job-ready" classification and denied their families cash assistance, leaving them with no safety net—while reducing the amount of benefits contractors have to pay.

While contractors crow about "success rates" in job placement, former welfare recipients seldom find year-round, full-time employment, and even fewer earn enough to get out of poverty. A report by the University of Wisconsin's Institute for Research on Poverty, for example, found that fewer than 40% of former recipients had year-round earnings for each of the three years studied, and that more than 70% had gross earnings below the poverty line. Yet under W-2, contractors have told participants who are severely disabled or homeless, but who pick up 10 or 15 hours of work a week, that they are too employable to get cash assistance.

Families who do make it into W-2 encounter a bureaucracy usually more concerned with producing paperwork than providing services. Participants have been sent to "job search," instead of legally required training programs, by contractors who claimed that filling out applications counted as "education." "Work experience" often means packing hangers into boxes in a warehouse. "Case management" for disabled participants frequently involves no more than handing out forms for doctors to complete. Good caseworkers—and there are some—are stymied by policies that focus on punishing participants who don't do assignments instead of providing needed services and support.

Last September, Sandra sought legal assistance to get her money back. At a hearing at her W-2 agency, the "fact finder" (an agency employee) conceded that the case manager had mishandled Sandra's case—but still refused to restore her benefits. Sandra appealed to the independent state hearing office. In October, a hearing officer ordered the agency to repay the money it had wrongfully taken from Sandra's check the month before.

The same week Sandra learned she'd get back her $298, DWD and Maximus cut a deal. Community activists and legislators had called for terminating Maximus' contract. Instead, DWD—claiming that the contractor's financial misdeeds had only been "sloppy bookkeeping"—allowed Maximus to refund $500,000, agree to provide another $500,000 in services, and keep its $46 million contract. These days, that's how Wisconsin works.

Karyn Rotker is a Milwaukee attorney who represents recipients of public assistance, including Sandra.

Resources: State of Wisconsin, Legislative Audit Bureau Report, "Administration of the Wisconsin Works Program by Maximus, Inc." (July 2000); State of Wisconsin, Legislative Fiscal Bureau, Informational Paper 45 (January 1999); Maria Cancian et al., "Before and After TANF: The Economic Well-Being of Women Leaving Welfare" (University of Wisconsin-Madison Institute for Research on Poverty [IRP], May 2000); Institute for Wisconsin's Future; University of Wisconsin-Milwaukee Center for Economic Development; IRP.

A brief version of this article appeared in The Nation.