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Sun Sep 15 02:12:45 MDT 1996
New York Times -- Sunday, September 15, 1996
GIANT COMPANIES ENTERING RACE TO RUN STATE WELFARE PROGRAMS
By NINA BERNSTEIN
The new welfare law is still a matter of confusion in statehouses and city
streets. But to some companies, it already looks like the business
opportunity of a lifetime.
The players are as diverse as Electronic Data Systems, the $12.4 billion
information-technology company that Ross Perot founded, and companies at
least a thousand times smaller like Curtis & Associates, which supplements
its successful welfare-to-work jobs clubs with accessories like
"motivational fortune cookies" at $3.99 a dozen. A sample message is, "The
way to control your future is to work hard today."
The newest and most formidable entrant in a field once left largely to
local charities and several small companies is Lockheed Martin, the $30
billion giant of the weapons industry. A nonmilitary division, Lockheed
Information Services, is bidding against Electronic Data Systems and
Andersen Consulting to take over $563 million in welfare operations in
And that is only the beginning, Lockheed executives say. Having hired two
longtime federal welfare employees and top officials from Texas, Oregon
and Alabama, the corporation plans to market even more comprehensive
welfare contracts to states and counties in what is potentially a new
multibillion-dollar industry to overhaul and run welfare programs.
"We're approaching this marketplace the way we approach all other
marketplaces," said Holli Ploog, senior vice president of business
development at Lockheed Information Services.
It is a market that expanded overnight when President Clinton signed a law
to replace the 60-year-old guarantee of federal aid to poor children with
lump-sum grants to the states.
To state and county officials facing capped welfare budgets and financial
penalties if they fail to move most recipients into jobs in two years, a
fixed-price contract with a corporation has a strong appeal.
For the first time, the law allows states to buy not only welfare services
but also gatekeepers to determine eligibility and benefits.
"There's some easy money if the states aren't careful," said Robert Tyre,
head of the government contracts division of Andersen Consulting, a $4.2
billion sister company of Arthur Andersen, the accounting firm.
The jockeying frightens longtime social-service workers and public-interest
lawyers. No company can be expected to protect the interests of the needy
at the expense of its bottom line, least of all a publicly traded
corporation with a fiduciary duty to maximize shareholder profits, said
Henry A. Freedman, executive director of the Center on Social Welfare
Policy and Law, a research and advocacy law office.
If a gatekeeper's profits are linked to reducing the welfare rolls,
Freedman said, the incentive to deny aid will be overwhelming.
But proponents say turning over welfare to the private sector will prove to
be the most cost-effective and humane way for states to face up to the
fiscal imperatives of the new law. A profit-making company has the
flexibility to reward employees for results, the proponents argue, and to
change the culture of the welfare office from one focused on calculating
deprivation and issuing checks to one that quickly helps people into jobs.
States that are slow to shrink administrative costs will have no money for
the additional child-care and transportation spending that are needed to
move recipients to work. With the clock ticking on a five-year lifetime
limit on benefits, recipients are ultimately the ones who will pay the
penalty for delay.
"The days of spending any amount on welfare and going to the federal
government for a match are over," said Russell Beliveau, president of the
Government Operations Group of Maximus Inc., a consulting company in
McLean, Va., that had $100 million in business this year, including $7
million in welfare-to-work programs in Boston; Fairfax, Va., and two
"If they don't perform, they're going to have to overspend," Beliveau said.
"If they underspend, they can find other uses for that money. I've been
telling states this is the golden opportunity to turn to private companies
for a risk and profit-sharing arrangement."
In Texas, Health and Human Services Commissioner Michael McKinney said
states would receive their money's worth if they wrote contracts
Texas is revising its request for offers to combine, overhaul and run the
separate systems that now determine eligibility for welfare, food stamps,
Medicaid and more than 25 other programs. Lockheed has teamed up with IBM
and the state's workforce commission, offering a fixed-price contract with
penalties for failures to perform.
Electronic Data Systems, which has long designed computer systems for
welfare and Medicaid, is collaborating with Unisys and the Texas Human
Services Commission. A third bid will come from Andersen, which offers to
take a percentage of the savings it achieves as its only fee.
Like Wisconsin, where similar bidding is under way county by county, Texas
is seen by many as the forerunner of a new wave of privatization. Until
now, churches and groups like Goodwill Industries had been the main
competition for the three companies in the welfare-to-work niche: Maximus;
Curtis, which began as the pet project of a communications professor in
Kearney, Neb., and America Works, a $7 million job broker with contracts
in New York City, Albany, N.Y., and Indianapolis.
Selling federally subsidized management systems to welfare departments was
a separate and much bigger business, the province of huge
information-technology companies. Now the separation has vanished, and the
welfare-to-work crevasse is suddenly a canyon. Sheer scale puts the big
companies in command.
"When you talk about small players like a Maximus, an America Works and a
Curtis & Associates, they do not have the ability to indemnify the state
the way a large corporation would," Ms. Ploog of Lockheed said. "The
larger states want to make sure they can hold you accountable and can dip
into your pockets if there's a problem."
The line where Lockheed's resources end and those of the U.S. Treasury
begin sometimes blurs. The corporation, which the government bailed out in
the 1970s and '80s, has a backlog of more than $50 billion in contracts,
mostly with the Defense Department, and it is lobbying for $1.6 billion in
subsidies for mergers with two former competitors, Martin Marietta and
Members of a bipartisan congressional coalition opposed to the subsidies
have called them corporate welfare at its worst and payoffs for layoffs,
because the mergers are tied to 30,000 layoffs and $92 million in
The chief executive of Lockheed, Norman Augustine, who received an $8.2
million bonus, has argued that the subsidies will eventually save
taxpayers money. Although a voice vote in the House would have blocked the
subsidies, the issue is back in the military appropriations bill, which is
in a conference committee.
One opponent, Rep. Christopher Smith, R-N.J., has a Lockheed plant
scheduled to close in his district. Last week Smith's staff director,
Andrew Napoli, said the prospect of Lockheed's winning major welfare
contracts gave new meaning to the phrase double dipping.
"They would be getting a subsidy to lay off these folks and then could be
getting additional money from the government to help these people get
jobs," Napoli said.
Few companies come to the marketplace with clean slates. The Florida
attorney general tried unsuccessfully to bar Electronic Data Systems from
doing business in the state last year in a dispute over what officials
called a "grossly inefficient" $240 million Lockheed computer-management
system for welfare eligibility, benefits and child-support enforcement.
A spokesman for EDS, which has contracts in 30 states, called the dispute
America Works has been embraced by New York City Mayor Rudolph Giuliani and
former New York Gov. Mario Cuomo. But it left a trail of unhappy officials
in Ohio, Massachusetts and Erie County, N.Y.
In West Virginia, an independent consultant whom Maximus paid to help
prepare its bid for an automated statewide child-welfare system in 1994
turned out to be the state employee in charge of the project. He was later
indicted, and Maximus lost the contract to Lockheed.
Lockheed, meanwhile, agreed to forfeit the chance to bid on contracts in
New York City for four years, after an investigation found that aides to
Mayor David Dinkins had shown favoritism in awarding the company a $150
million contract to run the Parking Violations Bureau in 1993, a case that
revived memories of scandals in the '80s, when a Lockheed executive
admitted bribing officials to obtain such contracts.
Leaders at the American Federation of State, County and Municipal Employees
say privatization opens the door to big campaign contributors and their
cronies. They also fear that welfare privatization may come at the expense
of their members, whose jobs could be cut or reinvented at lower pay by
But on the front lines of change, even some public employees are converts.
In San Francisco, welfare recipients with children 3 and older are now
ordered to report to the Express for Success Center, an employment and
training program redesigned by Curtis in February. Staff members are still
employed by the Human Services Department. But they had to apply to Curtis
for jobs at the center and take its training.
The supervisor, Casey Brenner, said that at first she and other
social-service veterans were skeptical of the "cheesy, smiley" approach of
the trainers from Curtis.
"We were like, 'Oh, yeah, right, Kearney, Neb., is not going to work in San
Francisco,' " Ms. Brenner said. "But you know what? It did."
She showed off walls with photographs of smiling recipients who had landed
jobs after a six-day workshop.
As the latest workshop reached its end, a trainer led the graduates in
cheering one another. Elsewhere, job seekers worked a telephone bank to
set up interviews and helped one another fill out job applications.
Later, Ms. Brenner said the center was placing 40 of the 60 people a month
who completed the program, which has a 17 percent dropout rate. That
represents a 20 percent improvement on the city-run program, which dealt
with recipients one at a time, lacked a sense of urgency and focused more
on barriers to employment than on strengths, she said.
"It really lifted me up," a job seeker, Denise Hunter, said. "But I can't
make nobody give me a job."
She said that after looking for work for three weeks she saw the way that
the welfare law would play out. "People that's been working 20 years,
they're going to give us their jobs for minimum wage," she said.
Most of the companies seeking to inject marketplace efficiency into
government bureaucracies were built on government contracts and have long
staffed their top ranks with once and future officials.
To some longtime workers in social services the new systems seem like a bad
"For us old bleeding-heart liberals who were on the streets in the '60s,
the idea that Lockheed, of the military-industrial complex, would be in
charge of welfare is out of somebody's nightmare fantasy," said the
director of the JOBS program in a northeastern state.
Then he begged not to be identified, "We may end up working with them," he
Copyright 1996 The New York Times Company
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