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Offline Ursus

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Evolution Or Extinction: A Strategy for Nonprofits...
« on: November 30, 2010, 09:19:00 PM »
This is an old classic that I had a much harder time finding this time around, so here it is for posterity's sake...

Online portal for this document: http://nvs.sagepub.com/content/29/2/315

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Note: This text was the keynote address at the annual meeting of the California Association of Nonprofits, Oakland, CA, October 1999.

From: Nonprofit and Voluntary Sector Quarterly
June 2000, vol. 29 no. 2, pp 315-324

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Evolution Or Extinction: A Strategy for Nonprofits in the Marketplace

By Edward Skloot
Surdna Foundation, Inc.


THE VALUES QUESTION

How we break into this vast subject of privatization and competition is exceedingly important. Some of our nonprofit colleagues seek to discuss competition with the private sector in terms of morals and values. They say: "We have ours, which are nurturing and valiant and deeply American. They have theirs, which are grasping, mechanical, and destructive to individuals and community." Or something like that.

It is most important not to start this conversation from the point of view of values; whose are better and whose work better. If we do, we will speak in wholly different tongues. We simply will not be understood. The dialogue will quickly become polarized.

In addition, we have to build mutual confidence between proponents of different views—so that we can ultimately work together. Nonprofits must completely understand what others are doing in the marketplace before they can address moral concerns. We must dive into the subject fromthe empirical side first.

So what is happening? We are in the middle of major sectoral boundary shifts. They are incremental but undeniable. The service delivery map is changing. More and more, private entrepreneurs are taking over the work of both governments and nonprofits. Life is increasingly transactional, and nonprofits are increasingly vulnerable.


MARKETPLACE ECONOMICS

In the minds of most Americans today, the marketplace has triumphed. Market competition seems to be that longed for win-win solution—reduced costs and increased efficiencies leading to better results for all.

Simultaneously, governments are systematically degraded. They are no longer the agents of positive change that spanned the era from the Great Depression to the Great Society. Forces on the right have asserted governments are incapable, incompetent, or illegitimate—or all three. Sometimes they are right. As Alan Ehrenhalt (1999), the wise editor of Governing magazine, recently wrote: "Gradually, without most of us stopping to notice it, Congress is ceasing to be a serious legislative institution" (p. A27).

Think about health care for a moment. Most people do not know that health management organizations (HMOs) were created in the early 1970s as a mechanism to ensure community benefits and cover more of the poor. Federal legislation, sponsored by Senator Ted Kennedy, required large employers to offer an HMO option. Nonprofit auspices were preferred.

But, federal financing ended in 1982, and nonprofit HMOs had difficulty raising capital for growth and expansion. Meanwhile, federal administrators began to encourage for-profits to enter the field. With easy access to capital, guaranteed reimbursement, and a natural drive to grow market share, private health care companies expanded ferociously. More than two thirds of HMOs are now privately held (as of 1993), covering a majority of enrollees.

The irony is stunning. Today, HMOs, created to ensure the average person could find quality health care, are hastening out of what they view as unprofitable markets. Last year, HMOs in 30 states began their retreat from Medicare, leaving 440,000 elderly patients to scramble for coverage. Today, nearly 45 million Americans have no insurance, including 11 million children. If the goal is decent health coverage at a reasonable cost for all Americans, then the marketplace and government regulators have both failed dismally.

Thus, our health care nonsystem lurches about while nonprofit deliverers of service, both hospitals and HMOs, steadily diminish in number through sale, conversion, or purchase.

It is easy to criticize or dismiss the encroachment of the private sector into roles traditionally done by nonprofits or government. But the fact is, competition and privatization, the right hand and the left hand of the marketplace, are here to stay. In health care. In corrections. In education. In human services.

Here are a few examples.

In September 1999, the College Board, the nonprofit organization that administers the Scholastic Aptitude Test (SAT), decided to set up its first forprofit subsidiary to compete with Kaplan and the Princeton Review (New York Times, September 25, 1999).

In kindergarten through 12 education, the privately held Edison Project runs programs in 51 schools with 24,000 pupils. It recently announced its offer to give its teacher-employees stock in the company—a most intriguing incentive unimaginable in public schools.

Even the Archdiocese of Los Angeles has jumped in. It recently inked a joint venture with Stuart Enterprises, a major for-profit funeral chain, to build and run funeral homes on nine church-owned cemeteries. They share the profits (Forbes, June 14, 1999).

In these examples, it is easy to see for-profit companies doing well. It is also easy to see nonprofits doing well. The fact is, there are horror stories on all sides, but little conclusive data on who does a consistently better job. And absent better data, the beat to privatize services goes on.

I do not believe decline in the sector is imminent. But, I certainly believe that barriers to entry are shrinking and competition is growing and nonprofits have a lot of work to do.


THE HUMAN SERVICES SUBSECTOR

Whereas each subsector presents different challenges, I want to focus on human services—where most of you make your living. Here, competition and privatization are emerging as the dominant force of institutional life.

The primary reason for this shift is the passage of the Welfare Reform Act of 1996 (formally known as the Personal Responsibility and Work Opportunity Reconciliation Act of 1996). As you know, the law essentially certified the outright failure of the welfare system as we knew it. Its most dramatic provision was a 5-year lifetime limit on public assistance and a 2-year deadline for most welfare recipients to get employment. Implementation of this law was devolved to the states.

The Welfare Reform Act gave an extraordinary boost to privatization and competition. The reasons have to do with the need for speed and the mandated integration of various postwelfare services.

In fact, one of the act's great accomplishments is that it compels local governments to break out of their destructive, artificial funding silos. Clients of the welfare system now have to be treated in a holistic way, connecting, for example, their transportation, child care, job training, substance abuse, and food stamps needs. When looked at from the view of the recipients, this is a tremendous win. For smaller, specialized nonprofits, however, it can be an insurmountable opportunity.

Many for-profit companies have been in and around the human services for a long time. The best known older player (since 1975) is Maximus, based in McClean, Virginia. Maximus is a human services company. It functions as an integrator of services for the numerous tasks bundled under the welfare law. It provides case management for individuals and families. It takes responsibility for emergency assistance. It does job training and referral. It handles placement transition services such as child care and transportation to work.

Maximus is decidedly for profit. It was Number 22 on Business Week's "Hot Growth Companies" list last spring (Wollert, 1999). If it were a state, it would have the 29th largest social services caseload in America. According to Business Week, Maximus holds a 30%share of the booming privatization market in health and human services. Last year, it billed out more than $230 million.

Maximus is not the only big player. Lots of newer ones come to mind, including EDS, Ross Perot's old firm, Deloitte and Touche, and Lockheed-Martin Information Management Systems, to name the most active.

What these companies offer are deep pockets, apparent management acumen, and almost guaranteed results. When the welfare law hit, local governments needed to act swiftly. Under tight federal guidelines that state legislatures often made tighter, they began to look elsewhere to get the job done. They did not have the capability. The big private companies were ready to roll.


THREE MODELS AND FOUR CHALLENGES

Three different models of service delivery now seem to be developing. The first model is sale and merger. Consider Pittsburgh-based Abraxas. This was a respected nonprofit organization that specialized in working with the hardest to handle young people. Three years ago, its CEO, Arlene Lissner, saw the handwriting on the wall. She feared large for-profits "would roll over us and put us out of business" (personal telephone interview). So Abraxas put itself in play. It chose to be bought out by a for-profit company, Cornell Corrections Corporation. It is now part of this $200 million comprehensive services firm. It runs both adult and juvenile correctional facilities from coast to coast.

A second approach seems to be the joint venture. Here we can look to Milwaukee and the local YWCA, which was already a sophisticated multimillion-dollar organization. The Y set up a limited liability company called YW-Works with two for-profit partners. YW-Works provides welfare to-work services. With her two for-profit partners, Julia Taylor, the CEO, bid for and won a $39 million contract to provide all welfare services to 2,400 clients in part of Milwaukee. They committed themselves to performance targets and, so far, they have met them. Ms. Taylor is bullish on her joint venture and believes that the for-profit/nonprofit business is "working out great."

The third approach seems to be that of Lockheed-Martin or Maximus: the managing corporation. Here, a large integrator of services employs many others, both for-profits and nonprofits. They deliver a wide menu of comprehensive services. Lockheed-Martin has done this in Washington, D.C., Florida, and many other states. In fact, many nonprofits around the country now find themselves working for commercial businesses as subcontractors—not as partners with government. They are increasingly accountable to business. They have a bottom line and performance goals to meet.

Privatization and competition raise four specific challenges. I want to talk about each briefly and ask you to see where you fit in.

The first is access to capital. The for-profits I mentioned can raise money and bid on almost any contract they choose. They can accept considerably higher risk. This is important because a lot of the state and local contracts demand that winning bidders pay for cost overruns.

Most contracts are large and multifaceted. Successful bidding may mean having to open new offices, pay salaries for months before reimbursements arrive, and meet unforeseen start-up costs. In Washington, D.C., Lockheed-Martin had to put together a welfare-to-work office to serve 5,000 clients in 3 weeks. For-profits can go to the financial markets to raise working capital to front these costs (and expansions too).

As we know, nonprofits do not have this option. They are constrained by their 501(c)(3) status, which forbids the distribution of profit—or even making it. They cannot raise capital in exchange for stock; they do not have any. And, many would choose not to even if they could. High finance is foreign to the nonprofit culture. It is often seen as a distraction from getting the job done.

Many do not have the money or capacity to deliver comprehensive services. It is not surprising that entrepreneurial nonprofits are looking for ways to merge, joint venture, be bought out, or set up for-profit subsidiaries.

Second, information technology (IT) is critical. IT enables providers to operate at sufficient scale and detail to provide all these integrated services. This includes the most mundane activities such as bookkeeping and keeping case histories. It involves complicated tasks too, such as calibrating payments to several family members in transition off welfare.

The new law mandates that numerous strands of client information be aligned and integrated. Often, they are kept separately, in different agencies, at different levels of government, with different computer systems and protocols.

Again, the resource problem emerges. Few nonprofits—and few for-profits too—have the funds to buy and use the IT systems needed to manage hundreds or thousands of clients. But, the ability to aggregate and manipulate vast amounts of data (and money) is the bottom line.

Benchmarks are needed to hold providers and their clients accountable too.

More than hardware and software is involved. Skilled personnel are also necessary. These individuals, always in high demand, command high salaries. Increasingly, IT capacity will separate the successful vendor from the mere survivor.

Third, welfare reform requires building large-scale operations. Together with IT, size permits economies of scale over large service areas. Size lets organizations implement master contracts. It offers the ability to aggregate and use trend data. Maybe most important, it reduces headaches for government servants. Large contracts let government officials rely on others to bundle and oversee their welfare-to-work responsibilities.

The final problem is attracting and retaining the best employees.

In the Washington, D.C., welfare-to-work contract won by Lockheed-Martin, the company receives fees pegged to the length of time the client holds a job—$500 on placement, $500 after 3 months, and $1,000 more after 6 months. Such pay-for-performance requirements are growing in frequency. These incentives run counter to traditional partnerships between government and nonprofits, which are paid through lump sum contracts. The new arrangements epitomize a managed care approach to human services filled with incentives and rewards.

This may be the most telling concern: With increasing frequency, for-profits are attracting accomplished public and nonprofit executives. They are anxious to break free from stifling work rules and inadequate—or perverse—rewards for performance. The brain drain from the nonprofit sector threatens its leadership.

Thus, in each of these four areas: capital availability, information technology, size and scale, and recruitment and retention, the nonprofit sector is at a distinct disadvantage. It has fewer resources, human and financial, less of a competitive urge, and a culture that is broadly anticompetitive.

Yet, there is a choice to compete or not to compete. If nonprofits choose to, they will need to refashion their organizations and show demonstrable results.


TOWARD A STRATEGIC RESPONSE

This means they will have to begin doing a number of critical tasks. The first is benchmarking, defining our current outputs and measuring them consistently going forward. Granted, the soft services are truly soft. But, we are in an era that demands greater accountability. Both the public and its public servants are asking, "Are we getting the most for our money?" They deserve an answer.

If for-profit companies can assign dollar values and outputs to their efforts, nonprofits must do the same. If not, they will be consistently outbid. Or, they will win contracts but lose their shirts. Nonprofits must do it for a second reason: Benchmarking helps them manage better too.

But, benchmarking without better information systems is a pipe dream. And, information technology is still a backwater in the corporate life of nonprofits. Yet one way or another, through the use of volunteers, donated hardware and software, graduate students and interns, and especially the determined application of institutional cash, the move toward computerization is absolutely essential. If nonprofits do not do this, they will forever be at the mercy of any institution that collects and controls the data they use.

This is one of the important messages of e-commerce. It could not operate without software to do everything, from taking orders to shipping purchases quickly. Successful dot.coms know that without profiling customers and meeting their needs with timely and efficient service, their efforts to attract faithful customers will be fragile.

The new economic rules make routine chores easier and faster. So, whereas computerized case management may look revolutionary to some nonprofits, it really is an evolutionary step. It creates efficiency and lowers cost through the use of new technology.

The Economist magazine recently reported that Jack Welch, CEO of General Electric, recently ordered every senior manager to spend a couple of hours each week being bossed around by an "Internet Mentor," usually an employee from a younger generation ("The House," 1999). This is nothing more than a kind of knowledge transfer at which the best corporations excel. Nonprofits must do it too.

But think about it. IT is more than a tool for efficiency and for gaining a competitive edge. It can also help redefine and transform the relationships among nonprofits. When was the last time your organizations benchmarked best practices and then voluntarily shared the methodology with your colleagues? When was the last time you worked closely together to help each other out of service delivery jams? Could this be the beginning of a real competitive advantage?

Nonprofits can also form self-help networks. They can share information among different specialties to improve or reorganize services. They can create knowledge consortia as well as bidding consortia. They can treat clients better and share the secrets how.


CARE OF EMPLOYEES

If I were an executive director of a nonprofit, and I have been, I would couple investment in IT with a determined effort to support my employees.

Today, we cannot fail to notice the changes that have occurred in employment policies throughout the country. Short-term contracts and freelancing are increasingly the rule. Corporations are shrinking their commitment to employees, which includes providing health care, pensions, and related benefits. Employees are enticed or compelled to trade better short-term pay for meager benefits and job insecurity.

This is a hidden opportunity for the nonprofit sector. (It is also what makes the Edison Project stock options for its teachers so suggestive and so potentially threatening.)

Just as civil service jobs and teaching were seen as viable, enviable, longterm career choices for the post-Depression generation, there is every reason to assume that nonprofits could fill that role today. With a little imagination and hard cash, they can distinguish themselves competitively—and attract even better employees.

Human service institutions have not been known for their benefit packages or work rules. Why not do everything possible to improve them and make them attractive to new and current employees? Pay for professional courses. Support flex-time and home-based schedules. Offer financial and other incentives to enhance productivity. Pay for performance improvement. This approach is what the best for profits now do for their employees. It is part of the reason they pick off the best of the nonprofit leaders. It is time the sector did it too.

Just as TIIA-CREF was created to strengthen the college teaching profession by making pensions broadly available and portable, the nonprofit sector must look to the deepening of its own incentives and benefits. This will help it compete in the increasingly unstable marketplace and improve its own supply of talent too.

Yes, this takes money. Of course it does. But I would imagine, first, the cost is less than you think. Second, the sector now has more money pouring in than in recent memory. If not now, when? Finally, if we do not find the way to invest now, we may not be around to serve later.


JOINT VENTURES

Add joint venturing to IT and improved benefits and working conditions. If nonprofits can work out joint ventures with richer, bigger for-profits or other nonprofits, they could specialize. They could extend their reach and serve their clients better. Each could build off its core competencies.

For example, business could apply its technology, management tools, and bidding expertise. It could help upgrade the skills of nonprofit partners or subcontractors for mutual benefit too. Nonprofits, on their part, could do what they do best—skilled one-on-one personal involvement, assistance, and steady care. They could build community capacity and support and represent local needs.

This is also a lesson from e-commerce. Technology and speed alone cannot guarantee market dominance. Or market performance. You have to deliver a high-quality product or service to successfully compete for the long haul.

A prototype for this has occurred between Lockheed-Martin and the Urban League. It is in Baltimore, centered around child support enforcement and family unification. Under contract, the Urban League does the skills training for custodial parents. In 3 years, it has placed more than a thousand people in jobs. The organization is bullish on its partnership with Lockheed-Martin. Furthermore, the company has upgraded the staff's technical skills. In return, it got improved access to the community and to local politicians. This is a model very much worth developing.


THE NEED FOR ADVOCACY

But, you can ask, will all this lead to an inescapable role conflict for nonprofits? Can they serve two masters, a private sector contractor and a human services client at the same time? Can they serve the bottom line and at the same time advocate for changes in contracts or policies?

In New York City, in particular, we have seen how difficult it is to deal with a government that throttles the opposition. Service deliverers are often cowed by politicians and bureaucrats. Implicitly or explicitly, they threaten to cancel contracts for disagreeing with established policy.

I have spoken with numerous nonprofit executives who talk of the need to tuck in their advocacy sails. They are unsure they could keep their contracts if they became critics of government or private sector contractors. This is a very hard problem. It is the iron fist behind the Istook-type amendments (1) that seek to restrict advocacy by nonprofit organizations.

One possible response is for national offices of nonprofits to step up their advocacy on national and state policy. This might provide cover for locals who have to deliver on contracts day-to-day. One timely opportunity is to strenuously advocate using more than $3 billion now being sequestered by states in Temporary Assistance for Needy Families (TANF) money. Another is the billions more lying unspent for the Children’s Health Insurance Program. Opening up these funding streams could literally transform human services. And, they could capitalize much of the internal management changes that nonprofits have to do.

It is in advocacy where the issue of values really rises up. In my view, nonprofits can do it much more effectively from the strength conferred by delivering excellent services. Some groups, of course, will do only advocacy. But, my reference point is those that choose affirmatively to engage in both.

At bottom, I am suggesting that nonprofits really have little choice. If they choose to compete, they must do it whole hog. They can distinguish themselves by systematically investing in IT, in management, and in their employees. By upgrading themselves, they upgrade their ability to compete and to advocate. When they do that, they will also advance their values of inclusion, civic engagement, democratic participation, and community building.

If we can join together and deliberately pool knowledge and strengths, I believe we can reach a new sectoral balance that gives a proper, important, and even enhanced place to the nonprofit sector. Most of all, I believe the sector can succeed if it starts first from the demonstrable quality of its work, not from the power of its vocal chords or its political muscle. As Christopher Marlowe once wrote, "Honor is purchased by the deeds we do." To that, I would add, robust health.


Note (1). Named after Ernest R. Istook, Republican Congressman from Oklahoma, who for several years has proposed legislation to restrict lobbying by nonprofits that receive government support.


References

    Ehrenhalt, A. (1999, October 4). Demanding the right size government.
The New York Times, p. A27.[/list]
    Fisher, Daniel. (1999). Grave Dancer.
Forbes (pg. 17.)[/list]
    The house that Jack built. (1999, September 18).
The Economist, 23.[/list]
    Wilgoren, Jodi. (1999, September 25). Aged Upstart, College Board, Is Joining Gold Rush on Web.
New York Times, p.A1.[/list]
    Wollert, L. (1999, May 31). Maximus, Inc.: Welfare privatizer.
Business Week, p.76.[/list]
« Last Edit: December 31, 1969, 07:00:00 PM by Guest »
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Offline MedicalWhistleblower

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Re: Evolution Or Extinction: A Strategy for Nonprofits...
« Reply #1 on: August 25, 2011, 06:42:03 PM »
Charitable Choice

Religious organizations have long been involved in provision of services to the communities they live in and work in.  Religious organizations working as government subcontractors are not new.   Catholic Charities , Lutheran Social Services, the Salvation Army , and the Jewish Welfare Federation  have long been indispensable sources of social aid.  For almost 40 years there have been collaborative service agreements between the government and sectarian organizations.  Catholic Charities, United Jewish Communities and others who have provided welfare services, maintained proper procedures in accounting to ensure the separation of church and state/federal funding.  These religious organizations put in place safeguards to protect the integrity of the religious organization, as well as the interests of state/federal taxpayers.  These religious organizations did not contract directly with the government; rather, religious institutions created separate entities (usually 501(c)(3) organizations) to handle public funds, and they did not incorporate religion into the publicly-funded program.  For large religious organizations, such as Catholic Charities U.S.A., the government money has been a large or even major portion of their budget.  

The new Faith-based initiatives paved the way for a political system which delegates social welfare responsibilities to newly-affiliated organizations       (some from the religious right) with which it forges privatized partnerships.  The strategy redistributes federal funding for social services from government functions where accountability had been fairly established and allocates funds to newer programs expected to bridge gaps in service/funds by being more cost-effective.  This places a greater burden on the former, established Faith-based community to become competitive bidders for their programs, increasingly subject to changes and cuts in government funding.

There is criticism that the proponents of new public-religious partnerships may be motivated by something other than a desire better to meet the social service needs of the country.   This debate has been partially driven by political and ideological concerns beyond the desire to help the poor. These concerns persist, notwithstanding the fact that improving social service provision is the public justification offered by former President Bush’s for charitable choice partnerships with pervasively sectarian organizations.

Charitable Choice was introduced during the mid-1990s after congressional committees devised alternate ways to address the burdensome welfare system. The Charitable Choice laws applied to four Federal programs: Temporary Assistance to Needy Families (TANF) and the Community Services Block Grant (CSBG) programs (both overseen by the Administration for Children and Families at the United States Department of Health and Human Services (HHS)); programs for substance abuse and mental health (overseen by the Substance Abuse and Mental Health Services Administration (SAMHSA) at HHS); and the Welfare-to-Work program (overseen by the Department of Labor).  

It is viewed with concern by some who fear that it will end public provision of social services and a welfare support system that many Americans in need depend on.  Charitable Choice strategy success requires that non-government social service providers will find the social services demand possible to meet. The increased burden of government regulation and competing demands for a charitable organization’s resources might cause mission displacement and have a negative impact on congregations.  A new dependence on government funds could result in decreased donations given to the charitable organization based on the presumed receipt of public funds.  Public perception is not necessarily in sync with legislative intent.  The premise behind Charitable Choice is that it relies on the market model with an emphasis on customers rather than citizens.  The goals of a democratic government are more than to simply respond to its citizens as customers.  There can be a potential for religious bias or discrimination by particular Faith-based contractors against needy citizen-clients who do not share common beliefs. There could also be bias in the grant of government contracts because effective oversight is difficult given the many different players at various levels of government.  

Many civil rights watchdog organizations warned that Charitable Choice blurred the boundaries between church and state.     Faith-based initiatives were policies based on concepts of fiscal conservatism, decreased size of the federal government, facilitated collaboration and cooperation in forged partnership with the religious community.  Thus, through this new legislative policy, Charitable Choice authorized a change for the way in which the church and state interact.  Conservatives find these Faith-based initiatives appealing because they want to decrease the size of government. They see the initiatives as an inexpensive alternative to government-sponsored social services.  Cuts in government funding result in a greater burden placed on the Faith-based community to take up the slack.    

The Charitable Choice concepts of indirect funding and neutrality principle   appear to promote a “black hole” for federal funds due to little transparency or oversight and little accountability to the taxpayer.  When private contractors are religious institutions they can claim constitutional protection against interference with free exercise of their religion.  The law currently exempts houses of worship from the full financial disclosure that is required from other non-profits when they are given tax-exempt status.  Thus when a church or religious institution receives public money to run welfare-to-work programs, it may legally assert a right to religious liberty and thus resist disclosing its financial records.  This may limit transparency regarding the dispersal of tax money to contracted service program providers and the government’s ability to assure honesty in provision of government contracted services.  A religious provider of job counseling, for example, could demand enough latitude to include prayer or Bible study in its programs, even if the government is directly contracting for the services.  Thus the government might be viewed as endorsing those religious practices, establishing them, or even coercing individuals in dire straits to engage in a particular religious practice.

The Charitable Choice program has been accused of giving preferential advantage to certain faith groups and endorsed them to receive federal grants. Constitutional concerns were raised in 2002 when President Bush issued Executive Order 13279, which facilitated churches and other Faith-based organizations to receive federal money by circumventing anti-discrimination laws.  This opened the door to bias in employment practices and service provision by Faith-based and Community Initiative programs paid for with Charitable Choice funding.  The Coalition Against Religious Discrimination (CARD)    warned that possible proselytism when federal funds are used could violate the First Amendment related to church-state relations. Many scholars believe that direct funding would compromise the religious rights of recipients, encourage intense competition among America's religions, create a divisive political and legal battle over whether government funds should ever pay for programs that discriminate in whom they hire, and harm religious entities by restricting their autonomy. Because of the lack of good options of social welfare programs in all areas, publicly funded vouchers may pressure people into religious activities that they would otherwise not choose.    

Privatization of welfare – due process & constitutional concerns  

In concert with diminished regulation over programs, the social safety net is vulnerable to exploitation.   Providing the safety net is a core public function which should remain responsive to democratic principles and accountable to elected officials. Although the government can contract out services, it cannot contract out the function of governing.

This privatization of welfare services leads to lack of adequate oversight in many jurisdictions when the organization that obtains the government grant subcontracts services to others, including private businesses. Thus, for-profit companies can be the entities that actually provide the in-field services. There is no provision for financial or service-quality oversight.  In theory, the contractors should police themselves and their subcontractors, but there is little profit incentive to do proper oversight.  

President George W. Bush’s Faith-based initiative intended to reduce the size of government, but not necessarily the amount spent.  His applied method shifted the responsibility for delivery of numerous social services from government agencies to newly-recognized, Faith-based organizations.  Privatization of welfare by delegation to contractors and subcontractors for service provision raises due process and accountability issues. Welfare programs involve provision of adequate food, adequate clothing, adequate shelter, and minimal preventive public health care.  Although the government has been viewed as the most obvious provider of these programs, faith-based programs have also frequently provided services to those in need.    But the government, which is elected and accountable to the citizenry, still accepts responsibility and accountability to see that social justice prevails and a decent chance at a reasonably healthy and active life can be provided for all citizens.

In 1997, the Texas Supreme Court   developed a test to evaluate the efficacy of delegation to private parties.  These guidelines are used to frame decisions about the scope of authority, accountability to the public and to federal authorities.  They identify the requisite expertise that qualifies a private entity to be a contractor.  

There is concern that private entities which contract to provide welfare services are not governed by constitutional constraints.  In other words, if a private contract provider of social services commits a wrongful action, the wronged person cannot invoke constitutional protections.  

The legal doctrine that defines “State Action” determines that a person who is a government actor and commits a wrongful act is subject to constitutional constraints.  State government and federal employees are clearly government actors, but private entities usually are not.  With government privatization contracts, authorization is transferred to private entities, but not “state actor” obligations.  Liability for actions is effectively diminished.  Privatization of contracts for welfare services permits autonomy without supervision or legal accountability.  Although there may be statutes in state or federal law that give the wronged person the opportunity to receive notice and obtain a hearing, these laws are generally not enforceable.  The courts have held that, unless there is a specific provision for enforcement, there will be no enforcement of these procedural rights.   The wronged person can sue under the third-party beneficiary principle - to compel compliance with the terms of the contract between the government and the private entity, but this is rarely successful.  

Contracts are often drawn up with the simple insertion of a provision in the contract that bars third-part lawsuits. Social service recipients are largely at the mercy of the political process to grant legal protection entitlements and due process rights.  They are also at the mercy of contracted parties to define and/or grant them contractual rights.  

Despite these constitutional and due process concerns, an increased number of government services are contracted out to private providers, which leaves clients with little or no recourse if their constitutional rights are violated.  Privatization may, in reality, simply replace a government bureaucracy with a private monopoly.    Most persons who oppose privatization are concerned about the negative outcomes it makes very possible.  

There is a human dimension to quality social services that is difficult to protect in an unregulated contractual arrangement. To relegate sensitive decisions to private organizations and companies that use market-based models is potentially a risk that is under-appreciated for its implications. Critical decisions that affect our society’s most vulnerable citizens can become based on short-term private incentives rather than long-term public interests.     Government authority may be unable to scrutinize the work of private entities adequately because of budgetary restrictions or unfamiliarity with contract management.  The lack of oversight could mean that the public is not assured that tax dollars awarded to government contractors will yield a privatized service that performs adequately.  

The Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996   repealed Aid to Families with Dependent Children (AFDC), the federal cash assistance program, and replaced it with Temporary Assistance for Needy Families (TANF), a cash assistance program primarily operated by the individual states.  Prior to PRWORA, determination of which applicants qualified for federal benefits was performed by a public agency staff in civil service. (Title I, Section 104)  Under the new 1996 law,  however, TANF eligibility in Florida and Texas was contracted out to private organizations which were not directly accountable to public authority.

Privatization can be undermined by corruption if lucrative contracts are awarded to political allies, relatives or friends of public officials.  Many of these contractors are not qualified for the work or may cut corners to expand profits, especially when oversight is limited.  Contractors have been found to commit fraudulent and illegal practices, including:

• bid-rigging (arranges bids to be submitted by selected firms to limit real competition);
• low-ball bids (sets bids artificially low to win contracts, then subsequently raises fees excessively through tactics such as change orders);
• over-billing (charge too much, or charge for work not done).

These practices are difficult to prove, to monitor for and to investigate.  

Texas and Florida privatized functions to qualify clients for public benefits.  They closed public offices and set up call centers that use 2-1-1 information lines.  Staff employed by private contractors took initial client applications by telephone and if eligible, sent them to a public agency for final certification.  Private contractors employed by corporations determined whether an application was submitted to a public agency. Access to benefits under this system can be manipulated to maximize profit or can be awarded in a biased way.  The privatization of welfare eligibility determination, including food stamp and Medicaid coverage, represents a fundamental shift in delivery of social support to low-income populations. Large, for-profit corporations may have strong financial incentives to either turn away recipients or provide them with inadequate services.  Freedom of information and open records acts do not apply to private contractors.  This makes it difficult to determine how public funds were spent.

The use of subcontractors or outsourcing has often been used to abdicate social and moral responsibility.  There are significant legal, political and economic advantages to the perpetrator of human rights abuses, of using subcontractors, because it ultimately helps obscure the relationship between the perpetrator and the actual act.  It is a politically valuable device, because even if abuses are exposed, it will frequently look as if someone else (the contractor) was responsible.  This ultimately makes it difficult to hold a violator legally accountable and to be able to apply appropriate sanctions.  Thus the very effective human rights tactic of public shaming, in these circumstances, often becomes ineffective.  Outsourcing to contractors permits the perpetrators to ignore the societal norms and to conceal the perpetrators breach of those norms.  In addition, it legally protects perpetrators from both legal prosecution and embarrassment.  Subcontracting to corporations providing services such as prisons, healthcare and the military are particularly problematic, as in these settings there is reduced transparency to the public and less scrutiny by law enforcement.  Transnational corporations have enormous political and financial influence and power.  Health maintenance organizations and prisons use cost cutting methods which include using insufficiently trained, underpaid and over worked employees.  Rapid employee training and high turnover can lead to inadequate services in residential treatment centers, prisons, and other facilities.  When operated as a for profit business, cost reductions can lead to inadequate care, lack of adequate programming and abuse.  Outsourcing allows the perpetrator to not just abdicate responsibility but also assists the aggressor in maintaining a respectable public persona in the public eye. This often amounts to abuse of state-sanctioned power and authority.  Often outsourcing is presented to the public as necessary to cut costs. The use of subcontractors makes it more difficult to determine who is responsible for abuses and these cases are very complex.
 
  In fact, in the United States, seven of the largest religiously affiliated entities serve more than sixty million people with social services. Religiously affiliated entities tend to provide a wide range of social services comparable to those provided by government social service agencies. Many are professionally accredited through the Council on Accreditation of Services for Families and Children, Inc. Thus, they are held to the same standards as secular organizations.  See John McCarthy & Jim Castelli, “Nonprofit sector research fund, religion- sponsored social service providers: the not-so-independent sector” (Aspen Inst., Working Paper No. WP98-02, 1998); see also Michael W. McConnell, “ Religious Freedom at a Crossroads,” 59 U. CHI. L. REV. 115, 183 (1992); Ronald Thiemann et al., “Responsibilities and Risks for Faith-Based Organizations, in Who will provide? The changing role of religion in American social welfare” 51-70 (Mary Jo Bane et al. eds., 2000).

References and citations:

  Catholic Charities USA, “Who We Are,”  http://www.catholiccharitiesusa.org/who/ index.htm.

  The U.S. Salvation Army received thirteen percent of its fiscal year 200I funds from the government. Salvation Army USA Nat'l Headquarters, Annual Report (200I), available at http://www.salvationarmyusa.org.

  In 200I, United Jewish Communities received a federal grant of $59,868,000. CBBB Wise Giving Alliance, Charity Report United Jewish Communities (2002), available at http://www.give. org/reports/care2_dyn.asp.  “United Jewish Communities, About Us,” at http://www. ujc.org/aboutus_home.html.

  "Catholic Charities USA is the nation's largest, private network of social service organizations with I,400 local agencies and institutions providing essential services to more than 9.5 million people annually, regardless of their religious, racial, ethnic, or economic background." Letter from Catholic Charities USA to Senate and House Budget Committees (Feb. 26, 2000), at http://www.catholiccharities usa.org/programs/Advocacy/letters/Letters2001/budget1.htm.
 
Charitable Choice Funds, MissouriNet.com,  http:/ http://www.missourinet.com/2010/12/23/c ... wer-audio/.
 
 Sager, Rebecca, “Faith, Politics, and Power,” The Politics of Faith-Based Initiatives,  Oxford University Press, 2010, TheDivineConspiracy.org,  http://www.thedivineconspiracy.org/Z5242W.pdf.

  Stevenson, Dru, “Privatized Welfare and the Nondelegation Doctrine,” 35 Clearinghouse Rev. 546 (2001-2002) Jan-Feb 2002. http://heinonline.org/HOL/LandingPage?c ... 4&id=&page.

  Gedicks, Frederick Mark, “A two-track theory of the establishment clause,”
Establishment Clause doctrine has long been informed by two mutually antagonistic values: the separation of church and state, and government neutrality with respect to religion. There are conflicting values of both separation and neutrality which co-exist. The Speech Clause doctrine provides an absolute minimum of constitutional protection for expression against even content-neutral regulation, so also Establishment Clause doctrine provides for an absolute minimum of church-state separation against even religiously neutral government action. The Establishment Clause has long been thought to protect two values, the separation of religion and government from each other, and government neutrality with respect to religion. Separation requires that religion and government each refrain from involving itself in the affairs of the other. (Everson v. Board of Education).  Neutrality has not totally eclipsed separation, which is the more fundamental Establishment Clause value.  Neutrality requires that government regulate its interactions with religious individuals and institutions so that it neither encourages nor discourages religious beliefs or practices. (Epperson v. Arkansas). http://www.bc.edu/bc_org/avp/law/lwsch/ ... 03_FMS.htm.
 
  Minow, Martha, “Public and Private Partnerships: Accounting for the New Religion,” 116 Harvard Law Review. 1229, 1232-33 (2003).

  The Coalition Against Religious Discrimination (CARD) opposes charitable choice as an unconstitutional and dangerous proposal that will harm religion, authorize government-funded discrimination, undermine the accountability of taxpayer dollars, foster litigation against state and local governments, and violate the personal religious rights of Americans seeking help. See Coalition Against Religious Discrimination, What Is "Charitable Choice"?, at http://www.stop religiousdiscrimination.org/what is_charitable_choice.html. CARD includes many religious and nonreligious nonprofit organizations such as American Baptist Churches, USA; American Civil Liberties Union; American Jewish Committee; American Jewish Congress; Americans United for Separation of Church and State; Baptist Joint Committee on Public Affairs; Catholics for a Free Choice; Central Conference of American Rabbis; Friends Committee on National Legislation; Jewish Council for Public Affairs; Jewish Women International; NARAL Pro-Choice America; National Association for the Advancement of Colored People; National Association of Alcoholism and Drug Abuse Counselors; National Association of Social Workers; National Council of Jewish Women; National Education Association; National Gay and Lesbian Task Force; National Organization for Women; National Parent-Teacher Association; National Partnership for Women and Families; National Women's Law Center; People For the American Way; Planned Parenthood Federation of America; Rabbinical Assembly; Service Employees International Union, AFL-CIO; The Interfaith Alliance; Union of American Hebrew Congregations; Unitarian Universalist Association; United Church of Christ (Justice and Witness Ministries); and United Methodist Church (General Board of Church and Society). Coalition Against Religious Discrimination, About C.A.R.D., at http://www.stopreligiousdiscrimination. org/about_CARD.html.  More than 850 religious leaders signed a petition organized by CARD urging President Bush and Congress to reject charitable choice propos- als, explaining that the "flow of government dollars and the accountability for how those funds are used will inevitably undermine the independence and integrity of houses of worship." Coali- tion Against Religious Discrimination, An Open Letter to President Bush and Congress from America's Clergy (June 14, 2001), http://www.stopreligiousdiscrimination. ... rom_clergy. pdf; see also Press Release, Americans United, Religious Leaders Urge Bush, Congress To Reject "Faith-Based" Funding Proposals That Allow Discrimination, Entangle Religion and State” (Apr. 24, 2001), http://www.au.org/cardpressrelease.htm.

  Saperstein, David, “Public Accountability and Faith-Based Organizations: A Problem Best Avoided,” Harvard Law Review, Vol. 116, No. 5, (Mar., 2003), pp. 1353-1396, The Harvard Law Review Association, http://www.jstor.org/stable/1342729.

  Collins, Milton, “The Privatization of Social Service Programs,”
http://www.wlu.edu/documents/shepherd/a ... ollins.pdf.

  Tex. Boll Weevil Eradication Found., Inc. v. Lewellyn, 952 S.W.2d 454, 472 (Tex. 1997).  These  factors affect whether a government function can be delegated:    (1) are the private delegate's actions subject to meaningful review by a state agency or other branch of state government;( 2) are the persons affected by the private delegate's actions adequately represented in the decision process; (3) is the private delegate's power limited to making rules, or does the delegate also apply the law to particular individuals;(4) does the private delegate have a pecuniary or other personal interest that may conflict with his or her public function; (5)is the private delegate empowered to define criminal acts or impose criminal sanctions; (6)is the delegation narrow in duration, extent, and subject matter; (7)does the private delegate possess special qualifications or training for the task delegated to it; and (8) has the Legislature provided sufficient standards to guide the private delegate in its work. Although not all the factors relate to public assistance (notably three and five), the rest can, and are considered very instrumental to determine whether certain authority can have been delegated. http://www.supreme.courts.state.tx.us/e ... 048105.pdf.

  Freeman, Jody, 116 Harv. L. Rev. 1285, 1304-05 (2003).

  Estrin Gilman, Michele, “Legal Accountability in an Era of Privatized Welfare,”  81 Cal. L. Rev. 569, 611-12 (2001).

  Freeman, Jody,  “Extending Public Law Norms Through Privatization,” 116 Harv. L. Rev. 1285, 1300 (2003).

  Jody Freeman, “The Contracting State,” 28 Fla. St. U. L. Rev. 155, 170 (2000).  Persons concerned about the potential negative results associated with privatization are called  “consequentialists.”

  Diller, Matthew, Form and Substance in the Privatization of Poverty Programs, 49 UCLA L. Rev. 1739, 1740 (2002).

  Shue, Henry, Basic Rights: Subsistence, Influence, and U.S. Foreign Policy,p. 23, Princeton University Press (1996).

  Personal Responsibility and Work Opportunity Reconciliation Act of 1996, Pub.L.No. 104-193, 110 Stat. 2105.

  42 U.S.C § 604(a)

  Stevenson, Dru,  “Privatization of Welfare Services: Delegation by Commercial Contract:, 45 Ariz. L. Rev. 83, 88 (2003).

  “Safety Net for Sale: Dangers of Privatizing Social Services,”  American Federation of State, County and Municipal Employees, AFL-CIO,  1625 L Street, N.W., Washington, D.C. 20036-5687, Web site:www.afscme.org,
 Privatization Section, http://www.afscme.org/private/index.html
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