81 Cal. L. Rev. 569 (2001)
by Professor Michele Estrin Gilman
Lockheed Martin, the defense contracting giant, has found a new business niche in an era of declining defense spending: running welfare offices. Private companies like Lockheed Martin, along with smaller nonprofit organizations, have become an integral part of the massive welfare reform effort started in 1996 with the enactment of the Personal Responsibility and Work Opportunity Reconciliation Act (“PRA”). 1
The PRA restructured welfare administration by eliminating the country's main assistance program for poor families, Aid to Families with Dependent Children, and giving states fixed block grants for “temporary assistance for needy families,” known as TANF. The act, commonly known for turning “welfare” into “workfare,” is designed to push welfare recipients into the workforce by placing a five-year lifetime limit on the receipt of benefits. At the same time, the act devolves significant control over welfare administration from the federal government to the states, and it further gives the states the option of devolving welfare operations to the county and city level, and to private organizations if they choose. State and local governments have eagerly embraced this new opportunity to privatize welfare administration and services in the hopes that private organizations can deliver welfare cheaper, faster and better.
Despite this massive shift from public to private provision of social services and the likelihood of its continued expansion, there has been little discussion of the ramifications of this change on the recipients themselves - either from a practical, empirical or legal perspective. This article explores how privatization affects the legal rights of welfare beneficiaries to fair procedures. In short, when government transfers the operation of public programs to the private sector, various legal doctrines that were created to constrain official discretion no longer apply. This means that welfare recipients may have little recourse if a private welfare provider illegally denies or terminates their benefits, or sanctions them for alleged failure to meet program requirements.
Government has increasingly relied on contracting with private nonprofit entities for social service delivery since the 1960s. Indeed, “the United States relies more heavily on nonprofit organizations than on its own instrumentalities to deliver government-funded human services, and ... human service nonprofits receive more of their income from government than from any other single source.” 2 However, until recently, nonprofits have generally provided only discrete welfare related services such as job training or child care. PRA makes two major changes to this existing scheme of public/private interdependence. First, under PRA, private entities are allowed to run entire welfare offices. This means that - for the first time - they can perform eligibility determinations and sanction recipients for noncompliance with program requirements. Second, the PRA has opened the door for large for-profit organizations such as Lockheed Martin and Maximus to enter into welfare delivery. These for-profit entities have different incentives, and more political power, than the nonprofit entities typically engaged in social service delivery in the past. In many contracting schemes, where a set fee is paid to the contractor, the more money the provider saves, the more money the provider gets to keep. This raises incentives for profit-seeking organizations to cut staffs and to implement other cost-savings measures that can impact the quality of service provided. In other contracting schemes, where fees are paid based on services provided, there are incentives to help only those persons most easily placed in jobs. These changes heighten the importance of ascertaining whether welfare recipients have any enforceable rights against welfare providers.
The empirical evidence strongly suggests that privatization is not likely to improve upon government performance in complex social service arenas such as welfare.
Moreover, after PRA, welfare office employees are no longer mere dispensers of checks. They are expected to put people to work, and this requires intensive interpersonal interventions such as educating applicants about the TANF program; assessing their work histories and attempts to obtain employment; assisting them in securing child support from noncustodial parents; helping them with job searches; assessing their child care and transportation needs, as well as domestic violence problems or alcohol or drug abuse; and the like. 3 As a result, front-line workers have vastly increased discretion. When privatization is layered over PRA's already discretionary scheme, accountability issues become heightened.
In fact, the history of social service privatization is littered with stories of failed programs. For instance, Maryland cancelled a contract with Lockheed Martin to conduct child support enforcement in the face of service complaints after Lockheed failed to meet collection objectives, and other headline-grabbing failures abound. 4 Apart from this anecdotal evidence, the empirical evidence suggests that privatization is ill-fitted for performing the complex, long-term tasks associated with most types of social service delivery, including welfare delivery after PRA. There simply are not the definable yardsticks or enough competition in this area necessary to sustain accountability to taxpayers and to service beneficiaries. 5 As a result, the legal mechanisms for enforcing accountability from welfare providers are more important than ever. Fair procedures increase the likelihood of success for substantive claims for benefits, constrain arbitrary and capricious decision-making by front-line workers, and provide welfare recipients with empowerment and dignity. For over 30 years, it has been a tenet of public benefits law that due process protections attach to the government's delivery of benefits. Yet when private entities deliver the same benefits, constitutional protections may fall by the wayside. At the same time, other avenues for enforcing procedural protections - such as statutory claims, contract remedies and equitable relief - are also of questionable usefulness in a privatized regime.
The Constitution protects citizens only from acts committed by “state actors;” private conduct falls outside the Constitution's reach. State action is clearly present when a state employee acting in her official capacity pursuant to state law deprives a person of constitutional rights. However, when government officials carry out their programs with the assistance or participation of private persons, as is increasingly the case in the provision of social services, the state action issue becomes more difficult. Privatization poses a challenge to the state action doctrine because it blurs the dividing line, upon which much of our jurisprudence is based, between private and governmental action.
As the law now stands, state action exists only where the state has coerced or encouraged specific private action or where a private entity is carrying out a function traditionally and exclusively performed by the state. 6 The Supreme Court has repeatedly held that private social service contractors are not state actors, even where they are funded almost exclusively by public monies and extensively regulated by the state. As a result, for state action to arise in a contracting scheme, there essentially needs to be a direct command from the government agency to the private provider mandating a specific course of action. Yet because social service privatization is designed to increase innovation and efficiency, government agencies generally have a hands-off approach that allows for substantial independence by front-line workers. Thus, it is likely that private social service providers will successfully argue that they are not state actors.
Given the court's current narrow reading of the state action doctrine, the need for alternatives to constitutional litigation to enforce accountability in privatized welfare jurisdictions is apparent. Another potential source of due process rights for welfare beneficiaries are the federal and state laws governing TANF programs. These statutes generally provide some sort of notice and hearing requirements, even though some of those requirements arguably fall short of constitutional due process norms. However, just because these statutes contain “rights” does not necessarily mean that those rights are enforceable. To the contrary, where statutes do not expressly provide for private enforcement, the Supreme Court and the state courts have placed tight limits on their enforceability by refusing to “imply” a right of action. Most welfare statutes under TANF do not provide express rights to enforce procedural protections.
Typically in public benefits litigation, the shortcomings of the implied right of action doctrine have been compensated for by the availability of judicial review under federal and state Administrative Procedure Acts. These acts permit statutory beneficiaries to enforce agency accountability. However, APAs operate as constraints on governmental, rather than private, action. The case law is replete with examples of quasi- governmental and private organizations who were deemed to fall outside of Administrative Procedure Act requirements because they were not “agencies.”
Contract law provides a potentially more fertile avenue for relief - and, notably, one not available in government-run welfare programs. Welfare beneficiaries may be able to sue private providers under a third-party beneficiary theory to force compliance with the terms of the contract between the private welfare provider and the government entity. To the degree that the contract terms are favorable, for example, expressly requiring the private contractor to adhere to specified due process norms, beneficiaries in privatized jurisdictions may have an additional avenue to enforce their process rights.
Unfortunately, the usefulness of this theory lies outside the control of TANF claimants. To begin with, this approach only makes sense if the underlying contractual terms are beneficial. But since TANF claimants are not at the negotiating table, they are left at the mercy of the negotiating process. Especially where powerful corporations such as Lockheed are at the table, such corporations may be able to demand concessions from local governments that accrue to their own benefit. In the procurement process, it is not clear who, if anyone, will be looking out for the interests of welfare beneficiaries. A simple declaration in the contract that it is not enforceable by third-parties will knock this approach off the table. Thus, just as TANF recipients are largely at the mercy of the political process to grant them entitlements and due process rights, they are at the mercy of contracting parties to define and/or grant them contractual rights.
Privatization has been heralded as the cure to many government ills. For certain, discrete municipal services, privatization may indeed be the necessary salve. However, the empirical evidence strongly suggests that privatization is not likely to improve upon government performance in complex social service arenas such as welfare. Moreover, welfare claimants may end up worse off than they are under even the dreariest of governmental bureaucracies. Certainly, their legal rights are much more tenuous in the wake of privatization. As a nation, we have embarked on a bold experiment, but we have jumped in headfirst, with scant attention to the legal implications of this shift. Not surprisingly then, the legal rights of the poor have fallen by the wayside.