The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) eliminated federal responsibility for setting basic national standards and matching state spending for cash assistance to low-income families. PRWORA established a fixed block grant to states and significantly increased the level of discretion states may impart with regard to eligibility, benefit levels, and program rules. This block-grant funding structure presents states with substantially different incentives to spend state funds. Under the old system, Aid to Families with Dependent Children (AFDC), any additional dollar that a state spent on cash-assistance for low-income families would be matched by federal funds. Under its successor program, Temporary Assistance to Needy Families (TANF), any additional dollar that a state spends will be state-only dollars. This new funding structure serves as a powerful incentive for states to monitor cash-assistance spending more carefully.

TANF requires high participation rates and puts pressure on welfare reform programs to work with a broad segment of the welfare caseload. States were required to have 25 percent of all families participating in certain work activities in fiscal year 1997, increasing to 50 percent in 2002. States risk reductions in block-grant funding if they do not meet these rates. In the initial implementation of TANF, many states will easily reach these participation rates because they tend to have larger shares of their caseloads already working. Later, however, these early success rates may lead to a larger proportion of hard-to-employ adults, making TANF's increasingly strict work participation requirements more difficult to meet.

The current national welfare reform environment emphasizes economic self- sufficiency through immediate employment or "work first." Virginia's welfare reform efforts, which predate PRWORA, include the Virginia Independence Program (VIP) and its employment related initiatives, the Virginia Initiative for Employment not Welfare (VIEW). Implemented on July 1, 1995, on a two-year quarterly phase-in basis, VIEW requires program participants to work within 90 days of receipt of welfare benefits. Participants are required to work in private, unsubsidized employment; in private, subsidized employment; or in a community work setting. VIEW also establishes a two-year time limit for cash assistance benefits (with one additional year of transitional benefits).

In many instances, former recipients are working more than full-time hours to achieve partial economic self-sufficiency. Many recipients in Virginia are working at entry-level positions for wages insufficient to rise out of poverty. Many recipients are also having difficulty sustaining employment.

Other states experiencing similar outcomes have increased their contracting efforts with private and non-profit agencies to provide job-placement and job-retention services. Wage-rate data suggests that contracting with specialty job-placement service providers may increase entry-level wages. As Tables 2 and 3 indicate, entry-level wages for welfare recipients in Indianapolis in 1995-96 exceed 1997 average wages in Virginia (in actual dollars). Nationally, the focus of immediate employment for welfare recipients presents increased opportunities for contracting out job-placement and retention services. These experiences may be useful to Virginia's policymakers as they plan future services for Virginia's poor.

As state governments seek innovative ways to improve services and get more bang for their welfare buck, privatization is increasingly being considered. Many state and local governments have privatized a broad range of government activities in both social- and non-social-service programs. Privatization of social services, in particular, has increased steadily during the past decade. The Council of State Governments observed this trend in a 1993 national study that reported that almost 80 percent of the surveyed state social service departments had expanded privatization of social services in the preceding five years. A variety of factors such as political pressure for privatization, restrictions on government hiring, or a desire to take advantage of the specialized experience of other agencies may lead policymakers and program administrators to look outside the welfare department for certain tasks.

In Virginia, several local child-support offices each contracted with a private organization to provide a full range of program services such as locating absent parents, establishing paternity and support orders, and collecting child-support payments. More recently, the state has begun to contract out case-management and assessment functions in its welfare program. In Fairfax County, Fairfax Works, an employment assistance program for welfare recipients, is currently operating a partnership with Maximus, a private contractor, to provide employment-related services such as job readiness skills, employer outreach, and employment resource centers.

An increasing state and local trend is the implementation of performance-based job-placement and job-retention systems for welfare recipients. The basic idea is that contractors or service providers will be paid to place welfare recipients into jobs and that those contractors will be paid based on their demonstrated success. Instead of being paid for effort, regardless of outcome, contractors will be paid for the outcome. A key feature of this approach is that contractors are placed at risk by government. If they succeed, they will be paid fairly; if they do not succeed, they will not be paid. Success is defined in terms of specific outcomes such as initial placement in a job and retention of that job after specified time periods e.g., three or six months. In a fully at-risk performance-based contract, a contractor is not paid at common process points along the way, such as completion of soft skills training.

One argument for privatized performance-based systems is that the structure of the traditional government welfare system is not well suited for moving people relatively quickly into jobs. Given fast approaching time limits, many state and local governments rely increasingly on performance-based contracts with private and non-profit contractors to assist in placing welfare recipients, especially "hard-to-employ" welfare recipients with multiple barriers to employment such as low education and skills training and physical, mental, and emotional limitations, including- substance abuse, lack of employment motivation, little or no work history, and/or poor work record.

ISSUES IN PERFORMANCE-BASED CONTRACTING

Although the executive branch has the primary responsibility for welfare reform, the state legislature's lawmaking, appropriation, and appointment powers are central to any state's welfare-reform efforts. As states and local governments contemplate increasing their usage of performance-based contracting for job-placement and retention services, there are some key issues for policymakers to consider-- short, look (and plan) before you leap.

Performance-based versus fee-for-service contracts

Often in performance-based contracting, a gap exists between the concept and the reality of implementation. Preliminary results from the Indianapolis welfare-to-work program, Indianapolis Manpower Placement and Comprehensive Training (IMPACT), reveal that some of the 1995-96 contracts were structured in such a way that providers could receive more than half of their funding before making any initial placements. In the case of Indianapolis, recipients begin with job-readiness training, designated as "job search" in the state contracts, which can last from a few days to three weeks, depending on the contractor, and in which recipients are taught "soft skills," such as resume writing, interviewing skills, and professional conduct. After successful completion of the job-search component, recipients move into job development, where clients are expected to spend at least 20 hours a week looking for work using resources provided by the contractor--classified ads, phones, faxes, and computer searches, for example. Some contractors are paid on a fee-for-service basis when a certain percentage of clients complete each of these components.

In the case of Indianapolis, most contractors convinced the government, through a series of negotiations, to pay them on a fee-for-service basis for job-placement preparation services. Although many of these pre-placement services are necessary, this payment system is not fully performance based. In deciding whether to implement a fully performance-based or fee-for-service contract, some important questions should be considered. What is the composition of the caseload? Are contractors receiving clients who are job ready, those with a few barriers to employment, the hard-to- employ, or a mixture of each? The higher the composition of harder-to-serve recipients, the stronger argument the contractor has for fee-for-service, pre-placement payment points. One approach is to pay contractors a lump-sum, pre- placement amount and allow them to decide which services to provide instead of pre-specifying particular job preparation activities. This approach allows the government to contain costs and the contractor the flexibility to develop a variety of job-preparation activities.

Another question to consider is, What is the intended contractor pool? Most research suggests that competition is critical to the success of privatization. Community-based organizations may have more success in addressing motivational and self-esteem issues with clients, especially for more intensive one-on-one placement needs. They are unlikely to have the capacity to serve a large caseload. Also, they are not likely to have the financial capital to operate a fully performance-based contract with delayed payments. Larger non-profit and for-profit contractors, such as Goodwill Industries and America Works, may have the cash flow to provide the up-front training costs but may be more difficult to attract to rural areas with low caseloads.

Referrals

Government has an obligation to ensure a steady flow of referrals and to refer the type of clients specified in the contracts. In most performance-based contracts, the list of referrals is provided by the local welfare agency or Department of Social Services. A common complaint from contractors is that the Department of Social Services does not send job-ready clients, which creates enormous problems for contractors who understood from the agreement that they would be working with job-ready clients. For example, contractors may have to amend their job-readiness activities to include more intensive job assistance, such as substance-abuse counseling. This can have a significant impact from a planning and staffing perspective. A common concern from government is the ability of contractors to "cream" welfare clients by placing those with fewer barriers to employment, thus leaving the harder-to-employ. In order to minimize these problems, the government and the contractor should develop mutually agreed upon (preferably objective) criteria for categorizing clients--e.g., educational level, work history, criminal background, transportation, and child- care barriers--and their corresponding payment rates. When multiple contractors are "competing" under the same contractual guidelines, contractors may assert that they are competing on an uneven playing field where some contractors "?????receive more job-ready clients than others. In some contracts, clients are randomly referred to a contractor. In other cases, when contractors offer specific skills training, government caseworkers refer the client to a certain contractor that is the best match for the client's employment goals--e.g., health care and computer skills. Arranging monthly meetings between all contractors and the referring agency can foster increased communication and prevent the "snowballing" of these types of problems.

Specifying successful job-placement and job-retention conditions

Job-placement performance-based contracts often have wage and health benefit specifications. Wage language is straight-forward. The contract may specify a minimum job-placement hourly wage or graduated payments at higher placement wages. The language for health benefits may need additional specification. For example, one Seattle contract defined successful job placements to include employee health benefits available at a reasonable cost. Some contractors interpreted the health benefit requirement as meaning access to insurance, with or without a substantial (or any) contribution by the employer.

Defining job retention also needs careful consideration. Many performance-based contracts will have payment points at three months post-placement and six months post-placement. In Seattle, some contractors interpreted this as retaining the same (placement) job; others interpreted this as working, regardless of whether the client changed jobs during the time period. It is important for the state to clearly define the language used in successful job placements and job retention. Neglecting to do so presents serious limitations when comparing the performance rate o"?f??contractors.

Double-counting and invisible placements

In some cases, one contractor will have more than one government contract covering the welfare population. For example, a contractor may have a JTPA (Job Training Partnership Act) ?contract through the Private Industry Council and another contract through the Department of Social Services. If the state does not have a strongly coordinated system or if the contractual language is vague, one client may receive a referral from both agencies, allowing the contractor to double count or bill both agencies. This skews the contractor's placement rates and is not cost-effective for government. Before engaging in performance-based contracts, it is essential that agency referrals of welfare recipients be coordinated.

Invisible placements refer to a contractor billing the government for a non- assisted job placement. For example, each week a contractor receives a new list of referrals from the Department of Social Services. About 50 percent of referred clients never show up for training or job-placement assistance with the contractor. The contractor monitors the work activity of the entire list of referrals, regardless of whether the client actually utilized the contractor's services. The contractor may simply contact the client and inquire

whether he or she is working. In other words, the government may pay the contractor for placement of a client who never showed up for services but who found a job entirely on his or her own.

Management information systems

In order for a performance-based contracting system to work, the government must have reliable, timely, and accessible information on results. If performance is to be the basis for payment, it must be measured accurately. In Indianapolis, each contractor collected data in a different way and much of the data was incomplete, fragmented, and internally inconsistent. As payer, the government has the responsibility to establish a standardized reporting system, preferably on a monthly basis, and to build this requirement into the request for applications. A key component of this data collection system is that performance terms are clearly specified and consistently used among contractors.

Contract monitoring

Contract monitoring should assess the contractor's compliance with statutes, regulations, and terms of the agreement, as well as evaluate the contractor's performance in delivering services and achieving desired program goals. In many cases, the government relies on contractor-reported data and does not monitor data reporting. Failing to develop reliable data systems can undermine the cost effectiveness attraction of privatizing job-placement services. The October 1997 General Accounting Office Social Service Privatization Report found that monitoring contractors' performance was the weakest link in the privatization process.

TO CONTRACT OR NOT?

It is important that states accurately assess their track records and capacities to meet their identified welfare reform goals, such as assisting clients to attain economic self-sufficiency. In an era of time and financial contracts, states must consider contracting out welfare services in which the public sector has had limited success. Early national welfare reform results suggest that welfare recipients are working but are not obtaining jobs that provide self-supporting wages. One approach to address this problem is specifying hourly or weekly placement wages for contractors to meet in placing clients. Contractors in Milwaukee, Indianapolis, and Seattle generally have done well in meeting the wage criteria. Entry-level wages in 1996 typically ranged from $6.00 to $8.00 per hour.

The Council of State Governments (CSG) independently surveyed state social-service agencies. CSG reported some cost reductions after privatizing social services, but less savings than state agencies reaped in privatizing other types of services. Cost comparison involves the ability to accurately calculate the public sector's cost and the resulting savings if the function is privatized. This includes the public agency's overhead costs and costs associated with bidding out and monitoring contracts. The U.S. General Accounting Office (GAO) reported that cost comparisons between public and private provision also must control for complex variables such as the proportion of clients who are considered "hard-to-employ."

Typically, per-unit placements range between $3,500 and $5,500, depending on the caseload characteristics and contract-specified "success" definitions. Simply stated, placing the hard-to-employ is a difficult and expensive task. While a unit-cost assessment indicates the amount of money the government is spending for successful placements, it does not show how much the government is saving by removing families from welfare dependency. These clients will also be paying taxes, which increases government revenue. A comprehensive cost assessment considers program costs, savings, and revenue generation.

Accountability and ethical issues make contract management a key component of privatization. States must devote the necessary resources to adequately monitor contractors. As contracting increasingly affects the well-being of low-income, often vulnerable families, states will need to consider what kinds of due-process procedures are needed so that the rights of clients are protected. Contracts should include penalties for inappropriate contractor activities or decisions. In Wisconsin, a contractor is fined $5,000 each time he or she fails to serve an eligible and cooperative individual.

Under the right conditions, contracting out job-placement and job-retention services to private or non-profit service providers may be a useful tool in appropriating limited state welfare dollars and helping welfare recipients obtain long- term economic self-sufficiency. The lack of careful planning and forethought, however, can have serious financial, legal, and ethical implications. Ultimately, the Commonwealth of Virginia has an important responsibility to provide strong job-placement and retention services during the 90 days in which a welfare recipient has to find a job.

PRIVATIZATION EFFORTS IN OTHER STATES

Arizona: Since 1993 the Department of Economic Security has paid providers or job placement services according to whether a welfare recipient gets placed in a job, with a bonus if the recipient stays on the job for 90 days. Arizona's new welfare legislation will expand state contracting. In two pilot sites, all welfare services will be privatized with performance-based contracts awarded no later than January 1, 1999.

Florida: State law provides specification of performance contracting of welfare services. Statute 414 requires that all contracts under the welfare program limit pre-job placement payments to contractors to no more than 40 percent of the total costs of providing services to a welfare recipient. Contractors receive 50 percent when they actually place a recipient in a job and the final 10 percent after the recipient retains the job for six months. The law also states that the performance structure must take into account hard-to-place recipients, recipients' salaries, and contractors who achieve long-term job retention.

Indiana: Indiana has recently tightened the payment methods for performance. As of July 1, 1997, most contractors providing work-related services for the new welfare program, Indiana Manpower Placement and Comprehensive Training (IMPACT), will not be paid until the welfare recipient is placed in a job. The 129 contracts recently awarded, which were written by the state but negotiated by counties, vary in terms of the additional payment points. Many contracts give further funding according to how long a recipient stays in a job, the amount above minimum wage he or she is paid, and whether health benefits are included.

Wisconsin: Under Wisconsin Works (W-2), a statewide initiative, the state is contracting for eligibility determinations, case management, employment, and other welfare-related services in each locality. Public, for-profit and non-profit agencies were able to bid for the contracts. Contractors will be able to make a profit if they spend less than their awarded allotments. However, a contractor will be fined $5,000 for each failure to serve an eligible and cooperative individual.

Sources: "Privatization and Welfare Reform," Issue Notes, February 1997; "Contracting for Performance in Welfare Reform," Issue Notes, August 1997