USDA Food Stamp
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Policy Considerations Relating to Privatization in the Food Stamp Program

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The Food Stamp Act requires that state civil servants make all decisions about individual households’ eligibility for benefits. Throughout the program’s history, state civil service administration has been taken for granted. Last year, however, USDA approved a waiver for Florida to partially privatize administration of the Food Stamp Program in several counties. Now, at least two states are developing plans to contract with private entities to take over substantial parts of the eligibility determination process. Florida has decided it does not want to wait for the results of the experiment USDA approved and is seeking approval for a loosely-defined waiver to allow it to solicit bids for privatizing statewide an undetermined number of functions within the eligibility determination process. On June 25, USDA expressed receptivity to Florida’s proposal but sought additional clarification. Texas has proposed to close more than half of its local offices, largely replacing them with kiosks and call centers that would determine eligibility based on materials received over the telephone and internet. Apparently some or all of these call centers might be operated by private contractors. Both states are pursuing similar changes in their Medicaid programs.

These proposals raise significant issues, both for these two states and for the future of the national Food Stamp Program. Over one million people received food stamps in Florida during an average month of 2003, with total issuance that year of almost one billion dollars. Texas’s average 1.9 million food stamp recipients received $1.9 billion in food stamps last year. This year, the states rank fourth and first in the country, respectively, in food stamp issuance. Private contractors long have operated some discrete functions for the Food Stamp Program: printing food stamp coupons, designing computer software, operating electronic benefit transfer (EBT) systems, managing employment and training programs, etc. No firm, however, has ever had control of the entire program — or, in particular, the decision about whether particular households receive food stamps. When the Food Stamp Program began to convert from paper coupons to EBT, USDA and states recognized that the conversion would be costly, disruptive, and subject to potentially serious unforeseen problems. Accordingly, they moved cautiously to minimize harm to vulnerable recipient families. This deliberate approach stands in stark contrast to the rapid, large-scale implementation that Florida and Texas are proposing.

Some people oppose privatization based on the principle that discretionary government functions should be performed by government employees. Others just as fervently support privatization as a way of shrinking government or introducing more private-sector efficiencies into public administration. Beyond these basic ideological positions, however, lie a host of practical considerations about how privatization might work. This paper seeks to examine some of those practical issues.

Without a doubt, the current administration of the program has significant problems. A number of eligible families feel badly treated. Some forego benefits that they need as a result. Improving access is a goal shared by many public officials, emergency food providers, antihunger advocates, and others. Some have seen privatization as a possible answer. Care should be taken, however, before regarding privatization as a panacea. Although private firms have made important contributions in performing discreet tasks for the program, it will be very difficult to design contracts that will give contractors incentives to improve service to low-income families while protecting the program’s integrity. Moreover, hurried or indiscriminate privatization could inadvertently cause significant problems with program access, integrity, and cost.

This paper first considers the inherent limits on states’ ability to reap the benefits of competition when contracting out program management. It then analyzes the challenges states face in making the transition from operating a program directly to letting and supervising contracts for program management, the different skills needed for these two functions, and the difficulty of crafting effective contracts for such a multi-faceted function as administering the Food Stamp Program. It attempts to identify the general factors that make a government function a more or less appealing candidate for contracting out. Finally, it suggests some safeguards that might be prudent if a political decision is made to experiment with contracting out food stamp eligibility determinations.