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Privatization of Welfare Services: Delegation by Commercial Contract

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On April 3, 2001, the Deputy Director of the Office of Management and Budget (OMB), Sean O’Keefe, ordered federal agencies to prepare annual inventories of their services, and to identify which ones should be considered “inherently governmental” functions. The implication was that any position NOT identified as “inherently governmental” could be privatized (contracted out). President Bush is a major advocate of this form of privatization—hiring private firms to do the government’s work—and implemented this policy in Texas while he was governor there. The new list of positions will be used as part of OMB’s internal review process. The expected result is an increase in privatization of government services over the next few years, as each agency bears the burden of identifying those which cannot be privatized, and the reasons why. The presumption is that most, if not all, of the agency’s tasks can be done by non-government employees.

Advocates of privatization argue that market forces automatically bring more efficiency to any government undertaking by introducing competition and profit incentives for those carrying out the tasks. The inefficiency of government employees, the overstaffing of government agencies, and the naturally superior productivity of private-sector workers are tenets of faith for privatization advocates.

The privatization pendulum may be swinging the other way. In the wake of the tragic terrorist attacks in September 2001, President Bush called for the “federalization” of airport security personnel, apparently meaning a degree of deprivatization. This year, a bill has been introduced in Congress that would restrict outsourcing of more services until the costs and benefits of the privatization in that case are first analyzed.7 The Truthfulness, Responsibility, and Accountability in Contracting Act (TRAC) would temporarily suspend the process of contracting out functions that would displace federal employees. Among the “Findings” proposed in the preamble of the legislation are the following:

  1. There has been a major increase in service contracting (relying on private contractors to provide services to the Federal Government) since 1993.
  2. Federal agencies have been increasing reliance on service contracting even though there are no reliable and comprehensive reporting systems in place to determine whether service contracting has achieved measurable cost savings or improved Government services for taxpayers.
  3. Federal agencies have contracted out work that either is being performed or could be performed by Federal employees without any public-private competition.
  4. Federal employees are being replaced by contractor employees without even knowing with certainty if the result is reduced costs or improved services.
  5. Federal agencies do not have systems in place to provide for work currently performed by Federal contractors to be performed by Federal employees, even after a determination that in-house performance would be more efficient and more cost effective.

“Privatization” can refer to any activity where a government cedes some task formerly performed by its employees to the private sector. This may be a mundane task such as trash collection, or a traditional government operation such as running prisons or welfare programs. Privatization takes many forms. A government may simply desist from an activity, leaving it up to the private sector to supply the service. In other circumstances, the government may deregulate an industry to allow private corporations to provide parallel services to the government in one area. A third model of privatization involves performance entirely by the private sector, with incorporation or official endorsement by the government of one designated entity. Finally, privatization can involve simple outsourcing, or contracting out of services that the government still takes responsibility to provide, albeit indirectly. This Article focuses on the last type of privatization: contracting between a government agency and a private corporation or entity to assume the work involved with providing a particular government service, and in particular, the provision of government benefits or assistance for those in poverty. This Article argues that the privatization of welfare services via contract with private organizations is inherently fraught with unavoidable due process problems and overstepping of the nondelegation doctrine.

Part II of this Article provides some background on the recent history of privatized welfare services. This part will also note some of the anecdotal criticisms lodged against privatized welfare. Part III surveys recent court cases applying the nondelegation doctrine to privatization, with a focus on cases that would be most applicable to privatized eligibility determinations for welfare services. Part IV analyzes the implications of the commercial contracts utilized to privatize government programs, which essentially create a special type of delegation problem: delegation by contract. The discussion focuses on delegation to private for-profit entities, but the implications for non-profit contractors are also explored. Part IV concludes that “contracting out” for the provision of welfare programs, particularly the eligibility determinations for such programs, creates an unavoidable conflict-of-interest that harms the poor people in our society. Part V discusses the special issues raised in privatization with nonprofit organizations. Part VI addresses problems with government contracting in general, and the specific problem of using commercial contract language as the mechanism for a delegation of governmental power. The conclusion constitutes Part VII.