Local governments provide social welfare benefits in the United States through three main mechanisms: (1) directly, using their own personnel; (2) indirectly, through grants or contracts awarded to private nonprofit or for-profit organizations to supply services to government-designated, eligible individuals; and (3) indirectly, through vouchers that are given to eligible recipients, who can use them to purchase services from approved service suppliers.
These mechanisms differ significantly. Under direct government provision, as well as under grants and contracts, the producer of the service is subsidized, whereas with vouchers the consumers of the service are subsidized. Both contracts and grants on the one hand, and vouchers on the other, can introduce competition and choice. These ingredients--important for good performance--are lacking in direct, monopolistic government services, hence the move toward privatization of public services, where the principal benefits are achieved by competition (Savas 2000, 122-24).
In the 1970s, social services underwent a dramatic change as government awarded contracts and grants to the private, nonprofit sector to supply social services. Between 1971 and 1979, the fraction of state and local social services provided in this manner increased from 25 percent to 55 percent (Kettner and Martin 1994) because local governments could not mobilize internally fast enough to take advantage of the federal funding available for new social programs. By 1992, the fraction of U.S. local governments that relied entirely on their own in-house units for various programs was small, as illustrated in table 1. (Miranda and Andersen 1994, 26-35). None of the responding local governments was operating its own homeless shelters, for example, while 54 percent contracted with private organizations for day care facilities and for homeless shelters.
The nonprofit world faces major environmental changes in the United States: devolution from the federal to state governments, welfare reform, tax reform, reinvented government, cuts in government budgets, managed health care, and the evolution of AIDS into a chronic illness, requiring relatively more outpatient social-support services and relatively less in-patient medical care. Welfare reform alone is having a major impact, with renewed emphasis on job training, job placement, child care, and transportation. Nowhere do these changes have more impact than in New York City, which has some 19,500 nonprofit organizations, including about 5,650 active in social services and health care (Haycock 1992).
Government funding of nonprofits in New York City--by the federal, state, and city governments--has grown to significant proportions and even dominates some fields: Nonprofit agencies in health care receive 74 percent of their funds from government; in housing, 68 percent; and in social services, 66 percent (Haycock 1992). In 1998, New York City entered into 4,361 such contracts for $1.95 billion (table 2); the vast majority of these were with nonprofit agencies, but the number with for-profit firms was rising. The average contract was for $447,000, an amount large enough, generally speaking, to affect the organization winning such an award.
This large-scale use of the private sector offers an opportunity to study the use of contracts for social services. The process of contracting for social services has been examined both conceptually and empirically, and, in particular, the issue of competition has been addressed. Kramer and Grossman (1987) identify major policy issues that arise in contracting for social services: Under what conditions should competition be encouraged? Should low bids always be accepted? Should nonprofit organizations be preferred over for-profits? Should government make special efforts to assist small nonprofit organizations so they can compete?
DeHoog (1984) asks the pertinent empirical question: "To what extent are [social] service environments characterized by competition? …