Social Service Privatization: Ethics and Accountability Challenges in
State Contracting (Letter Report, 04/05/99, GAO/HEHS-99-41).

Pursuant to a congressional request, GAO provided information on states'
social service contracting, focusing on: (1) the extent to which
government employees have moved to positions at social service
contractors and the impact such movement has had on the management of
publicly provided social services; (2) determining the relative success
in winning contracts by contractors who hired state employees and
contractors who did not; (3) state ethics laws, policies, and
enforcement approaches that address the employment of former state
employees and other related issues; and (4) state practices for holding
contractors accountable for achieving program results through contracted
services.

GAO noted that: (1) since 1993, 11 of 42 state child support enforcement
directors who left their government positions accepted managerial
positions with contractors providing child support enforcement services,
according to federal and state program officials; (2) similarly, since
1993, federal and state officials indicated that 10 of the 41 high-level
Temporary Assistance for Needy Families (TANF) managers who left state
services accepted positions with social service contractors; (3) when
the four states GAO examined lost child support enforcement and TANF
managers and other staff, officials indicated that they experienced
short-term difficulties because they were required to train staff
selected to fill the managerial vacancies; (4) although these 21
directors and managers left the government to accept positions with
social service contractors, GAO's review of 59 contract proposals in
four states found that proposals listing former state employees as key
personnel did not result in contract awards any more frequently than did
proposals not listing such employees; (5) this was the case for both the
child support enforcement and TANF-related programs; (6) GAO's analysis
also showed that proposals listing former employees from the same state
in which the bidding took place resulted in contracts about as
frequently as did proposals not listing such employees; (7) most states
have established some ethics policies designed to help ensure open and
fair contracting by adopting provisions determined by the American Bar
Association (ABA) and other organizations to be critical in prohibiting
certain postemployment practices and conflicts of interest; (8) however,
more than one-third of the states have ethics policies that lack one or
more of these provisions; (9) among the four states GAO examined,
enforcement approaches to help ensure compliance with applicable ethics
provisions differed widely; (10) to address these inconsistencies, model
laws prepared by ABA and others offer possible frameworks for
strengthening state ethics policies; (11) once contracts have been
awarded, several states have instituted mechanisms aimed at holding
contractors accountable for program results; (12) these mechanisms
include measures states apply when they assess contractor performance;
and (13) while these states have established practices to assess
contractor progress toward achieving program results, many others
generally rely on basic accountability measures that focus on compliance
with program rules rather than on results.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-99-41
     TITLE:  Social Service Privatization: Ethics and Accountability 
             Challenges in State Contracting
      DATE:  04/05/99
   SUBJECT:  State law
             Privatization
             Contractor personnel
             Conflict of interests
             Postemployment restriction
             State employees
             Contract oversight
             State-administered programs
             State and local procurement
             Ethical conduct
IDENTIFIER:  Maryland
             Arkansas
             HHS Temporary Assistance for Needy Families Program
             Medicaid Program
             Massachusetts
             Texas
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to Congressional Requesters

April 1999

SOCIAL SERVICE PRIVATIZATION -
ETHICS AND ACCOUNTABILITY
CHALLENGES IN STATE CONTRACTING

GAO/HEHS-99-41

Social Service Privatization

(116011)


Abbreviations
=============================================================== ABBREV

  ABA - American Bar Association
  HHS - Department of Health and Human Services
  IT - information technology
  OCSE - Office of Child Support Enforcement
  RFP - request for proposal
  TANF - Temporary Assistance for Needy Families

Letter
=============================================================== LETTER


B-279094

April 5, 1999

The Honorable Henry A.  Waxman
Ranking Minority Member
Committee on Government Reform
House of Representatives

The Honorable Dennis J.  Kucinich
House of Representatives

The magnitude of federal funding in several major social service
programs--child support enforcement, Temporary Assistance for Needy
Families (TANF), child welfare, and child care--which reached about
$20 billion in 1996, has contributed to renewed interest in the
states' contracting out of social services and other program
activities.  Program officials, contracting experts, and
others--prompted in part by a rise in the volume of contracting in
services not previously privatized--have raised concerns about
states' efforts to privatize social services.  In addition, some
Members of Congress have expressed concern that the movement of state
program managers and other employees to take similar jobs with
contractors, a process often called the "revolving door," may affect
the capacity of state governments to manage public services and may
give an unfair advantage to contractors employing former public
officials.  Members of Congress also have questioned the extent to
which states have adopted strategies to hold contractors accountable
for program results.  Recent changes in social service privatization
have prompted a growing need to assess the strength of ethics
policies intended to protect open and fair contracting and examine
states' capacity to ensure program accountability. 

To follow up on our previous report and testimony,\1 you raised
several issues about the revolving door and its relationship to
competitive social service contracting as well as the capacity of the
states to hold contractors accountable for program results. 
Therefore, you asked us to (1) identify the extent to which
government employees have moved to positions at social service
contractors and the impact such movement has had on the management of
publicly provided social services; (2) determine the relative success
in winning contracts by contractors who hired state employees and
contractors who did not; (3) examine state ethics laws, policies, and
enforcement approaches that address the employment of former state
employees and other related issues; and (4) examine state practices
for holding contractors accountable for achieving program results
through contracted services. 

As agreed with your offices, we focused on state-administered child
support enforcement and TANF given the significant level of federal
funds that support these services, the states' use of new and
different types of contracting, and the states' reliance on a mix of
for-profit and not-for-profit contractors.  To address these issues,
among other steps, we performed detailed work in four states with
diverse policies and program practices--Arkansas, Maryland,
Massachusetts, and Texas.  In these states, we examined employee
movement into positions with social service contractors, contract
awards, ethics laws and enforcement, and practices intended to hold
contractors accountable for program results.  We did our work between
January and December 1998 in accordance with generally accepted
government auditing standards.  A more detailed discussion of our
methodology is in appendix I. 


--------------------
\1 See Social Service Privatization:  Expansion Poses Challenges in
Ensuring Accountability for Program Results (GAO/HEHS-98-6, Oct.  20,
1997) and Child Support Enforcement:  Challenges in Ensuring
Accountability for Program Results (GAO/T-HEHS-98-22, Nov.  4, 1997). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Since 1993, 11 of 42 state child support enforcement directors who
left their government positions accepted a managerial position with a
contractor providing child support enforcement services, according to
federal and state program officials.  Similarly, since 1993, federal
and state officials indicated that 10 of the 41 high-level TANF
managers who left state service accepted a position with a social
service contractor.  As may be expected, when the four states we
examined lost child support enforcement and TANF managers and other
staff, officials indicated that they experienced short-term
difficulties because they were required to train staff selected to
fill the managerial vacancies.  Ultimately, however, these states
were able to fill their vacancies with program staff they believed
were capable of performing the roles and handling the
responsibilities. 

Although these 21 directors and managers left the government to
accept a position with a social service contractor, our review of 59
contract proposals in four states found that proposals listing former
state employees as key personnel did not result in contract awards
any more frequently than did proposals not listing such employees. 
This was the case for both the child support enforcement and
TANF-related programs.  Our analysis also showed that proposals
listing former employees from the same state in which the bidding
took place resulted in contracts about as frequently as did proposals
not listing such employees. 

Most states have established some ethics policies designed to help
ensure open and fair contracting by adopting provisions determined by
the American Bar Association (ABA) and other organizations to be
critical in prohibiting certain postemployment practices and
conflicts of interest.  However, more than one-third of the states
have ethics policies that lack one or more of these provisions.  For
example, in some states, ethics provisions only apply to a limited
range of state employees and officials likely to be involved in the
contracting process.  Among the four states we examined, enforcement
approaches to help ensure compliance with applicable ethics
provisions differed widely.  For example, the Arkansas Ethics
Commission, citing other priorities, has undertaken limited
enforcement of the state's competitive bidding process, whereas
Maryland has placed representatives from the Attorney General's
office in major state agencies to help ensure that the agencies
comply with applicable contracting policies.  To address these
inconsistencies, model laws prepared by ABA and others offer possible
frameworks for strengthening state ethics policies.  The Medicaid
statute also offers a model in that it directs participating states
to have requirements applicable to state Medicaid officials that are
at least as stringent as those applicable to federal employees. 

Once contracts have been awarded, several states have instituted
mechanisms aimed at holding contractors accountable for program
results.  These mechanisms include measures states apply when they
assess contractor performance.  While these states have established
practices to assess contractor progress toward achieving program
results, many others generally rely on basic accountability measures
that focus on compliance with program rules more than on results. 


   BACKGROUND
------------------------------------------------------------ Letter :2

States have contracted out social services for decades.\2 Federally
funded social service programs generally support the financial,
employment, and other public assistance needs of children and
families.  In recent years, the amount of contracting for
state-administered social services has increased and the nature of
privatization has changed significantly.  State governments have
increased their spending on privatized services, and strong support
from state political leaders and high-level program managers has
helped prompt new privatization initiatives.  Recent changes in
social service privatization have also been spurred by changes in
federal legislation.  As a result of the Personal Responsibility and
Work Opportunity Reconciliation Act of 1996 (P.L.  104-193), for
example, states are now permitted under TANF to privatize eligibility
determinations, a function traditionally performed by state
governments.  To help ensure program accountability in federally
funded social service programs, the Department of Health and Human
Services (HHS) has responsibility for overseeing state performance. 
With the fundamental changes in the magnitude and nature of social
service privatization, states continue to face new
challenges--utilizing competitive markets, developing
performance-based contracts, and enhancing program
accountability--that program officials, contracting experts, and
others believe warrant continued focus. 

When contracting for social services, states often seek to achieve
fair and open competition among those who submit contract proposals. 
To protect opportunities for all qualified contractors to compete
openly and fairly for government business, states may, among other
things, limit certain activities of former government employees
seeking employment with private organizations and prohibit financial,
programmatic, and other conflicts of interest.  Studies have
specified that state ethics policies should apply to a broad range of
public employees, including legislators, political appointees,
program managers, and others involved in the contracting process,
while minimizing to the extent possible the limits placed on the
discretion of state employees to choose public or private
employment.\3

State governments and social service contractors often work in tandem
to provide diverse program services.  In response to state RFPs,
contractors submit proposals they believe address state needs. 
Contractors recruit and hire qualified specialists to maximize their
competitive positions, while at the same time government employees
exercise their prerogatives in an open labor market to pursue private
sector careers where they can apply their talents in return for pay
and benefits commensurate with their experience and expertise.  In
this way, social service contractors make use of a flexible labor
pool in their attempts to meet state service needs.  While these
practices may benefit states and social service contractors, from
another perspective, the movement of government employees to work for
contractors may also reduce the capacity of states to manage public
services and may confer unfair advantages to certain offerors. 


--------------------
\2 Social service privatization is defined as contracting out program
functions or services.  To contract out social services, states
generally follow five major phases:  (1) issuing requests for
proposal (RFP), (2) reviewing contractor proposals, (3) awarding
contracts, (4) administering contracts, and (5) overseeing contractor
performance.  Our review focused primarily on state policies and
practices for reviewing proposals, awarding contracts, and overseeing
contractor performance.  When states review proposals, they consider
the proposals' relative technical merit, the proposers'
organizational and staff experience, and projected contract costs. 
States implement varying approaches to oversee contractor
performance.  These approaches include financial and compliance
audits and other program assessments. 

\3 Public Integrity Annual, ed.  James S.  Bowman (Lexington, Ky.: 
Council of State Governments, 1996) and Michael W.  J.  Cody and
Richardson R.  Lynn, Honest Government:  An Ethics Guide for Public
Service (Westport, Conn.:  Praeger, 1991). 


   STATES ABLE TO REPLACE
   DEPARTING PROGRAM MANAGERS, BUT
   LOSS OF INFORMATION TECHNOLOGY
   STAFF WAS MORE TROUBLESOME
------------------------------------------------------------ Letter :3

Although many child support enforcement and TANF senior program
managers left their positions from 1993 to 1998, about a quarter of
them left to take positions with social service contractors.  State
employees generally joined contractors to increase their income.  The
states we examined were able to fill vacancies created by the loss of
child support enforcement and TANF program managers and other staff
with minimal disruption.  However, Texas child support enforcement
officials expressed concern over their losses in mid-level
information technology (IT) personnel and related impacts on program
services. 


      SENIOR PROGRAM DIRECTORS AND
      OTHER STATE EMPLOYEES MOVED
      TO FOR-PROFIT CONTRACTORS,
      ATTRACTED BY HIGHER SALARIES
      AND BENEFITS
---------------------------------------------------------- Letter :3.1

Nationally, many senior program directors in both the child support
enforcement and TANF programs left their positions in the last 5
years.  About a quarter of these officials took positions with social
service contractors.  According to federal and state program
officials, of the 41 states in which the child support enforcement
director left that position, 11 directors went to work for social
service contractors.  Similarly, of the senior TANF program managers
who left their positions in 40 states, 10 joined the staffs of social
service contractors. 

According to state program officials we interviewed, senior program
directors most often leave their jobs to retire, fill other
government positions, or respond to changes in a state's
administration.  Contractors told us that they recruit more from
state child support enforcement programs than from TANF-supported
programs.  According to contractor officials, child support
enforcement demands a high degree of technical expertise,
particularly with respect to state information systems.  Through such
hiring practices, contractors believe they are in a better position
to meet state program needs. 

State officials noted that personnel who leave the government for
social service contractors generally do so to improve their salaries
and benefits.  Benefits such as stock option and profit-sharing plans
offered by some companies are appealing and often critical to
employees in weighing a decision to leave public service for private
sector careers.  Although pay and benefit considerations were often
cited as the leading reasons state personnel left their positions for
the private sector, we also found one instance in which state law
resulted in state employees leaving their government jobs to become
private sector employees.  In 1995, Maryland's legislature required
two locations--Baltimore City and Queen Anne's County--to privatize
all child support enforcement services.  The legislation also
required that the selected contractor offer employment to state
employees affected by the privatization.  Of the over 300 employees
who were affected, 213 accepted employment with the selected
contractor, while many of the remaining employees retired or accepted
jobs elsewhere. 


      LOSS OF CHILD SUPPORT
      ENFORCEMENT AND TANF PROGRAM
      MANAGERS POSED FEW PROBLEMS
---------------------------------------------------------- Letter :3.2

Some state officials we interviewed reported that they experienced
limited impacts on program management after losing program management
staff.  We were told that the loss of senior officials in their
states caused minimal disruption to the administration of the child
support enforcement and TANF programs.  These officials also reported
that when they lost middle management and staff-level state employees
to contractors, such losses did not cause disruption to program
administration, as agencies were able to train new employees. 


      INFORMATION TECHNOLOGY
      PERSONNEL LOSSES WERE MORE
      DIFFICULT TO ADDRESS
---------------------------------------------------------- Letter :3.3

Child support enforcement officials in Texas said that about 80
percent of their IT personnel, such as systems analysts and
programmers, left state government jobs to join various firms that
contract with the child support enforcement program and other program
areas.  The director of Texas' child support enforcement program
indicated that the movement of IT personnel to the private sector has
often been driven by private sector salaries that are up to about 40
percent higher than salaries for comparable government positions. 
The loss of these employees resulted in longer-term program impacts
than did the loss of senior program managers in other states.  In
those instances when Texas could not replace the IT personnel it had
lost, state officials said they had to contract for IT services at a
cost higher than would have been incurred if such services had been
performed by government employees.  According to state child support
enforcement program officials, the net loss of IT personnel resulted
in poor or reduced service to the public, because without timely
upgrades to automated systems, program personnel could not easily
access case information, update files, or respond to customer
inquiries. 


   NO RELATIONSHIP BETWEEN
   CONTRACTORS' HIRING OF STATE
   EMPLOYEES AND CONTRACTS AWARDED
------------------------------------------------------------ Letter :4

Among the proposals we reviewed, we found that child support
enforcement and TANF-related proposals listing former state employees
from any state as key personnel resulted in contract awards about as
frequently as did proposals that did not list such employees.\4 Of
the 59 child support enforcement and TANF contract proposals
submitted in the four states we reviewed, 34 listed at least one
former state employee as key contract personnel.  Twenty-five of
these proposals did not list any former state employees as key
contract personnel.  Those proposals that did not list former state
employees as key personnel were awarded contracts about as often as
those proposals that did.  Slightly under two-thirds of the proposals
from each group, that is, those listing state employees and those
not, resulted in contracts being awarded.  Thirty-eight percent of
the proposals that listed former state employees, and 36 percent of
those that did not, did not result in contract awards.  When we
examined the child support enforcement and TANF programs separately,
we still found that, in each program, proposals not listing former
state employees resulted in contract awards about as often as
proposals listing such employees.  These comparisons are summarized
in figure 1. 

   Figure 1:  Contract Awards for
   Proposals Listing and Those Not
   Listing Former State Employees
   as Key Personnel

   (See figure in printed
   edition.)

Note:  None of the differences between the proportion of proposals
resulting in contract awards among those listing former state
employees and the proportion resulting in contract awards among those
not listing state employees was statistically significant at the .05
level. 

Source:  GAO analysis and interviews with state officials. 

Even when contractors listed former state employees as key personnel
from the state offering the contract, the difference in the
proportion of contracts awarded among these proposals and the
proportion awarded among proposals not listing such employees was not
statistically significant.  Of the 18 proposals that listed employees
from the same state that offered the contract, 14 resulted in
contract awards.  By comparison, of the 41 proposals that did not
list such employees, 25 resulted in contract awards.\5


--------------------
\4 We focused our review of a proposal on the personnel who were
listed as key staff designated to perform specific functions in
direct support of the contract if it was awarded to the offeror. 

\5 Although the proportion of proposals resulting in contract awards
among those listing former state employees as key personnel from the
same state offering the contract is somewhat larger than the
proportion resulting in awards that did not list such employees, this
difference is not statistically significant at the .05 level. 


   SOME STATES LACK RECOMMENDED
   ETHICS PROVISIONS; ENFORCEMENT
   APPROACHES DIFFER WIDELY
------------------------------------------------------------ Letter :5

Many states, in an effort to help ensure open and fair competition
among contractors, have established ethics policies.  However, more
than one-third of the states lack one or more of the key ethics
provisions, such as those prohibiting certain postemployment
activities and conflicts of interest, which ABA and other
organizations recommend as critical to state efforts aimed at
protecting competitive contracting.\6 In addition, the states we
examined also differ widely in their approaches to enforce ethics
policies.  To address the disparities in state ethics policies, model
laws prepared by organizations such as ABA offer frameworks that
states can use to strengthen their ethics policies.  Also, the
Medicaid statute may offer a model in that it requires participating
states to have in place conflict-of-interest provisions applicable to
those involved in the program equivalent to federal
conflict-of-interest requirements. 


--------------------
\6 See ABA, The Model Procurement Code for State and Local
Governments (Washington, D.C.:  1979); Common Cause, A Model Ethics
Law for State Government (Washington, D.C.:  1989); and Society of
Professional Journalists, Open Records Model Law:  Revised Guidelines
and Recommended Minimum Standards for Statutes Governing Public
Access to Government Records and Information (Washington, D.C.: 
1993). 


      MORE THAN ONE-THIRD OF
      STATES LACK RECOMMENDED
      ETHICS PROVISIONS
---------------------------------------------------------- Letter :5.1

Many state ethics policies aimed at helping ensure open and fair
contracting have shortcomings relative to the provisions widely
recommended for protecting the integrity of the competitive
contracting process.\7 In some states, ethics provisions apply only
to a limited number of state employees, leaving others who may be
involved in the contracting process uncovered by them.  In other
states, ethics provisions differ as to the type of activity
prohibited and the period of time covered by the prohibition. 
Moreover, more than one-third of the states lack one or more ethics
provisions, such as restrictions against certain employment
activities by former state employees and prohibitions intended to
deter the misuse of public office for private gain.  The weaknesses
in state ethics policies are demonstrated in the examples summarized
here: 

  -- State ethics provisions applicable to a limited number of
     employees.  Oregon has provisions restricting the employment
     activities of former state employees.  However, these
     restrictions apply only to a limited group of former state
     employees who held positions specifically listed in the law and
     not to the full range of positions that may involve contracting. 
     (Or.  Rev.  Stat.  244.045 (1997))

  -- State postemployment restrictions have gaps.  South Carolina's
     ethics provisions apply only to former state employees that
     accept employment from an organization regulated by the state
     agency where they formerly worked or if this employment involves
     a matter in which they participated directly and substantially. 
     (S.C.  Code Ann.  8-13-755 (1997)) Hawaii's ethics provisions
     place some employment limitations on former employees and
     legislators but also expressly provide that those limitations do
     not prohibit a state agency from contracting with them to act on
     behalf of the state.  (Haw.  Rev.  Stat.  Ann.  84-18 (1998))

  -- Length of states' postemployment prohibitions varies.  Kansas'
     ethics provisions prohibit former state officers or employees
     from accepting employment with a person or business if they
     participated in the making of any contract with that person or
     business.  The prohibition lasts for 2 years from the time the
     contract is completed or from the time the state employment
     ended, whichever is sooner.  (Kan.  Stat.  Ann.  46-233 (1997))
     In contrast, Kentucky's provisions prohibit for 6 months after
     termination of state service certain former officials from
     participating in or benefiting from any contract involving the
     agency where they were employed.  The provisions also prohibit
     such individuals from accepting employment, compensation, or
     other economic benefits from any person or business that
     contracts with the state on a matter in which the former
     official was directly involved during the past 3 years of state
     service.  (Ky.  Rev.  Stat.  Ann.  11A.040 (1998))

According to a 1996 study completed by the Council of State
Governments and the American Society for Public Administration, 17
states lacked one or more of the ethics provisions ABA and other
organizations believe are necessary to promote open and fair
competitive contracting, as summarized in table 1.\8 Of these 17
states, 9 did not restrict postemployment activities of former state
employees with organizations that compete for government contracts. 
For example, Arkansas does not prohibit postemployment activities of
former state employees that could have a bearing on social service
contracting.\9 Eight states lacked provisions limiting the direct
involvement of former public employees in competitive contracting. 



                                         Table 1
                         
                          States Lacking One or More Recommended
                                    Ethics Provisions

                      State ethics provisions not included in contracting policies
                -------------------------------------------------------------------------
                                                                   Provision
                               Representa  Participat  Use of      of          Use of
                Acceptance of  tion of     ion in      public      benefits    confidenti
                postgovernmen  clients     competitiv  position    to          al
                t employment   before      e           for         influence   government
                with           government  contractin  private     government  informatio
State           contractors    agencies    g           gain        actions     n
--------------  -------------  ----------  ----------  ----------  ----------  ----------
Arkansas        X

California                                 X

Georgia         X

Indiana                        X                       X

Iowa                                                                           X

Louisiana                                                          X

Maine           X              X           X           X           X           X

Minnesota       X              X           X           X                       X

Mississippi     X              X

Nebraska        X

New Hampshire   X              X           X

New Mexico                     X           X

North Carolina  X              X                                               X

North Dakota    X                                                              X

Oregon                                     X

West Virginia                              X

Wisconsin                                  X

=========================================================================================
Total           9              7           8           3           2           5
-----------------------------------------------------------------------------------------
Source:  Council of State Governments and the American Society for
Public Administration. 


--------------------
\7 For detailed information regarding ethics policies in specific
states, see Marilyn Hughes, Ethics Update (Oklahoma City, Okla.: 
Council of Government Ethics Laws, 1997). 

\8 Public Integrity Annual, ed.  James S.  Bowman. 

\9 Through an executive order issued by Arkansas' Governor in
February 1998, the state now requires contractors to disclose whether
they have hired former state employees. 


      STATE ENFORCEMENT APPROACHES
      DIFFER WIDELY
---------------------------------------------------------- Letter :5.2

State enforcement approaches to help ensure compliance with ethics
provisions differed widely among the four states we reviewed.  In
these states, enforcement involved a variety of officials and
organizations, such as the department or agency that contracted for
services, ethics commissions, legislative and state auditors,
inspectors general, and attorneys general.  In Maryland, for example,
the state placed representatives from the Attorney General's office
in major state agencies to provide technical assistance and help
ensure that state agencies comply with applicable contracting
policies. 

Two of the four states lacked enforcement elements that officials in
those states believe are necessary to help ensure compliance with
applicable ethics policies.  In Massachusetts, the state Inspector
General believes that social services contracting has a high level of
risk, often associated with unfair contractor advantages, conflicts
of interest, and personal gain through public office.  According to
officials from the Attorney General's office, program staff have
sometimes been ineffective in enforcing compliance with applicable
ethics provisions.  As a result, the Attorney General has had to
prosecute contractors for violations of state ethics laws that
Attorney General representatives believe could have otherwise been
prevented. 

Arkansas lacks a statewide mechanism to enforce and resolve
allegations of unethical activity.  Unlike Massachusetts, the
Attorney General in Arkansas does not have statewide responsibility
to investigate illegal activities associated with state contracting. 
Instead, prosecuting attorneys in each county may investigate and
resolve allegations associated with state contracting.  Moreover, the
Director of Arkansas' Ethics Commission said the Commission has very
narrow enforcement responsibilities as well.  The Commission focuses
predominantly on campaign finance issues and is not involved with
monitoring the contracting process. 


      ALLEGED VIOLATIONS OF STATE
      ETHICS POLICIES INFLUENCED
      CONTRACT AWARD PROCESSES
---------------------------------------------------------- Letter :5.3

The lack of some states' ethics provisions may result in conflicts of
interest that adversely influence state contract award processes. 
According to Arkansas and Massachusetts officials we interviewed,
these situations have arisen in their states.  Arkansas has
contracted out the full range of child support enforcement services,
including locating absent parents and collecting support payments, in
selected counties.  Arkansas has contracted with an established
network of providers, some employees of whom had formerly worked for
the state's child support enforcement program.  According to the
state's child support enforcement General Counsel, the lack of a
comprehensive ethics policy undermined potential contractors'
confidence in the fairness of the contracting process.  As a result,
organizations that had not competed before were discouraged from
submitting proposals.  This situation, in turn, left the state with
no choice but to contract with organizations with which it had
long-standing relationships.  At the same time, allegations have
surfaced regarding the influence exerted by a state legislator to
have a child support enforcement full-service contract awarded to an
organization in which the legislator has a financial interest. 

In Massachusetts, state employee conflicts of interest had some
adverse impact in contracting supported by TANF block grant funds. 
Officials in the Department of Transitional Assistance who administer
TANF-funded programs had to recompete a contract because state
employees were found to have a conflict of interest with respect to
one of the competing contractors.  Under similar circumstances, the
state also had to terminate a contract that had previously been
awarded.  Final resolution of both these ethics issues required the
state to award the contract at a time later than originally
anticipated. 


      MODEL LAWS AND FEDERAL
      PROVISIONS SUGGEST FRAMEWORK
      FOR REDUCING DISPARITIES IN
      STATE ETHICS POLICIES
---------------------------------------------------------- Letter :5.4

ABA and Common Cause, a nonpartisan organization that studies
government policies, have developed comprehensive model laws that
address state ethics policies related to open and fair contracting
and include restrictions regarding postemployment activities,
conflicts of interest, and other safeguards.  States seeking to
strengthen their ethics policies may adopt the provisions included in
these model laws. 

Although states are contracting extensively for child support
enforcement and TANF-related services, federal laws for these two
programs, as recently amended by the Personal Responsibility and Work
Opportunity Reconciliation Act of 1996, do not require that states
establish or comply with ethics policies like those in ABA's model
law.  This is not true, however, with respect to Medicaid.  The
Congress incorporated conflict-of-interest provisions into state
Medicaid plan requirements in 1979, when legislation was enacted
authorizing greater use of health maintenance organizations.  As a
condition of state participation in Medicaid, states must have or
enact provisions that require anyone involved in Medicaid-related
contracting to be subject to conflict-of-interest requirements
similar to, or at least as stringent as, those applicable to federal
employees.\10 The federal ethics provisions applicable to Medicaid
also include employment restrictions and prohibitions on employees
knowingly participating personally and substantially in matters in
which they, family members, or certain business associates have a
financial interest.\11

More recently, section 4724(c) of the Balanced Budget Act of 1997
(P.L.  105-33) broadened the Medicaid state plan requirement to
include additional conflict-of-interest safeguards.\12 Specifically,
it required states to have in place restrictions at least as
stringent as those applicable to the federal contracting process
related to the disclosure of contractor bid, proposal, and source
selection information that might undermine open and fair
competition.\13 The Medicaid provisions allow states to tailor their
ethics policies to their specific circumstances, relying on model
laws and other enforcement approaches as they so choose, and offer
some assurance that basic safeguards will be in place when a state is
contracting for Medicaid services. 


--------------------
\10 42 U.S.C.  1396a(a)(4)(C). 

\11 18 U.S.C.  207 and 208. 

\12 42 U.S.C.  1396a(a)(4)(D). 

\13 41 U.S.C.  423. 


   STATE STRATEGIES TO HOLD
   CONTRACTORS ACCOUNTABLE ARE
   FOCUSED MORE ON COMPLIANCE WITH
   PROGRAM RULES THAN ON RESULTS
------------------------------------------------------------ Letter :6

Several states have established practices to help ensure that
contract awardees are held accountable for program results, which
provides added assurance that these states will receive the services
for which they paid.  These practices include performance measures
states use when they assess contractor progress toward achieving
program results.  However, program officials in most states indicated
that they rely on traditional accountability strategies, such as
audits, that focus more on compliance with program rules than on
results.  The Government Performance and Results Act of 1993 and
results-oriented state initiatives have helped establish frameworks
to better focus program management on accountability for results. 


      STATE PRACTICES TO HOLD
      CONTRACTORS ACCOUNTABLE
      FOCUSED ON COMPLIANCE WITH
      PROGRAM RULES
---------------------------------------------------------- Letter :6.1

In addition to an integrated network of comprehensive ethics policies
and enforcement approaches, contracting experts and program managers
believe states need effective approaches for holding contractors
accountable for program results.  Effective accountability
mechanisms, while difficult to develop, can help states ensure that
they base contract payments on performance.  Our earlier reviews of
privatization have concluded that managers need to supplement current
practices that assess compliance with program rules with a greater
focus on results.\14

Our earlier work on social service privatization also found that
monitoring contractors' performance toward achieving program results
was among the most challenging aspects of the privatization process. 
This examination of program accountability found that assessing
compliance with program requirements, while a significant component
of accountability, can constrain the available resources state
auditors are able to apply toward assessing longer-term program
results.  Faced with these priorities and related resource
constraints, officials in Texas' child support enforcement program,
for example, have relied on compliance reviews of administrative
processes and other approaches in an effort to monitor performance
relative to results specified in applicable contracts.  In recent
audit cycles, the state's auditors have reviewed compliance with
allowable expenditures and reporting requirements. 

Assessing program results can play a critical role in reviewing
contractor performance.  Such assessments could incorporate various
techniques, such as monitoring outcomes and reviewing qualitative
information.  In Maryland's oversight of its TANF-supported
welfare-to-work programs, for example, the state has developed a
planning process that sets forth long-term goals and objectives for
its Department of Human Resources--which administers TANF--and each
program it manages and oversees.  In addition, program officials,
through Strategic Management Assessment Review Teams, periodically
assess progress providers have made toward achieving program results,
such as program enrollment and completion, employment, and job
retention.  Generally, contractors are paid on the basis of their
performance in each of these program dimensions. 


--------------------
\14 See GAO/HEHS-98-6, Oct.  20, 1997, and Privatization:  Lessons
Learned by State and Local Governments (GAO/GGD-97-48, Mar.  14,
1997). 


      THE RESULTS ACT AND RELATED
      INITIATIVES PROVIDE
      FRAMEWORKS FOR ASSESSING
      STATE PROGRAM RESULTS
---------------------------------------------------------- Letter :6.2

Assessing program results enables states to determine whether
contractors have in fact achieved intended outcomes.  Under the
Results Act, HHS developed a framework for establishing performance
measures and assessing program results in the child support
enforcement program.  HHS' Office of Child Support Enforcement
(OCSE), in conjunction with the states, established a 5-year
strategic plan that included program goals and performance measures
for evaluating the magnitude of increases in paternities established,
support orders obtained, and collections received.  OCSE and the
states developed these measures after considering key dimensions
indicative of state performance in providing child support
enforcement services.  Subsequently, these and other measures were
included in modifications to the program's incentive funding
structure.  Such frameworks can enhance state strategies to improve
accountability for program results in privatized social service
programs supported with federal funds. 

Beyond the Results Act requirements applicable to federally
administered programs, some states, such as Oregon and Minnesota,
established their own strategies for assessing program results. 
Toward this end, state legislatures or executive branch agencies have
developed program goals and measures for assessing performance. 
Moreover, one recent study concluded that 47 states have established
performance-based budgeting systems intended to improve the
effectiveness of state programs.  These state initiatives, combined
with a greater orientation toward program results in HHS, provide
additional management tools that can be used to optimize the
anticipated benefits from privatizing child support enforcement,
welfare-to-work, and other social service programs. 


   CONCLUSIONS
------------------------------------------------------------ Letter :7

Social service contracting presents many significant challenges to
state governments, including the need to achieve competitive
contracting and accountability for program results.  These
challenges, coupled with the magnitude of federal funds that support
privatized social service programs, amplify the call for adequate
protections against ethics violations that can potentially undermine
competition.  While our work in selected states suggests that
contract awards were not related to the "revolving door," there is
room to strengthen state ethics policies and enforcement approaches
to help strengthen open and fair competition.  Without comprehensive
ethics policies and effective enforcement approaches intended to
safeguard competitive contracting, states may not benefit as fully
from competition when they privatize social services.  Similarly, an
insufficient capacity to assess progress toward achieving program
results weakens state assurances that contractors will provide
federally funded services efficiently and effectively. 

Faced with these challenges, states can take steps to mitigate
threats to competition.  By relying on comprehensive models for
guidance, states can develop or refine their ethics policies and
adopt effective enforcement approaches to strengthen competition in
privatized social services.  States have been required by statute, in
fact, to adopt and apply certain conflict-of-interest requirements to
state officials with regard to Medicaid.  While the Results Act
provides a framework for reorienting program management toward
accountability for results, states could take additional measures to
help ensure that they obtain desired results from their contracting
efforts.  Together, fortified ethics policies, effective enforcement
approaches, and accountability strategies focused on program results
can optimize the states' capacity to achieve the benefits of social
service privatization. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

We received comments on a draft of this report from HHS, the four
states in which we conducted detailed work, and a recognized expert
in social service privatization.  The comments generally concurred
with our findings and conclusions.  We also received a number of
technical comments that we incorporated where appropriate. 


---------------------------------------------------------- Letter :8.1

We are providing copies of this report to the Honorable Donna E. 
Shalala, the Secretary of HHS; and the Honorable Olivia A.  Golden,
HHS' Assistant Secretary for Children and Families.  We will also
send copies to state child support enforcement and TANF directors and
to other interested parties on request. 

If you or your staffs have any questions about this report, please
contact David D.  Bellis, Assistant Director, or Mark E.  Ward,
Senior Evaluator, at (202) 512-7215.  Other major contributors are
Gregory Curtis, Joel I.  Grossman, Craig H.  Winslow, and James P. 
Wright. 

Cynthia M.  Fagnoni
Director, Income Security Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

This appendix provides additional details on the methods we used to
meet the objectives of our study.  To help us understand state ethics
laws and their enforcement, we reviewed GAO reports, journal
articles, and studies on contracting, as well as state ethics laws
and policies.  To estimate the extent of national movement by former
state employees to positions at social service contractors, we
obtained information from federal and state program managers in the
child support enforcement and Temporary Assistance for Needy Families
(TANF) programs.  We supplemented these data by interviewing
officials of public employee unions and other organizations.  In
addition, we interviewed state government officials in four states to
determine how their states responded to the loss of personnel and the
impact this loss had on state programs. 

To aid us in determining the extent to which state employees left
government positions for employment with contractors and the effect
this movement had on contract awards, we examined the proposals
submitted in response to eight recently issued requests for proposal
(RFP) in the four selected states.  We selected two full-service
child support enforcement RFPs--one in Arkansas and one in
Maryland--and two child support enforcement RFPs for automated
systems--one in Massachusetts and one in Texas.  We also chose one
TANF welfare-to-work RFP in each of the four states.  We reviewed all
proposals submitted in response to RFPs for these contracts to
identify former government employees who had worked in either state
child support enforcement or welfare-to-work programs and were
subsequently listed as key personnel designated to perform specific
functions in direct support of the contract, pending selection of
contract awardees.  Sometimes states awarded more than one contract
for each RFP.  In addition, the projected contract costs among the
contracts we reviewed varied widely.  To supplement the information
we obtained from our review of proposals, we interviewed state
officials to obtain their perspectives on how the movement of former
state employees to organizations competing for contracts affected
contract awards.  We did not evaluate the merits of state contract
award decisions, nor did we independently assess whether states or
contractors complied with applicable ethics policies. 

We examined state ethics laws, policies, and enforcement approaches
and their federal counterparts to determine the extent to which state
ethics laws and policies parallel generally accepted ethics
standards, as defined by the American Bar Association, contracting
experts, and others.  We also interviewed state officials to identify
any allegations of state ethics violations and their resolution. 

In addition, we examined state and federal policies and practices for
holding contractors accountable for program results.  We also
interviewed state program officials in the four selected states to
identify the practices they used to hold contractors accountable for
program results.  Finally, we interviewed Department of Health and
Human Services officials regarding their oversight of state and local
social service contracting in the context of applicable federal
policies. 

We focused on the child support enforcement and TANF programs in four
states--Arkansas, Maryland, Massachusetts, and Texas.  We selected
these two programs because each receives a significant level of
federal funds and each makes widespread or long-term use of
contracting.  We chose these four states because they offered
variation in the strength of their respective ethics provisions.  In
addition, these four states were using contractors to provide child
support enforcement services or to design related automated systems. 
All four states contracted out TANF-funded welfare-to-work services. 
Table I.1 summarizes the selected states, number of proposals
submitted in response to each RFP, and number of contracts awarded. 



                         Table I.1
          
           Selected States, Programs, Proposals,
                    and Contract Awards

                  Child support enforcement
                           program
                  --------------------------
                     Number of     Number of
                         full-     automated     Number of
                       service        system          TANF
                     proposals     proposals     proposals
                           and           and           and
                     contracts     contracts     contracts
----------------  ------------  ------------  ------------
Arkansas
----------------------------------------------------------
Proposals per                8                           1
 RFP
Contracts                    6                           1
 awarded per RFP

Maryland
----------------------------------------------------------
Proposals per                3                          11
 RFP
Contracts                    1                           7
 awarded per RFP

Massachusetts
----------------------------------------------------------
Proposals per                              4            24
 RFP
Contracts                                  1            15
 awarded per RFP

Texas
----------------------------------------------------------
Proposals per                              1             7
 RFP
Contracts                                  1             5
 awarded per RFP
----------------------------------------------------------
Source:  GAO analysis of contract information. 

RELATED GAO PRODUCTS

Welfare Reform:  States Are Restructuring Programs to Reduce Welfare
Dependence (GAO/HEHS-98-109, June 18, 1998). 

Child Support Enforcement Privatization:  Challenges in Ensuring
Accountability for Program Results (GAO/T-HEHS-98-22, Nov.  4, 1997). 

Social Service Privatization:  Expansion Poses Challenges in Ensuring
Accountability for Program Results (GAO/HEHS-98-6, Oct.  20, 1997). 

Managing for Results:  Analytic Challenges in Measuring Performance
(GAO/HEHS/GGD-97-138, May 30, 1997). 

Welfare Reform:  Three States' Approaches Show Promise of Increasing
Work Participation (GAO/HEHS-97-80, May 30, 1997). 

Privatization:  Lessons Learned by State and Local Governments
(GAO/GGD-97-48, Mar.  14, 1997). 

Child Support Enforcement:  Early Results on Comparability of
Privatized and Public Offices (GAO/HEHS-97-4, Dec.  16, 1996). 

Child Support Enforcement:  Reorienting Management Toward Achieving
Better Program Results (GAO/HEHS/GGD-97-14, Oct.  25, 1996). 

Employment Training:  Successful Projects Share Common Strategy
(GAO/HEHS-96-108, May 7, 1996). 

District of Columbia:  City and State Privatization Initiatives and
Impediments (GAO/GGD-95-194, June 28, 1995). 

Welfare to Work:  Measuring Outcomes for JOBS Participants
(GAO/HEHS-95-86, Apr.  17, 1995). 

Office of Government Ethics:  Need for Additional Funding for
Regulation Development and Oversight (GAO/T-GGD-92-17, Mar.  4,
1992). 

Ethics Enforcement:  Process by Which Conflict of Interest
Allegations Are Investigated and Resolved (GAO/GGD-87-83BR, May 21,
1987). 


*** End of document. ***