Welfare With A Debit Card
States look to private firms to automate delivery of benefits
By Jennifer Petersen/AllPolitics
WASHINGTON (AllPolitics, Aug. 12) -- In grocery stores across Texas, food stamps no longer cross the counter. Instead, welfare recipients swipe plastic cards through a register-side terminal to pay for groceries, much like shoppers using bank or credit cards.
Texas, like 20 other states, has replaced paper food stamp benefits statewide with automated accounts allowing people to access benefits with debit cards. And more states are following suit. By 2002, in fact, all 50 states are required to have such electronic benefits transfer (EBT) systems in place for food stamp delivery.
The cards by most accounts have been a success for the states. And the federal government has encouraged states to automate their cash assistance programs as well, which all but a few of those with electronic benefit programs in place have done.
Whether the contracts will be given to private agencies is not the question. Instead, the question is who the states will hire to administer the delivery systems.
States are leaving the delivery to companies that specialize in computer account systems instead of purchasing the expensive software systems themselves. For the most part, the competition for these contracts is between several large corporations, which could edge out the smaller companies in the business, leading to monopoly-like conditions.
The Department of Justice expressed just this concern when it filed a suit in late July to block the sale of the smaller Transactive Corp. to Citicorp. Justice Department officials determined that the sale of Transactive, which runs the Texas delivery system, to the larger Citicorp would "virtually eliminate competition."
The problem of profitability has left a scant handful of corporate giants such as Lockheed-Martin and Citicorp in the business, leading federal officials to worry about what effects this lack of competition may have for the states. Especially with welfare reform's mandate to cut welfare rolls, state contracts based on caseloads may not offer enough of an initial profit for smaller companies to join in the bidding.
In Texas, at least, the goals of welfare reform seem to be in direct opposition to the profitability of the state's contractor.
Transactive Corp., which won the bidding war to deliver the state's food stamp and cash assistance benefits in 1995, found its profits plummeting as welfare reform kicked in to reduce the welfare rolls.
Texas enacted its "Lone Star card" statewide in 1995, replacing paper food stamps and cash benefit checks with plastic. The card-account system works by establishing separate accounts for the different benefits: Money from Aid to Families With Dependent Children (AFDC) -- or now Temporary Assistance to Needy Families (TANF) -- goes directly into the cash assistance account, and food stamp benefits are translated into a monetary amount and deposited into a food stamp account.
Both can be accessed at grocery store checkout stands, though the food stamp account is a debit account that can only be used for the purchase of food items. Federal restrictions ensure that there is no processing fee for food stamp purchases.
There are no such restrictions, however, on withdrawals from the cash assistance accounts, and states have come up with a variety of processing fee policies. While most states allow recipients to withdraw money from ATMs as well as grocery stores, the processing fees that can be charged by the banks and the electronic benefits contractors for the withdrawals vary with the states.
For example, in Texas recipients are guaranteed two no-charge withdrawals from grocery check out stands, in which they can take out as much of their benefits as store policy allows. At the third withdrawal, the stores may charge a processing fee. Electronic benefits contractors cannot charge processing fees for the withdrawals under the Texas contract.
In Texas' bidding war, Transactive beat out giants such as Lockheed-Martin and Citicorp to get the seven-year contract. The contract stipulated that Transactive would receive $2 per food stamp case, and an additional 97 cents for cases that also received cash benefits.
In return, Transactive was to replace the state's clunky distribution system and to reduce the amount of welfare fraud. The deal didn't save Texas any money, but it did ensure delivery in what had become a bloated and inefficient system that relied on a wide variety of third parties to distribute assistance checks.
The cards were also widely advertised as being an effective way of putting an end to the black market in food stamps, which could be traded for drugs or partial cash value. The cards were promoted as making it easier for recipients to use their benefits and as reducing the risk of theft, particularly in the case of the highly redeemable food stamps.
But problems in the delivery system arose quickly for Transactive, and for Texas welfare recipients. Technical glitches and point-of-service problems quickly mounted to about $7 million in delivery errors subject to fines, leading Texas to withhold payment from the company for three months in 1996.
The company vowed to fix the bugs in the system, only to see its caseload dropping drastically. When Transactive took over the delivery system in 1995, the caseload for the food stamps and cash assistance programs was 1.2 million. After welfare reform, in November 1997, the caseload had declined to about 845,000.
Transactive said it made $1.5 million in December of 1998, far short of the $2.1 million the company said was necessary to remain profitable. Transactive's parent company, GTECH, announced the plan to sell Transactive, Texas contract and all, to Citicorp soon after.
With the suit filed by the Department of Justice, Transactive appears to have no recourse but to fulfill its delivery contracts with Texas and three other states.
The failure of a large company such as Transactive to make a sufficient profit may make other companies hesitant to enter into the market. While officials in the U.S. Department of Agriculture say that they believe there are profits to be made in the electronic benefits business, other companies may not be willing to take the risk illustrated by Transactive's case.
It may also be difficult for smaller companies to beat the larger ones in contract bids. Companies such as Citicorp, Lockheed and Transactive already have internal structures in place and have a wealth of financial resources to draw upon, allowing them to make low bids for state contracts.
And in the absence of other competition, it looks like states which do not yet have electronic benefits contracts will in effect have to negotiate with only three bidders, assuming Transactive pulls out of the bidding game. The main companies fighting for the contracts are Lockheed-Martin, Citicorp and Deluxe Data Systems, though in many states the three companies are more cooperative than competitive, working together to sub-contract services to each other.
"Competition among EBT vendors is important to maintaining and further promoting the hundreds of millions of dollars in cost savings each year associated with the use of EBT systems," said Joel I. Klein in a press release. Klein is the assistant attorney general of the Justice Department's Antitrust Division.
Just as competition is important to the states' savings, it is also important to benefit recipients.
"The fewer players there are in the game, the harder it is to renegotiate the contracts when they come up," said social policy consultant Barbara Leyser.
What this may mean for welfare recipients is fewer services, she said. If there are fewer players when the time comes for renegotiations, states may trade higher allowances on processing fees for contractors for lower-priced contracts. As the contractors make profits directly from the processing fees, higher fees would compensate for less contract money from states. And benefit recipients would pay more to access their cash assistance accounts.
Some services have already proved substandard in states with electronic benefits contracts, according to Leyser. The instructional information sent to food stamp recipients, which in many states falls under the sub-contract of Lockheed-Martin, does not meet with USDA standards. Leyser said written materials that explain how to use the EBT system works fail to meet the department's literacy requirements or to outline recipients' rights.
The deeper pockets of the large corporations, while allowing them to sit out less profitable contracts in the expectation of long-term payoffs, may also provide an attractive economic buffer for states in the case of transitional difficulties.
As Mike Jones, a public information officer for the Texas Department of Human Services, pointed out, just because a state contracts out services, the state should not assume that it is not responsible for those services. It is not unusual for states to have to step in to assure client services during the period of transition from state to private management.
These deep pockets may be part of what has led so many states to enter into contracts with large corporations in electronic benefits contracts, as well as in other areas of privatization.
The number of large contractors dominating the field in contracts for services such as work training, health care and other areas is slightly larger, but not by much. Large companies such as Lockheed-Martin and Andersen Consulting crowd in with smaller companies such as America Works, Curtis and Associates and Maximus, Inc. for contracts to administer state programs -- such as child care, work training and child support enforcement, among others -- paid for by federal Temporary Assistance to Needy Families (TANF) block grants.
The lack of competition for electronic food stamp contracts can be read as a warning as more states contract out TANF-financed programs. For, while TANF programs are more numerous and varied than benefit delivery programs and require different services and areas of expertise that can be offered by a variety of smaller companies, the larger corporations have the resources and infrastructures to offer the lowest bids for many of these programs.