FINANCIAL INCENTIVES

“…[M]any private [child welfare] agencies regularly deny thousands of children the chance of finding permanent homes so that they can continue to collect millions of dollars each year in city child support payments.”

  -- New York Daily News , May 16, 1975. [i]

“…[C]hildren … have become the lifeblood of these private agencies, which thrive on the millions of dollars the city pumps into them each year.   These agencies systematically keep the children in their jurisdiction so that a constant level of government funding is maintained.”

  – New York Daily News, May 17, 1975 [ii]

In all the decades since the network of private agencies that dominates child welfare in New York City was created, there had been plenty of newspaper accounts of problems in foster care and institutions.   But no one had traced the problems to a key source: a system of perverse financial incentives that rewards agencies for holding children in their “care” day after day after day and penalizes them for doing anything else.

The headline on part one of the series summed up the entire system: Big Money, Little Victims .

Nearly 30 years later, almost nothing has changed.   Financial incentives trap thousands of children needlessly in foster care.

The tragedy of these perverse incentives can be seen in the case of a boy named Issa, who lives with his handicapped mother in The Bronx, and whose story was told in a keenly-observed series by Westchester Journal-News : [iii]

The only label ever pinned on Issa was Attention Deficit Hyperactivity Disorder.   Sometimes he could be dangerously out of control.   But there was nothing wrong that couldn't be fixed with the right combination of outpatient psychiatric care and medication.   It's what thousands of middle-class and wealthy parents do for their children all the time.

Issa's mother didn't have such options.   But there is a fountain of money to warehouse such children in expensive Residential Treatment Centers.   So that's where Issa wound up, at an “RTC” in Westchester County where the cottages are spotless, the grounds are immaculate - and the little boy desperately missed his mother.  

Issa would have been far better off had the city simply given his mother money to get him the basic care he needed.   Taxpayers would have been far better off, too.   But there is no open-ended government aid for that.   In contrast, the federal government will pick up half the $85,000-a-year or more tab to warehouse a poor child like Issa at a Residential Treatment Center, and the state will cover part of the rest.   And the RTC will be paid for every day it fills its beds with children like Issa.

Government to Government Incentives

The largest federal child welfare program is called Title IV-E. Nationwide, in federal fiscal year 2004, the federal government is expected to spend at least $4.9 billion in IV-E funds on foster care, and another $1.7 billion on adoption. [iv]   IV-E foster-care money is an “entitlement.”   That means in New York, for every eligible child, the federal government will reimburse half the cost of foster care.   The state adds more aid.

In contrast, the major source of federal dollars to prevent foster care, Title IV-B was funded at only $700 million nationwide in FY 2004. [v] And not all of that went to prevention; IV-B also can be used for adoption and even foster care. And it's not an entitlement.   When the money runs out, states and localities must turn to other sources.   (And, incredibly, New York State has repeatedly refused to claim its share of IV-B money).

Thus, the federal government spends at least nine times more on foster care and adoption than on programs targeted to prevent foster care.

The one major change in federal incentives in recent years involves adoption.   Under the federal Adoption and Safe Families Act, governments are paid a bounty for every finalized adoption above the total number of adoptions in the previous year.   There is no comparable bounty for safely returning a child to his or her birth parents.   There also are less tangible incentives.   The one sure way for a child welfare agency to get good press is to get its adoption numbers up.

So the federal government now amply rewards adoption and foster care.   It does almost nothing for family preservation.

New York State now is trying to partially counteract the impact of some of these incentives.   The FY 2004 state budget spends almost as much on programs to prevent foster care ($344.9 million) as it does on foster care ($364.5 million).   And, in a reverse of the federal approach, the prevention money is open ended– the state will reimburse 65 cents on the dollar, while the foster-care money is in the form of a block grant to each county and to New York City.   Furthermore, if the city and the counties underspend their foster care funds, they can use the savings to fund more prevention efforts. [vi]

A child welfare agency with sufficient vision and imagination can use the state aid to begin to temper the incentives from the federal

government.   But in New York City, reforms have come in fits and starts and, despite measurable success, fallen victim to budget cuts or pressure from the city's enormously-powerful private child welfare providers.

Government to Agency Incentives

Almost all child welfare services in New York City are provided by scores of private agencies which contract with the city.

These agencies are told that their first job is to safely return a child to his or her birth parents, or, if that is not possible, get the child adopted.   But if they do that, ACS will stop paying them.   In contrast, ACS will pay these agencies for each day they keep a child in foster care – day after day after day.

In the years since the Daily News series a pattern has emerged.   Laborious negotiations with the private agencies would lead to a pilot program to change these incentives.   Some agencies would agree to accept a flat amount of money instead of per diem payments.   They would then be able to keep the savings if they shortened the time children spent in foster care.   The programs would be successful.   Then the City would face a fiscal crisis and the programs would be eliminated.   It happened this way with “Home Rebuilders” in the early 1990s, and with STAR (Safe and Timely Reunifications and Adoptions) which lasted from 2000 through 2002. [i]

All that remains is an evaluation mechanism called EQUIP.   This allows ACS, at its discretion, to withhold contracts from agencies which perform poorly in finding permanent homes for children.   But it does nothing to change the underlying financial incentives which make it difficult for agencies, especially newer agencies which lack huge endowments, to do the job right.   Or these agencies may simply lack the staff to document what they've done. [ii]  

EQUIP also relies heavily on self-reporting by the agencies themselves.   If an agency says a foster home is safe, for example, and the paperwork looks good, the city does nothing to check.   And EQUIP includes no mechanism for birth parents and older foster children to help evaluate the quality of care. [iii]

Publicly, the agencies piously deny that per diem payments have any effect at all on their decisions.   Privately, it's another story.

1975: The Daily News obtains a report from a private agency stating flatly that “the main reason for the lack of increased adoptions is that the reimbursement fee is still not high enough.   This fee level motivates many agencies to retain children in foster care rather than place them in adoptive homes.” [iv]

1990: A social worker who deals extensively with New York's private agencies states in a sworn affidavit that “I have been advised by a foster-care agency caseworker than her facility has imposed a three-month moratorium on discharges, because it was not receiving sufficient referrals to fill its beds.” [v]

1998: A former administrator for a private agency acknowledges that though no one would say flat out they were holding the children for the money, “there was a kind of unspoken idea that we should keep kids in care.   But it was always hidden with comments like ‘we don't want these kids on the streets.'…” [vi]

Further evidence for the difference it makes to change financial incentives comes from a state that actually did it.

Illinois also provides most child welfare services through a network of private agencies, and has done it that way for decades.   But in 1997, with the statewide foster care population at more than 51,000, the state changed financial incentives, creating a system that rewards agencies for keeping children safely in their own homes as well as for adoptions, and penalizing the agencies for letting children languish in foster care.  

The agencies resisted.                      

But when the financial incentives changed, suddenly the “intractable” became tractable.   The “dysfunctional” became functional.  

Today, there are fewer than 20,000 children in foster care.   As noted elsewhere in these papers, Cook County Illinois takes away proportionately fewer children than New York City.   And as the foster care population plummeted, according to both the state's own data [vii] and the assessments of independent monitors, child safety improved.  

Says University of Illinois Professor Mark Testa : “Children are safer now than they were when the state had far more foster children.” [viii]

[i] William Heffernan and Stewart Ain, “City Losing Fortune on Child Care,” New York Daily News , May 16, 1975.

[ii] William Heffernan and Stewart Ain, “Child Care Horros Abound, but City Sees No Evil,” New York Daily News , May 17, 1975.

[iii] Leah Rae and Shawn Cohen, “Issa's story: A mother's love isn't enough,” Westchester Journal News , Oct. 28, 2002.   The story is part of a larger series available at www.nyjournalnews.com/rtc

[iv] Child Welfare League of America, Funding Resources for Child Welfare, briefing paper presented to Child Welfare-Mental Health Coalition, Jan. 20, 2004.

[v] Ibid.

[vi] New York State Division of the Budget, 2003-04 Executive Budget, Appendix 1, Part One, The Budget by Function Area, Education, Labor and Financial Assistance , pp. 31, 32, available online at    http://www.budget.state.ny.us/pubs /executive/fy0304app1/elfa.pdf

[i] “Feds Pay, Kids Stay,” Child Welfare Watch , Winter 2001, p.8

[ii] Hilary Russ, “Racial Downsizing,” City Limits , November, 2003.

[iii] Wendy Davis, “Called Safe,” City Limits , December, 2003.

[iv] William Heffernan and Stewart Ain, “Big Money, Little Victims,” New York Daily News , May 13, 1975.

[v] Affidavit of Barbara Winter, M.S.W., C.S.W., Hauser v. Grinker Index #16409/89, Supreme Court of the State of New York, County of New York, June 6, 1990, p.20.

[vi] “Feds Pay…” Note 7 supra.

[vii] Illinois Department of Children and Family Services, Signs of Progress in Child Welfare Reform , available online at http://www.state.il.us/dcfs/SignsProg.pdf   

[viii] Matthew Franck, “The pendulum.” St. Louis Post-Dispatch, February 1, 2003 .