Evaluating Performance Contracting in TANF Programs

Purpose: The Wisconsin Works (W-2) program, the TANF program in Wisconsin, has introduced performance contracting to align W-2 service providers' objectives with the State's goals by establishing financial and administrative incentives. This study examines whether the introduction and revision of performance contracting contributed to improving the performance of W-2 participants.

Data: This study uses W-2 participant level panel datasets drawn from following three sources. First, the Client Assistance for Re-employment and Economic Support (CARES) system provided longitudinal information on the characteristics and program participation history of participants in the W-2 program. Second, employment and earning information is drawn from Wisconsin Unemployment Insurance (UI) dataset. Third, state policy documents on W-2 contracts are used to identify changes in performance contracting arrangements.

Analytic Strategy: There have been four rounds of biannual performance contracting (1997-99, 2000-01, 2002-03, and 2004-05) in the W-2 program. In the 2nd contract (2000-01), earning gain standard was first introduced and applied to all W-2 participants as a required standard to obtain the right of contract renewal and performance bonuses.

However, in the 3rd contract (2002-03), the standard was applied only to specific participant groups (e.g. participants in unsubsidized employment placements). It might increase W-2 agencies' incentives to select participants who might be more likely to produce earning gain, and to utilize more resources to serve the groups, lowering their incentives to provide intensive services to other groups of participants (e.g. participants in subsidized employment placements). Thus, by comparing changes in earning gains of the two groups from the 2nd contract to the 3rd contract, it is possible to identify the effects of the earning gain performance standard on W-2 participants' economic outcomes.

The standard was changed from a required standard in the 3rd contract to an optional one in the 4th contract (2004-05). It provides an additional opportunity to confirm the effect of the earning gain standard, by observing what happened when the standard was no longer used as a required standard.

Results: Comparison of earning gains between the 2nd and the 3rd contract across the two groups reveals that unsubsidized employment groups (treatment group) maintained similar level of earning gains during the 3rd contract. In contrast, subsidized employment groups (comparison group) had $160 decrease in earning gains during the period. In addition, W-2 agencies selected participants having higher level of education and better earning history to meet the earning gain standard. The elimination of the earning gain standard in the 4th contract shows decline in earning gains for the unsubsidized group by $74. It confirms the positive effect of adopting the earning gain standard.

Conclusion: Under exacerbating economic conditions and weakening financial incentives, the adoption of the earning gain standard contributed to maintaining substantial level of economic performance of W-2 participants. Performance contracting plays an important role by inducing welfare service providers to achieve higher performance in the TANF program. This research informs policy makers and public managers on a better contract design to improve the effectiveness of the TANF service administration.