Municipalities all across Michigan are experimenting with privatization of many types of local services, from trash collection to law enforcement. Led by Michigan Governor John Engler, state government is also pursuing opportunities for privatization.[1]

During the past decade, many analysts have examined how privatizing government services can reduce costs to taxpayers and improve the effectiveness of services.[2] Methods of privatization studied have included selling government assets, allowing private firms to compete with government, and contracting with private groups to provide services.

When government has a compelling interest in the provision of a certain type of activity, contracting with private providers is often the best privatization option. In most cases studied, analysts have found contracting both more effective and efficient, freeing up resources to meet other public needs. No one would dispute that the State of Michigan has a compelling interest in protecting the lives, health and welfare of the state's children.

Few issues are more emotional and controversial than how a state cares for children who are removed from their families because of neglect, abuse or abandonment. We find that it is less costly for Michigan taxpayers to place children in foster care environments supervised by private agencies than for this service to be provided directly by the state Department of Social Services (DSS). The vast majority of Michigan private child care agencies deliver care at a rate lower than the $21.82 daily per child cost of DSS child foster care service provision.

But cost alone is not the only criteria by which private foster care is preferable to public provision of foster care. Not only is the rate paid to private foster care agencies by DSS lower than our estimates of DSS in-house care per child, private agencies also provide a lower child-to-staff ratio than does DSS, an important measure of quality of service. Most national child care accreditation agencies recommend a child-to-caseworker ratio of 30:1, which is also DSS's stated staffing goal. However, it is well documented that DSS continues to fall well short of this ratio, while private agency ratios currently range from 19:1 to 23:1. Using this measure, Michigan taxpayers are receiving more foster care supervision at a lower cost through private agencies than through direct DSS supervision of foster care placement.

Private foster care has often been characterized as more caring, therapeutic and effective than public care. In some cases, although not all, this is probably true. This contention finds some support in the recent University Associates study of the Families First initiative, in which family preservation services are delivered to families whose children are judged at high risk of out-of-home placement.[3] While this paper examines the Families First program, the uniqueness of the initiative's partnership of public and private resources does not lend itself well to a comparison of public and private foster care provision.

Application of purely economic analysis suggests private care's clear superiority over public child foster care services. As a result, DSS officials and judges have placed an increasing share of the state's neglect/abuse wards in foster homes supervised by private caseworkers. From 1981 to 1991, the number of children placed in foster care for reasons of abuse and neglect rose 62%. During this time, the number of children supervised by private agencies rose 200%. In 1991, private agencies supervised 65.6% of such placements. This is a remarkable privatization success story.

But public policy decisions, such as continued use of private contractors to supervise the majority of child foster care placements, are not merely a matter of economics; politics also plays a major role. Use of a "public choice" model of government behavior pioneered by James M. Buchanan, recipient of the 1986 Nobel Prize for economics, can help explain the policy process. Buchanan's contribution to the science of economics is his leadership of a school of study, often called the "Virginia School," which views public policy as a market in which interest groups compete to maximize their benefits.[4]

In this paper, we briefly describe Michigan's system of foster care supervision. We explore how one should properly analyze the costs of government provision of a service, and examine the cost of DSS-provided foster care compared to the rate DSS pays private agencies to provide similar services. We examine alternatives to foster care, such as family preservation initiatives. Finally, we outline a public choice model of the public decision process regarding privatization in general and privatized child foster care in specific.