Madison — Gov. Scott Walker's proposal to privatize work determining who is eligible for food assistance in the state would violate federal law and could expose the state to a loss of more than $20 million in federal money, federal officials say.

In an April 14 letter to state Health Services Secretary Dennis Smith and Children and Families Secretary Eloise Anderson, Ollice Holden, a Midwest administrator for the USDA's Food and Nutrition Service, warned that the work of interviewing applicants and deciding who is eligible for the Wisconsin FoodShare program needs to be done by public workers who are essentially civil servants. If not, he said, the state could lose some of the federal funds supporting FoodShare, the successor in Wisconsin to the food stamp program.

In a statement released Thursday, U.S. Agriculture Secretary Tom Vilsack said, "Recent state agency privatization initiatives in Texas and Indiana have been complete failures, marked by technical difficulties, staffing shortages, and inadequate training of private call-center staff and resulting in adverse impacts on the state and its people.

"USDA will continue to work with Wisconsin to improve its program delivery and integrity so that the most vulnerable people in the state receive the nutrition benefits they need," Vilsack said.

Walker's proposal is just the latest strain on the state's partnership with the federal government on FoodShare. Two weeks ago, USDA officials said that state officials didn't inform them about their discovery last fall of the alleged theft of at least $290,000 in federal FoodShare benefits by Milwaukee County workers.

The FoodShare program in Wisconsin has more than 800,000 participants and distributes more than $1 billion a year to help low-income residents buy food. The program is largely funded by the federal government but is currently administered by the state and counties, with counties largely doing the work of interviewing applicants to see if they qualify for FoodShare and state health programs such as BadgerCare Plus.

One exception is Milwaukee County, where as of January 2010 the state finished taking over determining eligibility for county residents.

Walker's proposed 2011-'13 budget would take this work from the remaining counties and centralize it with the state by using a private contractor to do much of the work. The Walker administration estimates that the proposal would save $48 million per year and eliminate 270 positions.

But Holden said the action could also cause the state to lose federal funds used to help pay for the cost of administering FoodShare in Wisconsin. In 2010, the state received $20.5 million in federal money for that purpose plus another $2.3 million in one-time federal stimulus money.

Seth Boffeli, a spokesman for the state Department of Health Services, said that officials there are aware of the federal government's concerns and are working to come up with a new plan for consolidating intake work in programs for the needy.

"Again, it would be presumptuous to say that we would or wouldn't qualify for the federal match as we have yet to finalize a . . . plan. USDA has shared their concerns and we are taking them under consideration as we work on building the final centralization plan," he said.

In his letter, Holden said that the state was allowed to take over work now done by counties. But under federal rules only civil servants could have direct contact with applicants for and participants in FoodShare. Contractors can do some other tasks such as data entry and document scanning, he said.

Top state GOP lawmakers already said this week that they had concerns about the proposal by Walker, a fellow Republican, and were looking at other options.

Counties also concerned

Counties have also voiced concerns about the proposal. John Reinemann, who directs the lobbying efforts for the Wisconsin Counties Association, said the loss of federal funds would be a serious cost to the state.

"It's absolutely one more reason not to do it," Reinemann said of the federal objections.

Reinemann said county workers could do a better job of steering food stamp and health coverage applicants toward other services such as county transportation or child protective services. He said he was concerned that a for-profit company might be more focused on its bottom line than on priorities such as helping needy state residents or rooting out fraud.

Reinemann said counties would like to see a model where they formed groups to work together to serve participants more efficiently and save taxpayers money.

Newly elected Dane County Executive and former Democratic lawmaker Joe Parisi said he was concerned the proposal would lead to less personal contact between applicants and staff and end up pushing applicants to seek benefits through the Internet or by telephone.

Other states regret plan

Federal officials pointed to past problems with privatization deals in other states such as Indiana and Texas. In 2009, Indiana Gov. Mitch Daniels' administration dropped IBM's $1.4 billion contract to handle intake for residents of that state seeking health coverage and food assistance.

The state ended up suing the company for allegedly failing to live up to the contract and provide adequate service to sick and needy residents, said Marcus Barlow, a spokesman for the Indiana Family and Social Services Administration. The dispute drags on in court.

Sherrie Tussler, executive director of the Hunger Task Force in Milwaukee, said she saw advantages in having a centralized, state system staffed by public employees for handling FoodShare intake rather than having individual counties do the work. Having the responsibilities split between the state and counties means that it's harder to hold any one agency accountable for how the program is run, Tussler said.

"In state-run programs, the state has a lower administrative cost and a lower error rate," she said.

But Tussler said she also had worries that a private contractor might not provide adequate service to participants.

Tussler said she already had concerns about the use of contractors and the quality of service in Wisconsin's Enrollment Services Center. That center, begun during the administration of Democratic Gov. Jim Doyle, already consolidates intake at a statewide level but only serves childless adults seeking FoodShare or health care benefits.