AMERICA'S massive foster-care system has become so overburdened that it is threatening the welfare of thousands of the children it is supposed to protect. The system is in such disarray that many experts now say in too many cases state custody is as harmful to the children as are the abusive homes from which they were taken.

As a result, child-advocacy groups are increasingly resorting to lawsuits to force the state to be a better parent to abused and neglected kids in its care. Efforts to reform the system from within, they say, have not corrected a pattern of widespread negligence that sometimes results in harrowing cases of physical abuse, or even death. Consider the following children:

Nathan Moncrieff, a state ward since birth, was 13 months old in April 1986 when he was placed with two men. About a month later, the San Francisco boy was dead, bludgeoned by the couple, one of whom had a criminal record that should have disqualified him from foster care.

Charlie Wright was seven years old when he died last year after a beating inflicted by his mother's live-in boyfriend. Charlie had been in foster care three times because of neglect, but in each instance the Children Services Board in Akron, Ohio, shuttled the boy back to his prostitute mother in the interest of reuniting the family. The board cleared itself of blame in an internal investigation, but added that Charlie should have been removed permanently from the family years before.

Two-year-old Henry Gallop died Aug. 11, 1987, of unexplained causes in a Boston foster home. Ninety-eight days later a second foster child, 15-month-old Arron Johnson, was found dead in the same home. The home had a long record of rule violations, and a medical examiner's report later revealed that both children died of poisoning.

Stacey E. was placed in state custody when she was 3 years old after being sexually abused by a family member. Over the next four years, she stayed in five different foster homes, moving in one case because she was again sexually abused. Stacey is 12 now. She is part of a federal lawsuit brought by 15 foster children, charging that Louisiana officials violated their constitutional and legal rights to be free from harm while in state custody.

Joseph Hout, aged 2, was literally shaken to death in January, and his foster parents have been charged with the murder. Neither the city of Philadelphia nor a private placement agency carefully screened the foster father, who had hidden his 1981 conviction for rape and aggravated assault.

Similar tragedies litter the landscape of the entire child-welfare world. They raise two important questions:

Are these just isolated cases in a system that, though overburdened, is otherwise beneficent, as most state officials say?

Or, are they the inevitable consequences of a system so flawed that it is sometimes fatal, as many child advocates argue?

America's child-welfare system, scrutinized as part of the Monitor's six-month investigation of children in state custody, is undeniably being squeezed as never before.

New and pressing problems confront it: a shrinking pool of stay-at-home foster mothers, a 212 percent increase since 1976 of child-abuse reports, more than 1,000 children with AIDS, and a growing number of babies born addicted to cocaine.

Most often, social-service agencies have received no additional resources - and even face reduced funding in some states - to meet these extra responsibilities.

Training for social workers and for foster parents has also suffered, many child-welfare administrators say. At the bare minimum, prospective foster parents in most states go through a screening process, a home inspection, and a criminal background check. But problems persist. Background checks and foster parent training classes are not always as thorough as they need to be, they say.

The result can be worker caseloads that are double and triple the standard caseloads, as in Chicago. Or a 100 percent annual staff turnover, as in New Orleans. Or 300 children a day languishing in an emergency-shelter system that 15 years ago cared for only 40 kids, as in San Francisco.

``Just at the time when foster-care reform was supposed to start, we saw a huge influx of cases in San Francisco and a substantial cut in federal funding under the Reagan administration'' in social service programs, says Margaret Brodkin, director of Coleman Advocates for Children and Youth in San Francisco.

Her message echoes nationwide: ``The need just to find beds for kids has overwhelmed any broad effort at reform.''

But reform is precisely what is required under federal law. In 1980, Congress approved sweeping reforms under the Adoption Assistance and Child Welfare Act. It recognized that too many youngsters were being uprooted from their families only to spend the rest of their childhoods on the foster-care circuit.

Hailed as the most important piece of reform legislation in 30 years, the law rests upon three ``pillars'':

It requires states to make ``reasonable efforts'' to enable children to remain safely at home before resorting to foster care. ``Reasonable efforts'' have been interpreted to mean anything from assigning a social worker to the family to providing an array of counseling, homemaking, and parenting services.

For children who had to be removed from their homes, it requires states to make ``reasonable efforts'' to reunify parents and children.

For each foster child, it requires states to develop a permanent plan ``to achieve placement in the least restrictive [most family-like] setting available.''

The law was needed because some states did not even know how many children they had in care, or where the children were living. Now, to qualify to qualify for federal foster-care funding, a state is required to show compliance with the law and to account for every child in its custody.

DESPITE the confusion that greeted the 1980 reform law, at first it appeared to be working as intended. In 1977, about 500,000 children were in foster care; by 1983, the number had dropped to 263,000. The mean length of stay in foster care was also decreasing, from 47 months in 1977 to 35 months in 1982.

In the last few years, however, the numbers of foster-care children nationwide have been creeping upward, hitting 287,000 in 1987. And with each tragic death of a child, an outraged community wants to know why social-service officials didn't do something to prevent it.

US Rep. George Miller (D) of California, chairman of the House Select Committee on Children, Youth, and Families, thinks it's because the federal government is not holding the states' feet to the fire.

``The system clearly is out of compliance with federal law,'' he says, ``yet the Reagan administration has sent a clear and strong message to the states that it doesn't give a damn about how they comply or don't comply with it.''

The result is that children and families are being hurt, and the federal government is helping to pay for it, Congressman Miller says. ``We are in the situation now where we are underwriting a state system of abuse. Amnesty International ought to take a look at these kids.''

Reagan administration officials, however, say states are showing progress in complying with the reform law. A larger proportion of foster-care children are now being reunited with their families, and a smaller percentage are being placed in restrictive institutions, they note. Further, federal spending for foster care for poor children has increased 83 percent since 1981.

The US Department of Health and Human Services (HHS) now periodically reviews states' case files on foster children. These reviews are intended to assure that each foster child has a case plan, that each child's case is reviewed at least every six months, and that a court has approved each plan within 18 months after a child enters foster care - as required by the reform law. According to the US Children's Bureau, 31 states are complying with these provisions in 90 percent of their cases, and four are not. Another seven states are in compliance with these provisions in 80 percent of their cases, while four others are not.

Although HHS gives the foster care system a relatively clean bill of health in these reviews, it's all too easy to find egregious violations. A week's investigation in Louisiana turned up cases of foster children whose lives attest the difficulties of being a ward of the state.

STACEY E. and her older sister, Stephanie, were placed in state custody for their own protection, but they were not protected.

During a four-year period, the state moved Stacey in and out of five foster homes, at least in part because of her disturbed behavior, and because she was sexually abused again in one of them. At age 7, Stacey went to a group home for sexual-abuse victims in northern Louisiana, regarded as the last stop before institutionalization.

When Stacey first arrived at the group home, she, like other disturbed children, ``acted out severely, and I mean severely,'' says Brenda E., the former group-home operator who adopted Stacey two years ago. The child would, among other things, smear her own feces all over the bathroom, tear wallpaper off the wall, and dig her fingernails into the other girls. She would also refuse to go to bed at night.

``I finally sat her down and told her she wasn't going to leave here - that nothing she could do would make me send her away,'' Brenda recalls. ``And I told her that I loved her and that she was just going to have to learn to love me.''

Today, Stacey and her sister are two of 15 foster children involved in a federal lawsuit against Louisiana.

Brenda says she ``browbeat'' the child-welfare agency in efforts to get services for Stacey, such as visits with her sister in southern Louisiana, therapy, and even the final adoption papers. Now that Stacey is legally their own child, Brenda and her husband, Bobby, want nothing more to do with the state, even though Stacey is eligible for special funds for learning-disabled children.

Stacey is now progressing in her schoolwork, sleeps through the night, and likes to watch ``Grease'' on the VCR.

Brenda is party to the federal lawsuit because she feels Louisiana failed miserably in its responsibility to protect Stacey, and then refused to provide her with therapy to help correct its mistake. She has also seen a lot of disturbed children come through her door, and wonders whether the state itself hasn't caused some of the disturbance.

``All the placements, all the moving, all the people,'' she sighs. ``It's so damaging to these kids.''

THE jury is still out on the effectiveness of litigating foster-care reforms. In addition to Louisiana, civil-rights lawsuits are pending or have been settled in New Mexico, New York, Kentucky, Massachusetts, and many cities and counties across the US.

In other instances, caseworkers are being held individually liable when tragedies occur. In Chicago, for example, two child-welfare workers are facing criminal charges of official misconduct stemming from the unrelated murders of two boys. One child was killed by his mother's live-in boyfriend, and the other was strangled by his mother - but in each instance a caseworker had recently closed the file on grounds the state no longer needed to be involved.

But some child-welfare specialists say the litigation tactic could backfire. ``The trend now - suing social workers and administrators in both their professional and individual capacities - is definitely disturbing,'' says Anna Grace Day, former commissioner of Kentucky's Department of Social Services.

The trend was ``absolutely'' one factor in Ms. Day's decision to resign last December, after a four-year helmsmanship that child-advocacy groups say had stabilized and improved the department. It is unfair to give public agencies responsibility for some of the most vulnerable citizens in the state without giving them the money to do their jobs, she says.

Congressman Miller agrees that children's services are overwhelmed, and says he will request increased federal spending for children next year. But he also wants to make sure that new money is not misused by ineffective bureaucracies, and will tie funding to compliance with the 1980 foster-care reform law.

Others, however, say the child-welfare bureaucracy is so mismanaged that it is pointless to spend any more on it.

``Until the social-service field addresses its gross management problems, extra spending is just like pouring money down a rathole,'' says Ira Schwartz, director of the Center for Youth Policy at the University of Michigan.

``There are still some major public-policy issues - such as preserving the family vs. protecting the child - that should not be left in the hands of the professionals,'' Dr. Schwartz says. ``We as citizens have got to keep children's issues before us and provide some accountability. No more of this waxing and waning, or everything falls into chaos, which is essentially where we are right now.''

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