FEDERAL, STATE OFFICIALS SPAR OVER WELFARE SPENDING.

Byline: Robert Pear The New York Times

Federal and state welfare officials have become embroiled in an unforeseen dispute about how much power the states have over the use of their own money to help poor people under the new welfare law.

The question is whether states, in spending their own money, must follow the restrictions that apply to the dollars that they receive from the federal government.

Besides being a major test of federal and state power, the quarrel is likely to have tangible effects on poor people because it may determine who gets what types of assistance.

States are creating their own programs to help people who become ineligible for federal benefits under the federal law. Some states want to use state money to aid families who do not meet the law's stringent work requirements. Others want to help elderly immigrants who will lose federal benefits because they are not citizens.

The dispute, which arose at a meeting of federal and state welfare officials earlier this month, centers on whether state spending would have to meet federal criteria, including those that disqualify certain applicants.

Federal officials say they are considering such an interpretation. States contend that they should be able to spend their own money to help poor people in any way they want.

The new welfare law promised a historic shift of power from Washington to state capitals, giving the states vast new authority to run their own welfare and work programs with lump sums of federal money, and that is occurring. But the dispute shows the struggle states face in exercising that authority, after six decades in which the federal government dominated welfare policy.

Kevin Concannon, the commissioner of human services in Maine, said: ``We have been told by Congress and the administration that the era of big government is over and that states are the laboratories of democracy. But we see continuing evidence that the federal government is trying to micromanage what the states are doing.''

Clinton administration officials deny that they are trying to dictate welfare policy to the states. They say they are struggling to interpret a complex, poorly drafted law that is full of ambiguity. And, they say, they want to be sure that states spend their own money in ways that will move people from welfare to work.

Under the law, each state receives a lump sum of federal money. But to help preserve the social safety net, Congress stipulated that states must also continue spending their own money.

In each of the next six years, states must spend at least 75 percent to 80 percent of what they spent on welfare in 1994. In some cases, if they want to tap a special federal contingency fund for welfare programs, they must spend 100 percent of the 1994 amount. And they are subject to financial penalties if they cut state welfare spending below the levels specified by Congress.

But federal officials say that the state spending must meet certain federal criteria, or else it will not count toward the requirements of the new law. Under one interpretation of the law many of the new restrictions on the use of federal money would be applied to the use of state money as well.

Under the law, state outlays count as ``qualified state expenditures'' only when the money is used for ``eligible families.'' And federal officials say that the federal law defines who is eligible.

Olivia Golden, the top welfare official at the federal Department of Health and Human Services, raised the issue at a meeting with state officials in Phoenix earlier this month. And in the last week, federal officials offered a legal justification for this view, while emphasizing that they had not reached any conclusions.

State officials express outrage and disbelief that the federal government is even considering such an interpretation. While Washington can certainly regulate the use of federal welfare money, they say, it has no business trying to regulate the use of state dollars.

Cornelius Hogan, the secretary of human services in Vermont, who is also president of the American Public Welfare Association, said ``there was a collective gasp'' when Golden suggested that the federal rules might apply to the use of state money to assist needy families.

``It was an eventuality or prospect that none of us had thought about,'' Hogan said. ``To see the use of state dollars defined by federal law is worrisome. States want to use their own money to shape their own destiny.''

Gary Stangler, director of the Missouri Department of Social Services, said: ``This is a horrible idea. When we heard about it, we were aghast. Our reaction was one of stunned chagrin that federal officials would even be talking about this. The whole idea of the new law was for states to have greater flexibility.''

A federal official said that the states' argument, taken to its logical conclusion, would let states ``do whatever they want'' with their own money and get credit for meeting the requirements of the federal welfare law. Another federal official said, ``If the federal and state dollars are mixed together, why shouldn't federal rules apply?''

But Rochelle Chronister, secretary of the Kansas Department of Social and Rehabilitation Services, said: ``I don't think federal officials have any business telling us how to spend state money. They're entirely out of line.''

For example, Chronister said, ``we may want to spend state money on legal immigrants in nursing homes who are Alzheimer's patients and probably incapable of becoming citizens at this point.''