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Welfare spending: more for less.

Block grants and caseload drops are allowing states to put more money into services that help welfare recipients find jobs

When the federal welfare reforms passed, no one thought about welfare caseloads going down. Policymakers were too worried that they would go up, and states would have to choose between increasing welfare spending or cutting benefit levels.

That hasn't happened. Instead, states find that they have more money to help their poor find work. Welfare rolls have dropped 27 percent nationwide and benefits are holding steady, so there's more money for job training, child care and transportation. All this and states can still reduce total welfare spending and put money in a cash reserve.

Most of this good fortune is traceable to our strong national economy. So states can invest money in services that help recipients become self-sufficient. But there's still a long way to go to develop and fund the new programs needed for the work-based welfare system envisioned in state and federal reforms. Under the new block grant funding, states have that money.

As state legislatures return to welfare policy in the current sessions, many are in the unexpected position of having to take money already appropriated for benefit payments and use it to increase support services for recipients trying to find jobs.

NEW MATH OF STATE SPENDING

The Temporary Aid to Needy Families (TANF) block grants adopted by Congress in 1996 changed the structure of federal financial assistance to states. In the old Aid to Families with Dependent Children program, the federal government reimbursed states for welfare spending by 50 percent to 80 percent, depending on per capita income.
STATE APPROPRIATIONS AND CASELOAD CHANGES FOR THE TANF BLOCK GRANT
FY '98

STATE State State Caseload
 Welfare MOE Change
 Appropriations Level FY 1994 to
 FY 1998 FY 1998 July 1997
 (millions)

Alabama $42.9 82% -44%
Alaska 53.6 82 -11
Arizona 114 90 -31
Arkansas 31.9 115 -26
California 2,915.0 80 -14
Colorado 89.6 81 -49
Connecticut 217.7 89 -13
Delaware 25.9 89 -21
District of Columbia n/a n/a -13
Florida 460.4 93 -39
Georgia 225.6 98 -38
Hawaii 94.0 97 20
Idaho 14.5 79 -66
Illinois 510.1 89 -23
Indiana 113.4 75 -50
Iowa 65.8 80 -33
Kansas 80.2 97 -45
Kentucky 89.8 100 -27
Louisiana 59.1 80 -28
Maine 42.6 85 -30
Maryland 202 86 -30
Massachusetts 364.1 76 -36
Michigan 470.7 75 -36
Minnesota 217.1 91 -19
Mississippi 28.9 100 -45
Missouri 150.0 99 -31
Montana 17.5 84 -39
Nebraska 48.7 126 -17
Nevada 30.2 89 -26
New Hampshire 32.1 75 -37
New Jersey 303.0 75 -24
New Mexico 46.8 94 -23
New York 1,807.0 79 -20
North Carolina 213.8 104 -30
North Dakota 9.7 80 -36
Ohio 417.0 85 -34
Oklahoma 61.2 75 -43
Oregon 100.5 82 -51
Pennsylvania 411.5 76 -30
Rhode Island 68.8 85 -17
South Carolina 54.0 113 -45
South Dakota 11.7 100 -35
Tennessee 104.0 94 -46
Texas 252.3 80 -30
Utah 26.9 80 -36
Vermont 26.7 78 -19
Virginia 136.7 80 -39
Washington 321.3 89 -18
West Virginia 32.9 75 -30
Wisconsin 169.2 75 -56
Wyoming 11.3 79 -70
Puerto Rico 78.4 -23%

Source: NCSL survey by Dana Reichert and Laurie McConnell.


Now, states receive a fixed amount - the block grant. Each state's block grant is based on the federal money it received for AFDC from 1992 to 1995 when caseloads were high. The federal law also includes a maintenance of effort (MOE) requirement. States have to spend at least 80 percent compared with what they spent in the baseline year (or 75 percent if they met the work participation requirements in the federal law). For every dollar the state falls short in its MOE level, the block grant is reduced by $1. States also lose eligibility for their Welfare-to-Work grants. When the TANF block grants were enacted, caseloads had declined from those baseline levels, so most states received more federal money under TANF than they would have under the old system. However, the block grant will not change automatically when a state's assistance spending increases or decreases. This shifts much of the financial risk of welfare programs to the states.

States' early concerns involved spending increases, especially since economic factors outside state control have such a large effect on welfare caseloads and spending. What no one anticipated at the time was the stunning rate at which caseloads would drop. Between January 1994 and July 1997, the number of families on welfare nationwide dropped 27 percent. In five states, the number came down by more than 50 percent, and in seven others, more than 40 percent. This decrease is larger than any in history. It surprised most analysts and put states in a much different financial position than anticipated. The federal block grants go much further than expected. States have fewer welfare families, but their federal grants do not change as long as they spend state money up to their required MOE levels.
THE NEW MATH OF BLOCK GRANTS IN AN ERA OF FALLING CASELOADS

THE OHIO EXAMPLE:

FY 1994 FY 1998 PROJECTION

Caseload: 691,000 recipients Caseload: 481,000 recipients

Total welfare spending Welfare money available - $1.17
 - $1.17 billion billion
State money - $521 million State money - $521 million (at 100
 percent MOE)
Federal money - $652 million Federal block grant - $652 million
 (block grant)

Average cash payment per Projected to stay the same
 recipient - $116/month
 ($1,392/year)

Spending for benefits - Spending for benefits (at same rate
 $962 million as FY 1994) - $670 million

Spending for administration Spending for administration and
 and services - $221 million services (at same rate as FY
 ($320 per recipient) 1994) - $154 million

Total spending - $1.17 Total spending - $824 million
 million

If Ohio's per person cash payments and per person administrative and
service spending remained the same as in FY 1994, the state would
have $349 million left over.

With this money, Ohio could

 * Increase benefit payments by 10 percent ($67 million).

 * Increase administration and service spending by 50 percent ($77
million).

 * Leave 10 percent of the block grant as a reserve fund ($65
million).

 * Transfer $36 million to the child care or social services block
grants.

 * Reduce its MOE level to 80 percent (save $104 million).

Source U.S. Department of Health and Human Services; projections by
NCSL


In FY 1998, states maintained appropriations at least at the level of their required MOE, and most states appropriated more. They have decreased spending below the 1994 level (the 100 percent MOE level), but not by as much as they could without losing federal money. A recent NCSL survey shows that most state appropriations for FY 1998 are below the 100 percent MOE levels. Seven states are at the minimum 75 percent required to get the full federal block grant. Another 13 states are between 75 percent and 80 percent. (States that do not reach the work participation rates have an 80 percent required spending level.) Thirty states are above the 80 percent MOE, including seven that maintained their 100 percent MOE levels or went above them.

What is surprising is not that some states have reduced their spending to the 75 percent and 80 percent maintenance of effort levels, but that so many have continued to spend above those levels despite the large drop in caseloads. Consider what the caseload drop means for state spending and the resources available for helping recipients. A 25 percent decrease in state spending from FY 1994 (the highest reduction in any state) involves a 5 percent to 12.5 percent drop in overall welfare spending (depending on the federal share). This reduction is much less than the nationwide caseload reduction of 27 percent.

Even if every state cut its required spending level to 75 percent, most of them would still have more than a 30 percent increase in resources available per family. That's why it is surprising that only seven of the surveyed states reduced spending to the minimum MOE. And those seven states are the ones that had even larger caseload declines. Indiana, for instance, is spending at the 75 percent MOE level in FY 1998. But caseloads have dropped by 50 percent, which gives them an 82 percent increase in federal and state money per family.

Factoring in the effects of the drop in caseloads and the amounts of block grants shows that every state but Hawaii has appropriated more money per family this year than they did in FY 1994. (Hawaii has experienced a 20 percent jump in caseloads.) Most states have appropriated substantially more. Thirty-five states budgeted at least 30 percent more, including 16 states with more than a 50 percent hike. Three states have more than doubled the money per family, led by Wyoming with a 200 percent increase per family because its cases have gone down 70 percent.

And this calculation understates the amount of money states have for increased services. In the past, states allocated less than 20 percent of their welfare spending to administration and services to recipients, including the JOBS program. Since few states are considering increasing benefit levels and administrative spending is capped at 15 percent, most of the increase per family is available for new and expanded services. Most states can increase benefit levels by 10 percent, increase spending on services for recipients by 50 percent and still have money left over to transfer to child care or social services and to keep part of their federal block grants as reserve funds.

THE CURRENT WELFARE SURPLUS

There is more. Caseloads have dropped so fast that states are not spending the money they appropriated to welfare in FY 1998 budgets. Many have a "welfare surplus." They are paying out less money for cash assistance. Many families have left the welfare rolls, and those still on have more earnings and therefore receive less cash assistance. If states continue their programs unchanged, they will have money left over from their appropriations at the end of the fiscal year. But states in this position have to increase welfare spending or face penalties and loss of block grant funds.

Most of states' current welfare appropriations must be spent on welfare. The federal government's interpretation of two federal laws, the Budget Empowerment Act and the Cash Management Improvement Act, essentially converts the block grant into a matching requirement. These laws do not affect the amount of the block grants or state entitlements to the full block grants. They do limit, however, how states can draw down block grant money and the flexibility states have in attributing spending to federal and state sources. The practical result is that states have to spend their MOE and the equivalent proportion of their block grant during each year to qualify for the full grant. That means they must spend (not just appropriate) either 75 percent or 80 percent of the amount of federal and state money they spent in FY 1994. Reserve funds do not count. That money must be spent for TANF purposes, either in the federal-state TANF program or a separate state program that targets the same group. (For instance, Wyoming has set up a state program that allows some recipients to attend college, which does not count as a work activity. By being enrolled in a state program, these recipients are not counted in the calculation of Wyoming's work participation rate, but spending in that program does count toward Wyoming's MOE.)

The combined effect of the block grants and these federal laws means that states have to spend at either 75 percent or 80 percent (depending on their MOE) of their overall baseline, including both federal and state money. States had planned to spend that much, but most states have had caseload drops of 30 percent and more. For many of them, their current spending does not meet that level. In the coming legislative sessions, resources are available for further investments in new and expanded programs to help recipients, particularly those hard to serve. Many legislators see this as a critical time to strengthen the welfare reforms they have started.

States have four basic options on how to spend state money already appropriated for welfare and the TANF block grant:

* Increase spending in welfare programs. This requires either increased benefit levels or increased support services for TANF clients. Few states are talking about substantial increases in benefit levels, so the focus here will be on increasing services. Depending on state law and practice, some options may require legislative authorization. There are three ways states can spend more in their TANF programs:

1. States can increase job training, child care, transportation and other services by increasing the availability of subsidized services or by increasing the subsidies. For instance, some states are expanding the number of job training slots. Or they could increase the amount of a subsidy, say increasing a child care subsidy to reduce the family's co-payment or allow them to get higher quality care. This strategy may be particularly important as states begin to work with hard-to-serve clients who may need more help to move into the work force.

2. States can expand the types of services available. Some states are trying to enhance training options by, for example, contracting with community colleges to offer training for jobs that pay more than minimum wage and have growth potential. Others are offering new forms of transportation help such as vehicle purchase plans or contracting for "reverse commute" transit routes to get inner city recipients to jobs in the suburban areas. States also are developing new types of assistance, such as substance abuse treatment or housing subsidies. Once again, states beginning to work with hard-to-serve clients may have to find new ways to help them overcome the multiple barriers they face in becoming self-sufficient.

3. States can expand the population eligible for TANE Easing eligibility for cash payments would increase spending for both cash assistance and for services. Some states are considering maintaining their existing cash eligibility, but establishing a new "service eligibility" category. Families whose incomes are above the cash eligibility line, but below the service eligibility line would not receive cash assistance. But they would be eligible for job training, child care, transportation and other services. For instance, New Mexico is considering a policy that will make families eligible for cash and services if their income is less than 37 percent of the federal poverty level (currently $4,920 for a family of three) and eligible for services only if their income falls between 37 percent and 100 percent of the federal threshold (currently between $4,921 and $13,330 for a family of three). This option would counteract one of the criticisms of the current system, where families that have "played by the rules" by working and staying off welfare cannot get the same services available to welfare recipients and ex-recipients.

* Leave some TANF money at the federal level as a reserve for poor economic times. The current structure of the block grants means that once states spend up to their required federal MOE level, they qualify for the entire block grant, even if they do not draw it down for spending in that year. Leaving money at the federal level would not affect the next year's block grant. Leaving part of the block grant as a reserve fund makes a lot of sense for states concerned that a reverse in the current strong economy will produce a large increase in welfare spending at the same time revenues decline. The danger, however, is that the federal government will see that a substantial portion of the block grants is not being spent. It may cut the grants or require that states spend them for other purposes. The history of block grants is one of decreasing amounts and increasing strings, so states need to be concerned about this prospect. And Congress recently started the process of requiring states to take on more spending under TANF by shifting food stamp and Medicaid administrative costs to the states. States may have to walk a fine line between maintaining a reserve account and maintaining their welfare spending at levels that demonstrate the need to continue the current level of funding for block grants.

* Transfer TANF money to other block grants. Up to 10 percent of the TANF block grant can be shifted to social services and up to 30 percent can be shifted to child care development (although the total transfer to both cannot exceed 30 percent). Transfers would have to be spent during the current fiscal year, however, and there are restrictions on how the money can be spent and on supplanting other funds. Unless the programs are already spending above projected levels, it may be difficult to use the money in this way. * Give up some federal TANF and Welfare-to-Work money. States can choose to spend less than the MOE level, but will face severe penalties. States that fall short of their required spending lose money dollar for dollar. If the state falls short of the requirement by $1 million, it loses $1 million in block grant money. Two other penalties also apply. The state loses eligibility for the Welfare-to-Work formula grant. That means that the following year's TANF block grant will be reduced by the amount of any Welfare-to-Work grant paid in the fiscal year that the maintenance of effort requirement was not met. In addition, states must increase state spending to make up any reductions in their TANF block grants, including the dollar-for-dollar reduction in the block grant. If a state fails to make up the reduction, it will lose more of its block grant. The federal law specifically excludes states from making reasonable cause arguments to avoid penalties for failing to meet the MOE level.

States risk these penalties if they do not ensure that welfare spending meets the required level. The critical measure for MOE level is spending, not appropriations. Penalties will be assessed according to how much the state spends on its TANF program in the federal fiscal year. Because caseloads have dropped so much, spending in many states is currently behind the level required. These states risk MOE penalties despite appropriating sufficient money in their budgets. And states that are penalized lose their entitlements. Unlike money left in the federal block grant, states cannot increase spending in future years and get the money back.

States have fundamental decisions to make about welfare spending in this fiscal year. The unexpectedly large caseload drops have put them in a surprising position that allows them to increase support services to welfare families, to expand services to working poor families, to transfer money to other programs and to create a reserve fund for future economic changes - all without increasing state appropriations. But these decisions have to be made quickly or states may be caught in the position of falling short in welfare spending and being penalized and losing part of their block grants.

RELATED ARTICLE: THE DANGER OF SPENDING TOO LITTLE

Failure to meet the maintenance of effort (MOE) requirement in the federal Temporary Assistance to Needy Families law is linked to significant penalties. if states fall short, they face four sanctions:

* The next year's block grant is reduced by the dollar amount that the state failed to meet in its MOE level.

* The state loses its eligibility for the Welfare-to-Work formula grant. It would have to pay back any money it received for Welfare-to-Work during the year it fell short of the MOE out of the next year's TANF block grant. (This penalty was added in the 1997 federal law that established the Welfare-to-Work program.)

* The state must increase its spending the following year to make up the difference. (In effect, the state's MOE level is increased by the amount it fell short the previous year.)

* If the state fails to increase its spending the next year, it faces an additional penalty of up to 2 percent of its TANF grant (which it must repay out of TANF funds in the following year or face still further penalties).

States need to be careful about any decisions that affect MOE levels. Legislators should monitor state spending on TANF because spending, not appropriations, is used to calculate the MOE level. Such monitoring is particularly important in states with large caseload drops, since spending will lag behind appropriations. Many state welfare agencies will be under great pressure to increase spending toward the end of the federal fiscal year, so legislators should be consulting with them now to determine that this money is spent according to legislative priorities.

Legislators should also make sure that state spending is consistent with federal restrictions about what counts as TANF MOE. In general, any state (or local) spending on behalf of TANF eligible families can count as MOE. Spending can be in the form of cash assistance, child care, transportation or such things as housing or employer subsidies. The state defines income eligibility for TANF. Two types of spending that do not count as state MOE are money used as match for the federal Welfare-to-Work grants and spending for child care for families ineligible under TANF.

Federal TANF MOE rules are complicated, and many implications are only being worked out as state practices are questioned. The drop in state welfare caseloads means that many states could fall short of their MOE and incur substantial penalties.

Jack Tweedie is NCSL's expert on state welfare policies. NCSL will soon publish a book on state wellfare reform efforts - Meeting the Challenges of Welfare Reform: Programs with Promise - of which he is the primary author. Call (303) 830-2054 for information.
COPYRIGHT 1998 National Conference of State Legislatures
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1998, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Tweedie, Jack
Publication:State Legislatures
Date:Mar 1, 1998
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