[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
``RAINY DAY'' AND OTHER SPECIAL TANF ISSUES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HUMAN RESOURCES
OF THE
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
APRIL 26, 2001
__________
Serial No. 107-15
__________
Printed for the use of the Committee on Ways and Means
COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia
SAM JOHNSON, Texas RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania XAVIER BECERRA, California
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona LLOYD DOGGETT, Texas
JERRY WELLER, Illinois EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
Allison Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Human Resources
WALLY HERGER, California, Chairman
NANCY L. JOHNSON, Connecticut BENJAMIN L. CARDIN, Maryland
WES WATKINS, Oklahoma FORTNEY PETE STARK, California
SCOTT McINNIS, Colorado SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan LLOYD DOGGETT, Texas
PHIL ENGLISH, Pennsylvania
RON LEWIS, Kentucky
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisory of April 19, 2001, announcing the hearing............... 2
WITNESSES
U.S. General Accounting Office, Paul L. Posner, Managing
Director, Strategic Issues..................................... 7
______
American Public Human Services Association, Elaine M. Ryan....... 18
Holzer, Harry L., Urban Institute, and Georgetown University..... 30
Ohio Department of Job and Family Services, Joel Potts........... 24
``RAINY DAY'' AND OTHER SPECIAL TANF ISSUES
----------
THURSDAY, APRIL 26, 2001
House of Representatives,
Committee on Ways and Means,
Subcommittee on Human Resources,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:02 a.m., in
room B-318 Rayburn House Office Building, Hon. Wally Herger
(Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HUMAN RESOURCES
CONTACT: (202) 225-1025
FOR IMMEDIATE RELEASE
April 19, 2001
No. HR-3
Herger Announces Hearing on
``Rainy Day'' and
Other Special TANF Funds
Congressman Wally Herger (R-CA), Chairman, Subcommittee on Human
Resources of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on ``rainy day'' and other special
funding issues under the Temporary Assistance for Needy Families (TANF)
program. The hearing will take place on Thursday, April 26, 2001, in
room B-318 of the Rayburn House Office Building, beginning at 10:00
a.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include representatives of the U.S. General Accounting
Office and State welfare administrators, as well as other experts on
State welfare funding issues. However, any individual or organization
not scheduled for an oral appearance may submit a written statement for
consideration by the Committee and for inclusion in the printed record
of the hearing.
BACKGROUND:
The Personal Responsibility and Work Opportunity Reconciliation Act
of 1996 (P.L. 104-193), commonly referred to as the 1996 welfare reform
law, made dramatic changes in the Federal-State welfare system designed
to aid low-income American families. The law repealed the former Aid to
Families with Dependent Children program, and with it the individual
entitlement to cash welfare benefits. In its place, the 1996
legislation created a new TANF block grant that provides fixed funding
to States to operate programs designed to achieve several purposes: (1)
provide assistance to needy families, (2) end the dependence of needy
parents on Government benefits by promoting job preparation, work, and
marriage, (3) prevent and reduce the incidence of out-of-wedlock
pregnancies, and (4) encourage the formation and maintenance of two-
parent families. Associated changes included individual time limits and
work requirements intended to reinforce the new focus on work and
independence for families needing assistance.
In addition to the basic TANF block grant, the 1996 law included
several separate funds to assist States with special needs. These
include two programs authorized through the end of Fiscal Year 2001: a
Federal contingency (or ``rainy day'') grant fund and supplemental
grants for fast-growing or relatively poor States. States also may save
any amount of their TANF block grant for future needs, which many
States have done, or borrow from a Federal contingency loan fund.
The Subcommittee hearing will explore ``rainy day'' and other
special funding issues, including changes that might permit or
encourage States to save more for their own future needs. Due to the
fixed TANF block grant and more than 50 percent caseload decline since
the 1996 welfare reform law, many States already have saved a
significant portion of their block grant for such purposes.
In announcing the hearing, Chairman Herger stated: ``Given current
concerns about the economy, it is important for us to examine how the
new law is working to encourage States to save for `rainy days' to
come. Fortunately, given the steep caseload decline, many States have
been able to do so. Our remaining tasks include assessing whether
incentives to save during good times can be improved so every State has
adequate funding for times to come.''
FOCUS OF THE HEARING:
The focus of this hearing is to examine ``rainy day'' and other
special funding issues under the TANF program.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch
diskette in WordPerfect or MS Word format, with their name, address,
and hearing date noted on a label, by the close of business, Thursday,
May 10, 2001, to Allison Giles, Chief of Staff, Committee on Ways and
Means, U.S. House of Representatives, 1102 Longworth House Office
Building, Washington, D.C. 20515. If those filing written statements
wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this
purpose to the Subcommittee on Human Resources office, room B-317
Rayburn House Office Building, by close of business the day before the
hearing.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.
1. All statements and any accompanying exhibits for printing must
be submitted on an IBM compatible 3.5-inch diskette WordPerfect or MS
Word format, typed in single space and may not exceed a total of 10
pages including attachments. Witnesses are advised that the Committee
will rely on electronic submissions for printing the official hearing
record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. A witness appearing at a public hearing, or submitting a
statement for the record of a public hearing, or submitting written
comments in response to a published request for comments by the
Committee, must include on his statement or submission a list of all
clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the
name, company, address, telephone and fax numbers where the witness or
the designated representative may be reached. This supplemental sheet
will not be included in the printed record.
The above restrictions and limitations apply only to material being
submitted for printing. Statements and exhibits or supplementary
material submitted solely for distribution to the Members, the press,
and the public during the course of a public hearing may be submitted
in other forms.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
Chairman Herger. Good morning. Welcome to today's hearing
on ``rainy day'' and other special welfare funding issues.
Today we will hear about several related matters requiring
our attention this year and next, as we consider the future of
the 1996 welfare reforms. Two provisions in the 1996 law will
expire at the end of the current fiscal year: the Federal
contingency grant fund and the supplemental grants to fast
growing or relatively poor States.
These programs are part of today's agenda, but they really
point us toward larger issues and questions: how should our
Nation's cash welfare program be funded as we go forward, and
what signals and incentives should Washington give on spending
or saving TANF funds?
The latter question is one I want to explore in depth
today, so I have encouraged witnesses to do some deep thinking
on ways to encourage States to save more for rainy days.
Fortunately, as we will hear, many are doing just that, aided
by the more than 50 percent national caseload decline and fixed
block grant funding.
What a change this is. Under the former AFDC system,
spending rose in good times and bad. In fact, the very idea of
saving cash welfare funds for rainy day was almost
unimaginable.
Still, there are complications. This Committee fought back
attempts to cut the TANF block grant when others saw welfare
``surpluses'' as inviting targets for budget cuts. We won that
fight, so now both sides have upheld their end of the 1996
deal, when we traded fixed Federal funding for more
responsibility to produce results.
What remains is to find ways to help States save more of
their block grants, while insulating such savings from
Washington budget cutters. That would leave States better able
to assist needy families in the event of tough times, and it
should help protect taxpayers' interests in the long run as
well. So I am eager to hear the testimony of all of our
witnesses on these important issues.
Without objection, each Member will have the opportunity to
submit a written statement and have it included in the record
at this point.
[The opening statement of Chairman Herger follows:]
Statement of Hon. Wally Herger, M.C., California, and Chairman
Subcommittee on Human Resources
Good morning, and welcome to today's hearing on ``rainy day'' and
other special welfare funding issues. Today we will hear about several
related matters requiring our attention this year and next as we
consider the future of the 1996 welfare reforms.
Two provisions in the 1996 law will expire at the end of the
current fiscal year--the Federal contingency grant fund and
supplemental grants to fast-growing or relatively poor states. These
programs are part of today's agenda. But they really point us towards
larger issues and questions:
How should our nation's cash welfare program be funded as
we go forward? and
What signals and incentives should Washington give on
spending or saving TANF funds?
The latter question is one I want to explore in depth today. So I
have encouraged witnesses to do some deep thinking on ways to encourage
States to save more for rainy days. Fortunately, as we will hear, many
are doing just that, aided by the more than 50 percent national
caseload decline and fixed block grant funding. What a change this is.
Under the former AFDC system, spending rose in good times and bad. In
fact, the very idea of saving cash welfare funds for a rainy day was
almost unimaginable.
Still, there are complications. This Committee fought back attempts
to cut the TANF block grant when others saw welfare ``surpluses'' as
inviting targets for budget cuts. We won that fight. So now both sides
have upheld their end of the 1996 deal, when we traded fixed Federal
funding for more responsibility to produce results.
What remains is to find ways to help States save more of their
block grants, while insulating such savings from Washington budget
cutters. That would leave States better able to assist needy families
in the event of tough times, and it should help protect taxpayers'
interests in the long run, too. So I am eager to hear the testimony of
all of our witnesses on these important issues.
Chairman Herger. Mr. Cardin, would you like to make an
opening statement?
Mr. Cardin. Thank you, Mr. Chairman.
I would request that my entire statement, along with a
letter from Governor Perry, the Governor of Texas, be put into
the record.
Chairman Herger. Without objection.
[The information follows:]
Office of the Governor
Austin, Texas
March 16, 2001
Honorable Tommy G. Thompson
U.S. Secretary of Health and Human Services
Department of Health and Human Services
Washington, DC 20201
Dear Secretary Thompson:
I am writing to urge you to extend the Temporary Assistance for
Needy Families (TANF) supplemental grants through fiscal year 2002.
These grants play an important role in helping hardworking men and
women achieve self-sufficiency. They were designed to address the needs
of States with especially high population growth or historically low
welfare benefits, and are critical to enable us to help even more
Texans move from welfare to work.
It is imperative that these grants be extended while we work toward
overall welfare reform reauthorization. I know you have heard from
several Governors on this issue already, and I appreciate your
consideration of this matter.
Please let me know if I can be of any assistance to you.
Sincerely,
Rick Perry
Governor
Mr. Cardin. Let me say first that I thank you for holding
this hearing. I think it is a very important subject that we
need to deal with this year, and I agree pretty much with
everything you have said, on the framework within which we have
to operate.
I, too, share your joy that the commitment we made to the
States has been upheld by Congress, that we have lived up to
what we said we were going to do. We did fight off efforts by
others to violate that commitment. The results, I think, have
been very, very positive.
I am not certain why, when we passed the legislation on the
contingency fund and the supplemental grants, we had an
expiration date in this year when TANF expires next year. It
seems to me that it would be better suited for us to take up
the longer term commitments on supplemental grants and
contingency funds when we take up TANF. They are very much
related.
On the other hand, I do not want to see either of those
programs expire, because if they do, then I think we are
violating the basic understanding we have with the States.
The supplemental grants, for example, would reduce TANF
funds basically for 17 States by about 10 percent. It doesn't
affect my State of Maryland, but it does affect many States in
this country. I asked permission to put Governor Perry's letter
in the record, where he strongly urges us to continue the
supplemental grants because it is very important for the State
of Texas.
In regards to the contingency fund, we all know that the
contingency fund was a major part of the TANF compromises that
were reached, to take into consideration that we may go through
a tough economic time. We haven't since we passed TANF. We
haven't tested the contingency funds, as to how they might be
called upon to be needed.
Several States, most States, have put some money away just
in case. That's exactly what we wanted them to do. They put
some of their TANF money away and some of their own funds away.
I have the figures here for Maryland, my own State, and we have
reserved about $50 million of TANF funds and have dedicated
about $80 million of our own resources in the event the economy
moves into a difficult position. So the States are doing what
we asked them to do.
If you take a look at the total dollars that have been
unencumbered, I think it's about $3 billion, that is available
to the States collectively, and about $9 billion has not been
spent. That's not a large sum of money when you consider that,
since the inception of the program, about $80 billion has been
made available to the States.
So I think the programs have been working, and they have
been working well. I would hope that we would either extend the
supplemental grant and contingency fund for one more year,
until we can get the TANF reauthorization, or we should really
take a look at both of these programs, update for the current
situation, look at some of the trigger mechanisms and determine
whether those trigger mechanisms are appropriate, look at the
appropriate funding levels--which might be difficult for us to
do this year. But if we can't agree on an extension for 1 year,
then I think we will need to do that.
I very much look forward to the witnesses.
[The opening statement of Mr. Cardin follows:]
Opening Statement of Hon. Benjamin L. Cardin, M.C., Maryland
Mr. Chairman, I want to thank you for calling us together today to
consider how the States and the Federal government should respond to
the obvious pressures that a recession would impose on our Nation's
ongoing efforts to reform welfare. I don't think there is any doubt
that the strength of our economy--which has seen the lowest
unemployment levels in three decades--has played a critical role in
helping people leave welfare for work.
Should the recent slowdown in our economy turn into a recession, it
will have an immediate impact on the TANF program. In fact, it has been
projected that welfare caseloads will increase by five to seven percent
for every single percentage point increase in our Nation's unemployment
rate.
Both the States and the Federal government have a role in planning
for this possibility. States should reserve a sensible amount of TANF
funding to meet the challenges of an economic downturn. This of course
does not mean that States should leave vast amounts of TANF funds
untapped when there are current, pressing needs for those resources.
There is currently about $3 billion in unobligated Federal TANF
spending nationwide, and we should have a discussion about whether that
amount is too high, too low, or about right.
Needless to say, any analysis of this issue must recognize the
enormous variation between the States in how much they are reserving in
``rainy day'' funds. I would note that my home State of Maryland has
both a reserve of Federal TANF funds (about $50 million) and a
dedicated reserve fund of State dollars for TANF purposes (about $80
million).
In support of State efforts to plan for the future, the Federal
government can do two things. First, we must stop threatening to take
back Federal money that States are holding in reserve. During past
Congressional debates about the budget, there have been proposals to
raid TANF surplus dollars, which obviously has a chilling effect on
State plans to save money for a possible recession.
And second, recognizing that we need a Federal backstop to help
States encountering economic difficulties, we should extend and improve
the Federal contingency fund. This fund expires in only five months,
meaning we need to move quickly to reauthorize it. We also should
consider making changes to the current contingency fund, such as better
triggers and more realistic maintenance-of-effort requirements, to make
it more accessible to States that need help.
Before I conclude, let me mention one other important issue that
our Subcommittee will consider today--the TANF Supplemental Grants,
which go to States with low Federal funding per poor person and/or
population increases. If our Subcommittee does not extend these grants,
which expire at the end of this fiscal year, 17 States will have their
annual TANF allocations cut by up to 10 percent.
Whether we are talking about helping States meet current needs or
plan for the future, a cut in their TANF funding is clearly a step in
the wrong direction. On this issue, I would like to place in the record
a letter urging the extension of the TANF Supplemental Grants from
Governor Rick Perry, who succeeded President Bush as the Governor of
Texas.
Thank you.
Chairman Herger. Thank you, Mr. Cardin, for your comments.
Before we go on to the testimony this morning, I want to
remind the witnesses to limit their oral statements to 5
minutes. However, without objection, all the written testimony
will be made a part of the permanent record.
Will the witnesses please have a seat at the table.
On today's panel, we will hear from Paul Posner, Director
of Federal Budget Issues at the U.S. General Accounting Office;
Elaine Ryan, Acting Executive Director, American Public Human
Services Association; Joel Potts, TANF Policy Administrator at
the Ohio Department of Job and Family Services; and Harry
Holzer, Professor of Public Policy, Georgetown University, and
Visiting Fellow, The Urban Institute. Mr. Posner, we will now
hear your testimony.
STATEMENT OF PAUL L. POSNER, MANAGING DIRECTOR, STRATEGIC
ISSUES, U.S. GENERAL ACCOUNTING OFFICE
Mr. Posner. Thank you very much, Mr. Chairman. It is a
pleasure to be here today.
I am reporting to you about the study that we have done for
the Subcommittee, revisiting ten States that we had looked at
several years ago, as part of our effort to monitor the
unfolding of the TANF block grant.
This particular testimony, as you indicated, focuses on the
potential challenges posed for this new partnership when we do
have a downturn, the potential cushions available for both
Federal and State governments to deal with the specific
contingency mechanisms that were alluded to, and options to
promote savings for a rainy day.
Fundamentally, the challenge is framed by the shift in
Federal funding from an open-ended to a closed-ended program,
which means that additional costs that might visit us in a time
of recession are no longer available on an open-ended match
from the Federal Government to the States. Once States exhaust
their TANF balances, they are more or less on their own to fund
those additional costs, which is why the Federal government
provided a contingency fund as part of the bargain, if you
will.
Although the extent of the new program's response to a
potential downturn still remains highly uncertain--conjectural,
if you will--most observers and researchers and State officials
agree that a downturn will put pressure on the program.
Against this backdrop, we know that State budgets tend to
be pro-cyclical. What do we mean by that? Unlike the Federal
budget, States have balanced budget requirements, bond markets,
other fiscal limitations, that prompt them to make painful
choices during times of downturn. As people become needier,
States have less money. Simply put, absent a deficit, they can
lower spending, raise taxes, or seek Federal help. Sometimes
these shocks come abruptly in the middle of a State's fiscal
year on biennium.
For States, fiscal planning is the key to smoothing out the
impacts of business cycles, both for their overall budget and
for programs like this that are sensitive to economic shocks.
Rainy day funds dedicated to general budget stabilization funds
are a normal part of State budgeting. Five percent of State
money is generally in those funds, as well as rainy day funds
dedicated to specific programs, with the general idea that you
``fix the roof while the sun is shining.''
The Federal government, too, has an interest, even in an
era of devolution in promoting savings for the future, as you
indicated. That is why we provided the contingency fund, in
fact, to buffer the impact of a cyclical change.
Recognizing that the Federal Government is often viewed as
a funder of last, and sometimes first resort, in the event of a
downturn, encouraging savings now helps smooth out the Federal
obligation as well.
Notwithstanding the contingency and loan fund, ironically
it is not that fund that has been the main source of potential
savings but, rather, the surprising unspent TANF balances that
have come to play the role of an ``accidental'' rainy day fund
for this program. They now total about $9 billion, or almost 15
percent of the grant since its inception.
Let me caution two things about those unspent balances.
There is less here than meets the eye. First of all, these
balances are highly uneven among the States. Ten States have
zero or almost zero balances left. They have drawn down almost
all their funds.
Second, we know there are inconsistent definitions
reporting across States as to what these balances consist of.
HHS has offered a few categories for States to report. Some are
calling them unobligated, some are calling them unliquidated.
The idea is to try to capture how many of those balances are
really pre-committed.
The problem we have, when we go behind that data and look
at the States, there is much uncertainty and confusion about
the nature of these balances. States reporting money as
unobligated, in fact, are reporting things that are, in fact,
committed, like pre-contracts to child care. On the other hand,
States reporting items as unliquidated obligations, in fact,
are reporting spending to counties that are still largely
uncommitted.
So what I have to say here is just like we said 2 years
ago: nobody really knows how much of that $9 billion is really
available as a cushion.
Why does this matter? The lack of clarity of balances puts
them potentially at risk in the budget process, particularly
when spending is constrained and numerous other demands press
for attention. The notion that it is ``the State's money''
might not be enough to protect it for the future in this
competitive environment.
Unspent funds in any budget process create the
presumption--and I would argue a legitimate presumption--that
funds aren't needed. Every program has a burden of showing why
these balances, in fact, are not only part of a bargain struck
by the States, but part of a national reserve to address
contingencies and cyclical pressures.
So we argue that the unique cyclical nature of this program
argues, first of all, for better reporting of the nature of
these balances, particularly how much would States be planning
to set aside for future contingencies. We recommended this in
1998 and we have not seen any progress really along this score.
Secondly, we think that improved planning by the States
themselves is important as well. We noted that States largely
have not dedicated any reserves from their own money, partly
because they can't count those reserves for their maintenance
of effort requirements. Only Maryland really has found a way to
do this. The Federal Contingency and Loan Fund is largely not
available because of the overly stringent requirements.
So what we say in conclusion here is we provide some
options for you to think about, changing the contingency fund,
providing a little more flexibility for States to dedicate
rainy day funds as part of their MOE, and ultimately provide
some better information so that we know going forward what we
really have to buffer the future in a downturn.
Thank you.
[The prepared statement of Mr. Posner follows:]
Statement of Paul L. Posner, Managing Director, Strategic Issues, U.S.
General Accounting Office
Mr. Chairman and Members of the Subcommittee:
Thank you for inviting me here today to discuss states' plans for
operating their welfare programs in the event of an economic downturn.
In the block grant environment, the federal government has an interest
in encouraging states to save for future contingencies, but within a
framework that recognizes that the size of the reserve will remain
largely a state determination made under conditions of inherent
uncertainty. In 1998 we reported on states' plans for financing their
welfare programs in the event that the economy unexpectedly turned
down.\1\ At that time most states' budget forecasts predicted that the
robust economy would continue providing strong revenue growth potential
and, more important for states' Temporary Assistance for Needy Families
(TANF) budgets, diminishing costs in many social services programs.
Last year, this subcommittee asked us to revisit the states examined in
our 1998 report and to, among other things, look anew at their
contingency plans. In part, my statement today includes research we
conducted in 10 states (California, Colorado, Connecticut, Louisiana,
Maryland, Michigan, New York, Oregon, Texas, and Wisconsin).
---------------------------------------------------------------------------
\1\ Welfare Reform: Early Fiscal Effects of the TANF Block Grant
(GAO/AIMD-98-137, August 22, 1998).
---------------------------------------------------------------------------
As we will discuss more fully later in this testimony, the data
available on the levels and adequacy of states' reserves is
insufficient and misleading. Furthermore, our case studies suggest that
most states have done little planning for economic contingencies.
Because states' new welfare programs remain untested in times of
downturn, these uncertainties make it difficult for anyone to predict
how states will respond and how former welfare recipients will be
affected if and when economic conditions change. Despite the
significant changes made to the nation's welfare program, the economy
will no doubt play a role in determining how many people return to the
welfare rolls and how long they, and those currently on the rolls, will
remain if there are fewer job opportunities available.
As economic forecasts have begun to change, there is some concern
that the states might not be as prepared as they could be to manage the
new fiscal challenges under welfare reform. Many adults have left the
rolls for work since TANF was implemented--caseloads have dropped more
than 50 percent nationwide--and those remaining on the rolls have
increased their work efforts. Greater emphases on work implies a
tighter link to work and hence the economy. This could make TANF more
sensitive to an economic downturn than Aid to Families with Dependent
Children (AFDC) if former recipients return to the rolls when they are
laid off, causing state TANF budgets to rise. However, the flexibility
of the grant combined with significant unspent TANF balances may help
mitigate the fiscal fallout from economic downturns.
In today's testimony I plan to address three points:
The shifting fiscal balance between the states and the
federal government and the challenges this new partnership poses in
financing and strengthening the safety net during times of economic
stress.
The potential for states to draw on their TANF grants and
state reserves to cushion fiscal and economic shocks to the program.
The complexity in the design of existing TANF contingency
mechanisms that limits the effectiveness of these mechanisms in
responding to uncertainties in the economy.
Finally, I would like to conclude with some options this
Subcommittee might consider that could lead to refinements in the new
fiscal partnership on welfare, giving the states more incentives to
save while maintaining the federal role in the safety net.
New Fiscal Partnership Poses Challenges
The Personal Responsibility and Work Opportunity Reconciliation Act
of 1996 (P.L. No. 104-193) (PRWORA) made sweeping changes to national
welfare policy. Principally, these reforms gave states the flexibility
to design their own programs and the strategies necessary for achieving
program goals, including how to move welfare recipients into the
workforce. But because the act also changed the way in which federal
funds for welfare programs flow to the states, most of the program's
fiscal risks also shifted to the states. PRWORA created the TANF block
grant, a fixed federal funding stream that replaced the AFDC and
related programs inwhich federal funding matched state spending and
increased automatically with caseload. Under AFDC, which entitled
eligible families to aid, the federal funding was largely open-ended so
that if a state experienced caseload and related cost increases,
federal funds would increase with state funds to cover expenditures for
the entire caseload. This open-ended federal commitment provided that
financing for every dollar spent on these programs was shared by the
federal government and the states, thereby limiting the states'
exposure to escalating costs. In contrast, the TANF block grant
eliminated the federal entitlement to aid. The federal government
provides a fixed amount of funds regardless of any changes in state
spending or the number of people the programs serve. While the states
must also provide a fixed level of funds from their own resources--
their maintenance of effort (MOE) \2\--they are now responsible for
meeting most of the costs associated with any increase in caseload on
their own. How they plan to manage this fiscal risk is what I refer to
in this testimony as contingency planning.
---------------------------------------------------------------------------
\2\ States' MOE requirements are based on their own spending in
federal fiscal year 1994 on AFDC, Job Opportunities and Basic Skills
(JOBS), Emergency Assistance (EA), related administrative costs, and
AFDC/JOBS child care programs: AFDC-Child Care Program, Transitional
Child Care, and At-Risk Child Care programs. A state that does not meet
PRWORA's work participation rates must maintain at least 80 percent of
its MOE. A state that meets its work participation rate must maintain
at least 75 percent of its MOE.
---------------------------------------------------------------------------
In this new welfare partnership, it is tempting to suggest that
since welfare reform devolved decisions regarding eligibility and
program services to the states, the potential volatility of the
caseload is no longer a federal concern. However, in light of both
federal requirements and their own fiscal limitations, states will be
challenged during a downturn to maintain or increase state funds for
benefits when they are most needed. States' decisions regarding who to
serve, for how long, and with what services will surely depend on how
much flexibility they have with the resources--state and federal--that
are available to finance their welfare programs. Although considerable
uncertainties exist about the impacts of downturns, the potential
cyclical nature of program costs as well as the fiscal constraints
states face in responding to hard times heightens the importance of
fiscal planning. Helping states maintain their programs was indeed
recognized as a federal interest by Congress when it included the
Contingency Fund and Loan Fund--mechanisms for states to gain access to
additional federal funds--in TANF.
Impact of Economic Cycles on TANF Caseloads Is Uncertain
It is unclear what impact a major economic downturn or recession
will have on welfare participation given the significant reforms in
national welfare policy. Recent studies have tried to establish a link
between caseload trends and certain macroeconomic indicators in part to
determine how sensitive welfare programs might be to changes in the
economy. While the research literature generally suggests that
caseloads may very well increase in an economic downturn, there is
substantial uncertainty regarding the extent of the impact. These
studies point to the variety of other factors affecting caseload
levels, particularly with the advent of welfare reform.
For example, a 1999 Council of Economic Advisors (CEA) report
suggests that a 1 percent increase in the unemployment rate could
produce a 5 to 7 percent increase in welfare caseloads. However, this
same study noted that changes in family structure and welfare policies
can significantly mitigate the impact of an economic downturn on
caseloads. In fact, the recent caseload drop was at least partly due to
reforms ushered in by TANF--the study suggests that about one-third of
the caseload reduction from 1996 through 1998--independent of the
strong economy.\3\
---------------------------------------------------------------------------
\3\ A recent survey of the research literature on this topic notes
that there is a ``mixed bag'' of evidence regarding policy reform's
influence on caseload size. Some studies found that policy reforms did
not independently cause--or have an influence--on caseload declines.
See Bell, Stephen H. ``Why Are Welfare Caseloads falling?'' Urban
Institute, March 2001.
---------------------------------------------------------------------------
Just as the reforms may have prompted reduced caseloads during
times of economic expansion, greater emphases on work implies a tighter
link to work and hence the economy, making TANF more sensitive to an
economic downturn than AFDC. On the other hand, the reforms may pose
significant disincentives for people to return to the welfare rolls or
to apply even if they are eligible during downturns. For example,
PRWORA imposes a 5-year lifetime limit on federal assistance on
individuals receiving on going assistance; \4\ many may try other
options first before returning to the welfare rolls. In addition, many
states now offer a variety of work supports such as child care,
transportation subsidies, and an earned income tax credit (EITC) to
families not receiving cash assistance. These supports may be enough to
allow earnings from even a part-time job to support a family without
returning to the cash assistance rolls.
---------------------------------------------------------------------------
\4\ In promulgating regulations concerning TANF, the Department of
Health and Human Services (HHS) makes a distinction between TANF- or
MOE-funded activities that are considered assistance and TANF- or MOE-
funded activities that are not considered assistance. The distinction
is important because activities that are considered ``assistance'' are
subject to a variety of spending limitation and requirements--including
work, time limits, child support assignments, and data reporting.
Activities considered to be nonassistance would not have the same
requirements associated with them. Assistance includes benefits
directed at basic needs even when based on participation in a work
experience or community service activity. It also includes childcare,
transportation, and supports for families that are not employed.
---------------------------------------------------------------------------
State Budget Processes Could Have an Impact on TANF Programs
Budgetary stress caused by caseload volatility may be compounded by
the limitations placed on most states by constitutional or statutory
requirements to balance their general fund budgets. During a fiscal
crisis, state policymakers face difficult choices regarding whom to
serve, for how long, and with what services. But more important to the
discussion today is that each of these ``hard choices'' must be
financed in the context of fiscal limitations--including legislative
restrictions, constitutional balanced budget mandates, or conditions
imposed by the bond market--on state's ability to increase spending,
especially in times of fiscal stress. For example, revenues may come in
lower than expected during an economic downturn and a state's enacted
budget can fall into deficit. State balanced budget requirements often
motivate states to both reallocate resources within their budgets and
cut program spending or increase taxes during recessions. Such
difficulties, I am sure, come as no surprise to many of the members of
this Subcommittee who have had to make many of these difficult choices
while serving in state legislative bodies. For these reasons prudent
fiscal planning, especially contingency budgeting for a fiscal ``rainy
day,'' becomes particularly important.
In a fiscal crisis, a state's need to cut spending or increase
revenues can be alleviated if it has accumulated surplus balances in
rainy day funds--these surpluses may be used to cover a given year's
deficit.\5\ However, unless there are reserves specifically earmarked
for low-income families, welfare programs will have to compete with
other state priorities for any of the rainy day funds.
---------------------------------------------------------------------------
\5\ Budgeting for Emergencies: State Practices and Federal
Implications (GAO/AIMD-99-250, September 30, 1999).
---------------------------------------------------------------------------
Reserves Are Key to States' Contingency Plans but States Cite
Disincentives To Save
Finding the right balance between saving and investing resources in
programs that help people make the transition from welfare to work
continues to be one of the main challenges for states as they develop
strategies to address the needs of low-income families. To set aside
reserves for future welfare costs, states have two options: they can
save federal TANF funds and/or they can save their own funds. However,
states noted significant disincentives to save associated with both of
these options. State officials told us that there is concern that
accumulating unspent TANF balances might signal that the funds are not
needed and that they have been under considerable pressure to spend
their TANF balances more quickly to avoid the accumulation of large
unspent balances in the U.S. Treasury. States have accumulated a
portion of their own funds in general purpose rainy day funds, but
welfare would have to compete with other claims for these dollars when
these dollars are released from state treasuries.
Flexibility of TANF Grants Allows States To Build Reserves
Under TANF, the amount of each state's block grant was based on the
amount of federal AFDC funds spent by the state when caseloads and
spending were at historic highs. Because caseloads have fallen so
dramatically, generally states have been able to reap the fiscal
benefits of welfare reform by parlaying abundant federal resources into
new programs and savings. Any federal funds they choose to reserve must
remain at the U.S. Treasury until the states need them for low-income
families.\6\ As of September 30, 2000 states reported leaving $9
billion in unspent TANF funds at the U.S. Treasury; this amounts to
14.5 percent of the total TANF funds awarded since 1996.\7\
---------------------------------------------------------------------------
\6\ HHS regulations stipulate that a state must obligate by
September 30 of the current fiscal year any funds for Expenditures on
Non-Assistance. The state must liquidate these obligations by September
30 of the immediately succeeding federal fiscal year for which the
funds were awarded. Unobligated funds from previous fiscal years may
only be expended on ``assistance'' and the administrative costs related
to providing ``assistance''.
\7\ These data are based on preliminary analysis of state-reported
data. As of April 2001, HHS' Administration for Children and Families
(ACF) has not publicly released this data.
---------------------------------------------------------------------------
Although many might view these balances as a de facto rainy day
fund for future welfare costs, in fact there is probably less here than
meets the eye. First, as we will discuss in more detail, the data
reported by the states is misleading. Second, the reported balances
themselves vary greatly among the states, suggesting that some states
may not be as prepared to address the fiscal effects an economic
downturn may have on their welfare programs without additional federal
assistance while others may have saved substantially more than they
might need. For example, some states report spending all their federal
funds--essentially holding nothing in reserve--while others report
accumulated reserves totaling more than their annual block grants. For
example, Wyoming reports that nearly 70 percent of the TANF funds it
has been awarded since 1997 remain unspent whereas Connecticut reports
spending all of its TANF funds.
Reliable Data on Adequacy of State Reserves Are Not Available
States do not report unspent balances in a consistent manner making
it difficult to ascertain how much of these balances is truly
uncommitted and available for future contingencies. Therefore, federal
policymakers lack reliable information to help assess states' plans for
economic contingencies, whether the levels of available funds are
adequate, and whether all states have access to these funds.
Department of Health and Human Services' (HHS) regulations require
that if a state has allocated a portion of its TANF grant to a rainy
day fund, the state should report these balances as unobligated.\8\
But, state rainy day funds for welfare programs represent only a
portion of the total reported unobligated balances. These balances can
represent funds the state has saved for a rainy day, funds for which
the state has made no spending plans, or funds the state has committed
for activities in future years. For example, in developing a budget for
a new child care program, officials in Wisconsin assumed that once the
program was fully subscribed it would require all available resources--
including any unobligated TANF funds from previous fiscal years. State
officials said that even though at the end of federal fiscal year 2000
the state reported $40 million TANF funds as unobligated, the state has
programmed these funds to pay child care subsidies to low-income
families in future reporting periods. This is a case where a reported
unobligated balance provides very little information about whether
these funds are committed or simply unbudgeted.
---------------------------------------------------------------------------
\8\ HHS regulations require states to report on the status of their
unspent TANF funds. Under HHS regulations the states use two categories
to report on the status of these funds: (1) unobligated balances
represent funds not yet committed for a specific expenditure by a state
and (2) unliquidated obligations represent funds states have committed
but not yet spent.
---------------------------------------------------------------------------
States also report unspent TANF funds as unliquidated obligations,
which means that, to varying degrees, an underlying commitment exists
for the funds either through a contract for services for eligible
clients or to a county for expenses it will incur in operating a
county-administered welfare program. But it is unclear how much of what
is currently obligated is committed for future needs. For example, both
California and Colorado have county-administered welfare systems. These
states pass most of their annual block grant directly to the counties.
As caseloads have continued to decline in both states, the budgets
over-estimated expenditures leaving considerable balances unspent.
Although these funds remain in the U.S. Treasury until a county needs
to spend them, they remain as unliquidated obligations committed to the
counties. California reports that it has over $1.6 billion in
unliquidated TANF obligations. But the state reports no unobligated
balances, implying that all these funds are earmarked. Recently,
California amended its state statute to allow the state to deobligate
some of these funds, if necessary, and make them available to other
counties. Likewise, as of September 30, 2000 Colorado reports about $95
million in unliquidated obligations, but passes virtually all TANF
resources to the counties. As of June 30, 2000 the state estimated that
counties hold about $67 million in reserves--or about 70 percent of the
total unliquidated obligations--for future contingencies.
As highlighted in the above examples, the difference between
unobligated balances and unliquidated obligations is often unclear and
varies by state. Significant portions of California's and Colorado's
unspent funds are not yet actually committed for specific expenditures
but these facts cannot be determined based on the aggregate data, in
part because of the way HHS requires states to report funds. Reporting
a significant share of their unspent balances as unliquidated
obligations implies that there is an underlying commitment on these
funds when, in fact, these funds are no more committed than the funds
Wisconsin must report in its unobligated balances but which are
budgeted for expected outlays in Wisconsin's child care subsidy
program.
Contingency Planning Receives Little Attention as States Cite Few
Incentives to Save
Even though some states might consider their unobligated balances
for TANF to be rainy day funds, it does not appear that the amounts
reserved were based on any kind of contingency planning or analysis.
For example, 5 of the 10 states we studied told us that they consider a
portion of the funds left at the U.S. Treasury to be rainy day funds
for unanticipated program needs. But the levels of the reserves
established in those five states were not determined through a fiscal
planning process that reflects budgetary assumptions about projected
future needs. Instead, these states' statutes merely designate all TANF
funds not already appropriated by the state legislature for other
purposes as constituting the state's welfare rainy day fund, a method
that clearly is not based on anticipated needs or contingencies.
Improved Reporting Requirements Could Improve Federal Oversight and
Provide States With Incentives To Save
The lack of transparency regarding states' plans for their unspent
TANF funds prompted us, in 1998, to recommend that HHS and the states
work together to explore options for enhancing the information
available regarding these balances. Although HHS, the National
Governor's Association (NGA), and the National Conference of State
Legislatures (NCSL) all agreed with us that more information regarding
unspent TANF balances would be useful, little progress has been made
implementing this recommendation and HHS' final regulations, issued on
April 12, 1999 did not address this issue. States were already
concerned that the TANF reporting requirements would pose a substantial
burden on state program administration and argued that adding another
reporting requirement to allow states to signal their intentions for
their unspent balances would only add to those burdens. However, the
lack of useful information on these balances continues to weaken the
effectiveness of congressional oversight over TANF funding issues,
including how well prepared states may be to address a fiscal downturn.
Our 1998 recommendation proposed a strategy that state and federal
officials had tried before and found to be successful. In 1981, a
number of categorical grants were block granted to states to provide
maximum flexibility in developing and managing programs, along the same
lines that TANF was designed in 1996. However, due to variations in the
way states reported information to the federal government on activities
funded by some of these block grants, Congress had no national picture
of the grants' impact. States and some national organizations
recognized that these aggregate data were important and developed their
own strategies to collect the data.\9\ We found that a cooperative data
collection approach was easier to implement when (1) there was federal
funding to support data collection activities, (2) national-level staff
worked with state officials, and (3) state officials helped in systems
design. We continue to believe that better information on the status of
these unspent balances is crucial to effective oversight and could even
enhance states' incentives to save some of their TANF funds. Absent
credible information on balances, there may be a greater risk that
Congress could take action to recoup TANF funds--a prospect that
reportedly has prompted some states to draw down and spend their TANF
funds rather than leave them in the Treasury.
---------------------------------------------------------------------------
\9\ Block Grants: Federal-State Cooperation in Developing National
Data Collection Strategies (GAO/HRD-89-2, November 29, 19998) and Block
Grants: Federal Data Collection Provisions (GAO/HRD-87-59FS, February
24, 1987).
---------------------------------------------------------------------------
States Have Few Incentives To Create State-Funded Welfare Reserves
Although many states have healthy general rainy day funds from
which all programs would compete for funds during times of fiscal
stress, only one of the states in our review, Maryland, has earmarked
state funds in a reserve specifically for contingencies in its welfare
program. Setting aside state funds in reserve for welfare requires
tradeoffs for state decisionmakers among competing needs for the funds
during a downturn. In addition, any funds a state sets aside for future
welfare contingencies cannot count toward a states' maintenance of
effort in the year they are reserved--in order to qualify as MOE, the
funds must be spent. Therefore, it is a very expensive proposition
indeed for a state to budget both for a welfare reserve and to meet its
MOE because it then would have far fewer resources available to finance
other state priorities.
Maryland found a way to transfer the costs of saving state funds to
the federal government. In state fiscal year 2001, the state identified
nine program accounts with annual expenditures of state funds totaling
about $30 million that, under the broad and flexible rules governing
TANF expenditures, could be funded with federal funds. In developing
the budget, the state replaced these state funds with federal funds.
Instead of using the``freed-up'' state funds for nonwelfare activities
the state used them to establish a dedicated reserve for its welfare
program.
Design of Federal Contingency Mechanisms Is Complex and Restrictive
While the ability to carry forward TANF balances is likely viewed
as the principle mechanism by which states can prepare for a rainy day,
PRWORA also created two safety-net mechanisms for states to access
additional federal resources in the event of a recession or other
emergency--the $2 billion Contingency Fund for State Welfare Programs
(Contingency Fund) and the $1.7 billion Federal Loan Fund for State
Welfare Programs (Loan Fund).
The Contingency Fund is authorized through 2001, at which time it
expires. The President's fiscal year 2002 budget proposal did not
include a request to reauthorize the Contingency Fund. Because of a
provision in the Adoption and Safe Families Act of 1997 that reduced
the TANF Contingency Fund by $40 million, the current balance in the
Contingency Fund is $1.96 billion.\10\ States are deemed ``needy'' and
eligible to receive funds from the Contingency Fund if they trigger one
of two criteria: (1) the state's unemployment rate exceeds 6.5 percent
for 3 months and is equal to at least 110 percent of its rate in the
same period of the previous year or (2) its average monthly food stamp
caseload for the most recent 3-month period is equal to at least 110
percent of the average monthly caseload from the same 3-month period in
fiscal year 1994 or 1995. Once eligible, a state must certify that it
has increased its own current spending to prewelfare reform levels
before it can gain access to the fund.
---------------------------------------------------------------------------
\10\ The Adoption and Safe Families Act of 1997 reduced the
contingency fund for state welfare programs by $40 million over four
years (P.L. No. 105-89, Sec. 404, 111 Stat. 2134)
---------------------------------------------------------------------------
Requiring states to increase their own financial stake in their
welfare programs before giving them additional federal funds is, in
principle, a reasonable approach that seeks to balance both the federal
government's interest in ensuring that states in trouble have access to
additional funds and its interest in ensuring that states have done
everything possible to address the shortfalls before turning to the
federal treasury. Not only does the statute require states to bring
their spending up to the prewelfare reform levels at a time when states
are experiencing fiscal stress, but PRWORA establishes a different and
more challenging base for the Contingency Fund's MOE. While a state's
MOE requirement under the basic TANF program can include state funds
expended under certain state programs and child care expenditures, the
MOE requirement for the Contingency Fund does not include these items.
Because states spend a significant share of their MOE funds on
activities that do not qualify as Contingency Fund MOE expenditures,
state budget officials told us that, rather than shifting their
spending priorities to meet the Contingency Fund MOE, they would find
other ways to manage deficits in their TANF budgets before they could
consider turning to the Contingency Fund. In 1997 eight states
qualified for contingency funds.\11\ However, only two states requested
and were awarded contingency funds--North Carolina and New Mexico. In
the end, only New Mexico complied with the Fund's requirements and
accepted $2 million. No state has used the Fund since 1997.
---------------------------------------------------------------------------
\11\ These states are Alaska, California, District of Columbia,
Hawaii, New Mexico, New York, North Carolina, and Washington.
---------------------------------------------------------------------------
Equally important as the requirement that states raise their own
financial commitment in order to gain access to additional federal
funds is a requirement that states share in all additional program
costs--even beyond the MOE requirements. Requiring a match encourages
states to be more cost-conscious than if the costs of an expanding
caseload were covered only with federal dollars. While the Contingency
Fund requires states to match all federal dollars at the states'
federal medical assistance percentage (FMAP) rate \12\ the statute goes
a step further. The statute limits the monthly draws to one-twelfth of
20 percent of a state's annual block grant. This limitation requires a
complex annual reconciliation process to certify that the state meets
its matching requirement but also that it did not receive more than its
monthly proportional share of contingency funds (see figure 1).\13\
Prorating a state's draws from the Contingency Fund--especially if the
state qualifies for a period that spans two federal fiscal years--
reduces the share of federal funds to which it is entitled. This
effectively increases the matching requirement (even higher than
required under AFDC), thus raising the state's costs for gaining access
to the funds.
---------------------------------------------------------------------------
\12\ Under AFDC, state spending was matched at a rate based on each
state's per capita income. This rate, FMAP, is also used for other
federal-state matching programs such as Medicaid. It ranges from 50
percent for wealthy states to 80 percent for poorer states.
\13\ For more information see GAO/AIMD-98-137.
---------------------------------------------------------------------------
Figure 1: The Contingency Fund's Annual Reconciliation Process
As currently structured, the reconciliation process favors states
that are ``needy'' within a single federal fiscal year compared with
those that are ``needy'' in months that overlap consecutive federal
fiscal years. A state that is needy for all 12 months during a federal
fiscal year would have to match all funds drawn at its applicable
fiscal year FMAP rate with no adjustments for the number of months it
was eligible because it was needy throughout the year. However, a state
that is needy for 12 consecutive months that span 2 federal fiscal
years (e.g., 6 months in each year) with an identical FMAP rate will
see its federal match rate reduced by half because of the adjustment
made for number of months the state was needy in each year.
To illustrate, the state that was needy for an entire federal
fiscal year and was eligible for and had drawn $20 million of
contingency funds would be able to retain these funds, provided the
state had spent the necessary matching funds. In contrast, the state
that qualified as needy for the same number of months and was eligible
for the same amount from the contingency Fund but overlapping 2 fiscal
years would initially obtain $10 million in each year, reflecting its 6
months of eligibility in each year, but then the state would have to
remit half of these funds after each year's reconciliation. This latter
reduction is the result of prorating the state's grant by the number of
months it was eligible for contingency funds, even though the state's
initial claim for each year was already based on the number of months
of eligibility. As a result, the second state would be allowed to
retain a total of $5 million of federal funds in that fiscal year, $5
million of federal funds in the next fiscal year--a total of $10
million even though its eligibility over these 2 years was the same as
the state receiving $20 million. In addition, the second state would
have to meet the Contingency Fund MOE in both years.
Unlike the Contingency Fund, the Loan Fund does not have triggers.
Instead, states that have not incurred penalties for improper use of
TANF funds are eligible for loans from the Loan Fund. Such loans are to
have a maturity of no more than 3 years at an interest rate comparable
to the current average market yield on outstanding marketable
obligations of the U.S. Treasury with comparable maturities. Some state
officials told us that they are eligible for better financing terms in
the tax-exempt municipal bond market. More important, officials in some
states indicated that borrowing specifically for social welfare
programs in times of fiscal stress would not receive popular support.
In summary, neither the Contingency Fund--as currently designed--
nor the Loan Fund is likely to be used by states in a fiscal crisis to
obtain more resources for their welfare programs. The Loan Fund is most
likely the wrong mechanism to provide assistance to states in a fiscal
crisis. However, if the Contingency Fund is reauthorized, Congress
could also contemplate improvements to enhance its usefulness in
addressing budgetary shortfalls in states' welfare programs that, at
the same time, could provide stronger incentives for states to save for
a rainy day.
Options To Strengthen Contingency Planning
Although PRWORA struck a new fiscal balance between the federal
government and the states in terms of welfare spending, both the states
and the federal government have a significant interest in preparing the
program to meet challenges in times of fiscal distress. Contingency
planning is about being prepared for the unknown--as the economy shows
possible signs of weakening, we need to begin to think about how
prepared we are to maintain this important aspect of the nation's
safety net. Although many view the states' large unspent TANF balances
as the de facto contingency fund, these balances vary across states;
this implies that some states may be better prepared for a recession
than others. More important, current reporting requirements do not give
us reliable, consistent information regarding states' actual plans for
these monies. According to NGA, few states have engaged in a systematic
fiscal planning process to project their needs under a variety of
economic scenarios. While we don't know how states' welfare programs
will respond to a weakened economy, we know both the federal government
and the states have a responsibility to ensure the viability of TANF in
good times and bad.
Before addressing how contingency planning can be improved for the
future, the federal government needs better information on states'
current plans. At the same time, Congress could consider ways to both
strengthen federal contingency mechanisms and give states greater
incentives to save for the future.
Improved National Reporting
In 1998, we recommended that the Secretary of Health and Human
Services explore with the states various options to enhance information
regarding states' plans for their unused TANF balances. We said that
such information could
include explicit state plans for setting aside TANF-funded
reserves for the future,
provide more transparency regarding these funds and
enhance congressional oversight, and
provide states with an opportunity to more explicitly
consider their long-term fiscal plans for TANF.
Although HHS concurred with our recommendation, to date, we have
seen no progress in this area. We continue to believe that Congress
would benefit from more complete information on states' plans for
future contingencies, including unspent TANF balances. While states
often face burdens with respect to federal financial reporting
requirements, states have historically recognized the benefits of
cooperative data collection and reporting efforts and worked
successfully with federal agencies to collect data that can give
oversight officials a broad, national perspective of how they are using
federal block grant funds. Allowing for more transparency regarding
states' fiscal plans for TANF funds could enhance congressional
oversight over the multi-year timeframe of the grant and provide states
with an opportunity to more explicitly consider their long-term fiscal
plans for the program. While the opportunity to more clearly signal
their intentions for these funds could prompt states to save, Congress
must have some assurance that states' estimates of their contingency
needs were developed using credible, realistic estimating procedures.
In order for a state to report to the federal government a balance
in a rainy day fund, and in order for the federal government to have
some level of confidence in such a figure, the federal government could
give states guidance on how it could designate its TANF balances as a
valid rainy day fund. Such guidance could include requirements that a
state rainy day fund (1) include criteria both for estimating the
appropriate reserve balances and for releasing funds and (2) be
auditable. This guidance could help states signal that much of these
balances are, in fact, committed. Furthermore, requiring that reserves
be determined by credible, transparent estimating procedures would help
provide better estimates of the potential need for federal contingency
funds.
Options To Improve the Federal Contingency Mechanism
The Contingency Fund, as currently designed, has not proven to be
an inviting option to the states that have actually experienced fiscal
stress to date. Should Congress decide to reauthorize the Contingency
Fund, consideration could be given to approaches that could both
improve the usefulness of the fund for hard-pressed states as well as
ensure that states contribute their fair share to future welfare costs.
Such approaches could include (1) eliminating the more restrictive the
Contingency Fund-MOE and substituting the more flexible basic TANF-MOE
and (2) eliminating the Monthly Payment Limitation (MPL) on the amount
of contingency funds to which each state has access. These actions
could help strengthen the role of the Contingency Fund in state
contingency budgeting.
Realigning the MOE and eliminating the MPL would make the
Contingency Fund more accessible and, therefore, more responsive. If
states had better access to federal contingency funds, they might be
more likely to use the money when needed. However, greater
accessibility must be balanced by fiscal responsibility. It is
important to be mindful of this balance so as not to make it too easy
for states to access federal contingency funds because they might be
less likely to save for a rainy day on their own, which could pose
risks to the federal Treasury.
The changes discussed above would still require states to increase
their own spending to pre-TANF levels (i.e., meet a 100 percent MOE) to
gain access to the Contingency Fund--a higher level than they must
maintain for the regular TANF program--as well as provide a matching
share for the additional federal funds. By broadening the fiscal base
that states can draw upon to meet this higher MOE, these changes might
not only make the fund more accessible in times of need but prompt
states to save their own funds in anticipation of accessing the federal
funds.
Options To Increase States' Incentives To Save
There are other options that could strengthen states' incentives to
save. For example, Congress could (1) allow states to count rainy day
funds towards their MOE and (2) allow states to draw down their entire
TANF grant and save these funds in their own treasuries.
Allowing states to count rainy day funds towards their MOE would
give them a greater incentive to save. However, ``maintenance of
effort'' implies an actual expenditure, and is a critical aspect of
PRWORA. If states save their own funds instead of spending them, they
might be more likely to draw down all of their TANF dollars now to
replace the state dollars they save for the future. However, this
outcome can be mitigated by limiting the amount of rainy day funds that
states could count towards their MOE. In addition, as we suggested
earlier when discussing the TANF balances saved by states, states could
also be required to certify that state rainy day funds are in fact
auditable and include criteria for estimating and releasing the funds.
Some state officials have argued that their incentive to save TANF
funds for the future could be bolstered by allowing states to keep
unspent TANF funds in their own accounts rather than at the U.S.
Treasury. They believe that this might reduce incentives for Congress
to rescind unspent balances since the outlays would be recognized
earlier at the time of the grant award, not when the money is actually
spent for a program need. State officials also told us that this would
alleviate the perceived pressure to spend TANF funds rather than save
them. However, it is important to note that, regardless of where these
federal funds are ``stored,'' states are accountable for these funds.
As such, Congress still needs consistent, reliable, and auditable
information on these funds.
There are significant issues associated with this proposal. First,
if states draw down all unspent balances in the current year, the rate
of outlays recorded for the TANF program would shift forward.
Accordingly, the federal budget surplus would be proportionately lower
in the near term. Second, the federal government would incur interest
costs while states could realize interest earnings. The Cash Management
Improvement Act of 1990 (CMIA) helps ensure that neither the states nor
the federal government incur unnecessary interest costs or forgo
interest income in the course of federal grant disbursement by
prohibiting states from drawing down funds until they are needed. If
Congress permitted states, notwithstanding CMIA, to draw down their
TANF balances to establish reserves, it could also require states to
reimburse the U.S. Treasury for any interest they earn on the
drawdowns. This would maintain the spirit of the CMIA by preserving
fiscal neutrality for the federal government and the states, since the
states could use interest earnings they gain on investing the drawdowns
to reimburse the Treasury.
Essentially, states would have to justify why TANF deserves an
exemption from a governmentwide grant policy that settled years of
intergovernmental conflicts between federal and state administrators.
The permanent nature of the appropriation to each state as well as the
significant devolution of responsibilities to states for addressing the
program's fiscal risks may argue for such a change, but other federal
interests would have to be weighed as well. For example, some may argue
that CMIA promotes transparency by ensuring that states' unspent
balances remain in the federal Treasury rather than in state
treasuries. This concern could be addressed through federal reporting
on states' expenditures and reserves.
Contacts and Acknowledgments
In conclusion, the TANF program has established a new fiscal
partnership that has supported the transition to work-based welfare
reforms. Because the partnership has yet to be tested in times of
fiscal stress, now is the time for both federal and state governments
to consider actions to prepare for more uncertain times and the
possibility of higher program costs. Although TANF currently contains
certain mechanisms to provide a fiscal cushion, the options we have
presented provide an opportunity to promote greater assurance that all
states will be poised to respond to future fiscal contingencies
affecting their TANF programs.
Mr. Chairman, this completes my prepared statement. I would be
happy to respond to any questions you or other Members of the
Subcommittee may have at this time.
For future questions regarding this testimony please call Paul L.
Posner at (202) 512-9573. Individuals making key contributions to this
testimony included Thomas M. James, Bill J. Keller, Jacqueline M.
Nowicki, Patricia L. Elston, Gale Harris, Marcus Melton, and Raymond G.
Hendren.
Chairman Herger. Thank you very much, Mr. Posner.
We will now hear from Miss Ryan.
STATEMENT OF ELAINE M. RYAN, ACTING EXECUTIVE DIRECTOR,
AMERICAN PUBLIC HUMAN SERVICES ASSOCIATION
Ms. Ryan. Good morning, Mr. Chairman, and Members of the
Subcommittee.
First, let me begin by expressing the American Public Human
Services Association's (APHSA) sincere thanks for all of your
efforts to keep the deal, to make sure the Federal TANF funds
remained in place, and for your efforts today to try to restore
Social Service Block Grant funding that is very important to
States.
I am Elaine Ryan, the Acting Executive Director of APHSA, a
nonprofit, bipartisan organization representing State and local
human service professionals for more than 70 years. Thank you
for the opportunity to testify.
Given the cycles of the economy, it is appropriate that
today's hearing focuses on TANF financial issues and the hope
that progress can be sustained in the future or in a recession.
Because there is an unfinished agenda of welfare reform--to
provide ongoing supports to working families, to aid those with
multiple barriers to overcome, to strengthen families, and to
reduce future welfare dependency. In periods of economic
downturn, these challenges may intensify. Rising caseloads and
fixed Federal funding may pressure States to reduce critical
investments. That is why APHSA supports measures to increase
State flexibility to create State TANF ``rainy day'' funds and
supports the continuation of the TANF contingency fund.
Shortly after the enactment of welfare reform, many States
felt the need to create reserve funds during periods of
economic downturn. In 1998, APHSA conducted its first survey
and found that 26 States had established some kind of TANF
rainy day fund. Seventeen States set aside Federal funds, 7
States reserved State funds, and 2 used a combination of State
and Federal funds. But by 1999, States had changed their
strategies, and our most recent survey finds that while many
States still have some reserve funds, many also plan to fully
obligate those Federal funds by the end of next fiscal year.
This change in strategy I think may be attributable to
several factors. First, the Federal regulations create
disincentives to reserve funds. Second, reports of the
unobligated fund balances made TANF the target of congressional
cuts in '98 and '99. And although the welfare reform law says
specifically that States may carryover funds fiscal year to
fiscal year, without limitation, the message from Washington
has been ``spend your TANF funds or risk losing them.''
Let me just briefly describe some of the regulatory
barriers that were imposed on States. States are not permitted
to use TANF Federal dollars for rainy day funds. They may
carryover funds from year to year, but the Federal regulations
attach a narrow definition of assistance, which means those
unobligated funds that you referred to can only be used for
cash-like assistance. They can't be used for teenage pregnancy
prevention, they cannot be used for work supports, they cannot
be used for child care.
States may not allow counties to reserve funds for rainy
days. A proposed Federal rule even goes so far as to require
States to spend new State dollars to draw down prior year
funds. These are all disincentives to rainy day funds.
I would also say that rainy day funds, like Maryland's,
where they're funded with 100 percent State dollars that do not
count toward Maryland's State maintenance of effort unless
they're expended. Therefore, APHSA requests that you consider
the following actions: to afford States the flexibility to draw
down TANF dollars to fund these rainy day funds; to afford
States the flexibility to establish county rainy day funds; to
allow States to use unobligated TANF funds for any purpose
under the Act; to maintain Federal funding for child care and
the social services block grant, and do not add any set aside
requirements that will force States to spend rather than
reserve those dollars.
When thinking about a contingency fund, I think it's
important to try to deduce how much of those unobligated
dollars are truly unobligated. The real story of State
spending, is illustrated in the CBO baseline, that shows that
TANF funds are leaving the Treasury at a rate such that outlays
will exceed the authorized level in fiscal year 2002 and
beyond.
TANF caseload data that you may look at, showing a 50-
percent decline, only measures families receiving cash
assistance, and not the families served by every other kind of
TANF program.
Some States may need to access a TANF contingency fund
during periods of economic downturn, and we support its
continuation. However, it needs to be a viable source for
States. The level of funding should be sufficient. The MOE
requirements should be modified to be the same as TANF. And the
unemployment triggers and food stamp triggers ought to be
modified as well.
Finally, I would say that APHSA urges Congress to extend
the TANF supplemental grants to the 17 high-growth, high-
poverty States. Allowing these supplements to expire would not
only result in a significant reduction in block grants, but it
also would impede their ability to transfer funds to other
block grants and it would reduce their high performance bonus
award.
I would like to close by just saying that the example of
one State, Tennessee, typifies an experience that many States
have had--the choice to spend in order to prove the need for
the funds, versus to draw down, to save for a rainy day.
In 1996, prior to the enactment of law, Tennessee engaged a
noted economist to try to forecast caseloads, to try to figure
out how much money they should reserve in the event of an
economic downturn. They established a State fund, and then they
used Federal funds to establish Federal reserves, and then
threatened Federal cuts inspired them to start to spend down
their reserves.
Since last June, Tennessee has experienced a 7 percent
increase in their welfare caseloads, and today they face the
prospect of losing their TANF supplemental grant to States.
It's a double-bind, that States spend or risk losing funds.
Perhaps there could be a better way.
We have outlined a number of recommendations in our
Association report, ``Crossroads: New Directions in Social
Policy,'' and a full range of all the reauthorizations pending
before this Committee, food stamps and others. We look forward
to working with you in the future.
Thank you.
[The prepared statement of Ms. Ryan follows:]
Statement of Elaine M. Ryan, Acting Executive Director, American Public
Human Services Association
Good Morning, Mr. Chairman and members of the Subcommittee. I am
Elaine Ryan, Acting Executive Director of the American Public Human
Services Association, a non-profit bipartisan organization representing
state and local human service professionals for more than 70 years.
Thank you for the opportunity to testify on the subject of ``rainy
day'' funds and other special funding issues under the Temporary
Assistance for Needy Families (TANF) program.
Background
Under the Aid to Families with Dependent Children (AFDC) program,
families were trapped in a pattern of dependency that few believed
could be reversed; states could give families little more than a check
to help them provide for their children and the federal rules
discouraged work. Since the enactment of the Personal Responsibility
and Work Opportunity Reconciliation Act of 1996, states have achieved
noteworthy success in implementing welfare reform. According to the
Administration for Children and Families, the percentage of working
welfare clients reached an all-time high in 1999 and their average
monthly earnings and hours of work continued to rise. The percentage of
Americans living in poverty continued to decline and child poverty
recorded its biggest five-year drop in 30 years. The percentage of the
population on welfare fell to its lowest point since 1965, child
support collections increased dramatically, and states continued to
provide critical TANF-funded supports to millions of families who
exited welfare for the workplace. Teenage pregnancy rates have steadily
declined during this period and some states have begun to achieve
progress in an effort to reduce the number of out-of-wedlock births.
While much has been achieved, states recognize that there are
challenges ahead.
Some have credited welfare reform for the progress that has been
achieved in recent years, while others point to a robust economy as the
reason so much has been achieved in such a short period of time. I
expect the debate will continue without any clear resolution for some
time to come. However, an unknown of perhaps a more pressing nature is
whether progress will continue, and if there is a prolonged economic
downturn, will there be sufficient resources available to states to
meet the needs of the children and families served under TANF?
Creation of State ``Rainy Day'' or ``Contingency'' Funds
Understanding the cycles of the economy, in the years following the
enactment of welfare reform, more than half of the states planned to
establish TANF ``rainy day'' funds to protect against economic downturn
or caseload increases. Based on an APHSA survey conducted in 1998, 26
states had established reserve funds. Fifteen states created the state
contingency funds in statute and eleven did so in budget language.
Seventeen states planned to set aside federal unobligated funds, seven
planned to set aside state funds for contingency purposes, and two
planned a combination of federal and state contingency funds. For
example, Georgia initially established a reserve fund with an up-front
set aside of 2.5 percent of its FY 1997 federal TANF block grant
allotment to be available in periods of future economic downturn.
Maryland created a ``Dedicated Purpose Account'' to reserve unexpended
state TANF MOE funds. And prior to 1996, Tennessee established a
reserve fund using state and later a combination of federal and state
funds to ensure that adequate funding would be available if caseloads
increased. By 1999, states were altering their plans; some created
funds and others eliminated their funds altogether. But the preliminary
findings of our most recent state survey indicate that while some
states still have reserve funds, the majority of respondents plan to
obligate or expend all of their federal TANF funds by the end of FY
2002.
This shift in state plans to fund ``rainy day'' funds may be
attributable to several factors. First, the federal TANF regulations
and other federal regulations created disincentives to reserve funds.
Second, in recent years, concerns have been expressed about the level
of state spending, and misleading reports of ``unobligated'' TANF funds
made the block grant the target of congressional attempts in 1998 and
1999 to cut or rescind unspent TANF funds. Although the welfare reform
law allows states to reserve TANF funds ``without fiscal year
limitation,'' the message sent from Washington to the states has been
spend the TANF funds or risk losing them.
State Spending Under TANF and Regulatory Disincentives to Reserve Funds
Over the past several years, federal agencies have restricted state
flexibility to reserve federal and state funds in order to plan for
periods of economic downturn or caseload increase. The final TANF
regulations, the application of the Cash Management Improvement Act to
the TANF block grant and ACF program instructions have limited states'
ability to draw down, obligate, and expend federal TANF funds. Examples
of restrictions include:
1. In welfare reform, states agreed each year to maintain their
historic level of spending, known as maintenance of effort or MOE, and
in exchange they would receive a fixed level of TANF block grant
funding from the federal government. Since the enactment of the law,
every year, every state has met the maintenance-of-effort requirement.
However, even after a state has satisfied its MOE in a given fiscal
year, any unobligated blockgrant dollars remain in the federal
treasury, conveying the false impression that these funds are unmatched
or unnecessary. And in past years, these unobligated federal TANF funds
have been targeted for cuts or rescissions.
2. States are not permitted to draw down these funds into their
state treasuries in order to fund ``rainy day'' or contingency funds
because these funds are not considered to be obligations under the
federal rules.
3. Exacerbating this situation, the final TANF regulations prohibit
states from spending unobligated federal funds from a prior year on any
purpose other than cash-like ``assistance'' payments. None of the
several billion of TANF carryover funds can be used to fund work
supports, such as child care, education and training or mentoring,
substance abuse treatment and prevention, two parent family
preservation, parenting education, or any other noncash service. Under
this restriction, even if states reserve TANF funds in a contingency
fund, the use of those funds would be severely limited, largely to
ongoing cash assistance. However, in an economic downturn, it is likely
that states would need to increase spending not only on cash but also
on such one-time emergency payments to prevent evictions and
homelessness and to create work experience and training programs.
4. Under welfare reform, the federal government devolved authority
to the states and, in turn, a number of states devolved authority to
counties and local governments. In January 2001, the Administration for
Children and Families issued a Program Instruction to states, (TANF-
ACF-PI-01-02) that would prevent states from permitting counties to
fund ``rainy day'' funds at the county level.
5. And last October, a proposed federal rule relating to the draw
down of TANF funds promised to make it even more difficult for states
to draw down TANF funds and by imposing yet another obstacle to the
funding of a TANF rainy day fund with federal funds. The proposed rule
would require states to spend additional state funds to draw down
unobligated TANF funds from the previous year even though the MOE
requirement has already been met for these dollars. And as previously
stated, those dollars could only be used to fund ``assistance''
benefits.
6. Finally, under federal rules, states may not count the state
expenditures placed in ``rainy day'' funds toward their annual MOE
until these funds are expended. Similarly, local funds reserved for
these purposes cannot be counted toward the state MOE.
Therefore, APHSA asks Congress to consider the following actions:
Afford states the flexibility to draw down TANF dollars to
fund ``rainy day'' or contingency funds after the annual state MOE
requirement has been satisfied and consider these funds as obligated;
Similarly, afford states the flexibility to establish
county ``rainy day'' funds;
Remove the federal ``assistance'' restriction on the use
of unobligated federal funds so that states may use these funds for any
purpose under the TANF act; and
Allow state and local expenditures for state or local
``rainy day'' funds to count toward the states' MOE requirement.
Finally, let me underscore the importance of maintaining federal
funding for related human service block grants such as the Child Care
and Development Fund (CCDF) and the Social Services Block Grant (SSBG).
If these block grants are reduced, states will be unable to reserve
funds for rainy days because funding will be needed to offset federal
cuts. As a related issue, we urge Congress to reject adding ``set-
aside'' language to the TANF block grant that requires states to spend
federal or state dollars for a particular benefit, service, or purpose.
These requirements will limit funds that could be reserved to protect
against periods of caseload increase or recession.
The Real Story of State Spending
After federal welfare reform was enacted, states needed time to
transition from a system of check-writing that existed under AFDC into
a program where time-limited assistance and work were the primary
focus. Time was needed to adopt state legislative changes, redesign
programs, train caseworkers, inform clients, and implement new program
rules. After this initial period of transition, welfare reform was well
underway in the states. As TANF caseloads declined dramatically, some
states may have been slow to obligate their federal block grant funds,
but again, it is important to note that all states met their state
maintenance-of-effort requirements. As TANF funds collected interest in
the federal treasury, state funds financed the early success of welfare
reform.
The ``True'' TANF Caseload
In recent fiscal years, however, the pace of spending under TANF
has changed. While some in Washington have focused on the
``unobligated'' TANF funds, the real story of state spending is
illustrated by the CBO baseline that shows TANF funds are leaving the
treasury at a rate such that outlays will exceed the authorized level
of funding in FY 2002 and beyond. After an initial period of transition
and program planning, many states are investing funds in a wide range
of programs to support self-sufficiency and prevent dependency and
transferring a significant amount of funds to the Child Care and
Development Fund and Social Services Block Grant. For example, from FY
1997 through the first two quarters of FY 2000, 44 states transferred
more than $4.3 billion of TANF funds to CCDF and an additional $3
billion to SSBG.
Perception and Reality
Contrary to what federal caseload data might suggest, the work of
the TANF agency does not end when families exit the cash assistance
caseload. Federal data on the size of the TANF caseload are limited to
the number of families receiving TANF cash assistance. The data do not
report the ``true'' TANF caseload that includes families that receive
TANF-funded child care, employment and training, counseling, programs
for noncustodial parents, teen pregnancy prevention, family support and
other critical services to children and families. Moreover, the TANF
``assistance'' and ``non assistance'' caseloads do not reflect the
thousands of families who receive child care assistance funded with
TANF transfer funds. The amount of unobligated funds and TANF caseload
decline should not give policymakers false hope that all states could
manage their TANF programs in periods of severe economic downturn. The
reported amount of unobligated funds does not accurately reflect the
planned and current state investment of TANF funds. The federal
caseload data do not include the millions of children and families
supported with services such as employment and training, counseling,
substance abuse counseling, family formation, parenting education,
teenage pregnancy prevention, transportation, and child welfare
services. Nor does the caseload include the thousands of children who
receive child care services funded with TANF transfer funds. Some have
suggested that the demand for services, such as child care, will lessen
in an economic downturn. This may not be the case. As long as there is
a requirement that parents are engaged in a meaningful work activity
while on welfare, there will be a need to provide child care for their
children. In periods of severe economic downturn, there may not be
sufficient TANF funds available in some states to meet the need of
rising caseloads and to maintain current investments.
Extend and Restructure the Contingency Fund
The TANF Contingency Fund was created in 1996 to ease the risk
states faced in accepting a fixed amount of block grant funding over a
period of six years. The risks may be as great today as they were then
for somestates. While a strong economy has obviated the need for states
to seek contingency funding, in a period of economic decline the
current TANF Contingency Fund would be of little use to states. While
APHSA supports the continuation of a federal Contingency Fund,
significant changes are needed to ensure that it would be a viable and
sufficient source of funds for states during periods of economic
downturn or recession. First, the level of funding for the fund should
be sufficient to provide support to a number of states that may need to
draw from the fund at the same time. Second, the eligibility
requirements should be revised. Specifically, the MOE requirements for
access to the fund should be the same as the TANF MOE requirement and
the definitions of qualified state expenditures should be aligned as
well. Third, the unemployment and food stamp triggers should be
modified. Considering the current U.S. unemployment rate, states would
be long into an economic recession before meeting the current trigger
of 6.5 percent. And in that instance, given the MOE requirement, few,
if any, states would be eligible.
Extend TANF Supplemental Grants to States
Under the welfare reform law, Congress provided a modest annual
supplement to seventeen rapidly growing states and high poverty to help
them achieve TANF goals. The supplemental grants included in the 1996
law were authorized only through fiscal year 2001, while the law
generally was authorized through fiscal year 2002. Allowing the TANF
supplements to expire this year would not only result in a significant
reduction in block grant funds, but states' ability to transfer funds
would be reduced and their TANF High Performance Bonus would be reduced
as well. APHSA urges Congress to extend these grants.
Closing Comments
In February, APHSA released Crossroads: New Directions in Social
Policy containing recommendations for the reauthorization of the
welfare reform law and other human service programs pending
reauthorization by this Congress. With respect to the TANF block grant,
our members have endorsed maintaining the current TANF baseline plus
inflation for the next six years. We support the extension of the TANF
supplemental grants to states and believe that this funding should be
in addition to the current block grant allocation. We support the
renewal of a TANF contingency fund and are working with our members to
develop new criteria for accessing these funds.
While much has been achieved, there is an unfinished agenda of
welfare reform--one that involves on-going supports to low-income
working families, one that seeks to remove the barriers for clients
with multiple barriers to overcome, and one that seeks to strengthen
families and eliminate welfare dependency for generations to come. In
order for early success in the workplace for TANF families to evolve
into extended periods of job retention and earnings progression,
continued federal and state investments are needed. In future years, a
sustained commitment of on-going TANF work supports, such as
transportation and education and training, may be required. And for
those families who have not made the transition from welfare to work--
those with multiple barriers to overcome--intensive services and
supports will be costly.
In periods of economic downturn, these challenges may intensify and
rising caseloads may pressure states to reduce current investments in
child care or other critical support services. Increased state
flexibility in the drawdown and expenditure of TANF program funds could
afford state and local administrators with the necessary tools to
manage during periods of increasing caseloads. A viable contingency
fund could enable states to continue program investments during period
of severe economic downturn. Above all, the federal commitment to
maintain TANF block grant funding levels and related human service
programs will enable states to their work to improve the future for
millions of low-income children and families in this country.
Thank you for the opportunity to testify. I would be pleased to
respond to any questions you may have.
Chairman Herger. Thank you very much, Miss Ryan.
Mr. Potts.
STATEMENT OF JOEL POTTS, TANF POLICY ADMINISTRATOR, OHIO
DEPARTMENT OF JOB AND FAMILY SERVICES
Mr. Potts. Good morning, Mr. Chairman, and Members of the
Committee. My name is Joel Potts and I am the TANF Policy
Administrator for the State of Ohio, and I, too, would like to
thank you for keeping the commitments.
I think that the Personal Responsibility and Work
Opportunity Reconciliation Act is the best piece of social
policy that has come out of Washington, and I think that it has
made a huge difference, not for States, not for caseworkers,
not for us in government, but for the people that we serve. I
hope that we can continue to work together to continue this
approach.
In Ohio, we have successfully implemented the Personal
Responsibility Act. It has allowed us to move forward with a
fundamental reform to the welfare system. And while that safety
net still remains in place for families and children who cannot
work, the primary focus of welfare reform in Ohio has moved
from a system that was focused previously in providing cash
assistance and cash payments to a system that now is bringing
stability and self-sufficiency to people's lives through the
promotion of work, and we obviously want to continue that.
Today, there are fewer Ohioans receiving public assistance
than at any time since 1967. When our caseloads peaked in the
early nineties, there were 748,000 individuals dependent on the
old AFDC system, at an average cost to the State and Federal
coffers of $82 million a month in Ohio. Today, that number is
210,000 individuals, with an average cost of $27 million per
month. Obviously, this reduction in caseloads provided us with
significant funding that we have been able to shift, along with
the flexibility provided by Congress, and it has resulted in a
model for welfare reform which is highlighted with more
families being served, fewer welfare-dependent families,
increased earnings, decreased poverty for those formerly on the
system, and broad community and business support.
I think we have taken a very responsible approach in Ohio
to implement our welfare reform program and the block grants.
Our strategy has been to provide this tremendous flexibility
and funding for programs and services never before possible,
while still maintaining a responsible cash reserve to protect
against a major downturn in the economy. We didn't really look
to the Federal Government and say, ``Boy, we're just going to
spend it, and in the event our caseloads keep going up or
something changes, we'll just turn back to our congressional
delegation and say Ohio is in trouble.'' We accepted the
challenge of the Act and we think what we're doing in TANF is
the right approach. We wanted to be able to manage that within
our own program.
Our approach has been responsive to meet the needs of the
clients, and I think it has been responsible to the integrity
of the TANF program, and it has been fiscally prudent. For the
first time in Ohio's history, we are spending more welfare
dollars to support work than to support dependency. Our
caseloads continue to decrease and we are able to shift more
and more revenues to families to help them stabilize their
lives and prevent long-term dependency.
At the beginning of the TANF program, we did decide that we
should have some type of contingency reserve in place. We set
aside about 10 percent, or $75 million, a year for the first 4
years in the contingency reserve. That reserve amount is now
around $300 million.
In the event of an economic downturn, we have gone back for
the past 30 years and looked at our worst economic situations.
We looked at the recessions of the late 1970's and the early
1990's and determined we have enough cash reserve that we can
continue to provide public assistance in Ohio for 27 to 45
months, while still continuing to maintain the existing
programs to support work, without having to take away from
those types of approaches.
We have had a tremendous change in the way we're doing
things, and I think one of the frustrations for States is that
we still continue to be measured on arbitrary data, and in some
cases I think the wrong things. In former public assistance
programs, we did not measure success. Frankly, we measured
failure. We looked at what was needed for public assistance
programs by looking at caseloads. The larger your caseloads,
the more money we got.
We measured clients in the same way. When they came to us
and said, ``We need help'', our response was something to the
effect of, ``You know, what you need really isn't important to
us. What's important to us is that you fill out this 35-page
application. We will take that information, we will put it into
our computer system, the system is going to tell us what you're
eligible for, and if what you're eligible for addresses what
you need, then we can provide you service.''
We don't do that any more. In fact, we do a lot more in
prevention and retention programs, to prevent people from ever
becoming dependent on the system than we ever could have
possibly imagined under the old AFDC program. We would like to
continue to do that.
We have been able to make that fundamental shift in
administering our programs. We didn't make the mistake in Ohio
of rushing out and spending the block grant on short-sighted
programs without significantly altering the former programs in
place under AFDC. We have been able to increase services to
support families, help families move out of poverty, train and
prepare individuals for work, and provide support services. In
addition, we have been able to accomplish the successes of
welfare reform in Ohio with an adequate reserve in place to
ensure that funding is available in a manner which can
successfully address unforeseen problems or crises.
I would like to finish by saying that I think what the
Committee is doing is obviously very vital to all the States.
It is where all the conversations are going right now--follow
the money. It's going to dictate what we do for the next
several years. It affects our communities, it affects our
legislatures, and it affects us as administrators.
But I would contend that it's not about the money only.
Welfare reform under the TANF program, I don't think it's about
time limits, I don't think it's about sanctions, I don't think
it's about flexibility. I think it's about all of those things.
The thing that is the common denominator in all of those is
personal responsibility. States need to be held personally
responsible, as do the clients. Part of that personal
responsibility is in being responsible for the funding and in
the flexibility you have provided.
Thank you.
[The prepared statement of Mr. Potts follows:]
Statement of Joel Potts, TANF Policy Administrator, Ohio Department of
Job and Family Services
Good morning, my name is Joel Potts and I am the TANF Policy
Administrator for the Ohio Department of Job and Family Services. I am
here today to discuss TANF funding issues and the unspent reserves in
Ohio.
Ohio's 88 counties and the state have successfully implemented the
Ohio Works First welfare reform program. The unprecedented flexibility
and approach afforded the agency by Congress in the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996 has
allowed Ohio to move forward with fundamental reform in the welfare
system. While a safety net remains to serve children and those who
cannot work, the primary focus of welfare reform in Ohio moved from a
system focused on providing cash payments to a system bringing
stability and self-sufficiency to people's lives through promotion of a
work first/work force philosophy.
Today, there are fewer Ohioans receiving monthly benefits than at
any time since 1967. When our caseloads peaked in March of 1992,
748,717 individuals were receiving cash assistance at an average cost
of $82 million per month. Today, that number is below 210,000 at an
average cost of $27 million per month. The reduction in caseload has
provided the state significant funding to go along with the flexibility
provided by Congress. The result is a model for welfare reform
highlighted with more families being served, fewer welfare dependent
families, increased earnings, decreased poverty for those formerly on
the system and broad community support and involvement.
Ohio's welfare reform program is divided into two major categories.
The first category provides temporary cash assistance to families for a
maximum of three years and is referred to as Ohio Works First. During
their time on assistance, families must sign a self-sufficiency
contract outlining work activities and other obligations recipients
must fulfil as a condition of receiving cash assistance.
On October 1, 2000, Ohio passed a significant milestone in the
implementation of Ohio Works First. That was the first date on which
households faced the risk of cutoffs as a result of utilizing all three
years of eligibility. On October 1, 1997, there were 117,000 families
that potentially faced termination on October 1 of 2000. Of that
117,00, fewer than 4,000 families ultimately utilized all 36 months of
eligibility. The 88 counties deserve tremendous credit for the manner
in which the 36 month limit was implemented and for the care that they
showed in working with these families.
Ohio is reinventing welfare by reinvesting in its communities.
Ohio's counties have been given more flexibility than ever before in
designing and implementing a service delivery system that addressees
the needs of the people they serve.
The second category of our welfare reform program is referred to as
Prevention, Retention and Contingency, or PRC. The PRC program focuses
on providing people with the help they need to stay off of public
assistance and assume personal responsibility. Counties determine what
services to provide and also set eligibility levels. Individuals do not
have to receive cash assistance to qualify for this portion of the
program.
To meet the needs of poor families, counties have made use of the
program in a wide variety of ways to deal with problems unique to their
local communities. For example:
Hamilton County--This metropolitan county contracts with a private
non-profit consortium of providers to work with ``hard to serve''
families. These families are generally recognized as multiple needs
families that have a long-term history of public assistance dependency.
In the past four years, nearly 3,000 families have been served with
only 150 families returning to public assistance.
Appalachian Counties--To address the chronic need to improve
attendance in Appalachian schools, mostAppalachian counties have
implemented head-lice programs. (Head lice is the number one cause for
absenteeism in Appalachia Ohio.) PRC programs have aggressively dealt
with this problem and in many school districts absenteeism has declined
by as much as 50 percent.
Cuyahoga County--The Cleveland area has effectively used their PRC
program to address the needs of families facing welfare cut-offs by
partnering with numerous county organizations and developing programs
to ensure that every family has access to services they desire or need
to succeed. Their time-limit cut-off plan includes providing immediate
employment opportunities for work ready clients, transitional
employment for those that are not necessarily ready to enter the job
market and short term transitional assistance. Additionally, a child
safety review process is in place which provides home visits by
community based agencies, linking families to support services and
assessing the viability of a family's plan for meeting its basic needs.
Montgomery County--Only 6 percent of low income families have a
computer in their home compared to 56% of families earning more than
$50,000 per year. In an effort to provide computers, technology and
training to poor families, Montgomery County has developed a program
that provides inner-city youth with the opportunity to ``earn'' a new
computer by participating in an intense computer training program that
includes education in software and hardware as well as exposing
teenagers to the computer field and possible employment opportunities
after graduation. Students that complete the course and meet all of the
requirements will get to keep the computer they actually build during
the 4 week course. This program has the endorsement of local community
and business leaders and costs the county less than $600 per student.
PRC is now the largest program in the state providing assistance to
poor families in Ohio (excluding Medicaid). Through county departments,
the state anticipates expenditures in the current biennium of nearly
$700 million dollars with nearly half of the money being utilized for
employment, training, work support and diversion. (Please see attached
report on the utilization of the PRC Program in Ohio.) During the Fall
of 2000, the Ohio Legislative Welfare Oversight Council, Co-chaired by
State Representatives Netzley and Boyd, visited with 19 separate
counties to discuss the progress of welfare reform. Without exception,
PRC was highlighted by each county as one of the most significant
programs in addressing the challenges counties face in meeting the
challenges of long-term dependency.
Additional major categories of expenditures include youth education
and support, emergency services, pregnancy prevention, child welfare,
non-custodial parent services and domestic violence counseling.
Furthermore, it should be noted that Ohio has been one of the leading
states in the nation for actively involving the faith-based community
in welfare reform. Counties project expenditures for the current
biennium of nearly $90 million in contracts with faith-based
organizations to provide many of the services mentioned above.
In short, Ohio's welfare reform program is paying off for families
and communities. According to studies commissioned by ODJFS and
mandated by the General Assembly, Ohio Works First's emphasis on
employment, personal responsibility and community support is working.
According to a study produced by Macro International of families
formerly participating in Ohio Works First, we found:
They're working
Two thirds of former recipients report working
A full week
They work an average of 38.4 hours per week
Their earnings are up
They earn, on average, $8.65 per hour or $1,410 per
month
Their kids have health care
Most (83%) indicated their youngest child had health
care coverage
They're not coming back
Most (84%) say they don't intend to return to OWF in the
future.
A cornerstone of welfare reform in Ohio was to make work pay and
we're meeting that goal. A family of three on welfare receives a
maximum benefit of $ 373 per month. A typical former recipient who
works, earns in excess of $1400 per month. In addition, expansions in
health care coverage for working families, child care and PRC help to
assure a family's transition to the workforce have the critical
supports needed to be successful.
The most important point in understanding the federal TANF program
is to realize that TANF is a program and NOT a funding stream. Over the
past few years the Ohio Department of Job and Family Services has
received numerous innovative ideas for use of the TANF funds that,
while worthy of consideration, were not within the federal parameters
for the TANF program.
In order to make use of TANF funds, the federal law outlines the
four goals of the program that must be met in order to be a qualified
expenditure.
1. End dependence of needy families on government benefits by
promoting job preparation, work and marriage.
2. Provide assistance to needy families so children may be cared
for in their own homes or in the homes of relatives.
3. Prevent and reduce the incidence of out-of-wedlock families.
4. Encourage the formation and maintenance of two parent families.
Ohio has taken a responsible approach to welfare reform and the
block grant. Our strategy has been to provide tremendous flexibility
and funding for programs and services never before possible, while
still maintaining a responsible cash reserve to protect against a major
downturn in the economy. Our approach has been responsive to meet the
needs of the clients, responsible to the integrity of the TANF program
and fiscally prudent.
For the first time in Ohio's history we are spending more welfare
dollars to support work than to support dependency. As our caseloads
continue to decrease we are able to shift more revenues to families to
stabilize their lives and prevent long-term dependency.
In Ohio, over the past several months, the primary focus of the
welfare reform debate is the TANF surplus. How much is it, what is
obligated, what's available, how should we spend it and who should
spend it are just a few of the many questions being asked. I wish I
could provide you with an easy answer to all of these questions but
unfortunately understanding the block grant and the surplus is not
simple.
Each year, Ohio receives a $728 million federal TANF grant. To
secure those funds, Ohio spends an additional $400 million in General
Revenue Funds to meet our federally mandated maintenance of effort
(MOE). During the term of the block grant, especially during the first
couple of years of the TANF block grant, Ohio had accumulated a
significant cash reserve.
According to the federal expenditure report filed at the end of the
last federal fiscal year, Ohio's TANF surplusstands at $721 million.
However, that figure does not take into account obligations that have
not yet been charged to that account, nor does it reflect what Ohio has
to spend. The myth that $721 million exists for Ohio to spend continues
to mislead, confuse and threaten the Ohio Works First program.
The Ohio Department of Job and Family Services accounts for TANF in
much the same manner as an individual balances a check book. At any
point in time, the bank may say you have $721 in the account, but if
you've written checks for xx amount and those checks haven't cleared
the process, then you know the bank's statement is not what you
actually have available to spend. The TANF block grant and the State's
surplus are no different. Since TANF dollars can only be drawn down to
the state based on actual expenditures delays the process and thus
balloons what appears to be unspent revenues when in fact, the funds
have been spent but not yet billed.
At the beginning of the TANF program, Ohio has decided to set aside
$75 million annually in a caseload contingency fund to protect against
an economic downturn. With $300 million currently in the contingency
fund, prudent reserves are set aside for the remaining two years of the
grant. Based on historic economic downturns in Ohio, this reserve could
be used up in 27 to 45 months for caseload increases, based on the
severity of the recession. Furthermore, we felt that this was fiscally
responsible based on the fact that we have the lowest caseloads in the
past 34 years in Ohio and one of the best economic conditions since the
end of WWII.
Additional obligations to the unspent TANF reserve include county
incentives for exceeding state and federal mandates. In an effort to
ensure meeting federal requirements, avoid penalties and encourage
creative and innovative approaches to serving poor families, Ohio has
made available $45 million annually for counties that exceed
performance standards. In many instances counties are utilizing these
dollars as their own contingency accounts in the event of local
economic downturns or funding decreases so that they may continue to
operate successful prevention or retention programs. By the end of
Federal Fiscal Year '01, Ohio estimates that $130 million of the
federal reserve will be obligated to counties as incentives but not
drawn down.
Finally, the federal estimate of Ohio's reserve does not reflect
nearly $300 million made available over the past 18 months to address
the 36-month time limit which went into effect on October 1, 2000.
Counties utilized these funds to ensure the safety of children and
families facing termination, provide job mentoring, training, education
and work support. Many of these expenditures have not yet been
submitted to the state and thus have not been drawn down from the
federal reserve.
Obviously, while the appearance in Washington is that Ohio has
substantial reserves, the reality is that we have fully committed all
of the available TANF funds. Clearly, the federal estimate of Ohio's
reserve is overstated. In fact, for the next biennium we anticipate
deficit spending for TANF programs which could result in our
contingency reserve being reduced.
Understanding the unspent TANF reserves is difficult, managing such
reserves is even more challenging. A lot of attention has been paid to
the amount of cash reserves available to states through the TANF
program. Unfortunately, for various reasons, rarely are the stories we
read in the papers or hear about through various sources, accurate.
TANF fundamentally changed the way we look at, manage, measure and
operate public assistance programs. One of the more significant changes
in administering the program through PRWORA was to get away from the
one size fits all approach of a federally run system and move to a
state driven program. Thus, in order to truly and fully understand a
state's welfare reform program, including spending, you must look at
each state on a case by case basis state. However, states continue to
be measured on arbitrary data that does not necessarily reflect the
local programs, standards or outcomes the states are attempting to
achieve.
This lack of understanding has resulted in tremendous pressure from
various sources including the federal government to spend the TANF
funds or risk losing them. This pressure comes at a time when there is
tremendous uncertainty of reauthorization, the definition of
``supplantation'' and the status of the economy. States have become
sitting ducks for federal, state and advocacy leaders to find ways to
spend the money.
Many states, including Ohio, have funded one-time only type
programs without reoccurring expenses. However, we have found that even
with this approach a state establishes a level of demand and
expectation. This is also difficult given the parameters of the TANF
program.
The pressure put on states to spend the money now also puts at risk
some potentially effective long-term programs that could prove to be
highly effective in working with youth to prevent out-of-wedlock births
and to encourage the formation of two parent families. Without a long-
term funding commitment, or the ability to operate an effective long-
term reserve, states and providers are discouraged from attempting
meaningful prevention programs.
Throughout the past few years we have been able to utilize
surpluses to avoid potential crises and address others. Through the use
of the surplus we have been able to shift funds to cover expansions in
day care programs, and operate expanded Summer school programs, thereby
helping students prepare for grade advancement and proficiency testing.
Furthermore, we have been able to administer the PRC program, which has
enabled counties to more thoroughly address the needs of their
communities.
Ohio has made the fundamental shift in administering welfare reform
programs. We did not make the mistake of rushing out and spending the
block grant on short-sighted programs without significantly altering
the programs that were already in place under the old AFDC program. We
have been able to increase services to poor families, help families
move out of poverty, train and prepare individuals for work, and
provide support services. In addition, we have been able to accomplish
the successes of welfare reform with adequate reserves in place to
ensure that funding is available in a manner which can successfully
address unforseen problems or crises.
[The attachment is being retained in the Committee files.]
Chairman Herger. Thank you very much for your testimony,
Mr. Potts.
Mr. Holzer.
STATEMENT OF HARRY J. HOLZER, PROFESSOR OF PUBLIC POLICY,
GEORGETOWN UNIVERSITY, AND VISITING FELLOW, URBAN INSTITUTE
Mr. Holzer. Thank you, Mr. Chairman, and Members of the
Committee.
I would like to argue broadly that there is a need for a
continued Federal role in terms of providing contingency funds
in the event of a downturn, and also that some changes should
be made in what triggers State participation in that fund, and
also in the level of funding.
Very briefly, if a recession occurs, we know that
employment rates could drop very substantially for welfare
recipients. Job availability will certainly decline and the
welfare caseload will rise. Now, of course, the big question is
by how much, and unfortunately, that's very hard to predict. It
depends on the severity of the recession, the duration of the
recession, but also how States respond to it.
I have seen estimates that say, in a mild recession, the
caseload could rise anywhere from 10 to 30 percent, and in a
more serious recession, like the one in the early eighties, it
could be 30 to 40 percent or even higher.
The important thing to remember is that these caseload
increases will not just be for 1 year but could last for
several years. It takes several years to recover from a major
recession. The caseloads actually lag behind recovery in the
economy. So the problem of higher caseloads could be around for
a while.
Several of the other speakers have addressed the adequacy
of the TANF surpluses that have accumulated and the ways in
which those moneys have already been committed. The point I
would like to make is that, in a recession, States will be
under pressure to make a very difficult choice--either between
cutting some of those spending programs they have taken on with
their extra surplus money, for things like child care and other
things with broad political support, or making it more
difficult for women to get back on the TANF rolls.
We know that at least part of the reason that TANF rolls
have declined over the last 5 years is that States have made it
more difficult administratively to get on the rolls. That may
make perfect sense in an economy where there is a lot of jobs.
I think it makes a lot less sense in an economy where a lot of
those jobs have dried up. So I think there is not only a good
argument for States to do more to help welfare recipients get
money, but for the Federal government to help the States out in
this regard, because it is so hard to plan for the size of a
recession.
We recognize that in other cases we don't want the States
to do it on their own. In fact, we have an unemployment
insurance program that recognizes this. Unemployment insurance
is our primary program to protect workers and States in times
of recession, and part of the unemployment insurance program is
an extended benefits program that is automatically triggered by
State insured unemployment rates. I think that provides a
strong parallel to the contingency fund and the need to
maintain something in the event of recessions.
Now, in terms of the specifics of that contingency fund, I
would like to argue that the triggers that were enacted in
1996, which basically were either that the State had to have an
unemployment rate of 6.5 percent, or that they have to have
food stamp caseloads 10 percent higher than their peak levels
in 1994 and '95, I think those triggers really did make a lot
of sense in 1996. Looking back from 1996, most States, in the
recession of the early nineties, would have qualified with that
set of triggers. About 35 States would have qualified just on
the basis of their unemployment rates, and several more would
have qualified on the basis of their food stamp caseloads.
Looking forward, however, now, that is much less likely to
be the case, because food stamp caseloads have declined so
dramatically, and because unemployment rates have also declined
so dramatically. Twenty-five States have had unemployment rates
below 4 percent over the last few years, and ten States have
had them below 3 percent. So in a moderate recession, like the
last one we had, it would be very difficult for most States to
reach those triggers and most States would not be covered.
Similarly, the level of the funding under the contingency
fund, $2 billion, really may be inadequate, even when added to
the amounts of the TANF surpluses, in the event of a serious
recession, in the event of a recession where caseloads really
do rise by very substantial amounts, and stay high over a
period of several years.
At least one possibility to consider is uncapping the
contingency fund and relying on the matching mechanism, to
create incentives for States to economize. I think all of us
agree that there needs to be incentives for the States to
economize and be responsible, but we don't want those
incentives to be too severe to the extent that they would force
States to turn away women who can't find jobs and who really
might be in need.
I would like to close by saying I think there's a strong
argument for incentives for States to do the right thing, but
also for Federal support. We should not only reauthorize the
contingency fund, but we should also make some changes, which I
think would update it and recognize some new realities.
Thank you.
[The prepared statement of Mr. Holzer follows:]
Statement of Harry J. Holzer, Professor of Public Policy, Georgetown
University, and Visiting Fellow, Urban Institute
The Personal Responsibility and Work Opportunity Reconciliation Act
of 1996 created a fixed level of block grant funding to states to pay
for the Temporary Assistance to Needy Families (TANF) program. Since
the size of the block grant itself does not vary in response to
changing economic circumstances (such as a downturn) that might create
greater caseloads, the 1996 legislation also established a contingency
fund of $2 billion to provide states with an additional source of
revenue in case of unforeseen developments.
The contingency fund is currently set to expire in five months, at
the end of FY2001. Should it be reauthorized? Despite the unspent TANF
surpluses that have been accumulated by many states, does there
continue to be a need for an additional federal funding source for TANF
in the event of an economic downturn? If so, what conditions should
trigger the availability of these funds to the states, and how large
should the fund be?
Below I argue that the contingency fund should be reauthorized,
with a somewhat different set of triggers than were established in
1996, and with an uncapped level of funds available to states in need.
The TANF supplemental grants to 17 relatively poor or rapidly growing
states, due to expire this year, should be extended for at least a year
as well.
An Economic Downturn Could Increase TANF Caseloads Substantially
A recession is a nationwide economic contraction that would be felt
in virtually all states, though to varying degrees. A recession could
be relatively mild, in which case the national unemployment rate might
rise by just 2-3 percentage points (as in 1990-92); or it could be more
severe, in which case the increase in the national rate could be 4-5
points (as in 1981-82) or more. During the most recent recession,
unemployment rates rose by a percentage point or less (in annual terms)
in about a third of the states, but they also rose by 4 points or more
in many others.
If a recession occurs, job availability for those seeking
employment will decline, and unemployment will rise among all groups,
especially less-educated workers and those with limited skills or labor
market experience. The increased unemployment would be what economists
often refer to as involuntary unemployment--i.e., unemployment
reflecting economic conditions rather than the choices made by workers
themselves about whether or not they want to work. Particularly,
employment will decline significantly among disadvantaged women, and
the welfare caseloads will rise (Holzer, 2000).
But the sizes of these prospective caseload increases are
uncertain, since we cannot predict the severity of therecession, or how
states will respond (in terms of the ease with which they allow women
to return to the welfare rolls). One recent study by the President's
Council of Economic Advisers predicts that the rolls will rise by 5-7
percentage points for every one-point increase in the national
unemployment rate. This estimate is based on a statistical analysis of
the extent to which a stronger economy is responsible for the caseload
decline of over 50% since 1994. Other estimates suggest that the strong
economy of the late 1990's was an even larger factor in the caseload
decline, and therefore that the rolls could increase by as much as 8-10
percentage points for each percentage-point increase in
unemployment.\1\ Again, the increases will almost certainly be larger
in some states than others. Furthermore, these increases may persist
for several years, since changes in welfare rolls tend to lag behind
changes in the unemployment rate (which themselves can persist for
several years during and after a downturn).
---------------------------------------------------------------------------
\1\ These studies are reviewed and critiqued in Bell (2001).
---------------------------------------------------------------------------
The Need for a Federal Response To Limit the Financial Strains on
States
During recessions, state revenues decline while their expenditures
on social services and support (such as TANF) generally rise. But,
since most states need to balance their budgets annually, these
economic fluctuations can create serious financial strains. Indeed,
many states will face an incentive to limit the extent to which they
allow low-income women (and men) to return to the rolls, and may use
various administrative means of diverting them from doing so. If this
occurs to a large extent, the hardships experienced by low-income women
could be very substantial.
Of course, many states have been accumulating unspent TANF
surpluses since 1996, as their caseloads have declined substantially
while their federal block grants have been fixed (at $16.5B annually).
The most recent numbers available (through the end of FY2000) show
cumulative unobligated surpluses of under $3B nationwide, and
unliquidated obligations of about $5B (Lazere, 2001). As the latter
have been at least nominally obligated to various expenditure
categories, their availability in case of a downturn will be uncertain.
Furthermore, the sizes of the surpluses vary dramatically across
states. For instance, several of the states with the largest caseloads
(such as California, Pennsylvania and Florida) have virtually no
unobligated surpluses and fairly small unliquidated sums (measured as
percentages of TANF grants in any year).
In addition, state spending on related matters, such as child care
assistance, have risen substantially in the past few years. Thus, a
large majority of states spent virtually their entire TANF block grant
in FY2000, and a dozen states even dipped into their surpluses to
finance these activities. In the event of a downturn, states will
likely face unpleasant tradeoffs between continuing these supports for
working families v. reducing them to fund rising caseloads.
In sum, many states would face serious financial strain in the
event of a downturn, and choices between continuing spending on popular
and legitimate work-support activities v. increased spending on a
rising caseload. Though the magnitude of the hardship will depend on
the severity of the recession, its distribution across states, and
their accumulated surpluses, a strong case can certainly be made for
continuing the option of federal assistance to many of these states in
need.
Are the Earlier Triggers for Receiving Aid Still Valid?
According to the 1996 law, states would have to meet several
criteria before they could qualify for contingency funding during a
downturn. For instance, the state's unemployment rate would have to be
at a level of 6.5% or more and at least 10% higher than it was in
either of the previous 2 years. Alternatively, states could qualify
based on increases in their food stamp caseloads, as long as the
caseloads were at least 10% higher than in FY 1994 or 1995 (adjusting
for changes in eligibility enacted as part of the 1996 law). In
addition, states must be spending at least as much on TANF as they were
in FY1994 of their own money (Falk, 2001).
Do these triggers make sense in the current environment? All of
these conditions have become more difficult to meet than they might
have been in 1996, due to either declining unemployment rates or
declining TANF and Food Stamp caseloads nationwide. For instance, the
required 6.5% state unemployment rate was chosen in a year (1996) when
the nation's unemployment rate was 5.4%--which was virtually identical
to the national unemployment rate in 1989, right before the previous
recession occurred. During the 1990-92 recession, over 30 states would
have met the unemployment rate requirements for access to the
contingency fund (Falk, 2001), as they represented average increases of
only 1.2 percentage points above the existing national rate.
However, the nation's unemployment rate has averaged just about 4%
during the past 2-3 years. If a recession of the same magnitude as that
in 1990-92 were to now occur, it is likely that most states would fail
to meet the 6.5% threshold. For instance, during the year 1999, 25
states had annual average unemployment rates below 4%, and 10 states
had rates below 3%. The former group would need to have unemployment
rates increase by well over 50%, and the latter would need increases of
well over 100%, in order to qualify for contingency funding.
Unemployment increases smaller than these would still generate hardship
for these states and for the low-income women seeking employment there,
but the states would not qualify for contingency fund assistance under
those circumstances.
Meeting the food stamp and expenditure-level criteria would be more
difficult than earlier as well. Food stamp caseloads have declined by
roughly 40% since the mid-1990's, vastly more than was expected on the
basis of eligibility changes. While these will no doubt rise again
during the next downturn, it seems highly unlikely that they will
increase by 80% above their current levels (which would be required to
reach 110% of the FY1994 or 1995 caseloads). And, with most states
currently spending 75-80% of what they were spending out of their own
funds in the pre-1996 period, increasing their expenditures back up to
100% (given the reallocations of money to other areas that have
occurred since that time) would be difficult as well for many states.
Under these circumstances, what kinds of changes in the triggers
would be most appropriate? One possibility is to have a lower threshold
level for state unemployment rates--such as 5%--perhaps combined with a
more stringent threshold for increases in the rate (e.g., 20% rather
than 10%). A 5% threshold level would constitute an increase in average
unemployment relative to the recent 4% benchmark of roughly the same
magnitude as a 6.5% threshold constituted relative to the 5.4%
unemployment rate of 1996. However, since a 5% threshold may still be
very difficult for states to meet that currently have unemployment
below 3%, an alternative threshold based only on increases in the state
rate (such as 50%) might be appropriate as well.
Similarly, a threshold for increases in the Food Stamp caseload
that is more stringent than the current required increase, but
calculated relative to the current base rather than the FY1994-95 base,
might make sense as well. For instance, a required increase of 20-30%
over current levels should be large enough to exceed any increases that
might occur for other reasons (such as improved outreach) and would
therefore capture labor market difficulties for unskilled workers that
may not be fully reflected in the overall state unemployment rate.
Finally, a state spending requirement of 75-80% of FY1994 levels (the
same as current ``maintenance of effort'' requirements under TANF)
would be a more realistic reflection of spending levels and obligations
for most states than a return to 100% of the FY1994 levels.
Should the Fund Be Capped at $2B?
In the event of a recession, it is possible that a $2B fund, in
addition to accumulated TANF surpluses and access to the limited TANF
loan fund, might be sufficient to meet state needs. On the other hand,
if the downturn is relatively more severe and lasts for a number of
years, it is also possible that this level of funding will prove
grossly insufficient to meet the extra financial needs of states.
For instance, the $2B funding level constitutes less than one-
eighth of one year's TANF block grant, and wellunder that percentage of
total spending for cash and related assistance at the state level. Yet,
in a recession, caseloads could rise by 10-30% (using the Council of
Economic Advisers' estimates) or by significantly more (according to
other estimates), and could persist for several years. Such increases
could easily swamp the $2B contingency fund and available TANF
surpluses, especially in the large states that have accumulated little
to date in the way of surpluses.
A more sensible approach would probably be to leave the total
amount of the contingency fund uncapped. Given that the funding
mechanism in the current law already requires (and should continue to
require) a match from the states, there are incentives in place for the
states to economize on their use of these funds. An uncapped
contingency fund would ensure sufficient availability to meet the
legitimate needs of states without encouraging wasteful spending on
their part.
Other Concerns Regarding TANF During a Downturn
While an uncapped contingency fund with appropriate trigger
mechanisms would help alleviate the financial difficulties faced by
states during an economic downturn, other concerns would remain,
especially about the well-being of low-income women who would have
difficulty gaining employment at that time.
At least a few of these concerns are as follows (Holzer, 2000):
(1) Many women who have been on TANF may be ineligible for further
funds, if they have reached their five-year lifetime limits; and most
of them will also not qualify for Unemployment Insurance, either
because they have too little work experience or because their reasons
for leaving their previous jobs make them ineligible;
(2) States will have more difficulty meeting their caseload work
requirements under TANF during a recession. Many states have met the
current requirements through caseload reductions rather than work among
current recipients. Both will be harder to achieve when the economy
turns downward.
While resolving these issues lies outside the scope of the current
hearings, they need to be addressed to ensure the existence of a
realistic safety net during a downturn for low-income women. Some
options that we might want to consider to alleviate these potential
problems include:
Reforms in the Unemployment Insurance system to ensure
higher rates of coverage for low-income women with at least some labor
market experience;
Reforms in TANF (perhaps implemented during
reauthorization in 2002) that would temporarily suspend time limits in
states with high unemployment and/or enable states to count a wider
range of education and training activities towards their work
requirements; and
The provision of technical assistance and/or funding to
states that want to implement Community Service Jobs programs to
welfare recipients during a downturn, as a way of meeting work
requirements and providing meaningful work experience to women who will
have more difficulty finding it in the private sector.
Other Funding Issues: Supplemental Grants
Though my testimony today has focused primarily on funds that would
be available to states during a downturn, a separate issue involves the
status of TANF Supplemental Grants to 17 states that are either
relatively poor or rapidly growing. Like the contingency fund, the
supplemental grants are also due to expire this year; and their
expiration would entail cuts in TANF block grants of roughly 10% to
most of the states receiving these funds.
While these issues are discussed in greater detail elsewhere (e.g.,
Primus and Lazere, 2001), the supplemental grants should be extended by
at least one more year, at a cost of roughly $400M, to ensure that
current funding streams remain in effect until TANF reauthorization
that will occur in FY2002.
Conclusion
At this point, it is impossible to know whether or not a recession
is on the immediate horizon, or how severe it will be and how long it
will last, if it actually occurs. Nevertheless, a strong case can be
made for reauthorization of a contingency fund that would provide some
federal assistance to states that face financial burdens from rising
caseloads during that time period. Furthermore, the triggers that would
enable states to access these funds should be updated in light of
developments that have occurred during the past five years; and the
level of funds should be uncapped, to ensure that they are sufficient
to meet the needs of states.
REFERENCES
Bell, Stephen. ``Why Have Welfare Caseloads Fallen?'' Discussion
Paper, Urban Institute, 2001.
Falk, Gene. ``Welfare Reform Financing Issues: Recession Funding.''
Congressional Research Service Report to Congress, 2001.
Holzer, Harry J. ``Unemployment Insurance and Welfare Recipients:
What Happens When the Recession Comes?'' Policy Brief, Assessing the
New Federalism, The Urban Institute, 2000.
Lazere, Ed. ``Unspent TANF Funds at the End of Fiscal Year 2000.''
Center on Budget and Policy Priorities, 2001.
Primus, Wendell and Ed Lazere. ``TANF Supplemental Grants Should be
Extended for Fiscal Year 2002.'' Center on Budget and Policy
Priorities, 2001.
Chairman Herger. Thank you very much, Mr. Holzer.
We will now turn to our panel for questioning. I would like
to remind the members that they each have 5 minutes for witness
questioning.
The gentleman from Oklahoma, Mr. Watkins.
Mr. Watkins. Thank you, Mr. Chairman.
I have a couple of questions, and one for Mr. Potts of
Ohio. Under title XX, I think you can switch up to 10 percent
of TANF funds. Do you shift that amount?
Mr. Potts. Mr. Chairman, Members of the Committee,
absolutely. The title XX monies are even more flexible than
TANF dollars, and the way that our county agencies are set up,
we have a county-administered system and most of our counties
will have a child welfare system and a public assistance system
that will be tied together, so we do try to maximize the
flexibility.
Mr. Watkins. Is that title XX by county, or by the State?
Mr. Potts. Actually, Mr. Chairman and Members of the
Committee, we do both. Some of it will be allocated to the
counties, and at the State level we have what we refer to as
consolidated funding. We try to get away from that kind of
``one size fits all'' approach to providing these services. The
counties--
Mr. Watkins. That's the point I was trying to make. I think
some counties in the poor and economically depressed areas, in
small town and rural depressed areas, are probably not getting
the transfer of that money down to them in the delivery system.
I would like to ask the staff, if it's all right, Mr.
Chairman, to take a look at the transfer of TANF and what title
XX is doing in some areas.
I have a question for Mr. Holzer. You said the trigger for
some of these various funds depends on the economic conditions,
et cetera. You said those triggers are based on State
unemployment. What about the county level of unemployment?
Mr. Holzer. My impression is it's the State level that
determines it, and it is the State insured unemployment rate
which, of course, differs from the State's overall unemployment
rate. Some States have different levels triggering their
amounts, but it is my impression that it's mostly at the State
level.
Mr. Watkins. That's another concern I have, that it has to
be the State figures which triggers it, where out in the small
towns and rural areas it may have been triggered a lot earlier.
I think that's something else we should look into and it may be
something we can correct.
I apologize for the hoarseness in my voice. Thank you, Mr.
Chairman.
Chairman Herger. Thank you, Mr. Watkins.
Mr. Cardin would you like to inquire?
Mr. Cardin. Thank you, Mr. Chairman. I thank all the
witnesses for their testimony.
Mr. Holzer, I was struck by your comparison between what we
should do on TANF and unemployment insurance and the role the
Federal Government plays as somewhat of an equalizer
nationwide.
You know, if we go through a recession, it is going to be
different in different parts of the country. You pointed that
out, that there will be some parts where there's a much higher
impact on their cash assistance needs than other parts of the
country. The unemployment rates will be different around the
Nation.
Mr. Potts, I really applaud what Ohio has done. As you
pointed out, if there's a mild recession, you can still
maintain your basic commitment not only to the cash assistance
caseload increase, but also to the noncash assistance programs.
That's wonderful. That's what you want to do.
But it wouldn't take much of a change in the economy to
increase dramatically the cash assistance rolls, if I
understand the correlation about a one-percent increase in
unemployment relates to somewhere around a five to ten percent
increase in the cash assistance welfare rolls. Again, that's a
rough calculation. So if we see a two percent or three percent
increase in unemployment, you will have a dramatic impact on
cash assistance.
It is true that there should be State accountability. When
you get flexibility, there should be State accountability. I
think you're absolutely correct on that, Mr. Potts, and States
should prepare for changes in economic conditions. But we do
need to have the Federal Government as a partner in trying to
make sure that those areas that are hit the hardest have a
partner in the Federal government, so that they can continue to
provide not just the cash assistance, but also the other
services.
It would be tragic if we lost the other related services
because we had to put so much into the cash assistance rolls.
So I really do appreciate very much your comments and the
challenge to us.
Mr. Holzer, I agree with you. The triggers need to be
revisited. We need to bring it up to where we are currently and
take a look at the dollars, the circumstances. I would be
wondering whether you have any specific recommendations you
would like to make on trigger mechanism changes, either now, if
you would like, or submit it to our Committee. I would
appreciate that.
Mr. Holzer. Briefly, I do have them in my written
testimony.
On the unemployment side, if you want to maintain the logic
of the original triggers, but update them to the new
circumstances, a five percent trigger level for unemployment
would be very comparable, because it would be roughly a one
percentage point increase above the average national
unemployment rate right now. But you might also want to have an
additional mechanism for the States that are starting it at 2.5
or three percent, that will never reach even five percent. You
might want to have any State that has a 50-percent increase, or
a 75-percent increase in their unemployment rate, they might
trigger as well.
Finally, on the food stamp side, I would argue that I might
live with even more stringent increases than the ones in the
current law, maybe 20 to 30 percent rather than 10 percent, but
starting at the current base rather than the base 1994-95. I
think those would be sensible, would maintain the logic of the
earlier triggers, but update them to new circumstances.
Mr. Cardin. Miss Ryan, let me ask you a question.
I understand that nine of the 17 States that receive
supplemental grants are already spending at least at their base
amount and most more than that. So if we were to eliminate the
supplemental funds, I'm curious as to what impact it would have
on the services being provided, at least in those nine States,
if not in all 17 States.
Ms. Ryan. That's exactly right. For example, in Louisiana,
given the way they are planning to transfer funds they estimate
they would have to reduce their child care spending by $5
million if they lost their TANF supplemental grant.
Other States are looking are looking to reduce or to
consider reducing other programs, such as a mentoring program
or ongoing work supports.
I would say that, given the fact that 44 States transfer
funds to child care and SSBG, I think there would be a
significant pressure on those States to actually reduce their
child care investments, or reduce their amount of transfer.
Though those children are not reflected in total caseload data,
they are certainly children who won't be cared for when their
moms go to work or training.
Mr. Cardin. Thank you.
Mr. Posner, very quickly, because my time is evaporating,
you mentioned Maryland as one of the ten States, and you
mentioned they had a combined model. I'm curious as to what
States you felt had good models that we could use as examples.
Mr. Posner. Well, Maryland was the only State that provided
a rainy day fund from their own money. Now, they did it by
shifting funds so that they freed up their own money by
replacing it with TANF money, but as you indicated, Maryland
has a $70 million rainy day fund, with a requirement that it be
reviewed by the legislature and the Governor before it's being
used.
Mr. Cardin. I just wanted to get a plug in for Maryland.
That's fine.
[Laughter.]
Mr. Posner. Glad to do it.
Chairman Herger. Well taken. Thank you very much, Mr.
Cardin.
Mr. Potts, do you have any specific suggestions for us to
encourage more State savings?
Mr. Potts. I have several, I guess. I think the main thing
that would really benefit those of us who are trying to
administer public assistance programs would be some type of
direction from Congress. The only thing our State legislatures
and our Governors are hearing is ``spend the money or lose
it''.
We have tried to put together a very responsible program.
Our Governor is very supportive. We have term limits that have
taken effect in Ohio. Forty-seven of our 99 House Members are
brandnew this year. They don't remember double-digit inflation
in Medicaid. They don't remember caseloads that actually went
up instead of going down. They don't remember the promises of
five years ago.
When the constant, consistent message from Washington is,
``You're sitting on substantial reserves and you ought to be
spending those'', I think it's a real challenge for us. So some
type of indication of what your wishes are for those. And it
doesn't even have to be ``we think you ought to keep a
reserve'', as much as if we would just get word from Washington
that, if a State chooses to do a reserve, we think that that's
allowable, or that that's something that we recognize as being
important. It has put States in a rather awkward situation as
we go through our budget debates, and especially in Ohio with
term limits, it has had a huge impact on us.
The other thing that really has States sitting out there
nervous is the entire definition of what you refer to as
``supplantation'', something that didn't exist when we first
started developing our programs. I think the sooner we can all
decide what exactly we mean by that, the better we can respond
to your wishes and the better we can administer these programs.
So I think the two major pieces--and I think both of those
don't require a law change as much as they do that partnering
you referred to and just a working back and forth.
Chairman Herger. Good. Thank you very much, Mr. Potts.
Hopefully we're beginning to do that.
Mr. Lewis of Kentucky will inquire.
Mr. Lewis. Thank you, Mr. Chairman.
Mr. Potts, you mentioned a program in some of your counties
in Ohio that were designed to cure head lice. How did that come
to your attention and what has been the results of those
programs?
Mr. Potts. Mr. Chairman and Members of the Committee, this
is actually probably one of the biggest surprises, but I think
one of the stories that I like to talk about quite often, of
how different welfare reform is now from before.
We require each of our 88 counties to have a public forum
before we hand over some of the flexibility in the TANF program
to them. They go to the communities and say what's available,
what can we do. We've got these types of funds that will now be
available to provide service to poor families.
At one of those meetings, a juvenile justice judge stood up
and said, ``Well, if you want to start dealing with problems in
the juvenile justice system, don't look to me. You really ought
to be looking to the schools, because I'm telling you right
now, the kids who are consistently absent from schools will be
the ones in my system within the next few years.''
So they started looking at the schools and asked if that
was an accurate statement, and the superintendents in the room
agreed. They sat down and worked on how they could address some
attendance problems.
They found the number one problem of attendance in
Appalachian schools in the State of Ohio was head lice. A child
that contracts head lice in their school districts at the
beginning of the school year can expect to miss 35 to 40 days
in the year. Once a child is identified by the school system as
having contracted head lice, they are sent home automatically.
They are given a note that says you have to go out and buy
these expensive shampoos, and you need to take care of that
problem before the child is allowed to come back in.
Even if they do the shampoos, it is very similar to--If you
have ever had a dog with fleas, you give it a bath, you see the
dead fleas, you feel pretty good about it, and 2 days later the
dog is scratching again. Head lice are no different. Not only
does the child have it, but generally so do the parents, so do
the siblings, so do the pets. So it's a constant recurring
problem.
The counties were able to take some of their TANF dollars
for poor families, and when they contracted head lice, they
actually send a nurse to the home. They will actually show and,
in some cases, bathe the children, show them how to rid the
head lice. They will give them vouchers for dry cleaners to get
the bed clothes cleaned. They will bring in carpet cleaners or
a carpet cleaning company, to clean the carpets and do those
types of things. As I said in the written testimony, in some
cases we've had school districts who reduced absenteeism by
about 50 percent in the first year of that program.
You know, I've been asked what exactly does that have to do
with welfare reform. We know that children who are consistently
absent from school are mostly likely to be held back. We know
those who are held back are the most likely to be dropouts. We
know dropouts are the most likely to be teen parents. We know
that over half of the teen parents wind up on welfare at some
point in their life, and we also know that 80 percent of the
people in the child welfare system, the children, their parents
either recently were or are on public assistance.
We thought head lice had everything to do with welfare
reform in Ohio. I thought the real advantage of that program
was that it was created not because we figured it out in
Columbus or here in Washington. This program came about because
we told the community what are the problems you're facing. I
thought it was a very unique and, frankly, very inexpensive way
to address a very serious problem in those areas.
Mr. Lewis. I agree. It is a very innovative way of dealing
with the problem. Other States could do similar things.
Can you project savings like with this particular program,
or other programs that you've been able to put in motion?
Mr. Potts. Mr. Chairman and Members of the Committee,
probably the biggest challenge, and from all the States I'm
talking to, is how do you measure whether or not a prevention
program really prevented somebody from coming on.
There are some programs that are probably the right thing
to do--and we have a difficult time trying to figure out how
would that fit within the TANF parameters--but how do you
really know, and do you know in a short term or a long term.
One of the greatest challenges when we talk about
preventing the incidence of out-of-wedlock births, it is
something we take very seriously, it's something we want to do
a lot of work with, but it is going to be a long time before we
can successfully determine the effectiveness of our programs.
People aren't going to stop doing things just because we say
so. We have tried to manipulate caseloads historically by
changing the parameters and that hasn't been real successful. I
think we really need to change our approach, and it has been a
real challenge.
I think one measurement in the long run will be the number
of community partners that are involved. We do a lot with
faith-based organizations in the State. In fact, about $90
million this biennium is going through faith-based contracts.
The more we can get the local communities, the churches and the
families involved, the better we will be long term. But we
don't have a real good way of measuring that.
Mr. Lewis. One last question.
Prior to welfare reform, would this have been possible to
do?
Mr. Potts. Mr. Chairman, Members of the Committee, no. No,
there wasn't any flexible funding. Our money was all going into
caseloads, so we were looking at ways to reduce the immediate
caseload. And when you talk about prevention programs,
especially a long-term prevention program, there weren't any
funds that would allow us to do that.
Mr. Lewis. Thank you.
Chairman Herger. Thank you very much, Mr. Lewis.
The gentleman from Texas, Mr. Doggett.
Mr. Doggett. Thank you, Mr. Chairman.
It was troubling that President Bush did not include in his
budget the continuation of the supplemental TANF funds. I am
pleased that Senator Bob Graham of Florida, joined by Senator
Hutchinson from Texas, have amended, as all of you probably
know, the budget resolution over in the Senate, to add it back
in for this next year, and hopefully the conferees on the
budget resolution will follow the Senate version of the bill.
Mr. Cardin has already entered into the record the
statement of the current Governor of Texas, Rick Perry. I think
there is a feeling among the people that I talk to in my home
State that we would really jeopardize funding particularly for
child care or child protective services, with reference to
abused children, if we don't have the TANF supplemental grants
restored for next year.
I believe, in response to Mr. Cardin's question, Miss Ryan
that you have already spoken to this. Mr. Holzer, could you
elaborate as to what will happen in other States if the
Congress does not act promptly this year to continue the
supplemental funding?
Mr. Holzer. As was indicated earlier, the supplemental
funds constitute about 10 percent of the overall funds going to
those 17 States on average. Now, a 10 percent cut, even at the
current caseload level, would again put States in this bind,
either having to make it more difficult for people to enter the
welfare caseloads and with cash assistance, or to cut from
other areas, other kinds of expenditures, child care and the
like, which are both politically popular and have bipartisan
support, and also are probably reasonably cost-effective in
what they do, so the States would face those difficult trade-
offs, even in the absence of any kind of economic downturn.
Mr. Doggett. I guess, if there is continued trouble with
the economy and the former welfare agencies, acting now more as
employment agencies, experience a greater number of people
returning to the rolls who are unemployed, that there will be
further pressure to cut into child care and other work
supports, correct?
Mr. Holzer. That's correct, absent these other contingency
funds and other funds that might be available to cushion those
increases.
Mr. Doggett. It seems to me that perhaps the best short-
term solution is to have Congress continue the supplemental
TANF funds for another year, and then, as a part of the overall
revision of TANF, make adjustments in the formula to take care
of this problem over the longer term, rather than having these
two separate programs.
Do you have thoughts about how, Mr. Posner, we should
address this on the long term, in contrast with the short-term
need?
Mr. Posner. I think that's a very good distinction, because
the formula really, essentially, grandfathered in the old
distribution, which promoted quite large disparities among
States, as you know. In terms of per-grant, per-child, it goes
from about $700 on average in those 17 to about $1,700 in some
of the other States that have traditionally been more willing
and able to spend higher amounts of money. So, by freezing in
the old distribution, we kind of perpetuated the disparities in
the program and the supplemental grants were a small
downpayment on trying to kind of edge our way toward a little
more uniform allocation.
I think putting that formula on the radar screen for
reauthorization is something I know is not easy to do for the
Congress, but it is something that probably is the right way to
approach that issue.
Mr. Doggett. Has any study begun of how that formula might
be altered in order to resolve this matter?
Mr. Posner. We have not done anything on that yet. We have
been doing some work on the Medicaid formula, which has similar
issues, where you really want to focus more on per person and
need indicators and total taxable resources among States and
figure out a way to kind of figure in needs, fiscal capacity,
and relative costs among States.
We need to develop a formula that--you know, here we have
inherited this formula over 60 or 70 years, and it served us
well possibly in the early stages of the program, but it is
time to reexamine it.
Mr. Doggett. Thank you.
Miss Ryan.
Ms. Ryan. May I just add to that by saying one thing that I
think does need to be looked at in reauthorization, is that, a
year after welfare reform was passed, the TANF supplemental
grant formula was applied and determined only 17 States would
ever get this supplement, notwithstanding any other changes in
poverty or population or anything else. So one thing to look at
is whether or not there should be a periodic review of the
initial eligibility of States, rather than just freezing that
in for six years.
In our Association, and in our bipartisan recommendations,
we are concerned about potential formula fights. We don't want
to see that occur. We think there is a reason to make
adjustments, but future supplements should be funded above the
current TANF baseline amount.
Thank you.
Chairman Herger. Thank you very much, Mr. Doggett.
Mr. Doggett. Thank you, Mr. Chairman.
Chairman Herger. Mr. Holzer, is it true that several of the
States receiving supplemental grants, including Mississippi,
Montana, Louisiana and Idaho, have some of the largest
unobligated TANF balances, and in all, 14 of the 17 States
receiving supplemental grants have unspent TANF balances?
Mr. Holzer. To be honest, I haven't looked carefully at
those numbers. It sounds like that might be true.
But on the other hand, remember that California and Florida
are two of the States receiving supplemental funds--and not all
States are equal in terms of caseload. We know that the eight
largest States account for over 60 percent of the overall TANF
caseload, and some of the largest States like California have
no unobligated balances and relatively small unliquidated
balances. So I think the experience there is a real mix across
different States. But some of the largest ones have more
serious fiscal situations than the States you indicated.
Chairman Herger. Thank you very much.
The gentleman from Pennsylvania, Mr. English, may inquire.
Mr. English. Thank you, Mr. Chairman.
Mr. Posner, in looking over your testimony, I notice you
also explore some options that might increase the States'
incentives to save. Specifically, you throw out the idea that
Congress could either allow States to count rainy day funds
toward their maintenance of effort, or that they could allow
States to draw down their entire TANF grant and save these
funds in their own treasuries.
I wonder if you could explore those two options and give us
a sense of the potential fiscal impact and the pros and cons.
Mr. Posner. Right. Those are important issues.
On the rainy day funds, we saw that some States felt they
did not have the incentives to save from their own funds
because they couldn't count it as part of the maintenance of
effort. The idea that could be explored is permitting States to
do that with some safeguards, because there are some potential
downsides. You don't want States to draw down their entire TANF
funds, replace their State funds, and put it aside for a future
purpose, for example.
Mr. English. On that point, may I ask, what safeguards do
you think would be most appropriate?
Mr. Posner. Well, you could limit the share of the MOE
that's dedicated to a rainy day. You could require States to
provide for a ``bona fide'' rainy day fund. In other words,
something like they do with their own rainy day funds, have
trigger mechanisms specifying the point when funds would be
released, have the legislature pass a statute, have some kind
of review process that ensures that the money will truly act as
a rainy day fund and be thought about in a more systematic way.
On the other proposal, we heard from State officials--and
it has been echoed here, and rightly so--that money that is
permanently appropriated to this program, which is available in
perpetuity to the States, for all intents and purposes, is
potentially at risk, because Congress sees these unspent
balances and doesn't really know potentially how much is really
needed, how much is not needed.
The idea has been advanced by States that they should draw
down that money entirely at the beginning of the year, put it
in the State treasuries rather than having it rest in the
Federal Treasury. Under the Cash Management Improvement Act,
that applies to all the Federal grant programs, States are not
allowed to draw down money until they absolutely need it to
spend, which means that the outlay is not recorded on the
Federal budget books until the States actually pay the money
for actual services. By requiring States to outlay that money
at the beginning of the year, it would take it off our books
and put it on their books.
There's a couple of very important issues. One is our
surplus would be lower, at least temporarily, by doing that,
and we would lose some interest. You could develop procedures,
as currently is done in some States with other grants, to have
States reimburse us for those interest costs, because they're
going to be gaining in interest earnings when they have those
balances in their own bank accounts. So we could have a
fiscally neutral exchange, essentially, that moves up the
timing of the money, so that States feel like this is in their
own bank accounts and can plan with more certainty that that
money will actually be there. That's the advantage of it.
We would want to make sure that we maintain transparency if
that happens. One of the advantages of the current situation is
we see very clearly how much States are spending and how much
they're not spending. We would want to make sure that that
continued with the other kind of process, should we think about
that.
Mr. English. Mr. Holzer, looking at these two suggestions,
allowing States to count their rainy day funds, perhaps with
some important qualifiers, toward their maintenance of effort,
and second, considering allowing States to draw down their TANF
grant and put it in their own treasury, do you feel comfortable
with these two proposals? What sorts of policy restrictions
should Congress consider if we get to the discussion stage on
these two ideas?
Mr. Holzer. Both proposals sound quite sensible to me. I
guess I would caution us from thinking that that might solve
the entire issue. I think one of the hardest things about this
business is trying to come up with even broad estimates of how
much might be needed in a recession, given how much uncertainty
exists about the magnitude of the recession and how States
would respond. So I think those are sensible suggestions. I
don't think it fully eliminates the need for contingency funds
and some additional Federal role.
Mr. English. Mr. Potts, looking at this from a State
perspective, on either of these two suggestions, are they ideas
that would make this even more attractive for Ohio?
Mr. Potts. Mr. Chairman, Members of the Committee,
certainly, the more control we have over the program, I think
the better we'll be in a position to make the more immediate
decisions.
We talk about recession numbers and inflation and those
types of things. Those will all show up eventually, butwhen we
have--for instance, in the City of Cleveland, when they just recently
announced a layoff of 2,000 steelworkers, and we know that for every
laid off steelworker, it generally results in the loss of five like
jobs, we know that that community has an immediate need.
So if we have some way of control where we can move those
contingency dollars, if we had control of those within our own
situation, as opposed to having to go and meet a formula and go
through all the hoops it would take to be able to pull those
dollars down, we can probably have a better effect at helping
those families that are being impacted by major economic
changes.
Obviously, from the State perspective, anything that gives
the State more control will ultimately result in better
outcomes.
Chairman Herger. If the witness could sum up. Thank you
very much.
Mr. English. Thank you, Mr. Chairman.
Chairman Herger. I thank the gentleman from Pennsylvania.
Now the gentleman from Michigan, Mr. Levin, may inquire.
Mr. Levin. This has been an interesting hearing, and I
think a very good idea. I wasn't quite sure what the issues
were, though, and I think the last few minutes have helped to
illuminate what the issues might be.
We are talking about the contingency fund and about rainy
day funds in addition to the supplemental. It seems to me that
the options are becoming a little more clear. We could leave
the contingency fund essentially inoperative, which it is today
because of the triggers, and essentially let Federal dollars go
into the States to create their own contingency funds, which is
what a reserve fund is, in which I think Mr. English's
questions elicited some response--and I don't mean these are
absolutely black and white situations or alternatives--or we
could make the Federal contingency fund operative and use the
Federal TANF funds to meet the challenges ahead in welfare
reform. I think there is a good argument for the latter, that
we not get lost in kind of accounting devices and go back to
what are the issues in front of us.
We have been talking about the contingency fund for a
number of years, and a number of us have urged that the
contingency fund be made real. We can make the triggers more
sensitive to the realities; we could also take the cap off the
contingency fund--we could have done that years ago--at a small
cost. True, if there were a recession, it would have shifted
more of the burden to the Federal government.
Also, the use of TANF funds, there is a reason for the
maintenance of effort provisions, to try to keep the focus on
the purpose of welfare reform, which is to help move people
from welfare into work and into work that will lift them out of
poverty. I think that's the trouble with the suggestion of
simply taking the TANF funds that are unused and putting them
into a rainy day fund, because if you take almost any State,
and maybe every State, there is a lot of work that is left to
be done, both with those who have not moved from welfare to
work, who are going to be in many instances harder to place or
harder to make that transition--we all know that, right, Mr.
Potts--I think you would acknowledge that, by and large, those
who remain in TANF have, by and large, whatever term we should
use, have needs that make it more difficult for them to make
that transition.
Also, for those who have made the transition, the data are
quite clear that the majority, or a substantial number of
them--it depends on the States--remain below the poverty level
and have needs, whether it's transportation needs to be able to
move into a higher paying job, or have training or retraining
needs.
So, Mr. Chairman, I think that the hearing has helped to
elucidate what these issues are, and I think there is a good
case to be made for our taking a look at the contingency fund
this year and see why it isn't working, to reauthorize it but
perhaps, I would hope, to improve it, and also to look at what
we want to be done with the unutilized Federal TANF funds.
I think the vast majority of States, and really all of
them, have a lot of unmet challenges to meet, to really make
the promise of welfare reform, as we carved it, a reality
increasingly, as well as taking a look at the supplemental
fund, which we must do.
Mr. Chairman, I would hope the hearing today might
accelerate our attention to these issues. I really think any
notion of essentially taking unused TANF funds and having them
replace what was supposed to be the purpose of a Federal
contingency fund is probably not good policy, in terms of
making welfare reform the full success that those of us who
worked on it, who helped to shape it and eventually voted for
it, to make that promise a reality.
Chairman Herger. I thank the gentleman from Michigan for
your comments.
Just in closing, I would like to ask you, Miss Ryan, in
general, wouldn't encouraging States to maintain their own
State contingency funds, using either their TANF block grants
or State funds, relieve some of the pressure on the Federal
contingency fund in times of need, and wouldn't that be a
smarter way to allocate resources for the Federal fund than to
back up State rainy day funds?
Ms. Ryan. Mr. Chairman, we strongly believe that additional
flexibility should be afforded to States to send a strong
signal from Washington that it is prudent to save in the
instances of an economic downturn--that decision Maryland made
to create a reserve with their own State dollars, even though
it doesn't count toward maintenance of effort to do so, was a
prudent course. So we strongly urge attention to giving States
more flexibility to be able to reserve State and Federal funds.
Just one other point, if I may. The regulations that apply
to the TANF block grant with respect to the drawdown of TANF
funds from the Treasury, are unlike any other Federal
regulation that applies to any other block grant. You have
other block grants in the Federal government that have
maintenance of effort requirements, such as substance abuse and
mental health block grants, that are treated in a totally
different way under Federal regulation than TANF. There have
been regulatory disincentives to save that don't exist with
respect to other block grants.
I urge you to consider regulatory changes outlined in my
testimony. But it seems to me that we should do both, TANF
supplemental grants should be extended. A contingency fund in
instances of severe economic downturn, yes, some States may
need that extra help. But in the interim, allowing States to
create reserve funds, a way to balance prudent investments and
saving for economic downturns, is the best formula for success
in the future.
Chairman Herger. Thank you, Miss Ryan.
Mr. Posner, would you like to comment on the same question?
Mr. Posner. Yes. I don't think that these options are
mutually exclusive. They need to be considered. You have a role
probably for a contingency fund, you have a role for saving
some of TANF's balances for a rainy day, and frankly, you have
a role for the States in providing their own money. In fact,
that is provided in the contingency fund formula, that States
have got to match it up to a certain level. So I think that is
the way to go forward.
I would add that the contingency fund has ``not worked''
not because so much of the triggers. It is because the fiscal
limits are so strict. California, for example, would have had
to spend $1.9 billion of its own State money increase to get a
$247 million State contingency fund grant. That's the
challenge. We have set the price. We should have the States
participate equally as partners, but that price--the question
is, is it self-defeating.
Chairman Herger. Thank you.
Mr. Potts, in light of Mr. Posner's suggestion, would
States be agreeable to paying interest to the Federal
government in order to keep unspent TANF balances in the State
treasury?
Mr. Potts. Mr. Chairman, members of the Committee--
obviously, not speaking for the other States, but for Ohio,
that would be fine. I think having control of the money and
having the ability to do those things is very important to us.
Right now, we don't have either. So is something better than
nothing? Absolutely. I do think it's a responsible way for us
all to approach this.
I also think for you to hold the States accountable is
critical. Make sure we understand that we are expected to
manage our own caseload. You know, we make decisions that will
determine how large our caseload will be. In Ohio we have a 3-
year time limit instead of a 5-year time limit. Obviously, that
makes a difference.
As long as the control and responsibility are combined, I
think that's fine.
Mr. Cardin. Would the chairman yield on that point?
Chairman Herger. Yes.
Mr. Cardin. Wouldn't it be more tempting for you to spend
the money that you actually have? Wouldn't the legislature give
you a little bit more of a difficult time?
Mr. Potts. Yes, Mr. Chairman, members of the Committee. I
worry about that. I mean, I think both things. I think that if
it's sitting in the State coffer somewhere, you're going to
have the State legislature probably dealing with some of the
things that you all had to deal with over the years. If that
money is sitting there unspent, especially when you get into
tough economic times, they start looking at those.
Yes, in many cases, it's six of one and a half-dozen of the
other.
Chairman Herger. I want to thank each of our witnesses for
your testimony this morning. It has been a very informative
hearing. I appreciate the work that you have done and the time
you have given us today.
With that, this Committee stands adjourned.
[Whereupon, at 11:15 a.m., the hearing was adjourned.]
[Questions submitted from Chairman Herger to the panel, and
their responses follow:]
U.S. General Accounting Office, Washington, DC 20548
1. How has the pattern of State saving for rainy days changed over
time?
a. For example, are States saving more or less now than before?
b. What factors contribute to this--implementing a new program,
signals from Washington about cutting the block grant, uncertainty as
TANF heads toward reauthorization?
In our written statement we make a distinction between two types of
saving, (1) reserves of unspent TANF balances at the U.S. Treasury and
(2) rainy day funds established by the state for welfare programs with
state or federal funds. The latter--an established rainy day fund--
implies explicit action taken by the state to recognize the need to
prepare for future unexpected costs. The former--reserves of unspent
TANF funds--provides no information on states' savings plans because it
is difficult to ascertain how much of these balances are truly
uncommitted and available for future contingencies. While states'
reserves of unspent TANF balances probably represent a de facto rainy
day fund, there is much ``less there than meets the eye'' because the
data reported by the states are misleading.
As such, if a state is saving Federal funds the distinction between
the two types of saving is blurred because all Federal funds a state
saves for a rainy day must remain in the Treasury until spent. In our
1998 report we recommended that HHS and the states work together to
improve reporting requirements on states' plans for these unspent
balances. Without improvements in the data we cannot assess any trends
or patterns in the levels of state saving for a rainy day from the data
states report on their unspent TANF funds because the data are not
reliable enough to make such a determination. Likewise, there is no
aggregate information on how much state funds states are saving for a
rainy day. States cannot count the funds reserved toward their MOE
requirement until they are spent. States are not required to report on
these state-only balances to the Federal government.
In our ongoing work for the Subcommittee we have collected data on
state savings in ten states. We have seen few changes in the pattern of
state saving for a rainy day. We surveyed ten states in 1997 after they
enacted their first budgets using TANF funds and found only three
states--Colorado, Texas, and Wisconsin--had established rainy day funds
of unspent Federal funds left at the U.S. Treasury. One state--
Maryland--used state funds to establish a reserve. In 2000 we surveyed
the same ten states and found that only one other state--New York--had
established a rainy day fund for its welfare program in the interim.
New York uses Federal funds for its rainy day fund. However, the
balances earmarked for these funds by the states were not determined
through a fiscal planning process that reflects budgetary assumptions
about projected future needs. State officials said that because their
new welfare programs had not been tested during a recession, developing
a model that might predict how caseloads and costs would respond to a
downturn proved difficult. Instead, these states designate any funds
not already appropriated by the state legislature for other purposes as
constituting the state's welfare rainy day fund.
Maryland has continued to make deposits into its state-funded rainy
day fund. In 1997 it made an initial deposit of $15.7 million and then
did not make another deposit until 2000, when it deposited $53 million
of state funds in its welfare reserve. However, as we noted in our
written statement, Maryland was able to shift the costs of saving state
funds to the Federal government by using TANF funds to replace state
funds in some programs and depositing the freed-up funds in its reserve
account. Again, Maryland has not projected future needs based on
alternative economic scenarios, instead a senior state budget official
said that they were motivated chiefly by the perceived need to draw
down their Federal funds quickly or risk their rescission. They were
also concerned that if they left these funds unspent it might affect
future funding levels.
In 1998 we reported that the levels of unspent TANF funds were
transitional in nature and that a number of factors unrelated to
states' savings decisions have influenced the levels of these funds,
including cash management practices, timing of the enactment of new
state welfare laws, slow-starting programmatic spending, and caseload
declines. Concerns similar to those expressed by Maryland budget
officials about the future of TANF funding levels have driven other
states to spend their TANF funds more quickly. As a result, the levels
of reserves are expected to go down.
2. In your written testimony you note several approaches to
encourage States to save more State Funds.
a. Would these changes result in added Federal costs?
b. In fact, depending on what we do with the Federal contingency
fund, wouldn't encouraging more State saving tend to reduce Federal
costs, as States would need less immediate Federal assistance in a
downturn?
In the new block grant environment, the Federal government has an
interest in encouraging states to save for future contingencies, but
within a framework that recognizes that the size of the reserve will
remain largely a state determination made under conditions of inherent
uncertainty. While the new fiscal partnership implies a much stronger
state role in the safety net, both Federal and state governments have a
shared responsibility to ensure that sufficient resources are available
for rising TANF costs in a recession.
In our written statement we noted that states could be encouraged
to save their own funds by counting a portion of state funds set aside
toward their MOE requirement. If a state chose this option it would
have to either cut program spending to make up the difference of what
it saves, or it could draw down any unspent TANF funds--if available--
and use the Federal dollars to make up the difference. If the state
chose to draw down TANF funds instead of leaving them in the U.S.
Treasury, the rate of outlays recorded in the TANF program would shift
forward. Accordingly, the Federal budget surplus would be
proportionately lower in the near term.
We also stated that states might be able to save more TANF funds
directly for the future if they were able to draw down Federal funds
earlier than needed for program spending. Some state officials argued
that their incentives to save for the future could be bolstered by
allowing states to keep unspent TANF funds in their own accounts rather
than the U.S. Treasury. They believe that this might reduce incentives
for Congress to rescind unspent balances since the outlays would be
recognized earlier at the time of the grant and not when the money is
actually spent.
We also suggested that certain changes to the Contingency Fund for
State Welfare Programs could make it more effective and thus more
likely states would incorporate the fund in its contingency plans which
could encourage states to save some of their own funds. The Fund
requires states to bring their own spending up to pre-welfare reform
levels before they can gain access to additional Federal funds.
Simplifying the fund's design and removing some of the restrictive
barriers to access could provide incentives to states to save some of
their own funds, since they would be more likely to use it in the event
of a downturn. Currently, future outlays from the Contingency Fund are
recorded at zero. Any change that eases access to the fund could record
a faster outlay rate.
It is unclear the degree to which a recession might impact TANF
caseloads and state welfare costs. If states have saved enough of their
own funds, they may not need to call on the Federal government for
emergency funding. But states have not engaged in any rigorous analyses
of their future needs. Without better information on the adequacy of
their reserves, we cannot assess the impact of these savings on future
Federal draws.
Urban Institute
Washington, DC 20037
May 9, 2001
Mr. Wally Herger
Subcommittee on Human Resources
Committee on Ways and Means
U.S. House of Representatives
Washington DC 20515
Dear Rep. Herger:
Thank you for giving me the opportunity to respond to your
questions about my testimony on April 26, which raise several important
issues.
1. I note your suggestions for changes in the Federal contingency
fund, including providing ``uncapped'' funding for this purpose.
A. Do you have any idea what this would cost?
B. If we enacted your proposals for relaxing eligibility criteria
and providing unlimited funds for this purpose, would any States
qualify right away? Which ones.
C. How is your proposal any different from the pre-welfare reform
approach of providing unlimited Federal funds to States that fail to
save or help families leave the rolls and go to work?
1. A. I would prefer to have CBO or OMB cost out this proposal, and
I would certainly defer to their estimates. However, my best guess is
that the total cost of my proposal to the Federal government would be
approximately $2B in a moderate recession and about $6B in a severe
one. (My worst-case estimates are about $4B in a moderate downturn and
$10B in a severe one respectively.) Details of how I arrive at these
estimates are available upon request.
This would be a one-time expenditure, spread over several years. To
put it in context, please note that this would be a very small fraction
of the total Federal expenditure on TANF block grants over its current
6-year authorization. It is also very small relative to the extra
Federal government expenditures in a recession on Emergency
Unemployment Insurance benefits ($28B in the previous recession, or
about $36B in current dollars) or on food stamps.
B. I don't believe any states would qualify right away (at least
not on the basis of the most recent caseload and unemployment rate
data), as the triggers I propose would require increases of
unemployment (or food stamp caseloads) of at least 20% over their
current levels.
C. The proposal differs from the pre-welfare reform approach in a
number of ways. For one thing, there would be triggers and state-level
MOE requirements that would now limit state access to Federal funds,
which was not true in the pre-welfare reform era.
Furthermore, this proposal would be implemented in the context of a
welfare reform effort that has already successfully reduced caseloads
and dramatically increased work incentives. The time limits and state-
level discretion that TANF allows will continue to reduce rolls beyond
what was true in the past.
If we pressure the states too much to ``save'' during good times
and finance their own caseloads during bad times, they may forego
expenditures on important supports (such as child care) to working
families who really need it, or they might decrease other expenditures
designed to improve employability among the hardest-to-serve.
Alternatively, they may turn away people from the rolls during
difficult times who have access to no other safety net.
2. You cite several studies suggesting rising unemployment will
send welfare caseloads up by certain percentages.
A. How high would the unemployment rate have to rise for the
caseload to return to where it was before the new law was signed in
August 1996?
B. How would that rate compare with the unemployment rate in 1996?
C. Do your calculations assume any change in behavior by would-be
recipients due to work requirements, time limits, and related factors?
2. A. According to the standard estimates, unemployment rates would
have to rise by as much as 10 percentage points or more to return to us
to the caseload levels that were in effect in August 1996. It is very
unlikely that this will happen, even in a serious recession. (Of
course, the ``standard estimates'' have their limitations, as I note in
part C below.)
B. The national unemployment rate averaged 5.4% during 1996, when
the welfare reform bill was signed.
C. These estimates are based on statistical models of previous
business cycles, but the models do include some measures of state-level
policies and behaviors (including enforcement of time limits) in the
1990's that have affected the caseloads. They also capture trends over
time that reflect federal work requirements and other recent changes.
It is possible that these models do not fully capture the behavioral
changes, since we don't really know how states will use their
discretion in responding to the increased need for assistance by
families during recessions. On the other hand, since the huge decrease
in the welfare rolls in recent years is completely unprecedented, it is
also possible that our estimates based on the past will understate the
response of the caseload to a serious downturn.
3. Sheldon Danziger of the University of Michigan, summarizing a
study by George Wallace and Rebecca Blank, the former Chair of
President Clinton's Council of Economic Advisors, writes: ``A severe
recession that raises the unemployment rate by 3-4 percentage points,
to 7.5-8 percent, would leave welfare caseloads well below the levels
reached in the early 1990s. They conclude that the 1996 welfare reform
seems to have achieved a large reduction in caseloads independent of
the state of the economy.'' Do you agree with this assessment?
3. As my previous answers indicate, I agree with the notion that
welfare reform has had an effect on caseloads that is, to some extent,
independent of the strength of the economy. The decline in caseloads
reflects another factor as well: the growth of the Earned Income Tax
Credit and other developments that help ``make work pay''. But the
strong economy has played a very important role as well. Without it,
caseload declines would have likely been much smaller, and much more
painful to achieve.
Furthermore, while we will not likely see any return to the
caseload levels of the mid-1990's during the next downturn, the need
for federal assistance to the states will remain. Given that states
have used their TANF block grants to fund a wide range of laudable
activities and work supports, they will not be able to finance
significantly higher TANF caseloads out of their current block grants
without serious cutbacks in these other supports, which in turn would
have unfortunate consequences for working families.
4. What is the ``full employment'' rate of unemployment? Has this
changed over time? You suggest (page 6) that contingency funds be
available to States with unemployment rates as low as 5 percent. Should
a rainy day fund be available to States that are technically at or near
``full employment''?
4. I currently regard the rate of unemployment that we can achieve
through fiscal and monetary policy without rising inflation as being
about 4%, and most economists would put it somewhere in the range of 4-
5%. This is significantly below the rate of 6% or so that most
economists believed was the lowest rate achievable in the 1970's, and
below the 5-5.5% rate of the 1980's. The decline in this rate can be
attributed to a wide range of factors--such as changes in workforce
demographics, industrial structure, coverage by unemployment insurance,
etc.
Two important caveats to the above statement must be mentioned
here. First, this rate should not necessarily be interpreted as ``full
employment.'' It is simply the lowest rate that we can achieve without
setting off inflation. (Most economists refer to this as the ``non-
accelerating inflation rate of unemployment'', or NAIRU, rather than
``full employment''.) Accordingly, there are probably a fair number of
poorly skilled individuals who have difficulty finding work, even in
such an environment; and many more people will have such difficulty
when unemployment rises above that rate.
Second, the NAIRU no doubt varies very significantly across states.
Since states differ from one another greatly in terms of the factors
that determine these rates (e.g., demographics, industrial structure,
coverage by Unemployment Insurance, etc.), they also differ greatly in
the rates to which unemployment can fall at any time. Thus, roughly 10
states have recently achieved unemployment rates below 3% (while a few
others, such as West Virginia and New Mexico, have had difficulty
achieving rates below 6-7%). These 10 states would presumably suffer
major cyclical job losses, a lack of job availability for unskilled
workers, and seriously rising welfare caseloads, even at 4-5%
unemployment; and it would be reasonable for the Federal government to
provide assistance in paying for its higher caseloads under those
circumstances.
I hope you find these responses useful. Please let me know if I can
be of any further assistance.
Sincerely,
Harry J. Holzer