Background

The TANF block grant was created through the Personal Responsibility  and Work Opportunity Reconciliation Act of 1996 (PRWORA) and was  designed to give states the flexibility to provide both traditional welfare  cash assistance benefits as well as a variety of other benefits and  services to meet the needs of low-income families and children. TANF  has four broad goals: (1) provide assistance to needy families so that  children may be cared for in their own homes or homes of relatives; (2)  end dependence of needy parents on government benefits by promoting  job preparation, work, and marriage; (3) prevent and reduce out-of- wedlock pregnancies; and (4) encourage the formation and maintenance  of two-parent families. Within these goals, states are responsible for  designing, implementing, and administering their welfare programs to  comply with federal requirements, as defined by federal law and HHS.
The creation of TANF significantly changed the federal government’s role  in financing welfare programs in states. PRWORA ended low-income  families’ entitlement to cash assistance by replacing the Aid to Families  with Dependent Children (AFDC) program with the TANF block grant.  Each state’s TANF block grant amount is generally based on the amount  of the state’s spending under AFDC. With the fixed federal funding  stream, states assume greater fiscal risks in the event of an economic  recession or increased program costs. In acknowledgment of these risks,  PRWORA also created a TANF Contingency Fund that states could  access in times of economic distress.  In addition, during the most recent  recession, the federal government created a $5 billion Emergency  Contingency Fund for state TANF programs through the American  Recovery and Reinvestment Act of 2009 (Recovery Act), available in  federal fiscal years 2009 and 2010.
PRWORA coupled the block grant with an MOE provision, which requires  states to maintain a portion of their own historic financial commitment to  their welfare programs as a condition of receiving their full federal TANF  allotments.  For example, these provisions generally require that each  state spend at least 80 percent (75 percent if the state meets certain  performance standards) of the amount it spent on welfare and related  programs in fiscal year 1994, before TANF was created.  In addition to  its own spending, under HHS regulations, a state is permitted to count  toward its TANF MOE requirement certain in-kind or cash expenditures  by third parties—such as nongovernmental organizations (including  nonprofit organizations or other private parties)—as long as the  expenditures meet other TANF MOE requirements, including those  related to eligible families and allowable activities.  In addition, an  agreement must exist between the state and the nongovernmental third- party organization allowing the state to count the expenditures toward its  TANF MOE requirement.
HHS noted in its preamble to the final rule for TANF issued in 1999 that  the MOE cost-sharing requirement reflected Congress’ recognition that  state financial participation is essential for the success of welfare  reform.  It also noted that Congress wanted states to be active partners  in the welfare reform process.  Allowing states to count  nongovernmental third-party expenditures toward their MOE requirement  was a policy choice HHS first articulated in December 2004.  HHS later  set forth the policy in a rule as part of the regulations implementing the  Deficit Reduction Act of 2005.  If a state fails to meet its TANF MOE  requirement for any fiscal year, HHS is required by law to reduce dollar- for-dollar the state’s basic TANF grant amount for the following fiscal  year.
States’ levels of MOE spending can affect other TANF requirements,  such as their required work participation rates. States are generally held  accountable for ensuring that at least 50 percent of all families with a  work-eligible individual receiving TANF assistance participate in work  activities for a specified number of average hours per week over the  month subject to a provision known as the caseload reduction credit,  which allows states to reduce the work participation rate they are required  to meet based on reductions in the size of their TANF caseload.  In  addition, under federal regulations, if states spend in excess of their  required MOE spending level (excess MOE), they may be allowed to  increase their caseload reduction credits and thereby lower the work  participation rates they must meet.  For example, our previous work  found that in fiscal year 2009, 32 of the 45 states that met their required  work participation rates for all TANF families claimed excess state MOE  spending toward their caseload reduction credits.  We have not updated  this analysis, and information on how many states use excess MOE to  reduce their required work participation rate is not readily available,  according to HHS officials. However, HHS’s most recent TANF  expenditure data reported by states show that for fiscal year 2014, about  half of states reported total MOE expenditures at the 100-percent level or  above.
According to HHS data, until fiscal year 2006, state TANF expenditures  counted toward TANF MOE requirements remained relatively stable.  Specifically, according to HHS data, spending hovered around required  minimum MOE levels (either 75 percent or 80 percent of the amount the  state spent in 1994).  Further, from fiscal years 2006 through 2009, the  level of TANF spending states counted toward MOE requirements  increased each year, according to HHS data. In aggregate, state MOE  expenditures have remained above the 100-percent MOE level since  2009. Several reasons account for higher levels of reported MOE  spending since 2006. First, many states (20) had to meet a higher MOE  spending requirement because they accessed TANF Contingency Funds  from fiscal years 2007 through 2010. According to HHS officials, many  states have continued accessing these funds through the present day.  Second, some states may have increased their level of MOE spending to  access the Emergency Contingency Fund, which almost all states did in  fiscal years 2009 and 2010. To access these funds, states were required  to increase their basic assistance caseload and spending or spend more  state funds for short-term, non-recurrent benefits or subsidized  employment than they had in a corresponding quarter in an earlier base  year. Third, many states claimed additional MOE spending to help them  meet work participation rate requirements.
Some stakeholders have raised questions about counting  nongovernmental third-party expenditures toward a state’s TANF MOE  requirement; these questions fall into two main categories. First, some  stakeholders question whether allowing states to count spending by  nongovernmental third-party organizations as TANF MOE spending is in  keeping with the goal of maintaining or increasing the level of state  provided services, considering these nongovernmental third-party  services may have been provided whether or not the state counted them  as MOE spending. If reported MOE spending does not actually reflect  maintaining or increasing service levels, the overall level of services  available to low-income families and children in the state may decrease.  HHS officials note that nongovernmental third-party expenditures do not  necessarily represent added state spending and that counting  nongovernmental third-party expenditures as TANF MOE spending can  reduce a state’s financial commitment in meeting its basic MOE  requirement. HHS officials said that prohibiting this practice would help to  ensure that states maintain their commitment to needy families as the law  intended. Second, some stakeholders have noted that allowing states to  count such spending toward MOE requirements makes it easier for states  to lower the work participation rates they are required to meet, decreasing  the share of adults on welfare expected to work or prepare for work.  On  the other hand, some stakeholders have noted that allowing states to  count nongovernmental third-party expenditures as MOE spending helps  states meet TANF requirements and facilitates public and private  partnerships.

	While Most States Do Not Regularly Count Nongovernmental Third-Party Expenditures as TANF MOE Spending, Some States Make Greater Use of It than Other States

		One-Third of States Counted Nongovernmental Third- Party Expenditures as TANF MOE Spending in Fiscal Year 2015

In fiscal year 2015, around one-third of states (16 of 51) reported counting  nongovernmental third-party expenditures as TANF MOE spending. After  peaking at 24 states in 2010—the last year Recovery Act Emergency  Contingency Funds were available—the number of states counting such  expenditures as TANF MOE spending fell. However, since that time the  number of states that have counted nongovernmental third-party  expenditures toward TANF MOE requirements has remained higher than  pre-Recovery Act levels (see fig. 1).
Overall, 29 states reported counting nongovernmental third-party  expenditures as state MOE spending at least once from fiscal years 2007  through 2015. Six states did so only during fiscal years 2009 or 2010  when Recovery Act Emergency Contingency Funds were available,  leaving 23 states that counted nongovernmental third-party expenditures  as TANF MOE spending at least once during a non-Recovery Act year.   Appendix I provides more detailed information on the number of years  states counted nongovernmental third-party expenditures as TANF MOE  spending.

		Some States Have Made Much Greater Use than Other States of the Option to Count Nongovernmental Third- Party Expenditures toward TANF MOE Requirements

Some states have made greater use of the option to count  nongovernmental third-party expenditures toward TANF MOE  requirements than others. In terms of number of years, 10 states we  surveyed reported counting nongovernmental third-party expenditures as  MOE spending for 5 or more of the 7 non-Recovery Act years from fiscal  years 2007 through 2015. In contrast, 28 states reported they had never  counted such expenditures as TANF MOE spending (see fig. 2).
Eleven states reported that nongovernmental third-party expenditures  accounted for over 10 percent of their TANF MOE spending (see fig. 3)  for the most recent year in which the state counted such expenses toward  TANF MOE requirements (fiscal years 2012 through 2015).  As also  shown in figure 3, 7 of these 11 states counted nongovernmental third- party expenditures toward TANF MOE requirements for 5 or more non- Recovery Act years from fiscal years 2007 through 2015 (Alabama,  Arizona, Colorado, Georgia, Hawaii, New Hampshire, and Rhode Island).  Overall, the percentage of TANF MOE spending comprised of  nongovernmental third-party expenditures (for the most recent year from  fiscal years 2012 through 2015 in which the state counted such expenses  toward TANF MOE requirements) for which we had data ranged from a  high of nearly 60 percent in Georgia to a low of .5 percent in Connecticut.
Regarding states’ plans to count nongovernmental third-party  expenditures toward TANF MOE requirements in the future, around one- third of states (18 of 51) reported they would definitively or probably count  such expenditures toward TANF MOE requirements in fiscal year 2016.  Of those 18 states, most (16 of 18) said they will definitely count such  expenditures as TANF MOE spending in fiscal year 2016 (see fig. 4).

	States Most Often Reported Food Assistance as the Nongovernmental Third-Party Provided Service Counted as TANF MOE Spending

According to our survey, most states that reported having counted  nongovernmental third-party expenditures toward their state’s TANF MOE  requirement in federal fiscal year 2015 also reported counting expenses  related to food assistance service as TANF MOE spending. Specifically,  of the 16 states that provided detailed information about how  nongovernmental third-party services counted toward their TANF MOE  requirement, three-quarters (12 of 16) reported having counted food  assistance service expenses toward their MOE requirement. Fewer states  reported having counted nongovernmental third-party expenditures on  youth services (8 of 16), family stabilization services (6 of 16), and  housing assistance services (1 of 16) toward their TANF MOE  requirement (see fig. 5).
Officials we interviewed from three states provided several examples of  how they have counted nongovernmental third-party services toward their  TANF MOE requirement. For example, Ohio officials told us that their  state counts the estimated value of food provided by the Second Harvest  Food Bank to TANF eligible families as TANF MOE spending. Similarly,  New Hampshire officials told us that their state counts the value of after- school and outreach activities provided by the Granite YMCA and the  Boys and Girls Club of Greater Nashua as TANF MOE spending.
In each of these cases, state officials reported having entered into a  formal, written agreement with the nongovernmental third-party  organization. In addition, state officials also reported taking steps to  ensure the value of services counted as TANF MOE spending reflects  those expenditures associated with TANF eligible participants. For  example, Ohio officials told us that they calculate the value of food  assistance services provided by the Second Harvest Food Bank to TANF  recipients using data this organization collects on the percentage of  families it serves that are TANF eligible and the monetary value of food  distributed and purchased over a specified time period. Similarly, officials  in Arizona reported that through an agreement with the Association of  Arizona Food Banks, the state counts toward its TANF MOE requirement  the value of the food assistance services the food bank provides to  families considered eligible for TANF services as defined by the state and  the administrative expenses associated with providing this service. Lastly,  New Hampshire state officials told us they estimated the monetary value  of the services provided by the Granite YMCA and Boys and Girls Club of  Greater Nashua using data provided by these organizations. Specifically,  these organizations provide spending figures directly to the state via a  reporting form, and the state only counts as TANF MOE spending those  figures associated with youth who qualify for free or reduced lunch.

	States Cited Multiple Reasons for Counting Nongovernmental Third-Party Expenditures as TANF MOE Spending and Reported Concerns about the Potential of Not Being Able to Do So in the Future

		Most States That Reported Counting Nongovernmental Third- Party Expenditures as TANF MOE Spending Cited Multiple Reasons

About three-quarters (19 of 25) of the states that reported on our most  recent survey that they had ever counted nongovernmental third-party  expenditures toward their TANF MOE requirement reported multiple  reasons for having done so.  The reasons most frequently cited by  states as being very or somewhat important were developing public- private partnerships (18 of 25) and counting excess MOE toward the  caseload reduction credit (15 of 25). Officials in all three states with whom  we spoke said that the public-private partnerships were valuable,  longstanding, and predated the state’s decision to count TANF MOE  expenditures toward its TANF MOE requirement.  Other frequently cited  reasons for counting these organizations’ expenditures as TANF MOE  spending were to maintain service levels (13 of 25) and to meet the basic  TANF MOE requirement (12 of 25) (see fig. 6).

		Some States Identified Concerns about the Potential for Discontinuing the Option to Count Nongovernmental Third- Party Expenditures as TANF MOE Spending

About half of the states (25 of 51) reported that they may need to take  various actions if they could no longer count nongovernmental third-party  expenditures as TANF MOE spending in the future. For example,  approximately one-third (8 of 25) of the states that reported they may  need to take action responded that they would be very or extremely likely  to identify existing state spending that had not been previously counted to  count toward their states’ TANF MOE requirement. A fifth of these states  (5 of 25) responded that they would be extremely or very likely to cut  services in another area to meet the TANF MOE requirement (see fig. 7).  According to an official from Georgia, where nongovernmental third-party  expenditures comprised 60 percent of the states’ MOE spending in fiscal  year 2015, there is a moderate probability that the state would cut funding  to other services and direct the funding to services that contribute to their  TANF MOE requirement. Similarly, officials from Ohio, where  nongovernmental third-party expenditures comprised 8 percent of TANF  MOE spending in fiscal year 2015, reported that the state would either  secure additional funding from its general revenue fund or another  program’s general revenue funding would be reduced to meet the TANF  MOE requirement, but the decision would be made through the state’s  biennial budget process. While states that have counted  nongovernmental third-party expenditures as TANF MOE spending in  multiple years reported the most concerns about the possibility of not  being able to do so in the future, one official from Maine, for which  nongovernmental third-party expenditures were counted toward the TANF  MOE requirement once from fiscal years 2007 to 2015, also reported that  the state would not meet its TANF MOE requirement if it was unable to  use this option in the future.
In our survey, officials from some states identified in open-ended survey  responses additional concerns should counting nongovernmental third- party expenditures as TANF MOE spending no longer be allowed.  Specifically, several (8 of 18) reported they would not meet the work  participation rate requirement if they were no longer allowed to count  nongovernmental third-party expenditures toward their states’ TANF MOE  requirement.  For example, officials in one state reported that without  the option to count nongovernmental third-party expenditures as TANF  MOE spending the state would not be able to meet required work  participation rates during economic downturns, when fewer employment  opportunities are generally available.  Furthermore, of the states that  noted additional concerns on our survey, several (6 of 18) reported they  would be unable to meet TANF MOE requirements should counting  nongovernmental third-party expenditures as TANF MOE spending no  longer be allowed. One state official noted that in recent years, the state  has used nongovernmental third-party spending as a budgetary strategy  to save state dollars. Specifically, the state has reduced its general fund  spending on TANF-related services while continuing to meet TANF MOE  requirements by counting expenditures made by existing programs in the  community toward the state’s TANF MOE requirement. Further, four  states reported that if they were no longer able to count nongovernmental  third-party expenditures toward their states’ TANF MOE requirement, they  would lose partnerships with nongovernmental third-party organizations.  Lastly, two states reported that without the ability to count  nongovernmental third-party expenditures as TANF MOE spending, they  would not be able to access additional federal funds from the TANF  Contingency Fund. Consequently, they would not be able to maintain  their current level of services, according to state officials.

	Agency Comments and Our Evaluation

We provided a draft of this report to HHS. HHS provided written  comments, reproduced in appendix II, in which the agency agreed with  our findings. HHS said the information and analysis provided in the report  will be helpful to stakeholders considering issues related to TANF MOE  spending.
HHS noted that, as our report describes, there is a growing tendency for  states to count the expenditures of nongovernmental third-party sources  as state MOE spending and that these expenditures do not necessarily  represent added state spending, but simply an increase in the claiming of  existing state or non-profit spending. HHS also noted that while the report  shows some states reported these arrangements fostered public-private  partnerships, the report does not provide evidence that such partnerships  occurred as a result of the third-party MOE provisions. It also noted that  such relationships could occur without states having the ability to count  nongovernmental third-party spending as TANF MOE spending.  We  provided additional information in the report that indicates officials in all  three states with whom we spoke said that the public-private partnerships  were valuable, longstanding, and predated its decision to count TANF  MOE expenditures toward the state’s TANF MOE requirement.  We agree  with HHS that states can develop and maintain such partnerships without  counting nongovernmental third-party expenditures as TANF MOE  spending.
HHS further stated that it is interested in working with Congress to enact  a provision to prohibit the practice of states counting nongovernmental  third-party expenditures as TANF MOE spending. HHS stated that  prohibiting this practice would help to ensure that states maintain their  commitment to needy families as the law intended.
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If you or your staff have any questions concerning this report, please  contact me at (202) 512-7215 or brownke@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff who made key contributions to  this report are listed in appendix III.

Appendix I: Detailed Data on States’ Use of Counting Nongovernmental Third-Party Expenditures as Temporary Assistance for Needy Families (TANF) Maintenance of Effort (MOE) Spending

Appendix II: Comments from the Department of Health and Human Services

Appendix III: GAO Contact and Staff Acknowledgment

	GAO Contact

	Staff Acknowledgment

In addition to the contact named above, individuals making key  contributions to this report were Gale Harris, Assistant Director; Amy  Buck; Theresa Lo; and Stacy Spence. In addition, key support was  provided by James Bennett, Deborah Bland, David Chrisinger, Holly Dye,  Alex Galuten, Monika Gomez, Sheila McCoy, Jean McSween, and  Almeta Spencer.

Summary:
Why GAO Did This Study

Each year, TANF block grants, which are overseen by the U.S. Department of Health and Human Services (HHS), provide $16.5 billion in federal funds to states to assist low-income families. States are also required to spend a significant amount of their own funds under TANF, but they can include certain expenditures made by nongovernmental third parties toward their MOE requirement. Some stakeholders support this option because it helps states meet MOE requirements, but others question whether this approach is consistent with program goals. GAO was asked to update the information presented in its 2012 report on this topic ( GAO-12-929R ).
This report updates information on, among other things, (1) the extent to which states count nongovernmental third-party expenditures for services as TANF MOE spending, and (2) the types of nongovernmental third-party services provided that states counted as TANF MOE spending.
To obtain this information, GAO surveyed state TANF directors in all 50 states and the District of Columbia and reached a 100-percent response rate. GAO also reviewed relevant federal laws and regulations, reviewed HHS expenditure data, and interviewed HHS officials. Lastly, GAO interviewed TANF officials in three states selected to reflect geographic diversity and variety among other factors.

What GAO Found

Nearly one-third of states (16 of 51) reported counting nongovernmental third-party expenditures toward their states' required spending level under the Temporary Assistance for Needy Family (TANF) block grant in fiscal year 2015, according to GAO's survey of all state TANF directors. TANF requires states to maintain a significant portion of their own historic financial commitment, called maintenance of effort (MOE), to welfare-related programs. In addition to its own spending, a state may count toward its MOE requirement certain in-kind or cash expenditures by nongovernmental third parties—such as food banks—as long as these services are allowable under TANF, are provided to needy families, and the state meets other requirements. The number of states counting such expenditures as MOE spending increased substantially between fiscal years 2009 and 2010, perhaps in part due to requirements necessary to obtain additional funding under the American Recovery and Reinvestment Act of 2009 (Recovery Act). After fiscal year 2010, the number of states counting nongovernmental third-party expenditures toward their TANF MOE requirements fell, but remained higher than pre-Recovery Act levels for other reasons. States that reported such expenditures as TANF MOE spending cited reasons such as developing public-private partnerships and meeting state MOE requirements.
Of the 16 states that reported counting nongovernmental third-party expenditures as TANF MOE spending in fiscal year 2015, most said the types of services they counted involved food assistance and programs serving youth, according to GAO's survey. For example, one state reported working with a food bank to count the value of the food the bank provided to families deemed needy under state TANF rules.

What GAO Recommends

GAO is not making recommendations in this report. HHS agreed with the findings, and provided written comments on the report.