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74–219 2001

‘‘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

(

ii

COMMITTEE ON WAYS AND MEANS

BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHIL ENGLISH, Pennsylvania

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY C. HULSHOF, Missouri

SCOTT MCINNIS, Colorado

RON LEWIS, Kentucky

MARK FOLEY, Florida

KEVIN BRADY, Texas

PAUL RYAN, Wisconsin

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

LLOYD DOGGETT, Texas

EARL POMEROY, North Dakota

ALLISON GILES, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON HUMAN RESOURCES

WALLY HERGER, California, Chairman

NANCY L. JOHNSON, Connecticut

WES WATKINS, Oklahoma

SCOTT MCINNIS, Colorado

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

PHIL ENGLISH, Pennsylvania

RON LEWIS, Kentucky

BENJAMIN L. CARDIN, Maryland

FORTNEY PETE STARK, California

SANDER M. LEVIN, Michigan

JIM MCDERMOTT, Washington

LLOYD DOGGETT, Texas

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.

iii

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

(1)

‘‘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:]

2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON HUMAN RESOURCES

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1025

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

3

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

f ’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

4

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.

5

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.

ing statement?

Chairman HERGER. Mr. Cardin, would you like to make an openf 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

f 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.

6

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.

7

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 H

Before we go on to the testimony this morning, I want to remind

ERGER. Thank you, Mr. Cardin, for your comments.

f 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

8

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

9

1Welfare Reform: Early Fiscal Effects of the TANF Block Grant (GAO/AIMD–98–137, August

22, 1998).

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,

10

2States’ 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.

Colorado, Connecticut, Louisiana, Maryland, Michigan, New York, Oregon, Texas,

and Wisconsin).

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 in which

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.

11

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. 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.

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

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.

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

12

5 Budgeting for Emergencies: State Practices and Federal Implications (GAO/AIMD–99–250,

September 30, 1999). 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’’. 7These 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.

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.

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

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

13

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.

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.

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 imVerDate 17-AUG-2001 02:12 Aug 28, 2001 Jkt 074219 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 E:\HR\OC\A219.XXX pfrm03 PsN: A219
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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). 10The 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, § 404, 111 Stat. 2134)

plementing 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.

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

15

11These states are Alaska, California, District of Columbia, Hawaii, New Mexico, New York,

North Carolina, and Washington. 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. 13For more information see GAO/AIMD–98–137.

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.

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.

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.

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

16

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.

17

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

18

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

512

M. James, Bill J. Keller, Jacqueline M. Nowicki, Patricia L. Elston, Gale Harris,

time.

For future questions regarding this testimony please call Paul L. Posner at (202)

–9573. Individuals making key contributions to this testimony included Thomas

f Marcus Melton, and Raymond G. Hendren.

Chairman H

We will now hear from Miss Ryan.

ERGER. Thank you very much, Mr. Posner.

f 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 barVerDate 17-AUG-2001 02:12 Aug 28, 2001 Jkt 074219 PO 00000 Frm 00022 Fmt 6633 Sfmt 6602 E:\HR\OC\A219.XXX pfrm03 PsN: A219
19

riers 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.

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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

21

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 block grant 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,

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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

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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 some states. 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 con- taining 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

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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 H

Mr. Potts.

ERGER. Thank you very much, Miss Ryan.

f 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

25

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

26

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.

27

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, most Appalachian 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 faithbased 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

28

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 surplus stands 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 reVerDate 17-AUG-2001 02:12 Aug 28, 2001 Jkt 074219 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 E:\HR\OC\A219.XXX pfrm03 PsN: A219
29

quirements, 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 shortsighted 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.]

f30

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

31

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

32

1These studies are reviewed and critiqued in Bell (2001).

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 the recession, 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).

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.

33

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.

34

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 well under 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

35

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.

Chairman H

We will now turn to our panel for questioning. I would like to

ERGER. Thank you very much, Mr. Holzer.

’’ Center on Budget and Policy Priorities, 2001.

f 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.

36

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 inVerDate 17-AUG-2001 02:12 Aug 28, 2001 Jkt 074219 PO 00000 Frm 00040 Fmt 6633 Sfmt 6602 E:\HR\OC\A219.XXX pfrm03 PsN: A219
37

crease 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 ConVerDate 17-AUG-2001 02:12 Aug 28, 2001 Jkt 074219 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 E:\HR\OC\A219.XXX pfrm03 PsN: A219
38

gress. 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.

39

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.

40

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 difVerDate 17-AUG-2001 02:12 Aug 28, 2001 Jkt 074219 PO 00000 Frm 00044 Fmt 6633 Sfmt 6602 E:\HR\OC\A219.XXX pfrm03 PsN: A219
41

ficult 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.

42

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.

43

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.

44

We talk about recession numbers and inflation and those types

of things. Those will all show up eventually, but when 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

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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

46

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.

47

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

48

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 prewelfare 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.

f 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?

49

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-toserve. 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?

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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

Æ