```

[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

              ``RAINY DAY'' AND OTHER SPECIAL TANF ISSUES

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                 OF THE

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 26, 2001

                               __________

                           Serial No. 107-15

                               __________

         Printed for the use of the Committee on Ways and Means

                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa                     JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia                 WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania           XAVIER BECERRA, California
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona               LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin

                     Allison Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                    Subcommittee on Human Resources

                   WALLY HERGER, California, Chairman

NANCY L. JOHNSON, Connecticut        BENJAMIN L. CARDIN, Maryland
WES WATKINS, Oklahoma                FORTNEY PETE STARK, California
SCOTT McINNIS, Colorado              SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  LLOYD DOGGETT, Texas
PHIL ENGLISH, Pennsylvania
RON LEWIS, Kentucky

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                               __________
                                                                   Page
Advisory of April 19, 2001, announcing the hearing...............     2

                               WITNESSES

U.S. General Accounting Office, Paul L. Posner, Managing 
  Director, Strategic Issues.....................................     7

                                 ______

American Public Human Services Association, Elaine M. Ryan.......    18
Holzer, Harry L., Urban Institute, and Georgetown University.....    30
Ohio Department of Job and Family Services, Joel Potts...........    24

 
              ``RAINY DAY'' AND OTHER SPECIAL TANF ISSUES

                              ----------                              

                        THURSDAY, APRIL 26, 2001

                  House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Human Resources,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:02 a.m., in 
room B-318 Rayburn House Office Building, Hon. Wally Herger 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                    SUBCOMMITTEE ON HUMAN RESOURCES

                                                CONTACT: (202) 225-1025
FOR IMMEDIATE RELEASE
April 19, 2001
No. HR-3

                      Herger Announces Hearing on

                           ``Rainy Day'' and

                        Other Special TANF Funds

    Congressman Wally Herger (R-CA), Chairman, Subcommittee on Human 
Resources of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on ``rainy day'' and other special 
funding issues under the Temporary Assistance for Needy Families (TANF) 
program. The hearing will take place on Thursday, April 26, 2001, in 
room B-318 of the Rayburn House Office Building, beginning at 10:00 
a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include representatives of the U.S. General Accounting 
Office and State welfare administrators, as well as other experts on 
State welfare funding issues. However, any individual or organization 
not scheduled for an oral appearance may submit a written statement for 
consideration by the Committee and for inclusion in the printed record 
of the hearing.
      

BACKGROUND:

      
    The Personal Responsibility and Work Opportunity Reconciliation Act 
of 1996 (P.L. 104-193), commonly referred to as the 1996 welfare reform 
law, made dramatic changes in the Federal-State welfare system designed 
to aid low-income American families. The law repealed the former Aid to 
Families with Dependent Children program, and with it the individual 
entitlement to cash welfare benefits. In its place, the 1996 
legislation created a new TANF block grant that provides fixed funding 
to States to operate programs designed to achieve several purposes: (1) 
provide assistance to needy families, (2) end the dependence of needy 
parents on Government benefits by promoting job preparation, work, and 
marriage, (3) prevent and reduce the incidence of out-of-wedlock 
pregnancies, and (4) encourage the formation and maintenance of two-
parent families. Associated changes included individual time limits and 
work requirements intended to reinforce the new focus on work and 
independence for families needing assistance.
      
    In addition to the basic TANF block grant, the 1996 law included 
several separate funds to assist States with special needs. These 
include two programs authorized through the end of Fiscal Year 2001: a 
Federal contingency (or ``rainy day'') grant fund and supplemental 
grants for fast-growing or relatively poor States. States also may save 
any amount of their TANF block grant for future needs, which many 
States have done, or borrow from a Federal contingency loan fund.
      
    The Subcommittee hearing will explore ``rainy day'' and other 
special funding issues, including changes that might permit or 
encourage States to save more for their own future needs. Due to the 
fixed TANF block grant and more than 50 percent caseload decline since 
the 1996 welfare reform law, many States already have saved a 
significant portion of their block grant for such purposes.
      
    In announcing the hearing, Chairman Herger stated: ``Given current 
concerns about the economy, it is important for us to examine how the 
new law is working to encourage States to save for `rainy days' to 
come. Fortunately, given the steep caseload decline, many States have 
been able to do so. Our remaining tasks include assessing whether 
incentives to save during good times can be improved so every State has 
adequate funding for times to come.''
      

FOCUS OF THE HEARING:

      
    The focus of this hearing is to examine ``rainy day'' and other 
special funding issues under the TANF program.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Thursday, 
May 10, 2001, to Allison Giles, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Human Resources office, room B-317 
Rayburn House Office Building, by close of business the day before the 
hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.

    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette WordPerfect or MS 
Word format, typed in single space and may not exceed a total of 10 
pages including attachments. Witnesses are advised that the Committee 
will rely on electronic submissions for printing the official hearing 
record.

    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.

    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.

    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.

    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                

    Chairman Herger. Good morning. Welcome to today's hearing 
on ``rainy day'' and other special welfare funding issues.
    Today we will hear about several related matters requiring 
our attention this year and next, as we consider the future of 
the 1996 welfare reforms. Two provisions in the 1996 law will 
expire at the end of the current fiscal year: the Federal 
contingency grant fund and the supplemental grants to fast 
growing or relatively poor States.
    These programs are part of today's agenda, but they really 
point us toward larger issues and questions: how should our 
Nation's cash welfare program be funded as we go forward, and 
what signals and incentives should Washington give on spending 
or saving TANF funds?
    The latter question is one I want to explore in depth 
today, so I have encouraged witnesses to do some deep thinking 
on ways to encourage States to save more for rainy days. 
Fortunately, as we will hear, many are doing just that, aided 
by the more than 50 percent national caseload decline and fixed 
block grant funding.
    What a change this is. Under the former AFDC system, 
spending rose in good times and bad. In fact, the very idea of 
saving cash welfare funds for rainy day was almost 
unimaginable.
    Still, there are complications. This Committee fought back 
attempts to cut the TANF block grant when others saw welfare 
``surpluses'' as inviting targets for budget cuts. We won that 
fight, so now both sides have upheld their end of the 1996 
deal, when we traded fixed Federal funding for more 
responsibility to produce results.
    What remains is to find ways to help States save more of 
their block grants, while insulating such savings from 
Washington budget cutters. That would leave States better able 
to assist needy families in the event of tough times, and it 
should help protect taxpayers' interests in the long run as 
well. So I am eager to hear the testimony of all of our 
witnesses on these important issues.
    Without objection, each Member will have the opportunity to 
submit a written statement and have it included in the record 
at this point.
    [The opening statement of Chairman Herger follows:]

    Statement of Hon. Wally Herger, M.C., California, and Chairman 
                    Subcommittee on Human Resources

    Good morning, and welcome to today's hearing on ``rainy day'' and 
other special welfare funding issues. Today we will hear about several 
related matters requiring our attention this year and next as we 
consider the future of the 1996 welfare reforms.
    Two provisions in the 1996 law will expire at the end of the 
current fiscal year--the Federal contingency grant fund and 
supplemental grants to fast-growing or relatively poor states. These 
programs are part of today's agenda. But they really point us towards 
larger issues and questions:
     How should our nation's cash welfare program be funded as 
we go forward? and
     What signals and incentives should Washington give on 
spending or saving TANF funds?
    The latter question is one I want to explore in depth today. So I 
have encouraged witnesses to do some deep thinking on ways to encourage 
States to save more for rainy days. Fortunately, as we will hear, many 
are doing just that, aided by the more than 50 percent national 
caseload decline and fixed block grant funding. What a change this is. 
Under the former AFDC system, spending rose in good times and bad. In 
fact, the very idea of saving cash welfare funds for a rainy day was 
almost unimaginable.
    Still, there are complications. This Committee fought back attempts 
to cut the TANF block grant when others saw welfare ``surpluses'' as 
inviting targets for budget cuts. We won that fight. So now both sides 
have upheld their end of the 1996 deal, when we traded fixed Federal 
funding for more responsibility to produce results.
    What remains is to find ways to help States save more of their 
block grants, while insulating such savings from Washington budget 
cutters. That would leave States better able to assist needy families 
in the event of tough times, and it should help protect taxpayers' 
interests in the long run, too. So I am eager to hear the testimony of 
all of our witnesses on these important issues.

                                

    Chairman Herger. Mr. Cardin, would you like to make an 
opening statement?
    Mr. Cardin. Thank you, Mr. Chairman.
    I would request that my entire statement, along with a 
letter from Governor Perry, the Governor of Texas, be put into 
the record.
    Chairman Herger. Without objection.
    [The information follows:]
                             Office of the Governor
                                              Austin, Texas
                                                     March 16, 2001
Honorable Tommy G. Thompson
U.S. Secretary of Health and Human Services
Department of Health and Human Services
Washington, DC 20201

Dear Secretary Thompson:

    I am writing to urge you to extend the Temporary Assistance for 
Needy Families (TANF) supplemental grants through fiscal year 2002. 
These grants play an important role in helping hardworking men and 
women achieve self-sufficiency. They were designed to address the needs 
of States with especially high population growth or historically low 
welfare benefits, and are critical to enable us to help even more 
Texans move from welfare to work.
    It is imperative that these grants be extended while we work toward 
overall welfare reform reauthorization. I know you have heard from 
several Governors on this issue already, and I appreciate your 
consideration of this matter.
    Please let me know if I can be of any assistance to you.
            Sincerely,
                                                 Rick Perry
                                                           Governor

                                

    Mr. Cardin. Let me say first that I thank you for holding 
this hearing. I think it is a very important subject that we 
need to deal with this year, and I agree pretty much with 
everything you have said, on the framework within which we have 
to operate.
    I, too, share your joy that the commitment we made to the 
States has been upheld by Congress, that we have lived up to 
what we said we were going to do. We did fight off efforts by 
others to violate that commitment. The results, I think, have 
been very, very positive.
    I am not certain why, when we passed the legislation on the 
contingency fund and the supplemental grants, we had an 
expiration date in this year when TANF expires next year. It 
seems to me that it would be better suited for us to take up 
the longer term commitments on supplemental grants and 
contingency funds when we take up TANF. They are very much 
related.
    On the other hand, I do not want to see either of those 
programs expire, because if they do, then I think we are 
violating the basic understanding we have with the States.
    The supplemental grants, for example, would reduce TANF 
funds basically for 17 States by about 10 percent. It doesn't 
affect my State of Maryland, but it does affect many States in 
this country. I asked permission to put Governor Perry's letter 
in the record, where he strongly urges us to continue the 
supplemental grants because it is very important for the State 
of Texas.
    In regards to the contingency fund, we all know that the 
contingency fund was a major part of the TANF compromises that 
were reached, to take into consideration that we may go through 
a tough economic time. We haven't since we passed TANF. We 
haven't tested the contingency funds, as to how they might be 
called upon to be needed.
    Several States, most States, have put some money away just 
in case. That's exactly what we wanted them to do. They put 
some of their TANF money away and some of their own funds away. 
I have the figures here for Maryland, my own State, and we have 
reserved about $50 million of TANF funds and have dedicated 
about $80 million of our own resources in the event the economy 
moves into a difficult position. So the States are doing what 
we asked them to do.
    If you take a look at the total dollars that have been 
unencumbered, I think it's about $3 billion, that is available 
to the States collectively, and about $9 billion has not been 
spent. That's not a large sum of money when you consider that, 
since the inception of the program, about $80 billion has been 
made available to the States.
    So I think the programs have been working, and they have 
been working well. I would hope that we would either extend the 
supplemental grant and contingency fund for one more year, 
until we can get the TANF reauthorization, or we should really 
take a look at both of these programs, update for the current 
situation, look at some of the trigger mechanisms and determine 
whether those trigger mechanisms are appropriate, look at the 
appropriate funding levels--which might be difficult for us to 
do this year. But if we can't agree on an extension for 1 year, 
then I think we will need to do that.
    I very much look forward to the witnesses.
    [The opening statement of Mr. Cardin follows:]
      Opening Statement of Hon. Benjamin L. Cardin, M.C., Maryland
    Mr. Chairman, I want to thank you for calling us together today to 
consider how the States and the Federal government should respond to 
the obvious pressures that a recession would impose on our Nation's 
ongoing efforts to reform welfare. I don't think there is any doubt 
that the strength of our economy--which has seen the lowest 
unemployment levels in three decades--has played a critical role in 
helping people leave welfare for work.
    Should the recent slowdown in our economy turn into a recession, it 
will have an immediate impact on the TANF program. In fact, it has been 
projected that welfare caseloads will increase by five to seven percent 
for every single percentage point increase in our Nation's unemployment 
rate.
    Both the States and the Federal government have a role in planning 
for this possibility. States should reserve a sensible amount of TANF 
funding to meet the challenges of an economic downturn. This of course 
does not mean that States should leave vast amounts of TANF funds 
untapped when there are current, pressing needs for those resources. 
There is currently about $3 billion in unobligated Federal TANF 
spending nationwide, and we should have a discussion about whether that 
amount is too high, too low, or about right.
    Needless to say, any analysis of this issue must recognize the 
enormous variation between the States in how much they are reserving in 
``rainy day'' funds. I would note that my home State of Maryland has 
both a reserve of Federal TANF funds (about $50 million) and a 
dedicated reserve fund of State dollars for TANF purposes (about $80 
million).
    In support of State efforts to plan for the future, the Federal 
government can do two things. First, we must stop threatening to take 
back Federal money that States are holding in reserve. During past 
Congressional debates about the budget, there have been proposals to 
raid TANF surplus dollars, which obviously has a chilling effect on 
State plans to save money for a possible recession.
    And second, recognizing that we need a Federal backstop to help 
States encountering economic difficulties, we should extend and improve 
the Federal contingency fund. This fund expires in only five months, 
meaning we need to move quickly to reauthorize it. We also should 
consider making changes to the current contingency fund, such as better 
triggers and more realistic maintenance-of-effort requirements, to make 
it more accessible to States that need help.
    Before I conclude, let me mention one other important issue that 
our Subcommittee will consider today--the TANF Supplemental Grants, 
which go to States with low Federal funding per poor person and/or 
population increases. If our Subcommittee does not extend these grants, 
which expire at the end of this fiscal year, 17 States will have their 
annual TANF allocations cut by up to 10 percent.
    Whether we are talking about helping States meet current needs or 
plan for the future, a cut in their TANF funding is clearly a step in 
the wrong direction. On this issue, I would like to place in the record 
a letter urging the extension of the TANF Supplemental Grants from 
Governor Rick Perry, who succeeded President Bush as the Governor of 
Texas.
    Thank you.

                                

    Chairman Herger. Thank you, Mr. Cardin, for your comments.
    Before we go on to the testimony this morning, I want to 
remind the witnesses to limit their oral statements to 5 
minutes. However, without objection, all the written testimony 
will be made a part of the permanent record.
    Will the witnesses please have a seat at the table.
    On today's panel, we will hear from Paul Posner, Director 
of Federal Budget Issues at the U.S. General Accounting Office; 
Elaine Ryan, Acting Executive Director, American Public Human 
Services Association; Joel Potts, TANF Policy Administrator at 
the Ohio Department of Job and Family Services; and Harry 
Holzer, Professor of Public Policy, Georgetown University, and 
Visiting Fellow, The Urban Institute. Mr. Posner, we will now 
hear your testimony.

   STATEMENT OF PAUL L. POSNER, MANAGING DIRECTOR, STRATEGIC 
             ISSUES, U.S. GENERAL ACCOUNTING OFFICE

    Mr. Posner. Thank you very much, Mr. Chairman. It is a 
pleasure to be here today.
    I am reporting to you about the study that we have done for 
the Subcommittee, revisiting ten States that we had looked at 
several years ago, as part of our effort to monitor the 
unfolding of the TANF block grant.
    This particular testimony, as you indicated, focuses on the 
potential challenges posed for this new partnership when we do 
have a downturn, the potential cushions available for both 
Federal and State governments to deal with the specific 
contingency mechanisms that were alluded to, and options to 
promote savings for a rainy day.
    Fundamentally, the challenge is framed by the shift in 
Federal funding from an open-ended to a closed-ended program, 
which means that additional costs that might visit us in a time 
of recession are no longer available on an open-ended match 
from the Federal Government to the States. Once States exhaust 
their TANF balances, they are more or less on their own to fund 
those additional costs, which is why the Federal government 
provided a contingency fund as part of the bargain, if you 
will.
    Although the extent of the new program's response to a 
potential downturn still remains highly uncertain--conjectural, 
if you will--most observers and researchers and State officials 
agree that a downturn will put pressure on the program.
    Against this backdrop, we know that State budgets tend to 
be pro-cyclical. What do we mean by that? Unlike the Federal 
budget, States have balanced budget requirements, bond markets, 
other fiscal limitations, that prompt them to make painful 
choices during times of downturn. As people become needier, 
States have less money. Simply put, absent a deficit, they can 
lower spending, raise taxes, or seek Federal help. Sometimes 
these shocks come abruptly in the middle of a State's fiscal 
year on biennium.
    For States, fiscal planning is the key to smoothing out the 
impacts of business cycles, both for their overall budget and 
for programs like this that are sensitive to economic shocks. 
Rainy day funds dedicated to general budget stabilization funds 
are a normal part of State budgeting. Five percent of State 
money is generally in those funds, as well as rainy day funds 
dedicated to specific programs, with the general idea that you 
``fix the roof while the sun is shining.''
    The Federal government, too, has an interest, even in an 
era of devolution in promoting savings for the future, as you 
indicated. That is why we provided the contingency fund, in 
fact, to buffer the impact of a cyclical change.
    Recognizing that the Federal Government is often viewed as 
a funder of last, and sometimes first resort, in the event of a 
downturn, encouraging savings now helps smooth out the Federal 
obligation as well.
    Notwithstanding the contingency and loan fund, ironically 
it is not that fund that has been the main source of potential 
savings but, rather, the surprising unspent TANF balances that 
have come to play the role of an ``accidental'' rainy day fund 
for this program. They now total about $9 billion, or almost 15 
percent of the grant since its inception.
    Let me caution two things about those unspent balances. 
There is less here than meets the eye. First of all, these 
balances are highly uneven among the States. Ten States have 
zero or almost zero balances left. They have drawn down almost 
all their funds.
    Second, we know there are inconsistent definitions 
reporting across States as to what these balances consist of. 
HHS has offered a few categories for States to report. Some are 
calling them unobligated, some are calling them unliquidated. 
The idea is to try to capture how many of those balances are 
really pre-committed.
    The problem we have, when we go behind that data and look 
at the States, there is much uncertainty and confusion about 
the nature of these balances. States reporting money as 
unobligated, in fact, are reporting things that are, in fact, 
committed, like pre-contracts to child care. On the other hand, 
States reporting items as unliquidated obligations, in fact, 
are reporting spending to counties that are still largely 
uncommitted.
    So what I have to say here is just like we said 2 years 
ago: nobody really knows how much of that $9 billion is really 
available as a cushion.
    Why does this matter? The lack of clarity of balances puts 
them potentially at risk in the budget process, particularly 
when spending is constrained and numerous other demands press 
for attention. The notion that it is ``the State's money'' 
might not be enough to protect it for the future in this 
competitive environment.
    Unspent funds in any budget process create the 
presumption--and I would argue a legitimate presumption--that 
funds aren't needed. Every program has a burden of showing why 
these balances, in fact, are not only part of a bargain struck 
by the States, but part of a national reserve to address 
contingencies and cyclical pressures.
    So we argue that the unique cyclical nature of this program 
argues, first of all, for better reporting of the nature of 
these balances, particularly how much would States be planning 
to set aside for future contingencies. We recommended this in 
1998 and we have not seen any progress really along this score.
    Secondly, we think that improved planning by the States 
themselves is important as well. We noted that States largely 
have not dedicated any reserves from their own money, partly 
because they can't count those reserves for their maintenance 
of effort requirements. Only Maryland really has found a way to 
do this. The Federal Contingency and Loan Fund is largely not 
available because of the overly stringent requirements.
    So what we say in conclusion here is we provide some 
options for you to think about, changing the contingency fund, 
providing a little more flexibility for States to dedicate 
rainy day funds as part of their MOE, and ultimately provide 
some better information so that we know going forward what we 
really have to buffer the future in a downturn.
    Thank you.
    [The prepared statement of Mr. Posner follows:]

Statement of Paul L. Posner, Managing Director, Strategic Issues, U.S. 
                       General Accounting Office

Mr. Chairman and Members of the Subcommittee:
    Thank you for inviting me here today to discuss states' plans for 
operating their welfare programs in the event of an economic downturn. 
In the block grant environment, the federal government has an interest 
in encouraging states to save for future contingencies, but within a 
framework that recognizes that the size of the reserve will remain 
largely a state determination made under conditions of inherent 
uncertainty. In 1998 we reported on states' plans for financing their 
welfare programs in the event that the economy unexpectedly turned 
down.\1\ At that time most states' budget forecasts predicted that the 
robust economy would continue providing strong revenue growth potential 
and, more important for states' Temporary Assistance for Needy Families 
(TANF) budgets, diminishing costs in many social services programs. 
Last year, this subcommittee asked us to revisit the states examined in 
our 1998 report and to, among other things, look anew at their 
contingency plans. In part, my statement today includes research we 
conducted in 10 states (California, Colorado, Connecticut, Louisiana, 
Maryland, Michigan, New York, Oregon, Texas, and Wisconsin).
---------------------------------------------------------------------------
    \1\ Welfare Reform: Early Fiscal Effects of the TANF Block Grant 
(GAO/AIMD-98-137, August 22, 1998).
---------------------------------------------------------------------------
    As we will discuss more fully later in this testimony, the data 
available on the levels and adequacy of states' reserves is 
insufficient and misleading. Furthermore, our case studies suggest that 
most states have done little planning for economic contingencies. 
Because states' new welfare programs remain untested in times of 
downturn, these uncertainties make it difficult for anyone to predict 
how states will respond and how former welfare recipients will be 
affected if and when economic conditions change. Despite the 
significant changes made to the nation's welfare program, the economy 
will no doubt play a role in determining how many people return to the 
welfare rolls and how long they, and those currently on the rolls, will 
remain if there are fewer job opportunities available.
    As economic forecasts have begun to change, there is some concern 
that the states might not be as prepared as they could be to manage the 
new fiscal challenges under welfare reform. Many adults have left the 
rolls for work since TANF was implemented--caseloads have dropped more 
than 50 percent nationwide--and those remaining on the rolls have 
increased their work efforts. Greater emphases on work implies a 
tighter link to work and hence the economy. This could make TANF more 
sensitive to an economic downturn than Aid to Families with Dependent 
Children (AFDC) if former recipients return to the rolls when they are 
laid off, causing state TANF budgets to rise. However, the flexibility 
of the grant combined with significant unspent TANF balances may help 
mitigate the fiscal fallout from economic downturns.
    In today's testimony I plan to address three points:
     The shifting fiscal balance between the states and the 
federal government and the challenges this new partnership poses in 
financing and strengthening the safety net during times of economic 
stress.
     The potential for states to draw on their TANF grants and 
state reserves to cushion fiscal and economic shocks to the program.
     The complexity in the design of existing TANF contingency 
mechanisms that limits the effectiveness of these mechanisms in 
responding to uncertainties in the economy.
    Finally, I would like to conclude with some options this 
Subcommittee might consider that could lead to refinements in the new 
fiscal partnership on welfare, giving the states more incentives to 
save while maintaining the federal role in the safety net.
New Fiscal Partnership Poses Challenges
    The Personal Responsibility and Work Opportunity Reconciliation Act 
of 1996 (P.L. No. 104-193) (PRWORA) made sweeping changes to national 
welfare policy. Principally, these reforms gave states the flexibility 
to design their own programs and the strategies necessary for achieving 
program goals, including how to move welfare recipients into the 
workforce. But because the act also changed the way in which federal 
funds for welfare programs flow to the states, most of the program's 
fiscal risks also shifted to the states. PRWORA created the TANF block 
grant, a fixed federal funding stream that replaced the AFDC and 
related programs inwhich federal funding matched state spending and 
increased automatically with caseload. Under AFDC, which entitled 
eligible families to aid, the federal funding was largely open-ended so 
that if a state experienced caseload and related cost increases, 
federal funds would increase with state funds to cover expenditures for 
the entire caseload. This open-ended federal commitment provided that 
financing for every dollar spent on these programs was shared by the 
federal government and the states, thereby limiting the states' 
exposure to escalating costs. In contrast, the TANF block grant 
eliminated the federal entitlement to aid. The federal government 
provides a fixed amount of funds regardless of any changes in state 
spending or the number of people the programs serve. While the states 
must also provide a fixed level of funds from their own resources--
their maintenance of effort (MOE) \2\--they are now responsible for 
meeting most of the costs associated with any increase in caseload on 
their own. How they plan to manage this fiscal risk is what I refer to 
in this testimony as contingency planning.
---------------------------------------------------------------------------
    \2\ States' MOE requirements are based on their own spending in 
federal fiscal year 1994 on AFDC, Job Opportunities and Basic Skills 
(JOBS), Emergency Assistance (EA), related administrative costs, and 
AFDC/JOBS child care programs: AFDC-Child Care Program, Transitional 
Child Care, and At-Risk Child Care programs. A state that does not meet 
PRWORA's work participation rates must maintain at least 80 percent of 
its MOE. A state that meets its work participation rate must maintain 
at least 75 percent of its MOE.
---------------------------------------------------------------------------
    In this new welfare partnership, it is tempting to suggest that 
since welfare reform devolved decisions regarding eligibility and 
program services to the states, the potential volatility of the 
caseload is no longer a federal concern. However, in light of both 
federal requirements and their own fiscal limitations, states will be 
challenged during a downturn to maintain or increase state funds for 
benefits when they are most needed. States' decisions regarding who to 
serve, for how long, and with what services will surely depend on how 
much flexibility they have with the resources--state and federal--that 
are available to finance their welfare programs. Although considerable 
uncertainties exist about the impacts of downturns, the potential 
cyclical nature of program costs as well as the fiscal constraints 
states face in responding to hard times heightens the importance of 
fiscal planning. Helping states maintain their programs was indeed 
recognized as a federal interest by Congress when it included the 
Contingency Fund and Loan Fund--mechanisms for states to gain access to 
additional federal funds--in TANF.
Impact of Economic Cycles on TANF Caseloads Is Uncertain
    It is unclear what impact a major economic downturn or recession 
will have on welfare participation given the significant reforms in 
national welfare policy. Recent studies have tried to establish a link 
between caseload trends and certain macroeconomic indicators in part to 
determine how sensitive welfare programs might be to changes in the 
economy. While the research literature generally suggests that 
caseloads may very well increase in an economic downturn, there is 
substantial uncertainty regarding the extent of the impact. These 
studies point to the variety of other factors affecting caseload 
levels, particularly with the advent of welfare reform.
    For example, a 1999 Council of Economic Advisors (CEA) report 
suggests that a 1 percent increase in the unemployment rate could 
produce a 5 to 7 percent increase in welfare caseloads. However, this 
same study noted that changes in family structure and welfare policies 
can significantly mitigate the impact of an economic downturn on 
caseloads. In fact, the recent caseload drop was at least partly due to 
reforms ushered in by TANF--the study suggests that about one-third of 
the caseload reduction from 1996 through 1998--independent of the 
strong economy.\3\
---------------------------------------------------------------------------
    \3\ A recent survey of the research literature on this topic notes 
that there is a ``mixed bag'' of evidence regarding policy reform's 
influence on caseload size. Some studies found that policy reforms did 
not independently cause--or have an influence--on caseload declines. 
See Bell, Stephen H. ``Why Are Welfare Caseloads falling?'' Urban 
Institute, March 2001.
---------------------------------------------------------------------------
    Just as the reforms may have prompted reduced caseloads during 
times of economic expansion, greater emphases on work implies a tighter 
link to work and hence the economy, making TANF more sensitive to an 
economic downturn than AFDC. On the other hand, the reforms may pose 
significant disincentives for people to return to the welfare rolls or 
to apply even if they are eligible during downturns. For example, 
PRWORA imposes a 5-year lifetime limit on federal assistance on 
individuals receiving on going assistance; \4\ many may try other 
options first before returning to the welfare rolls. In addition, many 
states now offer a variety of work supports such as child care, 
transportation subsidies, and an earned income tax credit (EITC) to 
families not receiving cash assistance. These supports may be enough to 
allow earnings from even a part-time job to support a family without 
returning to the cash assistance rolls.
---------------------------------------------------------------------------
    \4\ In promulgating regulations concerning TANF, the Department of 
Health and Human Services (HHS) makes a distinction between TANF- or 
MOE-funded activities that are considered assistance and TANF- or MOE-
funded activities that are not considered assistance. The distinction 
is important because activities that are considered ``assistance'' are 
subject to a variety of spending limitation and requirements--including 
work, time limits, child support assignments, and data reporting. 
Activities considered to be nonassistance would not have the same 
requirements associated with them. Assistance includes benefits 
directed at basic needs even when based on participation in a work 
experience or community service activity. It also includes childcare, 
transportation, and supports for families that are not employed.
---------------------------------------------------------------------------
State Budget Processes Could Have an Impact on TANF Programs
    Budgetary stress caused by caseload volatility may be compounded by 
the limitations placed on most states by constitutional or statutory 
requirements to balance their general fund budgets. During a fiscal 
crisis, state policymakers face difficult choices regarding whom to 
serve, for how long, and with what services. But more important to the 
discussion today is that each of these ``hard choices'' must be 
financed in the context of fiscal limitations--including legislative 
restrictions, constitutional balanced budget mandates, or conditions 
imposed by the bond market--on state's ability to increase spending, 
especially in times of fiscal stress. For example, revenues may come in 
lower than expected during an economic downturn and a state's enacted 
budget can fall into deficit. State balanced budget requirements often 
motivate states to both reallocate resources within their budgets and 
cut program spending or increase taxes during recessions. Such 
difficulties, I am sure, come as no surprise to many of the members of 
this Subcommittee who have had to make many of these difficult choices 
while serving in state legislative bodies. For these reasons prudent 
fiscal planning, especially contingency budgeting for a fiscal ``rainy 
day,'' becomes particularly important.
    In a fiscal crisis, a state's need to cut spending or increase 
revenues can be alleviated if it has accumulated surplus balances in 
rainy day funds--these surpluses may be used to cover a given year's 
deficit.\5\ However, unless there are reserves specifically earmarked 
for low-income families, welfare programs will have to compete with 
other state priorities for any of the rainy day funds.
---------------------------------------------------------------------------
    \5\ Budgeting for Emergencies: State Practices and Federal 
Implications (GAO/AIMD-99-250, September 30, 1999).
---------------------------------------------------------------------------
Reserves Are Key to States' Contingency Plans but States Cite 
        Disincentives To Save
    Finding the right balance between saving and investing resources in 
programs that help people make the transition from welfare to work 
continues to be one of the main challenges for states as they develop 
strategies to address the needs of low-income families. To set aside 
reserves for future welfare costs, states have two options: they can 
save federal TANF funds and/or they can save their own funds. However, 
states noted significant disincentives to save associated with both of 
these options. State officials told us that there is concern that 
accumulating unspent TANF balances might signal that the funds are not 
needed and that they have been under considerable pressure to spend 
their TANF balances more quickly to avoid the accumulation of large 
unspent balances in the U.S. Treasury. States have accumulated a 
portion of their own funds in general purpose rainy day funds, but 
welfare would have to compete with other claims for these dollars when 
these dollars are released from state treasuries.

Flexibility of TANF Grants Allows States To Build Reserves
    Under TANF, the amount of each state's block grant was based on the 
amount of federal AFDC funds spent by the state when caseloads and 
spending were at historic highs. Because caseloads have fallen so 
dramatically, generally states have been able to reap the fiscal 
benefits of welfare reform by parlaying abundant federal resources into 
new programs and savings. Any federal funds they choose to reserve must 
remain at the U.S. Treasury until the states need them for low-income 
families.\6\ As of September 30, 2000 states reported leaving $9 
billion in unspent TANF funds at the U.S. Treasury; this amounts to 
14.5 percent of the total TANF funds awarded since 1996.\7\
---------------------------------------------------------------------------
    \6\ HHS regulations stipulate that a state must obligate by 
September 30 of the current fiscal year any funds for Expenditures on 
Non-Assistance. The state must liquidate these obligations by September 
30 of the immediately succeeding federal fiscal year for which the 
funds were awarded. Unobligated funds from previous fiscal years may 
only be expended on ``assistance'' and the administrative costs related 
to providing ``assistance''.
    \7\ These data are based on preliminary analysis of state-reported 
data. As of April 2001, HHS' Administration for Children and Families 
(ACF) has not publicly released this data.
---------------------------------------------------------------------------
    Although many might view these balances as a de facto rainy day 
fund for future welfare costs, in fact there is probably less here than 
meets the eye. First, as we will discuss in more detail, the data 
reported by the states is misleading. Second, the reported balances 
themselves vary greatly among the states, suggesting that some states 
may not be as prepared to address the fiscal effects an economic 
downturn may have on their welfare programs without additional federal 
assistance while others may have saved substantially more than they 
might need. For example, some states report spending all their federal 
funds--essentially holding nothing in reserve--while others report 
accumulated reserves totaling more than their annual block grants. For 
example, Wyoming reports that nearly 70 percent of the TANF funds it 
has been awarded since 1997 remain unspent whereas Connecticut reports 
spending all of its TANF funds.

Reliable Data on Adequacy of State Reserves Are Not Available
    States do not report unspent balances in a consistent manner making 
it difficult to ascertain how much of these balances is truly 
uncommitted and available for future contingencies. Therefore, federal 
policymakers lack reliable information to help assess states' plans for 
economic contingencies, whether the levels of available funds are 
adequate, and whether all states have access to these funds.
    Department of Health and Human Services' (HHS) regulations require 
that if a state has allocated a portion of its TANF grant to a rainy 
day fund, the state should report these balances as unobligated.\8\ 
But, state rainy day funds for welfare programs represent only a 
portion of the total reported unobligated balances. These balances can 
represent funds the state has saved for a rainy day, funds for which 
the state has made no spending plans, or funds the state has committed 
for activities in future years. For example, in developing a budget for 
a new child care program, officials in Wisconsin assumed that once the 
program was fully subscribed it would require all available resources--
including any unobligated TANF funds from previous fiscal years. State 
officials said that even though at the end of federal fiscal year 2000 
the state reported $40 million TANF funds as unobligated, the state has 
programmed these funds to pay child care subsidies to low-income 
families in future reporting periods. This is a case where a reported 
unobligated balance provides very little information about whether 
these funds are committed or simply unbudgeted.
---------------------------------------------------------------------------
    \8\ HHS regulations require states to report on the status of their 
unspent TANF funds. Under HHS regulations the states use two categories 
to report on the status of these funds: (1) unobligated balances 
represent funds not yet committed for a specific expenditure by a state 
and (2) unliquidated obligations represent funds states have committed 
but not yet spent.
---------------------------------------------------------------------------
    States also report unspent TANF funds as unliquidated obligations, 
which means that, to varying degrees, an underlying commitment exists 
for the funds either through a contract for services for eligible 
clients or to a county for expenses it will incur in operating a 
county-administered welfare program. But it is unclear how much of what 
is currently obligated is committed for future needs. For example, both 
California and Colorado have county-administered welfare systems. These 
states pass most of their annual block grant directly to the counties. 
As caseloads have continued to decline in both states, the budgets 
over-estimated expenditures leaving considerable balances unspent. 
Although these funds remain in the U.S. Treasury until a county needs 
to spend them, they remain as unliquidated obligations committed to the 
counties. California reports that it has over $1.6 billion in 
unliquidated TANF obligations. But the state reports no unobligated 
balances, implying that all these funds are earmarked. Recently, 
California amended its state statute to allow the state to deobligate 
some of these funds, if necessary, and make them available to other 
counties. Likewise, as of September 30, 2000 Colorado reports about $95 
million in unliquidated obligations, but passes virtually all TANF 
resources to the counties. As of June 30, 2000 the state estimated that 
counties hold about $67 million in reserves--or about 70 percent of the 
total unliquidated obligations--for future contingencies.
    As highlighted in the above examples, the difference between 
unobligated balances and unliquidated obligations is often unclear and 
varies by state. Significant portions of California's and Colorado's 
unspent funds are not yet actually committed for specific expenditures 
but these facts cannot be determined based on the aggregate data, in 
part because of the way HHS requires states to report funds. Reporting 
a significant share of their unspent balances as unliquidated 
obligations implies that there is an underlying commitment on these 
funds when, in fact, these funds are no more committed than the funds 
Wisconsin must report in its unobligated balances but which are 
budgeted for expected outlays in Wisconsin's child care subsidy 
program.

Contingency Planning Receives Little Attention as States Cite Few 
        Incentives to Save
    Even though some states might consider their unobligated balances 
for TANF to be rainy day funds, it does not appear that the amounts 
reserved were based on any kind of contingency planning or analysis. 
For example, 5 of the 10 states we studied told us that they consider a 
portion of the funds left at the U.S. Treasury to be rainy day funds 
for unanticipated program needs. But the levels of the reserves 
established in those five states were not determined through a fiscal 
planning process that reflects budgetary assumptions about projected 
future needs. Instead, these states' statutes merely designate all TANF 
funds not already appropriated by the state legislature for other 
purposes as constituting the state's welfare rainy day fund, a method 
that clearly is not based on anticipated needs or contingencies.

Improved Reporting Requirements Could Improve Federal Oversight and 
        Provide States With Incentives To Save
    The lack of transparency regarding states' plans for their unspent 
TANF funds prompted us, in 1998, to recommend that HHS and the states 
work together to explore options for enhancing the information 
available regarding these balances. Although HHS, the National 
Governor's Association (NGA), and the National Conference of State 
Legislatures (NCSL) all agreed with us that more information regarding 
unspent TANF balances would be useful, little progress has been made 
implementing this recommendation and HHS' final regulations, issued on 
April 12, 1999 did not address this issue. States were already 
concerned that the TANF reporting requirements would pose a substantial 
burden on state program administration and argued that adding another 
reporting requirement to allow states to signal their intentions for 
their unspent balances would only add to those burdens. However, the 
lack of useful information on these balances continues to weaken the 
effectiveness of congressional oversight over TANF funding issues, 
including how well prepared states may be to address a fiscal downturn.
    Our 1998 recommendation proposed a strategy that state and federal 
officials had tried before and found to be successful. In 1981, a 
number of categorical grants were block granted to states to provide 
maximum flexibility in developing and managing programs, along the same 
lines that TANF was designed in 1996. However, due to variations in the 
way states reported information to the federal government on activities 
funded by some of these block grants, Congress had no national picture 
of the grants' impact. States and some national organizations 
recognized that these aggregate data were important and developed their 
own strategies to collect the data.\9\ We found that a cooperative data 
collection approach was easier to implement when (1) there was federal 
funding to support data collection activities, (2) national-level staff 
worked with state officials, and (3) state officials helped in systems 
design. We continue to believe that better information on the status of 
these unspent balances is crucial to effective oversight and could even 
enhance states' incentives to save some of their TANF funds. Absent 
credible information on balances, there may be a greater risk that 
Congress could take action to recoup TANF funds--a prospect that 
reportedly has prompted some states to draw down and spend their TANF 
funds rather than leave them in the Treasury.
---------------------------------------------------------------------------
    \9\ Block Grants: Federal-State Cooperation in Developing National 
Data Collection Strategies (GAO/HRD-89-2, November 29, 19998) and Block 
Grants: Federal Data Collection Provisions (GAO/HRD-87-59FS, February 
24, 1987).
---------------------------------------------------------------------------
States Have Few Incentives To Create State-Funded Welfare Reserves
    Although many states have healthy general rainy day funds from 
which all programs would compete for funds during times of fiscal 
stress, only one of the states in our review, Maryland, has earmarked 
state funds in a reserve specifically for contingencies in its welfare 
program. Setting aside state funds in reserve for welfare requires 
tradeoffs for state decisionmakers among competing needs for the funds 
during a downturn. In addition, any funds a state sets aside for future 
welfare contingencies cannot count toward a states' maintenance of 
effort in the year they are reserved--in order to qualify as MOE, the 
funds must be spent. Therefore, it is a very expensive proposition 
indeed for a state to budget both for a welfare reserve and to meet its 
MOE because it then would have far fewer resources available to finance 
other state priorities.
    Maryland found a way to transfer the costs of saving state funds to 
the federal government. In state fiscal year 2001, the state identified 
nine program accounts with annual expenditures of state funds totaling 
about $30 million that, under the broad and flexible rules governing 
TANF expenditures, could be funded with federal funds. In developing 
the budget, the state replaced these state funds with federal funds. 
Instead of using the``freed-up'' state funds for nonwelfare activities 
the state used them to establish a dedicated reserve for its welfare 
program.

Design of Federal Contingency Mechanisms Is Complex and Restrictive
    While the ability to carry forward TANF balances is likely viewed 
as the principle mechanism by which states can prepare for a rainy day, 
PRWORA also created two safety-net mechanisms for states to access 
additional federal resources in the event of a recession or other 
emergency--the $2 billion Contingency Fund for State Welfare Programs 
(Contingency Fund) and the $1.7 billion Federal Loan Fund for State 
Welfare Programs (Loan Fund).
    The Contingency Fund is authorized through 2001, at which time it 
expires. The President's fiscal year 2002 budget proposal did not 
include a request to reauthorize the Contingency Fund. Because of a 
provision in the Adoption and Safe Families Act of 1997 that reduced 
the TANF Contingency Fund by $40 million, the current balance in the 
Contingency Fund is $1.96 billion.\10\ States are deemed ``needy'' and 
eligible to receive funds from the Contingency Fund if they trigger one 
of two criteria: (1) the state's unemployment rate exceeds 6.5 percent 
for 3 months and is equal to at least 110 percent of its rate in the 
same period of the previous year or (2) its average monthly food stamp 
caseload for the most recent 3-month period is equal to at least 110 
percent of the average monthly caseload from the same 3-month period in 
fiscal year 1994 or 1995. Once eligible, a state must certify that it 
has increased its own current spending to prewelfare reform levels 
before it can gain access to the fund.
---------------------------------------------------------------------------
    \10\ The Adoption and Safe Families Act of 1997 reduced the 
contingency fund for state welfare programs by $40 million over four 
years (P.L. No. 105-89, Sec. 404, 111 Stat. 2134)
---------------------------------------------------------------------------
    Requiring states to increase their own financial stake in their 
welfare programs before giving them additional federal funds is, in 
principle, a reasonable approach that seeks to balance both the federal 
government's interest in ensuring that states in trouble have access to 
additional funds and its interest in ensuring that states have done 
everything possible to address the shortfalls before turning to the 
federal treasury. Not only does the statute require states to bring 
their spending up to the prewelfare reform levels at a time when states 
are experiencing fiscal stress, but PRWORA establishes a different and 
more challenging base for the Contingency Fund's MOE. While a state's 
MOE requirement under the basic TANF program can include state funds 
expended under certain state programs and child care expenditures, the 
MOE requirement for the Contingency Fund does not include these items.
    Because states spend a significant share of their MOE funds on 
activities that do not qualify as Contingency Fund MOE expenditures, 
state budget officials told us that, rather than shifting their 
spending priorities to meet the Contingency Fund MOE, they would find 
other ways to manage deficits in their TANF budgets before they could 
consider turning to the Contingency Fund. In 1997 eight states 
qualified for contingency funds.\11\ However, only two states requested 
and were awarded contingency funds--North Carolina and New Mexico. In 
the end, only New Mexico complied with the Fund's requirements and 
accepted $2 million. No state has used the Fund since 1997.
---------------------------------------------------------------------------
    \11\ These states are Alaska, California, District of Columbia, 
Hawaii, New Mexico, New York, North Carolina, and Washington.
---------------------------------------------------------------------------
    Equally important as the requirement that states raise their own 
financial commitment in order to gain access to additional federal 
funds is a requirement that states share in all additional program 
costs--even beyond the MOE requirements. Requiring a match encourages 
states to be more cost-conscious than if the costs of an expanding 
caseload were covered only with federal dollars. While the Contingency 
Fund requires states to match all federal dollars at the states' 
federal medical assistance percentage (FMAP) rate \12\ the statute goes 
a step further. The statute limits the monthly draws to one-twelfth of 
20 percent of a state's annual block grant. This limitation requires a 
complex annual reconciliation process to certify that the state meets 
its matching requirement but also that it did not receive more than its 
monthly proportional share of contingency funds (see figure 1).\13\ 
Prorating a state's draws from the Contingency Fund--especially if the 
state qualifies for a period that spans two federal fiscal years--
reduces the share of federal funds to which it is entitled. This 
effectively increases the matching requirement (even higher than 
required under AFDC), thus raising the state's costs for gaining access 
to the funds.
---------------------------------------------------------------------------
    \12\ Under AFDC, state spending was matched at a rate based on each 
state's per capita income. This rate, FMAP, is also used for other 
federal-state matching programs such as Medicaid. It ranges from 50 
percent for wealthy states to 80 percent for poorer states.
    \13\ For more information see GAO/AIMD-98-137.
---------------------------------------------------------------------------

     Figure 1: The Contingency Fund's Annual Reconciliation Process

    As currently structured, the reconciliation process favors states 
that are ``needy'' within a single federal fiscal year compared with 
those that are ``needy'' in months that overlap consecutive federal 
fiscal years. A state that is needy for all 12 months during a federal 
fiscal year would have to match all funds drawn at its applicable 
fiscal year FMAP rate with no adjustments for the number of months it 
was eligible because it was needy throughout the year. However, a state 
that is needy for 12 consecutive months that span 2 federal fiscal 
years (e.g., 6 months in each year) with an identical FMAP rate will 
see its federal match rate reduced by half because of the adjustment 
made for number of months the state was needy in each year.
    To illustrate, the state that was needy for an entire federal 
fiscal year and was eligible for and had drawn $20 million of 
contingency funds would be able to retain these funds, provided the 
state had spent the necessary matching funds. In contrast, the state 
that qualified as needy for the same number of months and was eligible 
for the same amount from the contingency Fund but overlapping 2 fiscal 
years would initially obtain $10 million in each year, reflecting its 6 
months of eligibility in each year, but then the state would have to 
remit half of these funds after each year's reconciliation. This latter 
reduction is the result of prorating the state's grant by the number of 
months it was eligible for contingency funds, even though the state's 
initial claim for each year was already based on the number of months 
of eligibility. As a result, the second state would be allowed to 
retain a total of $5 million of federal funds in that fiscal year, $5 
million of federal funds in the next fiscal year--a total of $10 
million even though its eligibility over these 2 years was the same as 
the state receiving $20 million. In addition, the second state would 
have to meet the Contingency Fund MOE in both years.
    Unlike the Contingency Fund, the Loan Fund does not have triggers. 
Instead, states that have not incurred penalties for improper use of 
TANF funds are eligible for loans from the Loan Fund. Such loans are to 
have a maturity of no more than 3 years at an interest rate comparable 
to the current average market yield on outstanding marketable 
obligations of the U.S. Treasury with comparable maturities. Some state 
officials told us that they are eligible for better financing terms in 
the tax-exempt municipal bond market. More important, officials in some 
states indicated that borrowing specifically for social welfare 
programs in times of fiscal stress would not receive popular support.
    In summary, neither the Contingency Fund--as currently designed--
nor the Loan Fund is likely to be used by states in a fiscal crisis to 
obtain more resources for their welfare programs. The Loan Fund is most 
likely the wrong mechanism to provide assistance to states in a fiscal 
crisis. However, if the Contingency Fund is reauthorized, Congress 
could also contemplate improvements to enhance its usefulness in 
addressing budgetary shortfalls in states' welfare programs that, at 
the same time, could provide stronger incentives for states to save for 
a rainy day.

Options To Strengthen Contingency Planning
    Although PRWORA struck a new fiscal balance between the federal 
government and the states in terms of welfare spending, both the states 
and the federal government have a significant interest in preparing the 
program to meet challenges in times of fiscal distress. Contingency 
planning is about being prepared for the unknown--as the economy shows 
possible signs of weakening, we need to begin to think about how 
prepared we are to maintain this important aspect of the nation's 
safety net. Although many view the states' large unspent TANF balances 
as the de facto contingency fund, these balances vary across states; 
this implies that some states may be better prepared for a recession 
than others. More important, current reporting requirements do not give 
us reliable, consistent information regarding states' actual plans for 
these monies. According to NGA, few states have engaged in a systematic 
fiscal planning process to project their needs under a variety of 
economic scenarios. While we don't know how states' welfare programs 
will respond to a weakened economy, we know both the federal government 
and the states have a responsibility to ensure the viability of TANF in 
good times and bad.
    Before addressing how contingency planning can be improved for the 
future, the federal government needs better information on states' 
current plans. At the same time, Congress could consider ways to both 
strengthen federal contingency mechanisms and give states greater 
incentives to save for the future.
Improved National Reporting
    In 1998, we recommended that the Secretary of Health and Human 
Services explore with the states various options to enhance information 
regarding states' plans for their unused TANF balances. We said that 
such information could
     include explicit state plans for setting aside TANF-funded 
reserves for the future,
     provide more transparency regarding these funds and 
enhance congressional oversight, and
     provide states with an opportunity to more explicitly 
consider their long-term fiscal plans for TANF.
    Although HHS concurred with our recommendation, to date, we have 
seen no progress in this area. We continue to believe that Congress 
would benefit from more complete information on states' plans for 
future contingencies, including unspent TANF balances. While states 
often face burdens with respect to federal financial reporting 
requirements, states have historically recognized the benefits of 
cooperative data collection and reporting efforts and worked 
successfully with federal agencies to collect data that can give 
oversight officials a broad, national perspective of how they are using 
federal block grant funds. Allowing for more transparency regarding 
states' fiscal plans for TANF funds could enhance congressional 
oversight over the multi-year timeframe of the grant and provide states 
with an opportunity to more explicitly consider their long-term fiscal 
plans for the program. While the opportunity to more clearly signal 
their intentions for these funds could prompt states to save, Congress 
must have some assurance that states' estimates of their contingency 
needs were developed using credible, realistic estimating procedures.
    In order for a state to report to the federal government a balance 
in a rainy day fund, and in order for the federal government to have 
some level of confidence in such a figure, the federal government could 
give states guidance on how it could designate its TANF balances as a 
valid rainy day fund. Such guidance could include requirements that a 
state rainy day fund (1) include criteria both for estimating the 
appropriate reserve balances and for releasing funds and (2) be 
auditable. This guidance could help states signal that much of these 
balances are, in fact, committed. Furthermore, requiring that reserves 
be determined by credible, transparent estimating procedures would help 
provide better estimates of the potential need for federal contingency 
funds.

Options To Improve the Federal Contingency Mechanism
    The Contingency Fund, as currently designed, has not proven to be 
an inviting option to the states that have actually experienced fiscal 
stress to date. Should Congress decide to reauthorize the Contingency 
Fund, consideration could be given to approaches that could both 
improve the usefulness of the fund for hard-pressed states as well as 
ensure that states contribute their fair share to future welfare costs. 
Such approaches could include (1) eliminating the more restrictive the 
Contingency Fund-MOE and substituting the more flexible basic TANF-MOE 
and (2) eliminating the Monthly Payment Limitation (MPL) on the amount 
of contingency funds to which each state has access. These actions 
could help strengthen the role of the Contingency Fund in state 
contingency budgeting.
    Realigning the MOE and eliminating the MPL would make the 
Contingency Fund more accessible and, therefore, more responsive. If 
states had better access to federal contingency funds, they might be 
more likely to use the money when needed. However, greater 
accessibility must be balanced by fiscal responsibility. It is 
important to be mindful of this balance so as not to make it too easy 
for states to access federal contingency funds because they might be 
less likely to save for a rainy day on their own, which could pose 
risks to the federal Treasury.
    The changes discussed above would still require states to increase 
their own spending to pre-TANF levels (i.e., meet a 100 percent MOE) to 
gain access to the Contingency Fund--a higher level than they must 
maintain for the regular TANF program--as well as provide a matching 
share for the additional federal funds. By broadening the fiscal base 
that states can draw upon to meet this higher MOE, these changes might 
not only make the fund more accessible in times of need but prompt 
states to save their own funds in anticipation of accessing the federal 
funds.

Options To Increase States' Incentives To Save
    There are other options that could strengthen states' incentives to 
save. For example, Congress could (1) allow states to count rainy day 
funds towards their MOE and (2) allow states to draw down their entire 
TANF grant and save these funds in their own treasuries.
    Allowing states to count rainy day funds towards their MOE would 
give them a greater incentive to save. However, ``maintenance of 
effort'' implies an actual expenditure, and is a critical aspect of 
PRWORA. If states save their own funds instead of spending them, they 
might be more likely to draw down all of their TANF dollars now to 
replace the state dollars they save for the future. However, this 
outcome can be mitigated by limiting the amount of rainy day funds that 
states could count towards their MOE. In addition, as we suggested 
earlier when discussing the TANF balances saved by states, states could 
also be required to certify that state rainy day funds are in fact 
auditable and include criteria for estimating and releasing the funds.
    Some state officials have argued that their incentive to save TANF 
funds for the future could be bolstered by allowing states to keep 
unspent TANF funds in their own accounts rather than at the U.S. 
Treasury. They believe that this might reduce incentives for Congress 
to rescind unspent balances since the outlays would be recognized 
earlier at the time of the grant award, not when the money is actually 
spent for a program need. State officials also told us that this would 
alleviate the perceived pressure to spend TANF funds rather than save 
them. However, it is important to note that, regardless of where these 
federal funds are ``stored,'' states are accountable for these funds. 
As such, Congress still needs consistent, reliable, and auditable 
information on these funds.
    There are significant issues associated with this proposal. First, 
if states draw down all unspent balances in the current year, the rate 
of outlays recorded for the TANF program would shift forward. 
Accordingly, the federal budget surplus would be proportionately lower 
in the near term. Second, the federal government would incur interest 
costs while states could realize interest earnings. The Cash Management 
Improvement Act of 1990 (CMIA) helps ensure that neither the states nor 
the federal government incur unnecessary interest costs or forgo 
interest income in the course of federal grant disbursement by 
prohibiting states from drawing down funds until they are needed. If 
Congress permitted states, notwithstanding CMIA, to draw down their 
TANF balances to establish reserves, it could also require states to 
reimburse the U.S. Treasury for any interest they earn on the 
drawdowns. This would maintain the spirit of the CMIA by preserving 
fiscal neutrality for the federal government and the states, since the 
states could use interest earnings they gain on investing the drawdowns 
to reimburse the Treasury.
    Essentially, states would have to justify why TANF deserves an 
exemption from a governmentwide grant policy that settled years of 
intergovernmental conflicts between federal and state administrators. 
The permanent nature of the appropriation to each state as well as the 
significant devolution of responsibilities to states for addressing the 
program's fiscal risks may argue for such a change, but other federal 
interests would have to be weighed as well. For example, some may argue 
that CMIA promotes transparency by ensuring that states' unspent 
balances remain in the federal Treasury rather than in state 
treasuries. This concern could be addressed through federal reporting 
on states' expenditures and reserves.

Contacts and Acknowledgments
    In conclusion, the TANF program has established a new fiscal 
partnership that has supported the transition to work-based welfare 
reforms. Because the partnership has yet to be tested in times of 
fiscal stress, now is the time for both federal and state governments 
to consider actions to prepare for more uncertain times and the 
possibility of higher program costs. Although TANF currently contains 
certain mechanisms to provide a fiscal cushion, the options we have 
presented provide an opportunity to promote greater assurance that all 
states will be poised to respond to future fiscal contingencies 
affecting their TANF programs.
    Mr. Chairman, this completes my prepared statement. I would be 
happy to respond to any questions you or other Members of the 
Subcommittee may have at this time.

                                

    For future questions regarding this testimony please call Paul L. 
Posner at (202) 512-9573. Individuals making key contributions to this 
testimony included Thomas M. James, Bill J. Keller, Jacqueline M. 
Nowicki, Patricia L. Elston, Gale Harris, Marcus Melton, and Raymond G. 
Hendren.

                                

    Chairman Herger. Thank you very much, Mr. Posner.
    We will now hear from Miss Ryan.

    STATEMENT OF ELAINE M. RYAN, ACTING EXECUTIVE DIRECTOR, 
           AMERICAN PUBLIC HUMAN SERVICES ASSOCIATION

    Ms. Ryan. Good morning, Mr. Chairman, and Members of the 
Subcommittee.
    First, let me begin by expressing the American Public Human 
Services Association's (APHSA) sincere thanks for all of your 
efforts to keep the deal, to make sure the Federal TANF funds 
remained in place, and for your efforts today to try to restore 
Social Service Block Grant funding that is very important to 
States.
    I am Elaine Ryan, the Acting Executive Director of APHSA, a 
nonprofit, bipartisan organization representing State and local 
human service professionals for more than 70 years. Thank you 
for the opportunity to testify.
    Given the cycles of the economy, it is appropriate that 
today's hearing focuses on TANF financial issues and the hope 
that progress can be sustained in the future or in a recession. 
Because there is an unfinished agenda of welfare reform--to 
provide ongoing supports to working families, to aid those with 
multiple barriers to overcome, to strengthen families, and to 
reduce future welfare dependency. In periods of economic 
downturn, these challenges may intensify. Rising caseloads and 
fixed Federal funding may pressure States to reduce critical 
investments. That is why APHSA supports measures to increase 
State flexibility to create State TANF ``rainy day'' funds and 
supports the continuation of the TANF contingency fund.
    Shortly after the enactment of welfare reform, many States 
felt the need to create reserve funds during periods of 
economic downturn. In 1998, APHSA conducted its first survey 
and found that 26 States had established some kind of TANF 
rainy day fund. Seventeen States set aside Federal funds, 7 
States reserved State funds, and 2 used a combination of State 
and Federal funds. But by 1999, States had changed their 
strategies, and our most recent survey finds that while many 
States still have some reserve funds, many also plan to fully 
obligate those Federal funds by the end of next fiscal year.
    This change in strategy I think may be attributable to 
several factors. First, the Federal regulations create 
disincentives to reserve funds. Second, reports of the 
unobligated fund balances made TANF the target of congressional 
cuts in '98 and '99. And although the welfare reform law says 
specifically that States may carryover funds fiscal year to 
fiscal year, without limitation, the message from Washington 
has been ``spend your TANF funds or risk losing them.''
    Let me just briefly describe some of the regulatory 
barriers that were imposed on States. States are not permitted 
to use TANF Federal dollars for rainy day funds. They may 
carryover funds from year to year, but the Federal regulations 
attach a narrow definition of assistance, which means those 
unobligated funds that you referred to can only be used for 
cash-like assistance. They can't be used for teenage pregnancy 
prevention, they cannot be used for work supports, they cannot 
be used for child care.
    States may not allow counties to reserve funds for rainy 
days. A proposed Federal rule even goes so far as to require 
States to spend new State dollars to draw down prior year 
funds. These are all disincentives to rainy day funds.
    I would also say that rainy day funds, like Maryland's, 
where they're funded with 100 percent State dollars that do not 
count toward Maryland's State maintenance of effort unless 
they're expended. Therefore, APHSA requests that you consider 
the following actions: to afford States the flexibility to draw 
down TANF dollars to fund these rainy day funds; to afford 
States the flexibility to establish county rainy day funds; to 
allow States to use unobligated TANF funds for any purpose 
under the Act; to maintain Federal funding for child care and 
the social services block grant, and do not add any set aside 
requirements that will force States to spend rather than 
reserve those dollars.
    When thinking about a contingency fund, I think it's 
important to try to deduce how much of those unobligated 
dollars are truly unobligated. The real story of State 
spending, is illustrated in the CBO baseline, that shows that 
TANF funds are leaving the Treasury at a rate such that outlays 
will exceed the authorized level in fiscal year 2002 and 
beyond.
    TANF caseload data that you may look at, showing a 50-
percent decline, only measures families receiving cash 
assistance, and not the families served by every other kind of 
TANF program.
    Some States may need to access a TANF contingency fund 
during periods of economic downturn, and we support its 
continuation. However, it needs to be a viable source for 
States. The level of funding should be sufficient. The MOE 
requirements should be modified to be the same as TANF. And the 
unemployment triggers and food stamp triggers ought to be 
modified as well.
    Finally, I would say that APHSA urges Congress to extend 
the TANF supplemental grants to the 17 high-growth, high-
poverty States. Allowing these supplements to expire would not 
only result in a significant reduction in block grants, but it 
also would impede their ability to transfer funds to other 
block grants and it would reduce their high performance bonus 
award.
    I would like to close by just saying that the example of 
one State, Tennessee, typifies an experience that many States 
have had--the choice to spend in order to prove the need for 
the funds, versus to draw down, to save for a rainy day.
    In 1996, prior to the enactment of law, Tennessee engaged a 
noted economist to try to forecast caseloads, to try to figure 
out how much money they should reserve in the event of an 
economic downturn. They established a State fund, and then they 
used Federal funds to establish Federal reserves, and then 
threatened Federal cuts inspired them to start to spend down 
their reserves.
    Since last June, Tennessee has experienced a 7 percent 
increase in their welfare caseloads, and today they face the 
prospect of losing their TANF supplemental grant to States. 
It's a double-bind, that States spend or risk losing funds. 
Perhaps there could be a better way.
    We have outlined a number of recommendations in our 
Association report, ``Crossroads: New Directions in Social 
Policy,'' and a full range of all the reauthorizations pending 
before this Committee, food stamps and others. We look forward 
to working with you in the future.
    Thank you.
    [The prepared statement of Ms. Ryan follows:]

Statement of Elaine M. Ryan, Acting Executive Director, American Public 
                       Human Services Association

    Good Morning, Mr. Chairman and members of the Subcommittee. I am 
Elaine Ryan, Acting Executive Director of the American Public Human 
Services Association, a non-profit bipartisan organization representing 
state and local human service professionals for more than 70 years. 
Thank you for the opportunity to testify on the subject of ``rainy 
day'' funds and other special funding issues under the Temporary 
Assistance for Needy Families (TANF) program.
Background
    Under the Aid to Families with Dependent Children (AFDC) program, 
families were trapped in a pattern of dependency that few believed 
could be reversed; states could give families little more than a check 
to help them provide for their children and the federal rules 
discouraged work. Since the enactment of the Personal Responsibility 
and Work Opportunity Reconciliation Act of 1996, states have achieved 
noteworthy success in implementing welfare reform. According to the 
Administration for Children and Families, the percentage of working 
welfare clients reached an all-time high in 1999 and their average 
monthly earnings and hours of work continued to rise. The percentage of 
Americans living in poverty continued to decline and child poverty 
recorded its biggest five-year drop in 30 years. The percentage of the 
population on welfare fell to its lowest point since 1965, child 
support collections increased dramatically, and states continued to 
provide critical TANF-funded supports to millions of families who 
exited welfare for the workplace. Teenage pregnancy rates have steadily 
declined during this period and some states have begun to achieve 
progress in an effort to reduce the number of out-of-wedlock births. 
While much has been achieved, states recognize that there are 
challenges ahead.
    Some have credited welfare reform for the progress that has been 
achieved in recent years, while others point to a robust economy as the 
reason so much has been achieved in such a short period of time. I 
expect the debate will continue without any clear resolution for some 
time to come. However, an unknown of perhaps a more pressing nature is 
whether progress will continue, and if there is a prolonged economic 
downturn, will there be sufficient resources available to states to 
meet the needs of the children and families served under TANF?

Creation of State ``Rainy Day'' or ``Contingency'' Funds
    Understanding the cycles of the economy, in the years following the 
enactment of welfare reform, more than half of the states planned to 
establish TANF ``rainy day'' funds to protect against economic downturn 
or caseload increases. Based on an APHSA survey conducted in 1998, 26 
states had established reserve funds. Fifteen states created the state 
contingency funds in statute and eleven did so in budget language. 
Seventeen states planned to set aside federal unobligated funds, seven 
planned to set aside state funds for contingency purposes, and two 
planned a combination of federal and state contingency funds. For 
example, Georgia initially established a reserve fund with an up-front 
set aside of 2.5 percent of its FY 1997 federal TANF block grant 
allotment to be available in periods of future economic downturn. 
Maryland created a ``Dedicated Purpose Account'' to reserve unexpended 
state TANF MOE funds. And prior to 1996, Tennessee established a 
reserve fund using state and later a combination of federal and state 
funds to ensure that adequate funding would be available if caseloads 
increased. By 1999, states were altering their plans; some created 
funds and others eliminated their funds altogether. But the preliminary 
findings of our most recent state survey indicate that while some 
states still have reserve funds, the majority of respondents plan to 
obligate or expend all of their federal TANF funds by the end of FY 
2002.
    This shift in state plans to fund ``rainy day'' funds may be 
attributable to several factors. First, the federal TANF regulations 
and other federal regulations created disincentives to reserve funds. 
Second, in recent years, concerns have been expressed about the level 
of state spending, and misleading reports of ``unobligated'' TANF funds 
made the block grant the target of congressional attempts in 1998 and 
1999 to cut or rescind unspent TANF funds. Although the welfare reform 
law allows states to reserve TANF funds ``without fiscal year 
limitation,'' the message sent from Washington to the states has been 
spend the TANF funds or risk losing them.

State Spending Under TANF and Regulatory Disincentives to Reserve Funds
    Over the past several years, federal agencies have restricted state 
flexibility to reserve federal and state funds in order to plan for 
periods of economic downturn or caseload increase. The final TANF 
regulations, the application of the Cash Management Improvement Act to 
the TANF block grant and ACF program instructions have limited states' 
ability to draw down, obligate, and expend federal TANF funds. Examples 
of restrictions include:
    1. In welfare reform, states agreed each year to maintain their 
historic level of spending, known as maintenance of effort or MOE, and 
in exchange they would receive a fixed level of TANF block grant 
funding from the federal government. Since the enactment of the law, 
every year, every state has met the maintenance-of-effort requirement. 
However, even after a state has satisfied its MOE in a given fiscal 
year, any unobligated blockgrant dollars remain in the federal 
treasury, conveying the false impression that these funds are unmatched 
or unnecessary. And in past years, these unobligated federal TANF funds 
have been targeted for cuts or rescissions.
    2. States are not permitted to draw down these funds into their 
state treasuries in order to fund ``rainy day'' or contingency funds 
because these funds are not considered to be obligations under the 
federal rules.
    3. Exacerbating this situation, the final TANF regulations prohibit 
states from spending unobligated federal funds from a prior year on any 
purpose other than cash-like ``assistance'' payments. None of the 
several billion of TANF carryover funds can be used to fund work 
supports, such as child care, education and training or mentoring, 
substance abuse treatment and prevention, two parent family 
preservation, parenting education, or any other noncash service. Under 
this restriction, even if states reserve TANF funds in a contingency 
fund, the use of those funds would be severely limited, largely to 
ongoing cash assistance. However, in an economic downturn, it is likely 
that states would need to increase spending not only on cash but also 
on such one-time emergency payments to prevent evictions and 
homelessness and to create work experience and training programs.
    4. Under welfare reform, the federal government devolved authority 
to the states and, in turn, a number of states devolved authority to 
counties and local governments. In January 2001, the Administration for 
Children and Families issued a Program Instruction to states, (TANF-
ACF-PI-01-02) that would prevent states from permitting counties to 
fund ``rainy day'' funds at the county level.
    5. And last October, a proposed federal rule relating to the draw 
down of TANF funds promised to make it even more difficult for states 
to draw down TANF funds and by imposing yet another obstacle to the 
funding of a TANF rainy day fund with federal funds. The proposed rule 
would require states to spend additional state funds to draw down 
unobligated TANF funds from the previous year even though the MOE 
requirement has already been met for these dollars. And as previously 
stated, those dollars could only be used to fund ``assistance'' 
benefits.
    6. Finally, under federal rules, states may not count the state 
expenditures placed in ``rainy day'' funds toward their annual MOE 
until these funds are expended. Similarly, local funds reserved for 
these purposes cannot be counted toward the state MOE.
    Therefore, APHSA asks Congress to consider the following actions:
     Afford states the flexibility to draw down TANF dollars to 
fund ``rainy day'' or contingency funds after the annual state MOE 
requirement has been satisfied and consider these funds as obligated;
     Similarly, afford states the flexibility to establish 
county ``rainy day'' funds;
     Remove the federal ``assistance'' restriction on the use 
of unobligated federal funds so that states may use these funds for any 
purpose under the TANF act; and
     Allow state and local expenditures for state or local 
``rainy day'' funds to count toward the states' MOE requirement.
    Finally, let me underscore the importance of maintaining federal 
funding for related human service block grants such as the Child Care 
and Development Fund (CCDF) and the Social Services Block Grant (SSBG). 
If these block grants are reduced, states will be unable to reserve 
funds for rainy days because funding will be needed to offset federal 
cuts. As a related issue, we urge Congress to reject adding ``set-
aside'' language to the TANF block grant that requires states to spend 
federal or state dollars for a particular benefit, service, or purpose. 
These requirements will limit funds that could be reserved to protect 
against periods of caseload increase or recession.

The Real Story of State Spending
    After federal welfare reform was enacted, states needed time to 
transition from a system of check-writing that existed under AFDC into 
a program where time-limited assistance and work were the primary 
focus. Time was needed to adopt state legislative changes, redesign 
programs, train caseworkers, inform clients, and implement new program 
rules. After this initial period of transition, welfare reform was well 
underway in the states. As TANF caseloads declined dramatically, some 
states may have been slow to obligate their federal block grant funds, 
but again, it is important to note that all states met their state 
maintenance-of-effort requirements. As TANF funds collected interest in 
the federal treasury, state funds financed the early success of welfare 
reform.

The ``True'' TANF Caseload
    In recent fiscal years, however, the pace of spending under TANF 
has changed. While some in Washington have focused on the 
``unobligated'' TANF funds, the real story of state spending is 
illustrated by the CBO baseline that shows TANF funds are leaving the 
treasury at a rate such that outlays will exceed the authorized level 
of funding in FY 2002 and beyond. After an initial period of transition 
and program planning, many states are investing funds in a wide range 
of programs to support self-sufficiency and prevent dependency and 
transferring a significant amount of funds to the Child Care and 
Development Fund and Social Services Block Grant. For example, from FY 
1997 through the first two quarters of FY 2000, 44 states transferred 
more than $4.3 billion of TANF funds to CCDF and an additional $3 
billion to SSBG.

Perception and Reality
    Contrary to what federal caseload data might suggest, the work of 
the TANF agency does not end when families exit the cash assistance 
caseload. Federal data on the size of the TANF caseload are limited to 
the number of families receiving TANF cash assistance. The data do not 
report the ``true'' TANF caseload that includes families that receive 
TANF-funded child care, employment and training, counseling, programs 
for noncustodial parents, teen pregnancy prevention, family support and 
other critical services to children and families. Moreover, the TANF 
``assistance'' and ``non assistance'' caseloads do not reflect the 
thousands of families who receive child care assistance funded with 
TANF transfer funds. The amount of unobligated funds and TANF caseload 
decline should not give policymakers false hope that all states could 
manage their TANF programs in periods of severe economic downturn. The 
reported amount of unobligated funds does not accurately reflect the 
planned and current state investment of TANF funds. The federal 
caseload data do not include the millions of children and families 
supported with services such as employment and training, counseling, 
substance abuse counseling, family formation, parenting education, 
teenage pregnancy prevention, transportation, and child welfare 
services. Nor does the caseload include the thousands of children who 
receive child care services funded with TANF transfer funds. Some have 
suggested that the demand for services, such as child care, will lessen 
in an economic downturn. This may not be the case. As long as there is 
a requirement that parents are engaged in a meaningful work activity 
while on welfare, there will be a need to provide child care for their 
children. In periods of severe economic downturn, there may not be 
sufficient TANF funds available in some states to meet the need of 
rising caseloads and to maintain current investments.

Extend and Restructure the Contingency Fund
    The TANF Contingency Fund was created in 1996 to ease the risk 
states faced in accepting a fixed amount of block grant funding over a 
period of six years. The risks may be as great today as they were then 
for somestates. While a strong economy has obviated the need for states 
to seek contingency funding, in a period of economic decline the 
current TANF Contingency Fund would be of little use to states. While 
APHSA supports the continuation of a federal Contingency Fund, 
significant changes are needed to ensure that it would be a viable and 
sufficient source of funds for states during periods of economic 
downturn or recession. First, the level of funding for the fund should 
be sufficient to provide support to a number of states that may need to 
draw from the fund at the same time. Second, the eligibility 
requirements should be revised. Specifically, the MOE requirements for 
access to the fund should be the same as the TANF MOE requirement and 
the definitions of qualified state expenditures should be aligned as 
well. Third, the unemployment and food stamp triggers should be 
modified. Considering the current U.S. unemployment rate, states would 
be long into an economic recession before meeting the current trigger 
of 6.5 percent. And in that instance, given the MOE requirement, few, 
if any, states would be eligible.

Extend TANF Supplemental Grants to States
    Under the welfare reform law, Congress provided a modest annual 
supplement to seventeen rapidly growing states and high poverty to help 
them achieve TANF goals. The supplemental grants included in the 1996 
law were authorized only through fiscal year 2001, while the law 
generally was authorized through fiscal year 2002. Allowing the TANF 
supplements to expire this year would not only result in a significant 
reduction in block grant funds, but states' ability to transfer funds 
would be reduced and their TANF High Performance Bonus would be reduced 
as well. APHSA urges Congress to extend these grants.

Closing Comments
    In February, APHSA released Crossroads: New Directions in Social 
Policy containing recommendations for the reauthorization of the 
welfare reform law and other human service programs pending 
reauthorization by this Congress. With respect to the TANF block grant, 
our members have endorsed maintaining the current TANF baseline plus 
inflation for the next six years. We support the extension of the TANF 
supplemental grants to states and believe that this funding should be 
in addition to the current block grant allocation. We support the 
renewal of a TANF contingency fund and are working with our members to 
develop new criteria for accessing these funds.
    While much has been achieved, there is an unfinished agenda of 
welfare reform--one that involves on-going supports to low-income 
working families, one that seeks to remove the barriers for clients 
with multiple barriers to overcome, and one that seeks to strengthen 
families and eliminate welfare dependency for generations to come. In 
order for early success in the workplace for TANF families to evolve 
into extended periods of job retention and earnings progression, 
continued federal and state investments are needed. In future years, a 
sustained commitment of on-going TANF work supports, such as 
transportation and education and training, may be required. And for 
those families who have not made the transition from welfare to work--
those with multiple barriers to overcome--intensive services and 
supports will be costly.
    In periods of economic downturn, these challenges may intensify and 
rising caseloads may pressure states to reduce current investments in 
child care or other critical support services. Increased state 
flexibility in the drawdown and expenditure of TANF program funds could 
afford state and local administrators with the necessary tools to 
manage during periods of increasing caseloads. A viable contingency 
fund could enable states to continue program investments during period 
of severe economic downturn. Above all, the federal commitment to 
maintain TANF block grant funding levels and related human service 
programs will enable states to their work to improve the future for 
millions of low-income children and families in this country.
    Thank you for the opportunity to testify. I would be pleased to 
respond to any questions you may have.

                                

    Chairman Herger. Thank you very much, Miss Ryan.
    Mr. Potts.

   STATEMENT OF JOEL POTTS, TANF POLICY ADMINISTRATOR, OHIO 
             DEPARTMENT OF JOB AND FAMILY SERVICES

    Mr. Potts. Good morning, Mr. Chairman, and Members of the 
Committee. My name is Joel Potts and I am the TANF Policy 
Administrator for the State of Ohio, and I, too, would like to 
thank you for keeping the commitments.
    I think that the Personal Responsibility and Work 
Opportunity Reconciliation Act is the best piece of social 
policy that has come out of Washington, and I think that it has 
made a huge difference, not for States, not for caseworkers, 
not for us in government, but for the people that we serve. I 
hope that we can continue to work together to continue this 
approach.
    In Ohio, we have successfully implemented the Personal 
Responsibility Act. It has allowed us to move forward with a 
fundamental reform to the welfare system. And while that safety 
net still remains in place for families and children who cannot 
work, the primary focus of welfare reform in Ohio has moved 
from a system that was focused previously in providing cash 
assistance and cash payments to a system that now is bringing 
stability and self-sufficiency to people's lives through the 
promotion of work, and we obviously want to continue that.
    Today, there are fewer Ohioans receiving public assistance 
than at any time since 1967. When our caseloads peaked in the 
early nineties, there were 748,000 individuals dependent on the 
old AFDC system, at an average cost to the State and Federal 
coffers of $82 million a month in Ohio. Today, that number is 
210,000 individuals, with an average cost of $27 million per 
month. Obviously, this reduction in caseloads provided us with 
significant funding that we have been able to shift, along with 
the flexibility provided by Congress, and it has resulted in a 
model for welfare reform which is highlighted with more 
families being served, fewer welfare-dependent families, 
increased earnings, decreased poverty for those formerly on the 
system, and broad community and business support.
    I think we have taken a very responsible approach in Ohio 
to implement our welfare reform program and the block grants. 
Our strategy has been to provide this tremendous flexibility 
and funding for programs and services never before possible, 
while still maintaining a responsible cash reserve to protect 
against a major downturn in the economy. We didn't really look 
to the Federal Government and say, ``Boy, we're just going to 
spend it, and in the event our caseloads keep going up or 
something changes, we'll just turn back to our congressional 
delegation and say Ohio is in trouble.'' We accepted the 
challenge of the Act and we think what we're doing in TANF is 
the right approach. We wanted to be able to manage that within 
our own program.
    Our approach has been responsive to meet the needs of the 
clients, and I think it has been responsible to the integrity 
of the TANF program, and it has been fiscally prudent. For the 
first time in Ohio's history, we are spending more welfare 
dollars to support work than to support dependency. Our 
caseloads continue to decrease and we are able to shift more 
and more revenues to families to help them stabilize their 
lives and prevent long-term dependency.
    At the beginning of the TANF program, we did decide that we 
should have some type of contingency reserve in place. We set 
aside about 10 percent, or $75 million, a year for the first 4 
years in the contingency reserve. That reserve amount is now 
around $300 million.
    In the event of an economic downturn, we have gone back for 
the past 30 years and looked at our worst economic situations. 
We looked at the recessions of the late 1970's and the early 
1990's and determined we have enough cash reserve that we can 
continue to provide public assistance in Ohio for 27 to 45 
months, while still continuing to maintain the existing 
programs to support work, without having to take away from 
those types of approaches.
    We have had a tremendous change in the way we're doing 
things, and I think one of the frustrations for States is that 
we still continue to be measured on arbitrary data, and in some 
cases I think the wrong things. In former public assistance 
programs, we did not measure success. Frankly, we measured 
failure. We looked at what was needed for public assistance 
programs by looking at caseloads. The larger your caseloads, 
the more money we got.
    We measured clients in the same way. When they came to us 
and said, ``We need help'', our response was something to the 
effect of, ``You know, what you need really isn't important to 
us. What's important to us is that you fill out this 35-page 
application. We will take that information, we will put it into 
our computer system, the system is going to tell us what you're 
eligible for, and if what you're eligible for addresses what 
you need, then we can provide you service.''
    We don't do that any more. In fact, we do a lot more in 
prevention and retention programs, to prevent people from ever 
becoming dependent on the system than we ever could have 
possibly imagined under the old AFDC program. We would like to 
continue to do that.
    We have been able to make that fundamental shift in 
administering our programs. We didn't make the mistake in Ohio 
of rushing out and spending the block grant on short-sighted 
programs without significantly altering the former programs in 
place under AFDC. We have been able to increase services to 
support families, help families move out of poverty, train and 
prepare individuals for work, and provide support services. In 
addition, we have been able to accomplish the successes of 
welfare reform in Ohio with an adequate reserve in place to 
ensure that funding is available in a manner which can 
successfully address unforeseen problems or crises.
    I would like to finish by saying that I think what the 
Committee is doing is obviously very vital to all the States. 
It is where all the conversations are going right now--follow 
the money. It's going to dictate what we do for the next 
several years. It affects our communities, it affects our 
legislatures, and it affects us as administrators.
    But I would contend that it's not about the money only. 
Welfare reform under the TANF program, I don't think it's about 
time limits, I don't think it's about sanctions, I don't think 
it's about flexibility. I think it's about all of those things. 
The thing that is the common denominator in all of those is 
personal responsibility. States need to be held personally 
responsible, as do the clients. Part of that personal 
responsibility is in being responsible for the funding and in 
the flexibility you have provided.
    Thank you.
    [The prepared statement of Mr. Potts follows:]

Statement of Joel Potts, TANF Policy Administrator, Ohio Department of 
                        Job and Family Services

    Good morning, my name is Joel Potts and I am the TANF Policy 
Administrator for the Ohio Department of Job and Family Services. I am 
here today to discuss TANF funding issues and the unspent reserves in 
Ohio.
    Ohio's 88 counties and the state have successfully implemented the 
Ohio Works First welfare reform program. The unprecedented flexibility 
and approach afforded the agency by Congress in the Personal 
Responsibility and Work Opportunity Reconciliation Act of 1996 has 
allowed Ohio to move forward with fundamental reform in the welfare 
system. While a safety net remains to serve children and those who 
cannot work, the primary focus of welfare reform in Ohio moved from a 
system focused on providing cash payments to a system bringing 
stability and self-sufficiency to people's lives through promotion of a 
work first/work force philosophy.
    Today, there are fewer Ohioans receiving monthly benefits than at 
any time since 1967. When our caseloads peaked in March of 1992, 
748,717 individuals were receiving cash assistance at an average cost 
of $82 million per month. Today, that number is below 210,000 at an 
average cost of $27 million per month. The reduction in caseload has 
provided the state significant funding to go along with the flexibility 
provided by Congress. The result is a model for welfare reform 
highlighted with more families being served, fewer welfare dependent 
families, increased earnings, decreased poverty for those formerly on 
the system and broad community support and involvement.
    Ohio's welfare reform program is divided into two major categories. 
The first category provides temporary cash assistance to families for a 
maximum of three years and is referred to as Ohio Works First. During 
their time on assistance, families must sign a self-sufficiency 
contract outlining work activities and other obligations recipients 
must fulfil as a condition of receiving cash assistance.
    On October 1, 2000, Ohio passed a significant milestone in the 
implementation of Ohio Works First. That was the first date on which 
households faced the risk of cutoffs as a result of utilizing all three 
years of eligibility. On October 1, 1997, there were 117,000 families 
that potentially faced termination on October 1 of 2000. Of that 
117,00, fewer than 4,000 families ultimately utilized all 36 months of 
eligibility. The 88 counties deserve tremendous credit for the manner 
in which the 36 month limit was implemented and for the care that they 
showed in working with these families.
    Ohio is reinventing welfare by reinvesting in its communities. 
Ohio's counties have been given more flexibility than ever before in 
designing and implementing a service delivery system that addressees 
the needs of the people they serve.
    The second category of our welfare reform program is referred to as 
Prevention, Retention and Contingency, or PRC. The PRC program focuses 
on providing people with the help they need to stay off of public 
assistance and assume personal responsibility. Counties determine what 
services to provide and also set eligibility levels. Individuals do not 
have to receive cash assistance to qualify for this portion of the 
program.
    To meet the needs of poor families, counties have made use of the 
program in a wide variety of ways to deal with problems unique to their 
local communities. For example:
    Hamilton County--This metropolitan county contracts with a private 
non-profit consortium of providers to work with ``hard to serve'' 
families. These families are generally recognized as multiple needs 
families that have a long-term history of public assistance dependency. 
In the past four years, nearly 3,000 families have been served with 
only 150 families returning to public assistance.
    Appalachian Counties--To address the chronic need to improve 
attendance in Appalachian schools, mostAppalachian counties have 
implemented head-lice programs. (Head lice is the number one cause for 
absenteeism in Appalachia Ohio.) PRC programs have aggressively dealt 
with this problem and in many school districts absenteeism has declined 
by as much as 50 percent.
    Cuyahoga County--The Cleveland area has effectively used their PRC 
program to address the needs of families facing welfare cut-offs by 
partnering with numerous county organizations and developing programs 
to ensure that every family has access to services they desire or need 
to succeed. Their time-limit cut-off plan includes providing immediate 
employment opportunities for work ready clients, transitional 
employment for those that are not necessarily ready to enter the job 
market and short term transitional assistance. Additionally, a child 
safety review process is in place which provides home visits by 
community based agencies, linking families to support services and 
assessing the viability of a family's plan for meeting its basic needs.
    Montgomery County--Only 6 percent of low income families have a 
computer in their home compared to 56% of families earning more than 
$50,000 per year. In an effort to provide computers, technology and 
training to poor families, Montgomery County has developed a program 
that provides inner-city youth with the opportunity to ``earn'' a new 
computer by participating in an intense computer training program that 
includes education in software and hardware as well as exposing 
teenagers to the computer field and possible employment opportunities 
after graduation. Students that complete the course and meet all of the 
requirements will get to keep the computer they actually build during 
the 4 week course. This program has the endorsement of local community 
and business leaders and costs the county less than $600 per student.
    PRC is now the largest program in the state providing assistance to 
poor families in Ohio (excluding Medicaid). Through county departments, 
the state anticipates expenditures in the current biennium of nearly 
$700 million dollars with nearly half of the money being utilized for 
employment, training, work support and diversion. (Please see attached 
report on the utilization of the PRC Program in Ohio.) During the Fall 
of 2000, the Ohio Legislative Welfare Oversight Council, Co-chaired by 
State Representatives Netzley and Boyd, visited with 19 separate 
counties to discuss the progress of welfare reform. Without exception, 
PRC was highlighted by each county as one of the most significant 
programs in addressing the challenges counties face in meeting the 
challenges of long-term dependency.
    Additional major categories of expenditures include youth education 
and support, emergency services, pregnancy prevention, child welfare, 
non-custodial parent services and domestic violence counseling. 
Furthermore, it should be noted that Ohio has been one of the leading 
states in the nation for actively involving the faith-based community 
in welfare reform. Counties project expenditures for the current 
biennium of nearly $90 million in contracts with faith-based 
organizations to provide many of the services mentioned above.
    In short, Ohio's welfare reform program is paying off for families 
and communities. According to studies commissioned by ODJFS and 
mandated by the General Assembly, Ohio Works First's emphasis on 
employment, personal responsibility and community support is working. 
According to a study produced by Macro International of families 
formerly participating in Ohio Works First, we found:
    They're working
       Two thirds of former recipients report working
    A full week
       They work an average of 38.4 hours per week
    Their earnings are up
       They earn, on average, $8.65 per hour or $1,410 per 
month
    Their kids have health care
       Most (83%) indicated their youngest child had health 
care coverage
    They're not coming back
       Most (84%) say they don't intend to return to OWF in the 
future.
    A cornerstone of welfare reform in Ohio was to make work pay and 
we're meeting that goal. A family of three on welfare receives a 
maximum benefit of $ 373 per month. A typical former recipient who 
works, earns in excess of $1400 per month. In addition, expansions in 
health care coverage for working families, child care and PRC help to 
assure a family's transition to the workforce have the critical 
supports needed to be successful.
    The most important point in understanding the federal TANF program 
is to realize that TANF is a program and NOT a funding stream. Over the 
past few years the Ohio Department of Job and Family Services has 
received numerous innovative ideas for use of the TANF funds that, 
while worthy of consideration, were not within the federal parameters 
for the TANF program.
    In order to make use of TANF funds, the federal law outlines the 
four goals of the program that must be met in order to be a qualified 
expenditure.
    1. End dependence of needy families on government benefits by 
promoting job preparation, work and marriage.
    2. Provide assistance to needy families so children may be cared 
for in their own homes or in the homes of relatives.
    3. Prevent and reduce the incidence of out-of-wedlock families.
    4. Encourage the formation and maintenance of two parent families.
    Ohio has taken a responsible approach to welfare reform and the 
block grant. Our strategy has been to provide tremendous flexibility 
and funding for programs and services never before possible, while 
still maintaining a responsible cash reserve to protect against a major 
downturn in the economy. Our approach has been responsive to meet the 
needs of the clients, responsible to the integrity of the TANF program 
and fiscally prudent.
    For the first time in Ohio's history we are spending more welfare 
dollars to support work than to support dependency. As our caseloads 
continue to decrease we are able to shift more revenues to families to 
stabilize their lives and prevent long-term dependency.
    In Ohio, over the past several months, the primary focus of the 
welfare reform debate is the TANF surplus. How much is it, what is 
obligated, what's available, how should we spend it and who should 
spend it are just a few of the many questions being asked. I wish I 
could provide you with an easy answer to all of these questions but 
unfortunately understanding the block grant and the surplus is not 
simple.
    Each year, Ohio receives a $728 million federal TANF grant. To 
secure those funds, Ohio spends an additional $400 million in General 
Revenue Funds to meet our federally mandated maintenance of effort 
(MOE). During the term of the block grant, especially during the first 
couple of years of the TANF block grant, Ohio had accumulated a 
significant cash reserve.
    According to the federal expenditure report filed at the end of the 
last federal fiscal year, Ohio's TANF surplusstands at $721 million. 
However, that figure does not take into account obligations that have 
not yet been charged to that account, nor does it reflect what Ohio has 
to spend. The myth that $721 million exists for Ohio to spend continues 
to mislead, confuse and threaten the Ohio Works First program.
    The Ohio Department of Job and Family Services accounts for TANF in 
much the same manner as an individual balances a check book. At any 
point in time, the bank may say you have $721 in the account, but if 
you've written checks for xx amount and those checks haven't cleared 
the process, then you know the bank's statement is not what you 
actually have available to spend. The TANF block grant and the State's 
surplus are no different. Since TANF dollars can only be drawn down to 
the state based on actual expenditures delays the process and thus 
balloons what appears to be unspent revenues when in fact, the funds 
have been spent but not yet billed.
    At the beginning of the TANF program, Ohio has decided to set aside 
$75 million annually in a caseload contingency fund to protect against 
an economic downturn. With $300 million currently in the contingency 
fund, prudent reserves are set aside for the remaining two years of the 
grant. Based on historic economic downturns in Ohio, this reserve could 
be used up in 27 to 45 months for caseload increases, based on the 
severity of the recession. Furthermore, we felt that this was fiscally 
responsible based on the fact that we have the lowest caseloads in the 
past 34 years in Ohio and one of the best economic conditions since the 
end of WWII.
    Additional obligations to the unspent TANF reserve include county 
incentives for exceeding state and federal mandates. In an effort to 
ensure meeting federal requirements, avoid penalties and encourage 
creative and innovative approaches to serving poor families, Ohio has 
made available $45 million annually for counties that exceed 
performance standards. In many instances counties are utilizing these 
dollars as their own contingency accounts in the event of local 
economic downturns or funding decreases so that they may continue to 
operate successful prevention or retention programs. By the end of 
Federal Fiscal Year '01, Ohio estimates that $130 million of the 
federal reserve will be obligated to counties as incentives but not 
drawn down.
    Finally, the federal estimate of Ohio's reserve does not reflect 
nearly $300 million made available over the past 18 months to address 
the 36-month time limit which went into effect on October 1, 2000. 
Counties utilized these funds to ensure the safety of children and 
families facing termination, provide job mentoring, training, education 
and work support. Many of these expenditures have not yet been 
submitted to the state and thus have not been drawn down from the 
federal reserve.
    Obviously, while the appearance in Washington is that Ohio has 
substantial reserves, the reality is that we have fully committed all 
of the available TANF funds. Clearly, the federal estimate of Ohio's 
reserve is overstated. In fact, for the next biennium we anticipate 
deficit spending for TANF programs which could result in our 
contingency reserve being reduced.
    Understanding the unspent TANF reserves is difficult, managing such 
reserves is even more challenging. A lot of attention has been paid to 
the amount of cash reserves available to states through the TANF 
program. Unfortunately, for various reasons, rarely are the stories we 
read in the papers or hear about through various sources, accurate.
    TANF fundamentally changed the way we look at, manage, measure and 
operate public assistance programs. One of the more significant changes 
in administering the program through PRWORA was to get away from the 
one size fits all approach of a federally run system and move to a 
state driven program. Thus, in order to truly and fully understand a 
state's welfare reform program, including spending, you must look at 
each state on a case by case basis state. However, states continue to 
be measured on arbitrary data that does not necessarily reflect the 
local programs, standards or outcomes the states are attempting to 
achieve.
    This lack of understanding has resulted in tremendous pressure from 
various sources including the federal government to spend the TANF 
funds or risk losing them. This pressure comes at a time when there is 
tremendous uncertainty of reauthorization, the definition of 
``supplantation'' and the status of the economy. States have become 
sitting ducks for federal, state and advocacy leaders to find ways to 
spend the money.
    Many states, including Ohio, have funded one-time only type 
programs without reoccurring expenses. However, we have found that even 
with this approach a state establishes a level of demand and 
expectation. This is also difficult given the parameters of the TANF 
program.
    The pressure put on states to spend the money now also puts at risk 
some potentially effective long-term programs that could prove to be 
highly effective in working with youth to prevent out-of-wedlock births 
and to encourage the formation of two parent families. Without a long-
term funding commitment, or the ability to operate an effective long-
term reserve, states and providers are discouraged from attempting 
meaningful prevention programs.
    Throughout the past few years we have been able to utilize 
surpluses to avoid potential crises and address others. Through the use 
of the surplus we have been able to shift funds to cover expansions in 
day care programs, and operate expanded Summer school programs, thereby 
helping students prepare for grade advancement and proficiency testing. 
Furthermore, we have been able to administer the PRC program, which has 
enabled counties to more thoroughly address the needs of their 
communities.
    Ohio has made the fundamental shift in administering welfare reform 
programs. We did not make the mistake of rushing out and spending the 
block grant on short-sighted programs without significantly altering 
the programs that were already in place under the old AFDC program. We 
have been able to increase services to poor families, help families 
move out of poverty, train and prepare individuals for work, and 
provide support services. In addition, we have been able to accomplish 
the successes of welfare reform with adequate reserves in place to 
ensure that funding is available in a manner which can successfully 
address unforseen problems or crises.
    [The attachment is being retained in the Committee files.]

                                

    Chairman Herger. Thank you very much for your testimony, 
Mr. Potts.
    Mr. Holzer.

   STATEMENT OF HARRY J. HOLZER, PROFESSOR OF PUBLIC POLICY, 
  GEORGETOWN UNIVERSITY, AND VISITING FELLOW, URBAN INSTITUTE

    Mr. Holzer. Thank you, Mr. Chairman, and Members of the 
Committee.
    I would like to argue broadly that there is a need for a 
continued Federal role in terms of providing contingency funds 
in the event of a downturn, and also that some changes should 
be made in what triggers State participation in that fund, and 
also in the level of funding.
    Very briefly, if a recession occurs, we know that 
employment rates could drop very substantially for welfare 
recipients. Job availability will certainly decline and the 
welfare caseload will rise. Now, of course, the big question is 
by how much, and unfortunately, that's very hard to predict. It 
depends on the severity of the recession, the duration of the 
recession, but also how States respond to it.
    I have seen estimates that say, in a mild recession, the 
caseload could rise anywhere from 10 to 30 percent, and in a 
more serious recession, like the one in the early eighties, it 
could be 30 to 40 percent or even higher.
    The important thing to remember is that these caseload 
increases will not just be for 1 year but could last for 
several years. It takes several years to recover from a major 
recession. The caseloads actually lag behind recovery in the 
economy. So the problem of higher caseloads could be around for 
a while.
    Several of the other speakers have addressed the adequacy 
of the TANF surpluses that have accumulated and the ways in 
which those moneys have already been committed. The point I 
would like to make is that, in a recession, States will be 
under pressure to make a very difficult choice--either between 
cutting some of those spending programs they have taken on with 
their extra surplus money, for things like child care and other 
things with broad political support, or making it more 
difficult for women to get back on the TANF rolls.
    We know that at least part of the reason that TANF rolls 
have declined over the last 5 years is that States have made it 
more difficult administratively to get on the rolls. That may 
make perfect sense in an economy where there is a lot of jobs. 
I think it makes a lot less sense in an economy where a lot of 
those jobs have dried up. So I think there is not only a good 
argument for States to do more to help welfare recipients get 
money, but for the Federal government to help the States out in 
this regard, because it is so hard to plan for the size of a 
recession.
    We recognize that in other cases we don't want the States 
to do it on their own. In fact, we have an unemployment 
insurance program that recognizes this. Unemployment insurance 
is our primary program to protect workers and States in times 
of recession, and part of the unemployment insurance program is 
an extended benefits program that is automatically triggered by 
State insured unemployment rates. I think that provides a 
strong parallel to the contingency fund and the need to 
maintain something in the event of recessions.
    Now, in terms of the specifics of that contingency fund, I 
would like to argue that the triggers that were enacted in 
1996, which basically were either that the State had to have an 
unemployment rate of 6.5 percent, or that they have to have 
food stamp caseloads 10 percent higher than their peak levels 
in 1994 and '95, I think those triggers really did make a lot 
of sense in 1996. Looking back from 1996, most States, in the 
recession of the early nineties, would have qualified with that 
set of triggers. About 35 States would have qualified just on 
the basis of their unemployment rates, and several more would 
have qualified on the basis of their food stamp caseloads.
    Looking forward, however, now, that is much less likely to 
be the case, because food stamp caseloads have declined so 
dramatically, and because unemployment rates have also declined 
so dramatically. Twenty-five States have had unemployment rates 
below 4 percent over the last few years, and ten States have 
had them below 3 percent. So in a moderate recession, like the 
last one we had, it would be very difficult for most States to 
reach those triggers and most States would not be covered.
    Similarly, the level of the funding under the contingency 
fund, $2 billion, really may be inadequate, even when added to 
the amounts of the TANF surpluses, in the event of a serious 
recession, in the event of a recession where caseloads really 
do rise by very substantial amounts, and stay high over a 
period of several years.
    At least one possibility to consider is uncapping the 
contingency fund and relying on the matching mechanism, to 
create incentives for States to economize. I think all of us 
agree that there needs to be incentives for the States to 
economize and be responsible, but we don't want those 
incentives to be too severe to the extent that they would force 
States to turn away women who can't find jobs and who really 
might be in need.
    I would like to close by saying I think there's a strong 
argument for incentives for States to do the right thing, but 
also for Federal support. We should not only reauthorize the 
contingency fund, but we should also make some changes, which I 
think would update it and recognize some new realities.
    Thank you.
    [The prepared statement of Mr. Holzer follows:]

 Statement of Harry J. Holzer, Professor of Public Policy, Georgetown 
            University, and Visiting Fellow, Urban Institute

    The Personal Responsibility and Work Opportunity Reconciliation Act 
of 1996 created a fixed level of block grant funding to states to pay 
for the Temporary Assistance to Needy Families (TANF) program. Since 
the size of the block grant itself does not vary in response to 
changing economic circumstances (such as a downturn) that might create 
greater caseloads, the 1996 legislation also established a contingency 
fund of $2 billion to provide states with an additional source of 
revenue in case of unforeseen developments.
    The contingency fund is currently set to expire in five months, at 
the end of FY2001. Should it be reauthorized? Despite the unspent TANF 
surpluses that have been accumulated by many states, does there 
continue to be a need for an additional federal funding source for TANF 
in the event of an economic downturn? If so, what conditions should 
trigger the availability of these funds to the states, and how large 
should the fund be?
    Below I argue that the contingency fund should be reauthorized, 
with a somewhat different set of triggers than were established in 
1996, and with an uncapped level of funds available to states in need. 
The TANF supplemental grants to 17 relatively poor or rapidly growing 
states, due to expire this year, should be extended for at least a year 
as well.

An Economic Downturn Could Increase TANF Caseloads Substantially
    A recession is a nationwide economic contraction that would be felt 
in virtually all states, though to varying degrees. A recession could 
be relatively mild, in which case the national unemployment rate might 
rise by just 2-3 percentage points (as in 1990-92); or it could be more 
severe, in which case the increase in the national rate could be 4-5 
points (as in 1981-82) or more. During the most recent recession, 
unemployment rates rose by a percentage point or less (in annual terms) 
in about a third of the states, but they also rose by 4 points or more 
in many others.
    If a recession occurs, job availability for those seeking 
employment will decline, and unemployment will rise among all groups, 
especially less-educated workers and those with limited skills or labor 
market experience. The increased unemployment would be what economists 
often refer to as involuntary unemployment--i.e., unemployment 
reflecting economic conditions rather than the choices made by workers 
themselves about whether or not they want to work. Particularly, 
employment will decline significantly among disadvantaged women, and 
the welfare caseloads will rise (Holzer, 2000).
    But the sizes of these prospective caseload increases are 
uncertain, since we cannot predict the severity of therecession, or how 
states will respond (in terms of the ease with which they allow women 
to return to the welfare rolls). One recent study by the President's 
Council of Economic Advisers predicts that the rolls will rise by 5-7 
percentage points for every one-point increase in the national 
unemployment rate. This estimate is based on a statistical analysis of 
the extent to which a stronger economy is responsible for the caseload 
decline of over 50% since 1994. Other estimates suggest that the strong 
economy of the late 1990's was an even larger factor in the caseload 
decline, and therefore that the rolls could increase by as much as 8-10 
percentage points for each percentage-point increase in 
unemployment.\1\ Again, the increases will almost certainly be larger 
in some states than others. Furthermore, these increases may persist 
for several years, since changes in welfare rolls tend to lag behind 
changes in the unemployment rate (which themselves can persist for 
several years during and after a downturn).
---------------------------------------------------------------------------
    \1\ These studies are reviewed and critiqued in Bell (2001).
---------------------------------------------------------------------------
The Need for a Federal Response To Limit the Financial Strains on 
        States
    During recessions, state revenues decline while their expenditures 
on social services and support (such as TANF) generally rise. But, 
since most states need to balance their budgets annually, these 
economic fluctuations can create serious financial strains. Indeed, 
many states will face an incentive to limit the extent to which they 
allow low-income women (and men) to return to the rolls, and may use 
various administrative means of diverting them from doing so. If this 
occurs to a large extent, the hardships experienced by low-income women 
could be very substantial.
    Of course, many states have been accumulating unspent TANF 
surpluses since 1996, as their caseloads have declined substantially 
while their federal block grants have been fixed (at $16.5B annually). 
The most recent numbers available (through the end of FY2000) show 
cumulative unobligated surpluses of under $3B nationwide, and 
unliquidated obligations of about $5B (Lazere, 2001). As the latter 
have been at least nominally obligated to various expenditure 
categories, their availability in case of a downturn will be uncertain. 
Furthermore, the sizes of the surpluses vary dramatically across 
states. For instance, several of the states with the largest caseloads 
(such as California, Pennsylvania and Florida) have virtually no 
unobligated surpluses and fairly small unliquidated sums (measured as 
percentages of TANF grants in any year).
    In addition, state spending on related matters, such as child care 
assistance, have risen substantially in the past few years. Thus, a 
large majority of states spent virtually their entire TANF block grant 
in FY2000, and a dozen states even dipped into their surpluses to 
finance these activities. In the event of a downturn, states will 
likely face unpleasant tradeoffs between continuing these supports for 
working families v. reducing them to fund rising caseloads.
    In sum, many states would face serious financial strain in the 
event of a downturn, and choices between continuing spending on popular 
and legitimate work-support activities v. increased spending on a 
rising caseload. Though the magnitude of the hardship will depend on 
the severity of the recession, its distribution across states, and 
their accumulated surpluses, a strong case can certainly be made for 
continuing the option of federal assistance to many of these states in 
need.

Are the Earlier Triggers for Receiving Aid Still Valid?
    According to the 1996 law, states would have to meet several 
criteria before they could qualify for contingency funding during a 
downturn. For instance, the state's unemployment rate would have to be 
at a level of 6.5% or more and at least 10% higher than it was in 
either of the previous 2 years. Alternatively, states could qualify 
based on increases in their food stamp caseloads, as long as the 
caseloads were at least 10% higher than in FY 1994 or 1995 (adjusting 
for changes in eligibility enacted as part of the 1996 law). In 
addition, states must be spending at least as much on TANF as they were 
in FY1994 of their own money (Falk, 2001).
    Do these triggers make sense in the current environment? All of 
these conditions have become more difficult to meet than they might 
have been in 1996, due to either declining unemployment rates or 
declining TANF and Food Stamp caseloads nationwide. For instance, the 
required 6.5% state unemployment rate was chosen in a year (1996) when 
the nation's unemployment rate was 5.4%--which was virtually identical 
to the national unemployment rate in 1989, right before the previous 
recession occurred. During the 1990-92 recession, over 30 states would 
have met the unemployment rate requirements for access to the 
contingency fund (Falk, 2001), as they represented average increases of 
only 1.2 percentage points above the existing national rate.
    However, the nation's unemployment rate has averaged just about 4% 
during the past 2-3 years. If a recession of the same magnitude as that 
in 1990-92 were to now occur, it is likely that most states would fail 
to meet the 6.5% threshold. For instance, during the year 1999, 25 
states had annual average unemployment rates below 4%, and 10 states 
had rates below 3%. The former group would need to have unemployment 
rates increase by well over 50%, and the latter would need increases of 
well over 100%, in order to qualify for contingency funding. 
Unemployment increases smaller than these would still generate hardship 
for these states and for the low-income women seeking employment there, 
but the states would not qualify for contingency fund assistance under 
those circumstances.
    Meeting the food stamp and expenditure-level criteria would be more 
difficult than earlier as well. Food stamp caseloads have declined by 
roughly 40% since the mid-1990's, vastly more than was expected on the 
basis of eligibility changes. While these will no doubt rise again 
during the next downturn, it seems highly unlikely that they will 
increase by 80% above their current levels (which would be required to 
reach 110% of the FY1994 or 1995 caseloads). And, with most states 
currently spending 75-80% of what they were spending out of their own 
funds in the pre-1996 period, increasing their expenditures back up to 
100% (given the reallocations of money to other areas that have 
occurred since that time) would be difficult as well for many states.
    Under these circumstances, what kinds of changes in the triggers 
would be most appropriate? One possibility is to have a lower threshold 
level for state unemployment rates--such as 5%--perhaps combined with a 
more stringent threshold for increases in the rate (e.g., 20% rather 
than 10%). A 5% threshold level would constitute an increase in average 
unemployment relative to the recent 4% benchmark of roughly the same 
magnitude as a 6.5% threshold constituted relative to the 5.4% 
unemployment rate of 1996. However, since a 5% threshold may still be 
very difficult for states to meet that currently have unemployment 
below 3%, an alternative threshold based only on increases in the state 
rate (such as 50%) might be appropriate as well.
    Similarly, a threshold for increases in the Food Stamp caseload 
that is more stringent than the current required increase, but 
calculated relative to the current base rather than the FY1994-95 base, 
might make sense as well. For instance, a required increase of 20-30% 
over current levels should be large enough to exceed any increases that 
might occur for other reasons (such as improved outreach) and would 
therefore capture labor market difficulties for unskilled workers that 
may not be fully reflected in the overall state unemployment rate. 
Finally, a state spending requirement of 75-80% of FY1994 levels (the 
same as current ``maintenance of effort'' requirements under TANF) 
would be a more realistic reflection of spending levels and obligations 
for most states than a return to 100% of the FY1994 levels.

Should the Fund Be Capped at $2B?
    In the event of a recession, it is possible that a $2B fund, in 
addition to accumulated TANF surpluses and access to the limited TANF 
loan fund, might be sufficient to meet state needs. On the other hand, 
if the downturn is relatively more severe and lasts for a number of 
years, it is also possible that this level of funding will prove 
grossly insufficient to meet the extra financial needs of states.
    For instance, the $2B funding level constitutes less than one-
eighth of one year's TANF block grant, and wellunder that percentage of 
total spending for cash and related assistance at the state level. Yet, 
in a recession, caseloads could rise by 10-30% (using the Council of 
Economic Advisers' estimates) or by significantly more (according to 
other estimates), and could persist for several years. Such increases 
could easily swamp the $2B contingency fund and available TANF 
surpluses, especially in the large states that have accumulated little 
to date in the way of surpluses.
    A more sensible approach would probably be to leave the total 
amount of the contingency fund uncapped. Given that the funding 
mechanism in the current law already requires (and should continue to 
require) a match from the states, there are incentives in place for the 
states to economize on their use of these funds. An uncapped 
contingency fund would ensure sufficient availability to meet the 
legitimate needs of states without encouraging wasteful spending on 
their part.

Other Concerns Regarding TANF During a Downturn
    While an uncapped contingency fund with appropriate trigger 
mechanisms would help alleviate the financial difficulties faced by 
states during an economic downturn, other concerns would remain, 
especially about the well-being of low-income women who would have 
difficulty gaining employment at that time.
    At least a few of these concerns are as follows (Holzer, 2000):
    (1) Many women who have been on TANF may be ineligible for further 
funds, if they have reached their five-year lifetime limits; and most 
of them will also not qualify for Unemployment Insurance, either 
because they have too little work experience or because their reasons 
for leaving their previous jobs make them ineligible;
    (2) States will have more difficulty meeting their caseload work 
requirements under TANF during a recession. Many states have met the 
current requirements through caseload reductions rather than work among 
current recipients. Both will be harder to achieve when the economy 
turns downward.
    While resolving these issues lies outside the scope of the current 
hearings, they need to be addressed to ensure the existence of a 
realistic safety net during a downturn for low-income women. Some 
options that we might want to consider to alleviate these potential 
problems include:
     Reforms in the Unemployment Insurance system to ensure 
higher rates of coverage for low-income women with at least some labor 
market experience;
     Reforms in TANF (perhaps implemented during 
reauthorization in 2002) that would temporarily suspend time limits in 
states with high unemployment and/or enable states to count a wider 
range of education and training activities towards their work 
requirements; and
     The provision of technical assistance and/or funding to 
states that want to implement Community Service Jobs programs to 
welfare recipients during a downturn, as a way of meeting work 
requirements and providing meaningful work experience to women who will 
have more difficulty finding it in the private sector.

Other Funding Issues: Supplemental Grants
    Though my testimony today has focused primarily on funds that would 
be available to states during a downturn, a separate issue involves the 
status of TANF Supplemental Grants to 17 states that are either 
relatively poor or rapidly growing. Like the contingency fund, the 
supplemental grants are also due to expire this year; and their 
expiration would entail cuts in TANF block grants of roughly 10% to 
most of the states receiving these funds.
    While these issues are discussed in greater detail elsewhere (e.g., 
Primus and Lazere, 2001), the supplemental grants should be extended by 
at least one more year, at a cost of roughly $400M, to ensure that 
current funding streams remain in effect until TANF reauthorization 
that will occur in FY2002.

Conclusion
    At this point, it is impossible to know whether or not a recession 
is on the immediate horizon, or how severe it will be and how long it 
will last, if it actually occurs. Nevertheless, a strong case can be 
made for reauthorization of a contingency fund that would provide some 
federal assistance to states that face financial burdens from rising 
caseloads during that time period. Furthermore, the triggers that would 
enable states to access these funds should be updated in light of 
developments that have occurred during the past five years; and the 
level of funds should be uncapped, to ensure that they are sufficient 
to meet the needs of states.

                               REFERENCES

    Bell, Stephen. ``Why Have Welfare Caseloads Fallen?'' Discussion 
Paper, Urban Institute, 2001.
    Falk, Gene. ``Welfare Reform Financing Issues: Recession Funding.'' 
Congressional Research Service Report to Congress, 2001.
    Holzer, Harry J. ``Unemployment Insurance and Welfare Recipients: 
What Happens When the Recession Comes?'' Policy Brief, Assessing the 
New Federalism, The Urban Institute, 2000.
    Lazere, Ed. ``Unspent TANF Funds at the End of Fiscal Year 2000.'' 
Center on Budget and Policy Priorities, 2001.
    Primus, Wendell and Ed Lazere. ``TANF Supplemental Grants Should be 
Extended for Fiscal Year 2002.'' Center on Budget and Policy 
Priorities, 2001.

                                

    Chairman Herger. Thank you very much, Mr. Holzer.
    We will now turn to our panel for questioning. I would like 
to remind the members that they each have 5 minutes for witness 
questioning.
    The gentleman from Oklahoma, Mr. Watkins.
    Mr. Watkins. Thank you, Mr. Chairman.
    I have a couple of questions, and one for Mr. Potts of 
Ohio. Under title XX, I think you can switch up to 10 percent 
of TANF funds. Do you shift that amount?
    Mr. Potts. Mr. Chairman, Members of the Committee, 
absolutely. The title XX monies are even more flexible than 
TANF dollars, and the way that our county agencies are set up, 
we have a county-administered system and most of our counties 
will have a child welfare system and a public assistance system 
that will be tied together, so we do try to maximize the 
flexibility.
    Mr. Watkins. Is that title XX by county, or by the State?
    Mr. Potts. Actually, Mr. Chairman and Members of the 
Committee, we do both. Some of it will be allocated to the 
counties, and at the State level we have what we refer to as 
consolidated funding. We try to get away from that kind of 
``one size fits all'' approach to providing these services. The 
counties--
    Mr. Watkins. That's the point I was trying to make. I think 
some counties in the poor and economically depressed areas, in 
small town and rural depressed areas, are probably not getting 
the transfer of that money down to them in the delivery system.
    I would like to ask the staff, if it's all right, Mr. 
Chairman, to take a look at the transfer of TANF and what title 
XX is doing in some areas.
    I have a question for Mr. Holzer. You said the trigger for 
some of these various funds depends on the economic conditions, 
et cetera. You said those triggers are based on State 
unemployment. What about the county level of unemployment?
    Mr. Holzer. My impression is it's the State level that 
determines it, and it is the State insured unemployment rate 
which, of course, differs from the State's overall unemployment 
rate. Some States have different levels triggering their 
amounts, but it is my impression that it's mostly at the State 
level.
    Mr. Watkins. That's another concern I have, that it has to 
be the State figures which triggers it, where out in the small 
towns and rural areas it may have been triggered a lot earlier. 
I think that's something else we should look into and it may be 
something we can correct.
    I apologize for the hoarseness in my voice. Thank you, Mr. 
Chairman.
    Chairman Herger. Thank you, Mr. Watkins.
    Mr. Cardin would you like to inquire?
    Mr. Cardin. Thank you, Mr. Chairman. I thank all the 
witnesses for their testimony.
    Mr. Holzer, I was struck by your comparison between what we 
should do on TANF and unemployment insurance and the role the 
Federal Government plays as somewhat of an equalizer 
nationwide.
    You know, if we go through a recession, it is going to be 
different in different parts of the country. You pointed that 
out, that there will be some parts where there's a much higher 
impact on their cash assistance needs than other parts of the 
country. The unemployment rates will be different around the 
Nation.
    Mr. Potts, I really applaud what Ohio has done. As you 
pointed out, if there's a mild recession, you can still 
maintain your basic commitment not only to the cash assistance 
caseload increase, but also to the noncash assistance programs. 
That's wonderful. That's what you want to do.
    But it wouldn't take much of a change in the economy to 
increase dramatically the cash assistance rolls, if I 
understand the correlation about a one-percent increase in 
unemployment relates to somewhere around a five to ten percent 
increase in the cash assistance welfare rolls. Again, that's a 
rough calculation. So if we see a two percent or three percent 
increase in unemployment, you will have a dramatic impact on 
cash assistance.
    It is true that there should be State accountability. When 
you get flexibility, there should be State accountability. I 
think you're absolutely correct on that, Mr. Potts, and States 
should prepare for changes in economic conditions. But we do 
need to have the Federal Government as a partner in trying to 
make sure that those areas that are hit the hardest have a 
partner in the Federal government, so that they can continue to 
provide not just the cash assistance, but also the other 
services.
    It would be tragic if we lost the other related services 
because we had to put so much into the cash assistance rolls. 
So I really do appreciate very much your comments and the 
challenge to us.
    Mr. Holzer, I agree with you. The triggers need to be 
revisited. We need to bring it up to where we are currently and 
take a look at the dollars, the circumstances. I would be 
wondering whether you have any specific recommendations you 
would like to make on trigger mechanism changes, either now, if 
you would like, or submit it to our Committee. I would 
appreciate that.
    Mr. Holzer. Briefly, I do have them in my written 
testimony.
    On the unemployment side, if you want to maintain the logic 
of the original triggers, but update them to the new 
circumstances, a five percent trigger level for unemployment 
would be very comparable, because it would be roughly a one 
percentage point increase above the average national 
unemployment rate right now. But you might also want to have an 
additional mechanism for the States that are starting it at 2.5 
or three percent, that will never reach even five percent. You 
might want to have any State that has a 50-percent increase, or 
a 75-percent increase in their unemployment rate, they might 
trigger as well.
    Finally, on the food stamp side, I would argue that I might 
live with even more stringent increases than the ones in the 
current law, maybe 20 to 30 percent rather than 10 percent, but 
starting at the current base rather than the base 1994-95. I 
think those would be sensible, would maintain the logic of the 
earlier triggers, but update them to new circumstances.
    Mr. Cardin. Miss Ryan, let me ask you a question.
    I understand that nine of the 17 States that receive 
supplemental grants are already spending at least at their base 
amount and most more than that. So if we were to eliminate the 
supplemental funds, I'm curious as to what impact it would have 
on the services being provided, at least in those nine States, 
if not in all 17 States.
    Ms. Ryan. That's exactly right. For example, in Louisiana, 
given the way they are planning to transfer funds they estimate 
they would have to reduce their child care spending by $5 
million if they lost their TANF supplemental grant.
    Other States are looking are looking to reduce or to 
consider reducing other programs, such as a mentoring program 
or ongoing work supports.
    I would say that, given the fact that 44 States transfer 
funds to child care and SSBG, I think there would be a 
significant pressure on those States to actually reduce their 
child care investments, or reduce their amount of transfer. 
Though those children are not reflected in total caseload data, 
they are certainly children who won't be cared for when their 
moms go to work or training.
    Mr. Cardin. Thank you.
    Mr. Posner, very quickly, because my time is evaporating, 
you mentioned Maryland as one of the ten States, and you 
mentioned they had a combined model. I'm curious as to what 
States you felt had good models that we could use as examples.
    Mr. Posner. Well, Maryland was the only State that provided 
a rainy day fund from their own money. Now, they did it by 
shifting funds so that they freed up their own money by 
replacing it with TANF money, but as you indicated, Maryland 
has a $70 million rainy day fund, with a requirement that it be 
reviewed by the legislature and the Governor before it's being 
used.
    Mr. Cardin. I just wanted to get a plug in for Maryland. 
That's fine.
    [Laughter.]
    Mr. Posner. Glad to do it.
    Chairman Herger. Well taken. Thank you very much, Mr. 
Cardin.
    Mr. Potts, do you have any specific suggestions for us to 
encourage more State savings?
    Mr. Potts. I have several, I guess. I think the main thing 
that would really benefit those of us who are trying to 
administer public assistance programs would be some type of 
direction from Congress. The only thing our State legislatures 
and our Governors are hearing is ``spend the money or lose 
it''.
    We have tried to put together a very responsible program. 
Our Governor is very supportive. We have term limits that have 
taken effect in Ohio. Forty-seven of our 99 House Members are 
brandnew this year. They don't remember double-digit inflation 
in Medicaid. They don't remember caseloads that actually went 
up instead of going down. They don't remember the promises of 
five years ago.
    When the constant, consistent message from Washington is, 
``You're sitting on substantial reserves and you ought to be 
spending those'', I think it's a real challenge for us. So some 
type of indication of what your wishes are for those. And it 
doesn't even have to be ``we think you ought to keep a 
reserve'', as much as if we would just get word from Washington 
that, if a State chooses to do a reserve, we think that that's 
allowable, or that that's something that we recognize as being 
important. It has put States in a rather awkward situation as 
we go through our budget debates, and especially in Ohio with 
term limits, it has had a huge impact on us.
    The other thing that really has States sitting out there 
nervous is the entire definition of what you refer to as 
``supplantation'', something that didn't exist when we first 
started developing our programs. I think the sooner we can all 
decide what exactly we mean by that, the better we can respond 
to your wishes and the better we can administer these programs.
    So I think the two major pieces--and I think both of those 
don't require a law change as much as they do that partnering 
you referred to and just a working back and forth.
    Chairman Herger. Good. Thank you very much, Mr. Potts. 
Hopefully we're beginning to do that.
    Mr. Lewis of Kentucky will inquire.
    Mr. Lewis. Thank you, Mr. Chairman.
    Mr. Potts, you mentioned a program in some of your counties 
in Ohio that were designed to cure head lice. How did that come 
to your attention and what has been the results of those 
programs?
    Mr. Potts. Mr. Chairman and Members of the Committee, this 
is actually probably one of the biggest surprises, but I think 
one of the stories that I like to talk about quite often, of 
how different welfare reform is now from before.
    We require each of our 88 counties to have a public forum 
before we hand over some of the flexibility in the TANF program 
to them. They go to the communities and say what's available, 
what can we do. We've got these types of funds that will now be 
available to provide service to poor families.
    At one of those meetings, a juvenile justice judge stood up 
and said, ``Well, if you want to start dealing with problems in 
the juvenile justice system, don't look to me. You really ought 
to be looking to the schools, because I'm telling you right 
now, the kids who are consistently absent from schools will be 
the ones in my system within the next few years.''
    So they started looking at the schools and asked if that 
was an accurate statement, and the superintendents in the room 
agreed. They sat down and worked on how they could address some 
attendance problems.
    They found the number one problem of attendance in 
Appalachian schools in the State of Ohio was head lice. A child 
that contracts head lice in their school districts at the 
beginning of the school year can expect to miss 35 to 40 days 
in the year. Once a child is identified by the school system as 
having contracted head lice, they are sent home automatically. 
They are given a note that says you have to go out and buy 
these expensive shampoos, and you need to take care of that 
problem before the child is allowed to come back in.
    Even if they do the shampoos, it is very similar to--If you 
have ever had a dog with fleas, you give it a bath, you see the 
dead fleas, you feel pretty good about it, and 2 days later the 
dog is scratching again. Head lice are no different. Not only 
does the child have it, but generally so do the parents, so do 
the siblings, so do the pets. So it's a constant recurring 
problem.
    The counties were able to take some of their TANF dollars 
for poor families, and when they contracted head lice, they 
actually send a nurse to the home. They will actually show and, 
in some cases, bathe the children, show them how to rid the 
head lice. They will give them vouchers for dry cleaners to get 
the bed clothes cleaned. They will bring in carpet cleaners or 
a carpet cleaning company, to clean the carpets and do those 
types of things. As I said in the written testimony, in some 
cases we've had school districts who reduced absenteeism by 
about 50 percent in the first year of that program.
    You know, I've been asked what exactly does that have to do 
with welfare reform. We know that children who are consistently 
absent from school are mostly likely to be held back. We know 
those who are held back are the most likely to be dropouts. We 
know dropouts are the most likely to be teen parents. We know 
that over half of the teen parents wind up on welfare at some 
point in their life, and we also know that 80 percent of the 
people in the child welfare system, the children, their parents 
either recently were or are on public assistance.
    We thought head lice had everything to do with welfare 
reform in Ohio. I thought the real advantage of that program 
was that it was created not because we figured it out in 
Columbus or here in Washington. This program came about because 
we told the community what are the problems you're facing. I 
thought it was a very unique and, frankly, very inexpensive way 
to address a very serious problem in those areas.
    Mr. Lewis. I agree. It is a very innovative way of dealing 
with the problem. Other States could do similar things.
    Can you project savings like with this particular program, 
or other programs that you've been able to put in motion?
    Mr. Potts. Mr. Chairman and Members of the Committee, 
probably the biggest challenge, and from all the States I'm 
talking to, is how do you measure whether or not a prevention 
program really prevented somebody from coming on.
    There are some programs that are probably the right thing 
to do--and we have a difficult time trying to figure out how 
would that fit within the TANF parameters--but how do you 
really know, and do you know in a short term or a long term.
    One of the greatest challenges when we talk about 
preventing the incidence of out-of-wedlock births, it is 
something we take very seriously, it's something we want to do 
a lot of work with, but it is going to be a long time before we 
can successfully determine the effectiveness of our programs. 
People aren't going to stop doing things just because we say 
so. We have tried to manipulate caseloads historically by 
changing the parameters and that hasn't been real successful. I 
think we really need to change our approach, and it has been a 
real challenge.
    I think one measurement in the long run will be the number 
of community partners that are involved. We do a lot with 
faith-based organizations in the State. In fact, about $90 
million this biennium is going through faith-based contracts. 
The more we can get the local communities, the churches and the 
families involved, the better we will be long term. But we 
don't have a real good way of measuring that.
    Mr. Lewis. One last question.
    Prior to welfare reform, would this have been possible to 
do?
    Mr. Potts. Mr. Chairman, Members of the Committee, no. No, 
there wasn't any flexible funding. Our money was all going into 
caseloads, so we were looking at ways to reduce the immediate 
caseload. And when you talk about prevention programs, 
especially a long-term prevention program, there weren't any 
funds that would allow us to do that.
    Mr. Lewis. Thank you.
    Chairman Herger. Thank you very much, Mr. Lewis.
    The gentleman from Texas, Mr. Doggett.
    Mr. Doggett. Thank you, Mr. Chairman.
    It was troubling that President Bush did not include in his 
budget the continuation of the supplemental TANF funds. I am 
pleased that Senator Bob Graham of Florida, joined by Senator 
Hutchinson from Texas, have amended, as all of you probably 
know, the budget resolution over in the Senate, to add it back 
in for this next year, and hopefully the conferees on the 
budget resolution will follow the Senate version of the bill.
    Mr. Cardin has already entered into the record the 
statement of the current Governor of Texas, Rick Perry. I think 
there is a feeling among the people that I talk to in my home 
State that we would really jeopardize funding particularly for 
child care or child protective services, with reference to 
abused children, if we don't have the TANF supplemental grants 
restored for next year.
    I believe, in response to Mr. Cardin's question, Miss Ryan 
that you have already spoken to this. Mr. Holzer, could you 
elaborate as to what will happen in other States if the 
Congress does not act promptly this year to continue the 
supplemental funding?
    Mr. Holzer. As was indicated earlier, the supplemental 
funds constitute about 10 percent of the overall funds going to 
those 17 States on average. Now, a 10 percent cut, even at the 
current caseload level, would again put States in this bind, 
either having to make it more difficult for people to enter the 
welfare caseloads and with cash assistance, or to cut from 
other areas, other kinds of expenditures, child care and the 
like, which are both politically popular and have bipartisan 
support, and also are probably reasonably cost-effective in 
what they do, so the States would face those difficult trade-
offs, even in the absence of any kind of economic downturn.
    Mr. Doggett. I guess, if there is continued trouble with 
the economy and the former welfare agencies, acting now more as 
employment agencies, experience a greater number of people 
returning to the rolls who are unemployed, that there will be 
further pressure to cut into child care and other work 
supports, correct?
    Mr. Holzer. That's correct, absent these other contingency 
funds and other funds that might be available to cushion those 
increases.
    Mr. Doggett. It seems to me that perhaps the best short-
term solution is to have Congress continue the supplemental 
TANF funds for another year, and then, as a part of the overall 
revision of TANF, make adjustments in the formula to take care 
of this problem over the longer term, rather than having these 
two separate programs.
    Do you have thoughts about how, Mr. Posner, we should 
address this on the long term, in contrast with the short-term 
need?
    Mr. Posner. I think that's a very good distinction, because 
the formula really, essentially, grandfathered in the old 
distribution, which promoted quite large disparities among 
States, as you know. In terms of per-grant, per-child, it goes 
from about $700 on average in those 17 to about $1,700 in some 
of the other States that have traditionally been more willing 
and able to spend higher amounts of money. So, by freezing in 
the old distribution, we kind of perpetuated the disparities in 
the program and the supplemental grants were a small 
downpayment on trying to kind of edge our way toward a little 
more uniform allocation.
    I think putting that formula on the radar screen for 
reauthorization is something I know is not easy to do for the 
Congress, but it is something that probably is the right way to 
approach that issue.
    Mr. Doggett. Has any study begun of how that formula might 
be altered in order to resolve this matter?
    Mr. Posner. We have not done anything on that yet. We have 
been doing some work on the Medicaid formula, which has similar 
issues, where you really want to focus more on per person and 
need indicators and total taxable resources among States and 
figure out a way to kind of figure in needs, fiscal capacity, 
and relative costs among States.
    We need to develop a formula that--you know, here we have 
inherited this formula over 60 or 70 years, and it served us 
well possibly in the early stages of the program, but it is 
time to reexamine it.
    Mr. Doggett. Thank you.
    Miss Ryan.
    Ms. Ryan. May I just add to that by saying one thing that I 
think does need to be looked at in reauthorization, is that, a 
year after welfare reform was passed, the TANF supplemental 
grant formula was applied and determined only 17 States would 
ever get this supplement, notwithstanding any other changes in 
poverty or population or anything else. So one thing to look at 
is whether or not there should be a periodic review of the 
initial eligibility of States, rather than just freezing that 
in for six years.
    In our Association, and in our bipartisan recommendations, 
we are concerned about potential formula fights. We don't want 
to see that occur. We think there is a reason to make 
adjustments, but future supplements should be funded above the 
current TANF baseline amount.
    Thank you.
    Chairman Herger. Thank you very much, Mr. Doggett.
    Mr. Doggett. Thank you, Mr. Chairman.
    Chairman Herger. Mr. Holzer, is it true that several of the 
States receiving supplemental grants, including Mississippi, 
Montana, Louisiana and Idaho, have some of the largest 
unobligated TANF balances, and in all, 14 of the 17 States 
receiving supplemental grants have unspent TANF balances?
    Mr. Holzer. To be honest, I haven't looked carefully at 
those numbers. It sounds like that might be true.
    But on the other hand, remember that California and Florida 
are two of the States receiving supplemental funds--and not all 
States are equal in terms of caseload. We know that the eight 
largest States account for over 60 percent of the overall TANF 
caseload, and some of the largest States like California have 
no unobligated balances and relatively small unliquidated 
balances. So I think the experience there is a real mix across 
different States. But some of the largest ones have more 
serious fiscal situations than the States you indicated.
    Chairman Herger. Thank you very much.
    The gentleman from Pennsylvania, Mr. English, may inquire.
    Mr. English. Thank you, Mr. Chairman.
    Mr. Posner, in looking over your testimony, I notice you 
also explore some options that might increase the States' 
incentives to save. Specifically, you throw out the idea that 
Congress could either allow States to count rainy day funds 
toward their maintenance of effort, or that they could allow 
States to draw down their entire TANF grant and save these 
funds in their own treasuries.
    I wonder if you could explore those two options and give us 
a sense of the potential fiscal impact and the pros and cons.
    Mr. Posner. Right. Those are important issues.
    On the rainy day funds, we saw that some States felt they 
did not have the incentives to save from their own funds 
because they couldn't count it as part of the maintenance of 
effort. The idea that could be explored is permitting States to 
do that with some safeguards, because there are some potential 
downsides. You don't want States to draw down their entire TANF 
funds, replace their State funds, and put it aside for a future 
purpose, for example.
    Mr. English. On that point, may I ask, what safeguards do 
you think would be most appropriate?
    Mr. Posner. Well, you could limit the share of the MOE 
that's dedicated to a rainy day. You could require States to 
provide for a ``bona fide'' rainy day fund. In other words, 
something like they do with their own rainy day funds, have 
trigger mechanisms specifying the point when funds would be 
released, have the legislature pass a statute, have some kind 
of review process that ensures that the money will truly act as 
a rainy day fund and be thought about in a more systematic way.
    On the other proposal, we heard from State officials--and 
it has been echoed here, and rightly so--that money that is 
permanently appropriated to this program, which is available in 
perpetuity to the States, for all intents and purposes, is 
potentially at risk, because Congress sees these unspent 
balances and doesn't really know potentially how much is really 
needed, how much is not needed.
    The idea has been advanced by States that they should draw 
down that money entirely at the beginning of the year, put it 
in the State treasuries rather than having it rest in the 
Federal Treasury. Under the Cash Management Improvement Act, 
that applies to all the Federal grant programs, States are not 
allowed to draw down money until they absolutely need it to 
spend, which means that the outlay is not recorded on the 
Federal budget books until the States actually pay the money 
for actual services. By requiring States to outlay that money 
at the beginning of the year, it would take it off our books 
and put it on their books.
    There's a couple of very important issues. One is our 
surplus would be lower, at least temporarily, by doing that, 
and we would lose some interest. You could develop procedures, 
as currently is done in some States with other grants, to have 
States reimburse us for those interest costs, because they're 
going to be gaining in interest earnings when they have those 
balances in their own bank accounts. So we could have a 
fiscally neutral exchange, essentially, that moves up the 
timing of the money, so that States feel like this is in their 
own bank accounts and can plan with more certainty that that 
money will actually be there. That's the advantage of it.
    We would want to make sure that we maintain transparency if 
that happens. One of the advantages of the current situation is 
we see very clearly how much States are spending and how much 
they're not spending. We would want to make sure that that 
continued with the other kind of process, should we think about 
that.
    Mr. English. Mr. Holzer, looking at these two suggestions, 
allowing States to count their rainy day funds, perhaps with 
some important qualifiers, toward their maintenance of effort, 
and second, considering allowing States to draw down their TANF 
grant and put it in their own treasury, do you feel comfortable 
with these two proposals? What sorts of policy restrictions 
should Congress consider if we get to the discussion stage on 
these two ideas?
    Mr. Holzer. Both proposals sound quite sensible to me. I 
guess I would caution us from thinking that that might solve 
the entire issue. I think one of the hardest things about this 
business is trying to come up with even broad estimates of how 
much might be needed in a recession, given how much uncertainty 
exists about the magnitude of the recession and how States 
would respond. So I think those are sensible suggestions. I 
don't think it fully eliminates the need for contingency funds 
and some additional Federal role.
    Mr. English. Mr. Potts, looking at this from a State 
perspective, on either of these two suggestions, are they ideas 
that would make this even more attractive for Ohio?
    Mr. Potts. Mr. Chairman, Members of the Committee, 
certainly, the more control we have over the program, I think 
the better we'll be in a position to make the more immediate 
decisions.
    We talk about recession numbers and inflation and those 
types of things. Those will all show up eventually, butwhen we 
have--for instance, in the City of Cleveland, when they just recently 
announced a layoff of 2,000 steelworkers, and we know that for every 
laid off steelworker, it generally results in the loss of five like 
jobs, we know that that community has an immediate need.
    So if we have some way of control where we can move those 
contingency dollars, if we had control of those within our own 
situation, as opposed to having to go and meet a formula and go 
through all the hoops it would take to be able to pull those 
dollars down, we can probably have a better effect at helping 
those families that are being impacted by major economic 
changes.
    Obviously, from the State perspective, anything that gives 
the State more control will ultimately result in better 
outcomes.
    Chairman Herger. If the witness could sum up. Thank you 
very much.
    Mr. English. Thank you, Mr. Chairman.
    Chairman Herger. I thank the gentleman from Pennsylvania.
    Now the gentleman from Michigan, Mr. Levin, may inquire.
    Mr. Levin. This has been an interesting hearing, and I 
think a very good idea. I wasn't quite sure what the issues 
were, though, and I think the last few minutes have helped to 
illuminate what the issues might be.
    We are talking about the contingency fund and about rainy 
day funds in addition to the supplemental. It seems to me that 
the options are becoming a little more clear. We could leave 
the contingency fund essentially inoperative, which it is today 
because of the triggers, and essentially let Federal dollars go 
into the States to create their own contingency funds, which is 
what a reserve fund is, in which I think Mr. English's 
questions elicited some response--and I don't mean these are 
absolutely black and white situations or alternatives--or we 
could make the Federal contingency fund operative and use the 
Federal TANF funds to meet the challenges ahead in welfare 
reform. I think there is a good argument for the latter, that 
we not get lost in kind of accounting devices and go back to 
what are the issues in front of us.
    We have been talking about the contingency fund for a 
number of years, and a number of us have urged that the 
contingency fund be made real. We can make the triggers more 
sensitive to the realities; we could also take the cap off the 
contingency fund--we could have done that years ago--at a small 
cost. True, if there were a recession, it would have shifted 
more of the burden to the Federal government.
    Also, the use of TANF funds, there is a reason for the 
maintenance of effort provisions, to try to keep the focus on 
the purpose of welfare reform, which is to help move people 
from welfare into work and into work that will lift them out of 
poverty. I think that's the trouble with the suggestion of 
simply taking the TANF funds that are unused and putting them 
into a rainy day fund, because if you take almost any State, 
and maybe every State, there is a lot of work that is left to 
be done, both with those who have not moved from welfare to 
work, who are going to be in many instances harder to place or 
harder to make that transition--we all know that, right, Mr. 
Potts--I think you would acknowledge that, by and large, those 
who remain in TANF have, by and large, whatever term we should 
use, have needs that make it more difficult for them to make 
that transition.
    Also, for those who have made the transition, the data are 
quite clear that the majority, or a substantial number of 
them--it depends on the States--remain below the poverty level 
and have needs, whether it's transportation needs to be able to 
move into a higher paying job, or have training or retraining 
needs.
    So, Mr. Chairman, I think that the hearing has helped to 
elucidate what these issues are, and I think there is a good 
case to be made for our taking a look at the contingency fund 
this year and see why it isn't working, to reauthorize it but 
perhaps, I would hope, to improve it, and also to look at what 
we want to be done with the unutilized Federal TANF funds.
    I think the vast majority of States, and really all of 
them, have a lot of unmet challenges to meet, to really make 
the promise of welfare reform, as we carved it, a reality 
increasingly, as well as taking a look at the supplemental 
fund, which we must do.
    Mr. Chairman, I would hope the hearing today might 
accelerate our attention to these issues. I really think any 
notion of essentially taking unused TANF funds and having them 
replace what was supposed to be the purpose of a Federal 
contingency fund is probably not good policy, in terms of 
making welfare reform the full success that those of us who 
worked on it, who helped to shape it and eventually voted for 
it, to make that promise a reality.
    Chairman Herger. I thank the gentleman from Michigan for 
your comments.
    Just in closing, I would like to ask you, Miss Ryan, in 
general, wouldn't encouraging States to maintain their own 
State contingency funds, using either their TANF block grants 
or State funds, relieve some of the pressure on the Federal 
contingency fund in times of need, and wouldn't that be a 
smarter way to allocate resources for the Federal fund than to 
back up State rainy day funds?
    Ms. Ryan. Mr. Chairman, we strongly believe that additional 
flexibility should be afforded to States to send a strong 
signal from Washington that it is prudent to save in the 
instances of an economic downturn--that decision Maryland made 
to create a reserve with their own State dollars, even though 
it doesn't count toward maintenance of effort to do so, was a 
prudent course. So we strongly urge attention to giving States 
more flexibility to be able to reserve State and Federal funds.
    Just one other point, if I may. The regulations that apply 
to the TANF block grant with respect to the drawdown of TANF 
funds from the Treasury, are unlike any other Federal 
regulation that applies to any other block grant. You have 
other block grants in the Federal government that have 
maintenance of effort requirements, such as substance abuse and 
mental health block grants, that are treated in a totally 
different way under Federal regulation than TANF. There have 
been regulatory disincentives to save that don't exist with 
respect to other block grants.
    I urge you to consider regulatory changes outlined in my 
testimony. But it seems to me that we should do both, TANF 
supplemental grants should be extended. A contingency fund in 
instances of severe economic downturn, yes, some States may 
need that extra help. But in the interim, allowing States to 
create reserve funds, a way to balance prudent investments and 
saving for economic downturns, is the best formula for success 
in the future.
    Chairman Herger. Thank you, Miss Ryan.
    Mr. Posner, would you like to comment on the same question?
    Mr. Posner. Yes. I don't think that these options are 
mutually exclusive. They need to be considered. You have a role 
probably for a contingency fund, you have a role for saving 
some of TANF's balances for a rainy day, and frankly, you have 
a role for the States in providing their own money. In fact, 
that is provided in the contingency fund formula, that States 
have got to match it up to a certain level. So I think that is 
the way to go forward.
    I would add that the contingency fund has ``not worked'' 
not because so much of the triggers. It is because the fiscal 
limits are so strict. California, for example, would have had 
to spend $1.9 billion of its own State money increase to get a 
$247 million State contingency fund grant. That's the 
challenge. We have set the price. We should have the States 
participate equally as partners, but that price--the question 
is, is it self-defeating.
    Chairman Herger. Thank you.
    Mr. Potts, in light of Mr. Posner's suggestion, would 
States be agreeable to paying interest to the Federal 
government in order to keep unspent TANF balances in the State 
treasury?
    Mr. Potts. Mr. Chairman, members of the Committee--
obviously, not speaking for the other States, but for Ohio, 
that would be fine. I think having control of the money and 
having the ability to do those things is very important to us. 
Right now, we don't have either. So is something better than 
nothing? Absolutely. I do think it's a responsible way for us 
all to approach this.
    I also think for you to hold the States accountable is 
critical. Make sure we understand that we are expected to 
manage our own caseload. You know, we make decisions that will 
determine how large our caseload will be. In Ohio we have a 3-
year time limit instead of a 5-year time limit. Obviously, that 
makes a difference.
    As long as the control and responsibility are combined, I 
think that's fine.
    Mr. Cardin. Would the chairman yield on that point?
    Chairman Herger. Yes.
    Mr. Cardin. Wouldn't it be more tempting for you to spend 
the money that you actually have? Wouldn't the legislature give 
you a little bit more of a difficult time?
    Mr. Potts. Yes, Mr. Chairman, members of the Committee. I 
worry about that. I mean, I think both things. I think that if 
it's sitting in the State coffer somewhere, you're going to 
have the State legislature probably dealing with some of the 
things that you all had to deal with over the years. If that 
money is sitting there unspent, especially when you get into 
tough economic times, they start looking at those.
    Yes, in many cases, it's six of one and a half-dozen of the 
other.
    Chairman Herger. I want to thank each of our witnesses for 
your testimony this morning. It has been a very informative 
hearing. I appreciate the work that you have done and the time 
you have given us today.
    With that, this Committee stands adjourned.
    [Whereupon, at 11:15 a.m., the hearing was adjourned.]
    [Questions submitted from Chairman Herger to the panel, and 
their responses follow:]

          U.S. General Accounting Office, Washington, DC 20548

    1. How has the pattern of State saving for rainy days changed over 
time?
    a. For example, are States saving more or less now than before?
    b. What factors contribute to this--implementing a new program, 
signals from Washington about cutting the block grant, uncertainty as 
TANF heads toward reauthorization?
    In our written statement we make a distinction between two types of 
saving, (1) reserves of unspent TANF balances at the U.S. Treasury and 
(2) rainy day funds established by the state for welfare programs with 
state or federal funds. The latter--an established rainy day fund--
implies explicit action taken by the state to recognize the need to 
prepare for future unexpected costs. The former--reserves of unspent 
TANF funds--provides no information on states' savings plans because it 
is difficult to ascertain how much of these balances are truly 
uncommitted and available for future contingencies. While states' 
reserves of unspent TANF balances probably represent a de facto rainy 
day fund, there is much ``less there than meets the eye'' because the 
data reported by the states are misleading.
    As such, if a state is saving Federal funds the distinction between 
the two types of saving is blurred because all Federal funds a state 
saves for a rainy day must remain in the Treasury until spent. In our 
1998 report we recommended that HHS and the states work together to 
improve reporting requirements on states' plans for these unspent 
balances. Without improvements in the data we cannot assess any trends 
or patterns in the levels of state saving for a rainy day from the data 
states report on their unspent TANF funds because the data are not 
reliable enough to make such a determination. Likewise, there is no 
aggregate information on how much state funds states are saving for a 
rainy day. States cannot count the funds reserved toward their MOE 
requirement until they are spent. States are not required to report on 
these state-only balances to the Federal government.
    In our ongoing work for the Subcommittee we have collected data on 
state savings in ten states. We have seen few changes in the pattern of 
state saving for a rainy day. We surveyed ten states in 1997 after they 
enacted their first budgets using TANF funds and found only three 
states--Colorado, Texas, and Wisconsin--had established rainy day funds 
of unspent Federal funds left at the U.S. Treasury. One state--
Maryland--used state funds to establish a reserve. In 2000 we surveyed 
the same ten states and found that only one other state--New York--had 
established a rainy day fund for its welfare program in the interim. 
New York uses Federal funds for its rainy day fund. However, the 
balances earmarked for these funds by the states were not determined 
through a fiscal planning process that reflects budgetary assumptions 
about projected future needs. State officials said that because their 
new welfare programs had not been tested during a recession, developing 
a model that might predict how caseloads and costs would respond to a 
downturn proved difficult. Instead, these states designate any funds 
not already appropriated by the state legislature for other purposes as 
constituting the state's welfare rainy day fund.
    Maryland has continued to make deposits into its state-funded rainy 
day fund. In 1997 it made an initial deposit of $15.7 million and then 
did not make another deposit until 2000, when it deposited $53 million 
of state funds in its welfare reserve. However, as we noted in our 
written statement, Maryland was able to shift the costs of saving state 
funds to the Federal government by using TANF funds to replace state 
funds in some programs and depositing the freed-up funds in its reserve 
account. Again, Maryland has not projected future needs based on 
alternative economic scenarios, instead a senior state budget official 
said that they were motivated chiefly by the perceived need to draw 
down their Federal funds quickly or risk their rescission. They were 
also concerned that if they left these funds unspent it might affect 
future funding levels.
    In 1998 we reported that the levels of unspent TANF funds were 
transitional in nature and that a number of factors unrelated to 
states' savings decisions have influenced the levels of these funds, 
including cash management practices, timing of the enactment of new 
state welfare laws, slow-starting programmatic spending, and caseload 
declines. Concerns similar to those expressed by Maryland budget 
officials about the future of TANF funding levels have driven other 
states to spend their TANF funds more quickly. As a result, the levels 
of reserves are expected to go down.
    2. In your written testimony you note several approaches to 
encourage States to save more State Funds.
    a. Would these changes result in added Federal costs?
    b. In fact, depending on what we do with the Federal contingency 
fund, wouldn't encouraging more State saving tend to reduce Federal 
costs, as States would need less immediate Federal assistance in a 
downturn?
    In the new block grant environment, the Federal government has an 
interest in encouraging states to save for future contingencies, but 
within a framework that recognizes that the size of the reserve will 
remain largely a state determination made under conditions of inherent 
uncertainty. While the new fiscal partnership implies a much stronger 
state role in the safety net, both Federal and state governments have a 
shared responsibility to ensure that sufficient resources are available 
for rising TANF costs in a recession.
    In our written statement we noted that states could be encouraged 
to save their own funds by counting a portion of state funds set aside 
toward their MOE requirement. If a state chose this option it would 
have to either cut program spending to make up the difference of what 
it saves, or it could draw down any unspent TANF funds--if available--
and use the Federal dollars to make up the difference. If the state 
chose to draw down TANF funds instead of leaving them in the U.S. 
Treasury, the rate of outlays recorded in the TANF program would shift 
forward. Accordingly, the Federal budget surplus would be 
proportionately lower in the near term.
    We also stated that states might be able to save more TANF funds 
directly for the future if they were able to draw down Federal funds 
earlier than needed for program spending. Some state officials argued 
that their incentives to save for the future could be bolstered by 
allowing states to keep unspent TANF funds in their own accounts rather 
than the U.S. Treasury. They believe that this might reduce incentives 
for Congress to rescind unspent balances since the outlays would be 
recognized earlier at the time of the grant and not when the money is 
actually spent.
    We also suggested that certain changes to the Contingency Fund for 
State Welfare Programs could make it more effective and thus more 
likely states would incorporate the fund in its contingency plans which 
could encourage states to save some of their own funds. The Fund 
requires states to bring their own spending up to pre-welfare reform 
levels before they can gain access to additional Federal funds. 
Simplifying the fund's design and removing some of the restrictive 
barriers to access could provide incentives to states to save some of 
their own funds, since they would be more likely to use it in the event 
of a downturn. Currently, future outlays from the Contingency Fund are 
recorded at zero. Any change that eases access to the fund could record 
a faster outlay rate.
    It is unclear the degree to which a recession might impact TANF 
caseloads and state welfare costs. If states have saved enough of their 
own funds, they may not need to call on the Federal government for 
emergency funding. But states have not engaged in any rigorous analyses 
of their future needs. Without better information on the adequacy of 
their reserves, we cannot assess the impact of these savings on future 
Federal draws.

                                

                                    Urban Institute
                                       Washington, DC 20037
                                                        May 9, 2001
Mr. Wally Herger
Subcommittee on Human Resources
Committee on Ways and Means
U.S. House of Representatives
Washington DC 20515

Dear Rep. Herger:

    Thank you for giving me the opportunity to respond to your 
questions about my testimony on April 26, which raise several important 
issues.
    1. I note your suggestions for changes in the Federal contingency 
fund, including providing ``uncapped'' funding for this purpose.
    A. Do you have any idea what this would cost?
    B. If we enacted your proposals for relaxing eligibility criteria 
and providing unlimited funds for this purpose, would any States 
qualify right away? Which ones.
    C. How is your proposal any different from the pre-welfare reform 
approach of providing unlimited Federal funds to States that fail to 
save or help families leave the rolls and go to work?
    1. A. I would prefer to have CBO or OMB cost out this proposal, and 
I would certainly defer to their estimates. However, my best guess is 
that the total cost of my proposal to the Federal government would be 
approximately $2B in a moderate recession and about $6B in a severe 
one. (My worst-case estimates are about $4B in a moderate downturn and 
$10B in a severe one respectively.) Details of how I arrive at these 
estimates are available upon request.
    This would be a one-time expenditure, spread over several years. To 
put it in context, please note that this would be a very small fraction 
of the total Federal expenditure on TANF block grants over its current 
6-year authorization. It is also very small relative to the extra 
Federal government expenditures in a recession on Emergency 
Unemployment Insurance benefits ($28B in the previous recession, or 
about $36B in current dollars) or on food stamps.
    B. I don't believe any states would qualify right away (at least 
not on the basis of the most recent caseload and unemployment rate 
data), as the triggers I propose would require increases of 
unemployment (or food stamp caseloads) of at least 20% over their 
current levels.
    C. The proposal differs from the pre-welfare reform approach in a 
number of ways. For one thing, there would be triggers and state-level 
MOE requirements that would now limit state access to Federal funds, 
which was not true in the pre-welfare reform era.
    Furthermore, this proposal would be implemented in the context of a 
welfare reform effort that has already successfully reduced caseloads 
and dramatically increased work incentives. The time limits and state-
level discretion that TANF allows will continue to reduce rolls beyond 
what was true in the past.
    If we pressure the states too much to ``save'' during good times 
and finance their own caseloads during bad times, they may forego 
expenditures on important supports (such as child care) to working 
families who really need it, or they might decrease other expenditures 
designed to improve employability among the hardest-to-serve. 
Alternatively, they may turn away people from the rolls during 
difficult times who have access to no other safety net.
    2. You cite several studies suggesting rising unemployment will 
send welfare caseloads up by certain percentages.
    A. How high would the unemployment rate have to rise for the 
caseload to return to where it was before the new law was signed in 
August 1996?
    B. How would that rate compare with the unemployment rate in 1996?
    C. Do your calculations assume any change in behavior by would-be 
recipients due to work requirements, time limits, and related factors?
    2. A. According to the standard estimates, unemployment rates would 
have to rise by as much as 10 percentage points or more to return to us 
to the caseload levels that were in effect in August 1996. It is very 
unlikely that this will happen, even in a serious recession. (Of 
course, the ``standard estimates'' have their limitations, as I note in 
part C below.)
    B. The national unemployment rate averaged 5.4% during 1996, when 
the welfare reform bill was signed.
    C. These estimates are based on statistical models of previous 
business cycles, but the models do include some measures of state-level 
policies and behaviors (including enforcement of time limits) in the 
1990's that have affected the caseloads. They also capture trends over 
time that reflect federal work requirements and other recent changes. 
It is possible that these models do not fully capture the behavioral 
changes, since we don't really know how states will use their 
discretion in responding to the increased need for assistance by 
families during recessions. On the other hand, since the huge decrease 
in the welfare rolls in recent years is completely unprecedented, it is 
also possible that our estimates based on the past will understate the 
response of the caseload to a serious downturn.
    3. Sheldon Danziger of the University of Michigan, summarizing a 
study by George Wallace and Rebecca Blank, the former Chair of 
President Clinton's Council of Economic Advisors, writes: ``A severe 
recession that raises the unemployment rate by 3-4 percentage points, 
to 7.5-8 percent, would leave welfare caseloads well below the levels 
reached in the early 1990s. They conclude that the 1996 welfare reform 
seems to have achieved a large reduction in caseloads independent of 
the state of the economy.'' Do you agree with this assessment?
    3. As my previous answers indicate, I agree with the notion that 
welfare reform has had an effect on caseloads that is, to some extent, 
independent of the strength of the economy. The decline in caseloads 
reflects another factor as well: the growth of the Earned Income Tax 
Credit and other developments that help ``make work pay''. But the 
strong economy has played a very important role as well. Without it, 
caseload declines would have likely been much smaller, and much more 
painful to achieve.
    Furthermore, while we will not likely see any return to the 
caseload levels of the mid-1990's during the next downturn, the need 
for federal assistance to the states will remain. Given that states 
have used their TANF block grants to fund a wide range of laudable 
activities and work supports, they will not be able to finance 
significantly higher TANF caseloads out of their current block grants 
without serious cutbacks in these other supports, which in turn would 
have unfortunate consequences for working families.
    4. What is the ``full employment'' rate of unemployment? Has this 
changed over time? You suggest (page 6) that contingency funds be 
available to States with unemployment rates as low as 5 percent. Should 
a rainy day fund be available to States that are technically at or near 
``full employment''?
    4. I currently regard the rate of unemployment that we can achieve 
through fiscal and monetary policy without rising inflation as being 
about 4%, and most economists would put it somewhere in the range of 4-
5%. This is significantly below the rate of 6% or so that most 
economists believed was the lowest rate achievable in the 1970's, and 
below the 5-5.5% rate of the 1980's. The decline in this rate can be 
attributed to a wide range of factors--such as changes in workforce 
demographics, industrial structure, coverage by unemployment insurance, 
etc.
    Two important caveats to the above statement must be mentioned 
here. First, this rate should not necessarily be interpreted as ``full 
employment.'' It is simply the lowest rate that we can achieve without 
setting off inflation. (Most economists refer to this as the ``non-
accelerating inflation rate of unemployment'', or NAIRU, rather than 
``full employment''.) Accordingly, there are probably a fair number of 
poorly skilled individuals who have difficulty finding work, even in 
such an environment; and many more people will have such difficulty 
when unemployment rises above that rate.
    Second, the NAIRU no doubt varies very significantly across states. 
Since states differ from one another greatly in terms of the factors 
that determine these rates (e.g., demographics, industrial structure, 
coverage by Unemployment Insurance, etc.), they also differ greatly in 
the rates to which unemployment can fall at any time. Thus, roughly 10 
states have recently achieved unemployment rates below 3% (while a few 
others, such as West Virginia and New Mexico, have had difficulty 
achieving rates below 6-7%). These 10 states would presumably suffer 
major cyclical job losses, a lack of job availability for unskilled 
workers, and seriously rising welfare caseloads, even at 4-5% 
unemployment; and it would be reasonable for the Federal government to 
provide assistance in paying for its higher caseloads under those 
circumstances.
    I hope you find these responses useful. Please let me know if I can 
be of any further assistance.
            Sincerely,
                                    Harry J. Holzer

                                

```