GAO

United States General Accounting Office

Report to Congressional Requesters

August 2001 WELFARE REFORM

Challenges in 

Maintaining a 

Federal-State Fiscal 

Partnership

GAO-01-828

Page 1 GAO-01-828 Welfare Reform

Contents

Letter 5

Background 6

Scope and Methodology 9

Results in Brief 12

State Budget Actions Shift Federal and State Support for 

Specific Activities 16

Net Fiscal Effects of Funding Shifts Varied Among States 24

States’ Contingency Plans Are Undeveloped 34

Design of Federal Contingency Mechanisms Is Complex and 

Restrictive 40

Concluding Observations 43

Recommendations for Executive Action 51

Agency Comments 52

Appendixes Appendix I: Scope and Methodology 54

Appendix II: California 61

Appendix III: Colorado 70

Appendix IV: Connecticut 78

Appendix V: Louisiana 85

Appendix VI: Maryland 92

Appendix VII: Michigan 99

Appendix VIII:New York 108

Appendix IX: Oregon 117

Appendix X: Texas 126

Appendix XI: Wisconsin 135

Appendix XII: Survey Instrument 144

Appendix XIII:Comments From the Department of Health 

and Human Services 154

Tables Table 1: Changes in Basic Welfare Services 28

Table 2: Category 1—State Expenditures on Basic Welfare

Services (State Fiscal Years 1995 and 2000) 29

Table 3: Category 2—Expenditures on Programs Supporting 

the Working Poor (State Fiscal Years 1995 and 2000) 30
Contents

Page 2 GAO-01-828 Welfare Reform

Table 4: Category 3—Expenditures on Programs Supporting 

the Working Poor and Related Health Care Costs 

(State Fiscal Years 1995 and 2000) 32

Table 5: Category 4—Expenditures on TANF-Related Social 

Services for Low-Income Families and the Working 

Poor (State Fiscal Years 1995 and 2000) 33

Table 6: California’s TANF-Related Expenditures (Categories 1 & 2) 65

Table 7: California’s TANF-Related Expenditures (Categories 3 & 4) 66

Table 8: Unspent TANF Funds in California as of September 30, 

2000 67

Table 9: Colorado’s TANF-Related Expenditures (Categories 1 & 2) 74

Table 10: Colorado’s TANF-Related Expenditures (Categories 3 & 4) 75

Table 11: Unspent TANF Funds in Colorado as of September 30, 

2000 76

Table 12: Connecticut’s TANF-Related Expenditures (Categories 1 & 2) 82

Table 13: Connecticut’s TANF-Related Expenditures (Categories 3 & 4) 83

Table 14: Unspent TANF Funds in Connecticut as of September 30, 

2000 84

Table 15: Louisiana’s TANF-Related Expenditures (Categories 1 & 2) 88

Table 16: Louisiana’s TANF-Related Expenditures (Categories 3 & 4) 89

Table 17: Unspent TANF Funds in Louisiana as of September 30, 

2000 90

Table 18: Maryland’s TANF-Related Expenditures (Categories 1 & 2) 95

Table 19: Maryland’s TANF-Related Expenditures (Categories 3 & 4) 96

Table 20: Unspent TANF Funds in Maryland as of September 30, 

2000 97

Table 21: Michigan’s TANF-Related Expenditures (Categories 1 & 2) 103

Table 22: Michigan’s TANF-Related Expenditures (Categories 3 & 4) 104

Table 23: Unspent TANF Funds in Michigan as of September 30, 

2000 106

Table 24: New York’s TANF-Related Expenditures (Categories 1 & 2) 113

Table 25: New York’s TANF-Related Expenditures (Categories 3 & 4) 114

Table 26: Unspent TANF Funds in New York as of September 30, 

2000 116

Table 27: Oregon’s TANF-Related Expenditures (Categories 1 & 2) 122

Table 28: Oregon’s TANF-Related Expenditures (Categories 3 & 4) 123

Table 29: Unspent TANF Funds in Oregon as of September 30, 

2000 125

Table 30: Texas’ TANF-Related Expenditures (Categories 1 & 2) 131

Table 31: Texas’ TANF-Related Expenditures (Categories 3 & 4) 132

Table 32: Unspent TANF Funds in Texas as of September 30, 

2000 134
Contents

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Table 33: Wisconsin’s TANF-Related Expenditures (Categories 1 & 2) 139

Table 34: Wisconsin’s TANF-Related Expenditures (Categories 3 & 4) 141

Table 35: Unspent TANF Funds in Wisconsin as of September 30, 

2000 142

Figures Figure 1: Four Categories of Welfare-Related Spending 11

Figure 2: TANF-Related Social Service Expenditures (Category 4)

in 10 States for State Fiscal Years 1995 and 2000 13

Figure 3: The Contingency Fund’s Annual Reconciliation Process 43

Figure 4: California’s TANF-Related Expenditures for State Fiscal 

Years 1995 and 2000 64

Figure 5: Colorado’s TANF-Related Expenditures for State Fiscal 

Years 1995 and 2000 72

Figure 6: Connecticut’s TANF-Related Expenditures for State Fiscal 

Years 1995 and 2000 81

Figure 7: Louisiana’s TANF-Related Expenditures for State Fiscal 

Years 1995 and 2000 87

Figure 8: Maryland’s TANF-Related Expenditures for State Fiscal 

Years 1995 and 2000 94

Figure 9: Michigan’s TANF-Related Expenditures for State Fiscal 

Years 1995 and 2000 102

Figure 10: New York’s TANF-Related Expenditures for State Fiscal 

Years 1995 and 2000 112

Figure 11: Oregon’s TANF-Related Expenditures for State Fiscal 

Years 1995 and 2000 121

Figure 12: Texas’ TANF-Related Expenditures for State Fiscal 

Years 1995 and 2000 130

Figure 13: Wisconsin’s TANF-Related Expenditures for State Fiscal 

Years 1995 and 2000 138
Page 4 GAO-01-828 Welfare Reform
Page 5 GAO-01-828 Welfare Reform

United States General Accounting Office

Washington, D.C. 20548 Letr

August 10, 2001

The Honorable Nancy L. Johnson

Chairwoman, Subcommittee on Health

Committee on Ways and Means

House of Representatives

The Honorable Wally Herger

Chairman, Subcommittee on Human Resources

Committee on Ways and Means

House of Representatives

The upcoming reauthorization of the Temporary Assistance for Needy 

Families (TANF) block grant presents an opportunity to re-examine the 

fiscal balance between the federal government and the states in providing 

services to needy families. TANF was created by the Personal 

Responsibility and Work Opportunity Reconciliation Act of 19961

(PRWORA, or the act) which ended families’ entitlement to cash assistance 

by replacing the Aid to Families with Dependent Children (AFDC) program 

with the Temporary Assistance for Needy Families (TANF) block grant, a 

$16.5 billion per-year fixed federal funding stream to the states. PRWORA 

coupled the block grant with a strong maintenance-of-effort (MOE) 

requirement2

 in order to ensure that states remain a strong fiscal partner. 

The MOE requires states to maintain a significant portion of their own 

historic financial commitment to their welfare programs as a condition of 

receiving their full TANF allotments. Since both the amount of federal 

TANF funds and the required MOE remain fixed regardless of the number 

of people states chose to serve with these funds, and because the number 

of families that receive basic cash assistance has declined dramatically 

since the mid-1990s (by more than 50 percent nationally), states have 

additional budgetary resources available for use in a variety of ways to help 

1

Most appropriations for TANF expire at the end of fiscal year 2002 (Public Law 104-193, 

Title I).

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-related child care programs: AFDC/JOBS child care 

program, Transitional Child Care, and At-Risk Child Care programs. A state that does not 

meet the act’s work participation rates must maintain at least 80 percent MOE. A state that 

meets its work participation rate must maintain at least 75 percent of its MOE. For more 

information see Welfare Reform: Early Fiscal Effects of the TANF Block Grant (GAO/AIMD98-137, August 18, 1998).
Page 6 GAO-01-828 Welfare Reform

people avoid dependency on public assistance. At the same time, the fixed 

nature of the federal contribution means that states now bear most of the 

program’s fiscal risks in the event of an economic downturn or increase in 

caseload.

In the 5 years since enactment of federal welfare reform, there has been 

much discussion of the fiscal implications of these sweeping changes in 

national welfare policy. A particularly contentious issue has been the 

extent to which states have replaced, rather than supplemented, their own 

spending with federal TANF dollars thereby freeing up state funds for other 

budget priorities. This practice is often referred to as “supplantation” or 

“substitution.”

3

 Other important intergovernmental fiscal issues 

surrounding PRWORA include whether states are setting aside funds for 

costs associated with increased caseloads they may experience during a 

recession and why some states are leaving large reserves of unspent TANF 

funds at the U.S. Treasury.4

Concerns about how states were spending their TANF funds prompted you 

to ask us to examine:

• the degree to which states have used the flexibility afforded in the 

federal TANF grant to supplant, rather than supplement, state spending 

for low-income families; 

• the changes that have occurred in states’ use of different funding 

sources (including their TANF funds) on programs that help the poor;

• the effect state funding choices have had on the amounts of TANF funds 

they have left unspent at the U.S. Treasury; and

• the measures states are taking to save a portion of the TANF grant or set 

aside state funds for a rainy day.

Background The change in the federal role in financing state welfare programs has 

provided both greater flexibility and greater uncertainty for the states. 

They have greater flexibility in how to administer and implement their 

welfare programs; however, they also face increased fiscal risk. Before 

3

For more information, see Federal Grants: Design Improvements Could Help Federal 

Resources Go Further (GAO/AIMD-97-7, December 18, 1996).

4

For more information, see Welfare Reform: Challenges in Saving for a “Rainy Day”(GAO01-674T, April 26, 2001).
Page 7 GAO-01-828 Welfare Reform

1996, under the AFDC program, any increased costs were shared by the 

federal government and the states. Under TANF, however, if costs rise, 

states face most of the burden of financing the unexpected costs. States 

must handle these costs in the context of any budgetary limitations—

including those imposed by legislation, balanced budget requirements, and 

scrutiny of the municipal bond market—on their ability to increase 

spending, especially in times of fiscal stress. This uncertainty highlights the 

importance of contingency planning, or “saving for a rainy day.”

At the same time, when caseloads drop, as they have since the mid-1990s, 

states can reap large fiscal benefits. A particularly contentious issue has 

been the extent to which states used this flexibility to replace, rather than 

supplement, state spending with federal TANF dollars thereby freeing up 

state funds for other budget priorities—a practice allowable under TANF. 

At the same time Congress consolidated the funding streams from the 

previous welfare programs into the TANF block grant, it broadened the 

programs goals and gave states flexibility to use federal funds on a wider 

array of programs. Specifically, states can use TANF funds on programs 

and activities to

• provide assistance to needy families so that children may be cared for in 

their homes or in the homes of relatives;

• end the dependence of needy parents on government benefits by 

promoting job preparation, work, and marriage;

• prevent and reduce the incidence of out-of-wedlock pregnancies; and

• encourage the formation and maintenance of two-parent families.

Many states are in a position to supplant state spending because given 

large, recent cash assistance caseload declines, the fixed TANF funding 

formula provides them with more budgetary resources for their welfare 

programs than they would have had under prior law. However, TANF’s 

MOE limits states’ ability to supplant funds because states face strict 

penalties unless they largely maintain their prior fiscal commitment to lowincome families. Therefore, states’ ability to divert state funds to other 

priorities is somewhat constrained. 
Page 8 GAO-01-828 Welfare Reform

In theory, federal grants serve purposes beyond simply returning and 

reallocating resources to taxpayers in the form of state services. As we 

have previously reported, they have also served as vehicles through which 

the federal government attempted to achieve a variety of national goals by 

providing funding to other levels of government to carry out specific 

national priorities. Grants can also serve as a tool to encourage states to 

spend federal funds for nationally important activities for which they 

otherwise would have spent less. The amount of additional spending is 

affected by the degree to which federal grants actually supplement, rather 

than supplant, state spending on these activities.5

5

Federal Grants: Design Improvements Could Help Federal Resources Go Further

(GAO/AIMD-97-7, December 18, 1996).
Page 9 GAO-01-828 Welfare Reform

Paradoxically, at the same time questions are being raised as to whether 

states have replaced their own spending with federal funds, the states have 

been under considerable scrutiny for not spending their TANF funds more 

quickly. There has also been much discussion about whether states are 

“saving for a rainy day.”

6

 If states choose to engage in this sort of 

contingency budgeting, they have several options. They can (1) use 

general-purpose state “rainy day funds,” (2) establish a state reserve 

specifically intended for welfare programs, (3) plan on using PRWORA’s 

two safety net mechanisms—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),7

 or (4) save an unlimited 

amount of their TANF allocation for use in later years.8

 If states choose to 

save all or part of their unspent TANF balances, laws governing the 

exchange of funds between the federal government and the states require 

that these resources be left at the U.S. Treasury until they are needed.9

Scope and 

Methodology

To address the four objectives of this report, we studied TANF-related 

budget decisions and collected data on social service expenditures in 10 

states —California, Connecticut, Colorado, Louisiana, Maryland, Michigan, 

New York, Oregon, Texas, and Wisconsin. These 10 states were the same 

states we studied in 1998, thereby providing a continuing perspective on 

fiscal issues among a common group of states as the program unfolds. 

These 10 states were selected because they represent a diverse array of 

socioeconomic characteristics, geographic locations, experiences with 

state welfare initiatives, and state fiscal and budget issues.

6

See Welfare Reform: Challenges in “Saving for a Rainy Day” (GAO-01-674T, April 26, 

2001).

7

The Adoption and Safe Families Act of 1997 reduced the Contingency Fund by $40 million 

over the remaining life of the fund. (P.L. 105-89, §404, 111 Stat. 2134.) Loans from the Loan 

Fund are to have a maturity of no more than 3 years at an interest rate comparable to the 

average market yield on outstanding marketable federal obligations with comparable 

periods to maturity.

8

 HHS regulations restrict the states’ use of these prior year funds to benefits and basic 

services to help families meet on-going needs.

9

Federal regulations prohibit grantees from drawing down funds in advance of expenditure 

in order to assure compliance with the Cash Management Improvement Act of 1990 (CMIA). 

CMIA settled a long-standing dispute between the federal government and the states over 

disbursement of funds for federal programs administered by the state; it helps to ensure that 

neither party incurs unnecessary interest costs in the course of federal grant disbursements.
Page 10 GAO-01-828 Welfare Reform

• In order to gauge the extent to which a state used TANF funds to free up 

state funds, we analyzed state budgets and supporting budget 

documents and interviewed key program budget officials, state budget 

officers, state auditors and legislative staff.

• To measure post-PRWORA changes in the mix of federal and state 

funding across TANF-related social services, we asked the 10 states to 

provide expenditure data on programs that provide social services to 

the needy. To do this, we adapted a fiscal survey developed by the 

Nelson A. Rockefeller Institute of Government.10 Specifically, we asked 

for state and federal expenditures on a variety of programs that targeted 

assistance to low-income families and individuals in state fiscal year 

1994-1995 and estimated expenditures in state fiscal year 1999-2000, and 

we verified the data they reported to us against their own accounting 

records. To improve the alignment of our survey data with TANF’s goal 

of ending the dependence of needy parents on government benefits, we 

excluded expenditures on the elderly and those services that were not 

transitional in nature. In our analysis, we aggregated state expenditure 

data by program category, allowing us to group programs into four 

categories—Basic Welfare Services (Category 1), Support for the 

Working Poor (Category 2), Health Care (Category 3), and Other TANFrelated Social Services (Category 4). The analysis is cumulative; that is, 

all expenditures in Category 1 are included in Category 2, and so on. See 

figure 1 for a description of programs that are included in our spending 

categories.

10“Changes in State Spending on Social Services Since the Implementation of Welfare 

Reform: A Preliminary Report.” Ellwood and Boyd, February 2000.
Page 11 GAO-01-828 Welfare Reform

Figure 1: Four Categories of Welfare-Related Spending

• To describe the measures states are taking to “save for a rainy day” and 

to analyze the impact these actions have on TANF reserve balances at 

the U.S. Treasury, we analyzed the 10 states’ budgets. To obtain a 

broader view of the levels of unspent TANF funds in all 50 states, we 

reviewed financial data reported by the states to the U.S. Department of 

Health and Human Services (HHS). (States report key TANF financial 

information on their quarterly ACF-196 reports.)

Category 3:

Health care

Category 2:

Support

for the

working poor

 

Category 4:

TANF-related social services

Category 1:

Basic welfare services

This is a prewelfare reform 

model of helping families move 

off welfare. This category 

includes cash assistance and

employment and training 

programs. It also includes 

one-time cash payments 

such as diversion payments.

All category 1 

expenditures plus: 

child-support 

passthroughs, 

emergency 

assistance, housing 

assistance, states’ 

supplemental SSI

payments, state 

earned income tax 

credits (EITCs), 

transportation or wage 

subsidies, child care, 

head start, pre-K 

programs for lowincome children; 

family formation and 

pregnancy prevention 

programs. 

Category 1 and 2 

expenditures plus: 

health care

expenditures for 

low-income

families and 

nonelderly poor 

adults. This 

category excludes 

all long-term and

institutional care 

costs.

All expenditures in Categories 1, 2, and 3 plus: 

child welfare, juvenile justice, substance abuse

prevention and treatment, services for the 

developmentally disabled, and mental health 

services.
Page 12 GAO-01-828 Welfare Reform

Results in Brief The combination of a precipitous drop in caseloads and fixed grant funding 

levels provided states with additional budgetary resources they could use 

to finance their new welfare policies. States faced many challenges 

determining the appropriate mix among several policy options: saving for 

the future, investing in programs serving current beneficiaries, and 

addressing fiscal pressures in the states’ budgets. Examining states’

choices in allocating federal and state funds for specific activities is an 

important first step in understanding financing changes ushered in by the 

TANF program. While addressing whether federal funds replaced or 

“supplanted” state funds for specific activities—which is legal under 

TANF—is one key issue, it is equally important to understand how states 

used this new-found fiscal flexibility to support the broader goals of the 

TANF program. For example, if a state replaced its own funds with TANF 

funds and then shifted the freed-up state funds into other programs that 

serve the working poor, the net impact of these shifts would be the same as 

if they used the federal funds to fund these other programs. Therefore, it is 

more informative to view the impact of supplantation in a broader fiscal 

context consistent with the new objectives and goals of TANF. 

In examining specific state funding decisions, we found that supplanting 

was a common budget practice among the 10 states in our study. At the 

same time, looking at the broadest level of TANF-related social services 

shows that over time most states have maintained or even increased their 

own investment to address the overall needs of low-income families. The 

effect of state budgetary decisions on the fiscal balance between federal 

and state governments differed depending on the range of programs we 

analyzed. The greatest impact was felt in basic welfare services—most 

states reduced their own spending and shifted more federal funds into 

those programs. However, since welfare reform, the effect of states’

decisions has been to shift resources from this narrow category to support 

the broadest array of programs addressing the goals of the TANF program; 

nearly all states increased total funding in real dollars for these programs, 

including health care and child welfare services. (See figure 2.)
Page 13 GAO-01-828 Welfare Reform

Figure 2: TANF-Related Social Service Expenditures (Category 4) in 10 States for State Fiscal Years 1995 and 2000 

Source: GAO survey and analysis of state expenditure data.

An analysis of state budgets shows that the degree to which states 

supplanted state spending varied considerably, ranging from about

25 percent of the annual block grant in Connecticut and Oregon to

5 percent or less in Colorado, Louisiana, and Michigan. State officials noted 

that supplanting had the effect of allowing them to use federal and state 

funds more flexibly to support a wide range of programs supporting needy 

families. Moreover, state officials noted that supplanting enabled the states 

that had initiated major social welfare programs prior to TANF to use 

federal funds to support these efforts. However, in many cases, the MOE 

requirement limited the extent to which states could use their federal funds 

to replace state funds. This MOE requirement has led to a situation in 

which many state officials say they are spending more than might be 

expected in the face of the large caseload drop. 

Some states report that their decisions on how to use federal TANF funds 

were influenced by their concerns about the vulnerability of accumulated 

0

5,000

10,000

15,000

20,000

25,000

State

Federal

California Colorado Connecticut Louisiana Maryland Michigan New York Oregon Texas Wisconsin

1995 dollars in millions
Page 14 GAO-01-828 Welfare Reform

unspent TANF balances to rescissions at the federal level. While many view 

the balances held in reserve at the U.S. Treasury as the de facto safety net 

for states to draw on in the event welfare costs rise, the potential risk of 

losing these balances to competing priorities at the federal level prompted 

some states to draw down these balances for current program needs or 

fiscal relief. As of September 30, 2000, all 50 states reported leaving a 

combined total of $8.6 billion in TANF funds unspent at the U.S. Treasury, 

or 13.5 percent of the total TANF funds that have been made available since 

1997. Little is known about whether these accumulating balances 

represent (1) actual commitments states made but have not yet liquidated, 

(2) balances the states are holding in reserve as rainy day funds, or

(3) funds the states do not need. This uncertainty is largely the result of 

variations in the way states report allocations to subgrantees and counties. 

The lack of transparency regarding states’ plans for their unspent TANF 

funds continues to weaken the effectiveness of congressional oversight 

over TANF funding issues.

Our review suggests widespread disparities among all 50 states in their use 

of TANF funds to prepare for the impact of an economic downturn on this 

program. Some states report spending all their federal funds—essentially 

holding nothing in reserve—while others report accumulated reserves 

totaling more than their annual block grant. The level of these reserves 

was not determined through a fiscal planning process analyzing potential 

future draws on program resources caused by a downturn in the economy. 

Furthermore, the design of PRWORA’s two safety net mechanisms for 

states—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)—is complex and restrictive. Therefore, 

neither one is likely to be used by states in a fiscal crisis to obtain more 

resources for their welfare programs.

The upcoming reauthorization of TANF presents Congress with an 

opportunity to re-examine the new federal-state fiscal partnership it 

established with enactment of PRWORA. In particular, Congress has the 

opportunity to consider the design of the block grant including (1) how it 

has affected the balance of fiscal responsibilities between federal and state 

governments to address the goals of the program and (2) whether the 

program promotes the savings of both federal and state funds to address a 

future “rainy day.” TANF provided states with increased flexibility; this 

flexibility combined with falling caseloads has allowed many states to 

obtain fiscal relief while maintaining or increasing their support for the 

broad purposes of the act. The addition of a nonsupplant provision might 
Page 15 GAO-01-828 Welfare Reform

help ensure that all federal funds supplement existing state spending, but it 

could also have the adverse effect of penalizing those states that took the 

initiative to begin new programs before TANF, and it might limit the 

intended breadth of the block grant by locking states into pre-established 

funding priorities. From this perspective, a broad-based MOE calling for 

states to maintain spending across a wide range of relevant programs might 

limit substitution while preserving state discretion. 

The shift from the open-ended match of AFDC to PRWORA’s fixed-dollar 

TANF block grant also increased the states’ exposure to fiscal risks in the 

event of an economic downturn or increased program costs. Recognizing 

that both the federal government and the states have an interest in 

contingency planning, we have testified on ways to improve the federal 

contingency mechanism as well as strengthen states’ incentives to “save for 

a rainy day.” For example, Congress could realign the contingency fund 

MOE and eliminate the monthly payment limitation on contingency fund 

access. There are other options that might strengthen states’ incentives to 

save. Congress could amend the law to (1) allow states to count rainy day 

funds toward a portion of their MOE and/or (2) allow states to draw down 

their entire TANF grant and save these funds in their own treasuries. 

There are pluses and minuses to each of these ideas—the exact design and 

implementation will be important in determining the actual impact of any 

change. 

In keeping with the intent of the block grant, federal oversight needs to 

focus not only on the use of TANF funds specifically, but also on how states 

use multiple federal and state funding streams to support the broadsweeping goals of the TANF program. Going forward, the overall fiscal 

balance portrayed in this report may shift over time, particularly under 

different economic conditions. Accordingly, we have recommended that 

the Secretary of Health and Human Services consult with the states to 

initiate periodic reporting on the entire federal-state fiscal effort relevant to 

goals of the program.
Page 16 GAO-01-828 Welfare Reform

State Budget Actions 

Shift Federal and State 

Support for Specific 

Activities

Much of the debate over whether—and if so, to what extent—states used 

federal funds to replace their own funds has hinged on the definition of 

supplantation. Under our most limited definition of supplantation—

replacing state dollars with TANF dollars for specific activities that are 

allowable uses of TANF dollars—we found that all 10 of the states in our 

study except California used TANF funds to replace some state funds from 

existing programs.11 However, the extent of the supplantation varied 

considerably across states, as did the reasons given for supplantation. 

Moreover, as discussed in a later section, replacement of state funds with 

federal funds for specific activities was often accompanied by an increase 

in state support for the broadest array of programs addressing the goals of 

the TANF program.

These fiscal actions took place within a framework of state budget 

negotiations, which normally requires some trade-offs among competing 

priorities. Moreover, the decisions were made at a time when caseloads had 

fallen dramatically and many states had significant levels of unspent TANF 

funds. In allocating federal and state funds, states had to balance a number 

of competing pressures. Among these were tensions between the need to 

draw down TANF balances, save for future needs, and a concern about 

building potentially new permanent state commitments that might outlast 

the federal funds themselves. From this perspective, a supplantation 

strategy allowed states to draw down their TANF balances to spend on 

current needs or save for future contingencies without building permanent 

new state commitments. 

The programmatic and fiscal flexibility afforded states through the block 

grant increases the opportunity to use federal funds to replace state 

funding in welfare-related programs. The shift from a matching grant to a 

block grant was in part intended to provide states with more flexibility. 

Given the complex and evolving relationship between the federal and state 

governments and their shared responsibilities for most domestic programs, 

it is understandable that observers will have different views of 

11California has not yet enacted a budget that contains apparent supplantation of federal 

TANF funds. However, the Governor’s budget proposal for California’s state fiscal year 2001-

2002 proposed using $154 million in federal TANF funds to replace state funds California 

already spent on its TANF program in 1997. This retroactive claiming of federal funds was 

made possible because the state recently certified that it had met its work participation rate 

in federal fiscal year 1997. In so doing, California’s MOE requirement was reduced in that 

year from $2.9 billion to $2.7 billion and the governor is proposing to use unspent federal 

TANF funds to reimburse the state for those “unnecessary” state expenditures. 
Page 17 GAO-01-828 Welfare Reform

supplantation. For example, advocates for low-income families lament the 

failure to increase resources available to their constituents as a result of 

supplantation. They note that when state resources are withdrawn and 

replaced with federal funds fewer total funds are available for low-income 

families than would be the case if federal funds were added. State officials 

note that the flexibility to use federal funds instead of state funds in some 

programs gives them opportunities to use freed-up state funds as leverage 

to enact new or expanded programs that also benefit the low-income 

population. In this debate, it is interesting to note that some states prohibit 

their counties from supplanting at the local level. In Colorado and New 

York, for example, counties are prohibited from using any of their TANF 

funds passed through from the state to replace their county-generated 

spending on social services.

Supplantation Varies Widely 

Among States 

Budgets are the tool that state policymakers use in deciding how to 

distribute limited resources among different policy choices. Once a state 

develops its priorities, decides which programs it needs, and develops 

estimates of how many people will be served by the programs, it can begin 

to develop program budgets. In general, the extent to which states can use 

federal funds to finance policy priorities is an important part of the budget 

debate—maximizing the use of federal funds means that state revenues go 

farther. There are certain limitations, however, on how states can utilize 

federal funds. For example, states must spend federal grant money on 

purposes specified by the federal law authorizing the grant. Furthermore, 

grants may also require a form of cost sharing—either a maintenance-ofeffort or a state match—in order to use federal funds. These features can 

help ensure that states maintain their fiscal commitment to programs for 

which they receive federal funds.

Although states are free under the law to replace state funds with TANF, in 

fact two conditions facilitated supplanting: the state must have surplus 

TANF funds available—in addition to those it needs to maintain program 

levels—and it must have programs in place that are traditionally funded 

with state dollars over and above the level necessary to meet its MOE 

requirement. Without the former, it could run short of the funds it needs to 

meet program demands and therefore have to find state general funds to 

pay for those costs; without the latter, a state would run the risk of fiscal 

penalties for not meeting its MOE requirement. 

During recent budget deliberations, 9 of the 10 states we reviewed used 

federal TANF funds to replace state funds in existing programs that met the 
Page 18 GAO-01-828 Welfare Reform

broad purposes of the act. In so doing, all of these states reduced their own 

contributions to these programs. Since money is fungible, we cannot know 

conclusively how they used these particular freed-up funds. As will be 

discussed below, in some states budget documents clearly revealed that 

supplanting enabled states to save their own funds for other programs; in 

other states supplanting was viewed as a strategy to shift state funds from 

traditional cash assistance to other low-income programs in keeping with 

the flexibility in TANF.

The extent to which states supplanted funds varied significantly. In the 

most recent year for which data is available, five of the states in our 

study—Connecticut, Maryland, Oregon, Texas, and Wisconsin—used 

between 15 percent and 25 percent of their annual block grants to finance 

state programs that had traditionally been financed with state dollars. Four 

states—Colorado, Louisiana, Michigan, and New York—used 10 percent or 

less of their TANF grants to replace state funding. In the remaining state, 

California, no evidence of supplantation exists in its enacted budgets to 

date, but this could change with its 2001-2002 budget. (See footnote 11.)

Interestingly, the role of local governments has also apparently affected 

some states’ ability to supplant. California, Colorado, and New York depend 

on their counties to define welfare spending priorities. This financing 

arrangement has limited the amount of TANF resources these states can 

use for other spending priorities because any supplantation done at the 

state level would reduce the amount of TANF funds available to the 

counties. Intergovernmental dynamics within each state were often 

powerful enough to dissuade these states from enacting budgets that 

reduced TANF funding for their counties. In both New York and Colorado, 

the states prohibit the counties from engaging in supplantation at the 

county level. That is, counties are prohibited from using any of their TANF 

funds to replace their own spending on social services.

Some States Supplanted to 

Address Fiscal Pressures

Budget officials cited many reasons for shifting program financing, and 

most of the states were able to achieve significant savings of state general 

fund dollars. For example, in Connecticut, when spending in many TANFfunded programs came in under budget, resulting in significant levels of 

unspent TANF funds, state officials found other accounts serving needy 

families that had traditionally been funded with state funds and used TANF 

funds instead. State budget officials estimated they used about $40 million 

in each of state fiscal years 1999 and 2000 to replace state funds with 

federal funds. They explained that because the state funds were never 
Page 19 GAO-01-828 Welfare Reform

drawn from the state’s general fund accounts, the effect of using the TANF 

funds in this manner was to enlarge their end-of-year general funds surplus. 

Other states were also unwilling to accumulate large balances of unspent 

TANF funds. State officials told us they were concerned that leaving a 

portion of their block grant in reserve might send the signal that the funds 

were not needed and risk their rescission by Congress. In state fiscal year 

2001, Michigan used about $27 million in TANF funds to pay for a lowincome housing tax credit that had been paid for with state funds since 

1973. Michigan state officials said their decisions to eliminate TANF 

reserves were in part due to mounting pressure to get the funds “off the 

table” before they could be taken back by Congress. Likewise, a Maryland 

state budget official said that Maryland was motivated to supplant chiefly 

by the perceived need to draw down its 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 state fiscal year 2001, Maryland 

identified several 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, 

however, the state used them to establish a dedicated reserve for its 

welfare program. 

Some States Supplanted in 

Order to Increase Flexibility 

to Address Needs of LowIncome Families

In addition to realizing savings, supplantation in some states was part of a 

broader strategy to shift the source of funds supporting state programs for 

the working poor. Freeing-up state funds from basic welfare programs in 

some cases gave states greater latitude towards meeting their MOE 

requirements. For example, in 1997 when Texas first deliberated how it 

would use the new TANF funds in its welfare program, state officials 

believed that cash assistance and training would be a good place to direct 

state resources to count toward the state’s MOE requirement. However, as 

caseloads dropped more quickly and to a greater extent than anticipated, it 

became clear that state funds were not being expended at levels sufficient 

to meet the MOE requirement. Subsequently, Texas decided to substitute 

federal for state dollars for job training activities and to direct state funds 

to other priorities that would spend out faster but that would still count 

toward the MOE. Child welfare programs were seen as a priority because 

of growing foster care caseloads and a state court ruling that called for 

heightened investigation and prevention of child abuse and neglect. 

Because spending on these programs was growing, these expenditures 
Page 20 GAO-01-828 Welfare Reform

were viewed as a better source of MOE financing than spending on basic 

welfare services. The legislature increased appropriations for an expanded 

child welfare program and directed the state agency to count the state’s 

share of the increase towards it MOE. This was not the end of the matter, 

however. After reviewing final TANF regulations, state agency officials 

found that certain foster care expenditures included in the child welfare 

expansion could not be counted toward the MOE requirement, which left 

them short again. In the end, state officials identified as MOE a portion of 

state aid used to support preschool programs. Since the state aid is 

allocated based on the number of needy children in the district, a portion of 

it qualifies as a MOE expenditure. The state spent nearly $320 million on 

this effort in 2000.

States With Significant Prior 

Commitments Supplanted 

for Fiscal Relief

Some states argue that supplantation, in effect, enabled them to gain 

federal funding for state initiatives that began prior to the implementation 

of federal reforms. From this perspective, supplantation allowed states to 

avoid becoming locked into spending even when federal funds come 

available, and also allowed for some federal recognition of their innovation 

and progressiveness. Furthermore, since the MOE has prevented states 

from reducing their spending as much as they otherwise would have been 

able to given recent caseload declines, it is not surprising that states such 

as Oregon argue that they deserve some fiscal relief. 

Oregon began its welfare reform program in 1992 and, recognizing the 

importance of employment and training and employment-related child care 

programs, invested heavily in those programs even though the federal 

match was capped. By the time the federal reforms were enacted, Oregon’s 

cash assistance caseload had already fallen by nearly 40 percent. Oregon 

officials subsequently decided that they had “over-invested” in the federal 

JOBS program, and since 1997, the state has withdrawn some of its own 

investment in these programs and replaced state funds with federal funds. 

Oregon argues that preventing supplantation would penalize it for being 

progressive and “out in front” in terms of welfare reform. 
Page 21 GAO-01-828 Welfare Reform

MOE Provision of TANF 

Limits Extent of 

Supplantation

As we have previously reported,12 some supplantation is to be expected in 

any grant. We have previously reported that because of supplantation, on 

average, every additional federal grant dollar results in about 60 cents of 

supplantation. However, we also noted that certain grant design features 

such as a strong MOE provision can limit states’ ability to supplant.13

Consistent with this, in our study of 10 states, we found that while most 

have enacted budgets that authorized some supplantation of welfare funds, 

the level did not exceed 25 cents of a state’s block grant dollar. For 

example, program and state budget officials in Louisiana said that one of 

the reasons for so little supplantation in Louisiana is the paucity of state 

funds in social service programs not already earmarked to meet other 

federal program requirements. The TANF MOE did more than limit the 

leakage of funds from these programs—it also stimulated state spending 

above and beyond what states would otherwise have spent. The following 

examples in New York and Wisconsin clearly highlight the significant 

impact that TANF’s MOE can have on state spending, particularly at a time 

when caseloads were falling so much.

In New York, the level of fiscal relief possible largely depends on withinstate cost sharing arrangements that were in place under the AFDC 

program and continue under TANF. Under AFDC, the federal government 

paid 50 percent of AFDC costs and the state and local governments shared 

the remaining costs equally. Because caseloads dropped and new programs 

and services were slow to start for a variety of reasons, spending rates 

under TANF were slower than expected. As a result, total expenditures 

fell. The state feared it would not meet its MOE requirement if the 

expenditure trends continued at the current rate and if the state continued 

to reimburse counties with federal and state funds. Since the state 

operates on a cost-reimbursement basis with its localities, if the state 

temporarily had suspended the federal reimbursements, the effect would 

have been to pay for all costs with state and local funds—making it easier 

to reach the state’s MOE. To resolve the potential MOE shortfall, the state 

halted any reimbursement to the localities for expenditures they had made 

in the last quarter of the fiscal year. The state then counted all of the local 

expenditures toward the state’s MOE, effectively spending more state and 

12Federal Grants: Design Improvements Could Help Federal Resources Go Further

(GAO/AIMD-97-7, December 18, 1996).

13See also Block Grants: Issues in Designing Accountability Provisions (GAO/AIMD-95-

226, September 1, 1995).
Page 22 GAO-01-828 Welfare Reform

local funds on these programs than otherwise would have been the case. 

The state now closely monitors total expenditures and adjusts the federal 

share of the reimbursement to ensure that the state will meet its MOE each 

year.

In Wisconsin, MOE also forced the state to spend more state funds than it 

otherwise may have. According to legislative members and staff we 

interviewed, pre-TANF, Wisconsin was spending less than the new MOE 

required it to spend because it had already instituted substantial reforms 

which helped lower caseloads, and in turn, expenditures. Because the 

TANF MOE was pegged to a period when state spending levels were at an 

historic high, Wisconsin had to raise its spending in order to meet its 

75 percent MOE level. During the 1999-2001 budget deliberations, state 

budget analysts projected that the state would fall short of its MOE 

requirement by about $40 million because the number of W-2 families 

receiving cash assistance had fallen so dramatically. At the same time, final 

TANF regulations were issued and allowed use of TANF funds to establish 

or expand state earned income tax credit programs (EITC). This permitted 

Wisconsin to substitute federal funds for about $52 million a year in state 

funds that it was already spending on its state’s EITC. But because 

Wisconsin was short on MOE funds to begin with, further reducing its 

MOE-eligible expenditures only served to worsen the looming shortfall. 

Members of the state’s Joint Finance Committee—a bicameral legislative 

committee—however, realized that part of the freed-up state general 

revenues could be used for a property tax cut, and the rest to expand 

certain programs for the state’s low-income population. The funds used on 

these expanded programs serving the low-income population could then be 

used to meet the state’s MOE requirement so there would be no shortfall.

The compromise resulted in increased investment of state funds in a 

variety of programs, even though some funds were diverted to a tax cut. 

The package presented during the negotiations afforded the opportunity to 

raise TANF spending on new programs even further, thereby increasing the 

state’s investment on low-income families. Leadership stressed that these 

new programs could not have been funded during the 1999-2001 biennium 

in the absence of the compromise arising from the freed-up state general 

funds.
Page 23 GAO-01-828 Welfare Reform

“New Spending Test”

Augmented the Effect of 

TANF’s MOE

States’ dissatisfaction with the MOE generally arises because, in order to 

avoid strict financial penalties, they are forced to spend more on these 

programs than they otherwise may have spent. Moreover, the MOE’s 

stimulative effect on new state spending is further enhanced by what is 

sometimes referred to as the “new spending test.” The new spending test 

allows state spending on eligible programs to be counted toward the TANF 

MOE only to the extent that this “new” spending is on behalf of eligible 

families and it exceeds total spending in 1995 on those same programs. 

Therefore, a state that had a particular MOE-eligible program in effect prePRWORA may only count new expenditures on that program toward its 

MOE requirement, but a state that implemented a similar program after 

PRWORA may count the entire amount spent on the program towards its 

MOE. 

The new spending test was particularly problematic for Michigan. The state 

had financed a low-income homestead tax with its own funds since 1973. 

However, because of the new spending test, only a portion of the credit 

counted towards its MOE requirement. As a result, state budget officials 

argue that the state is penalized, when compared to other states, for having 

a low income tax credit before TANF was enacted; a state with no tax 

credit could enact a new tax credit using only TANF funds.

Not only do some states find the new spending test overly restrictive, but 

some states are also concerned that the provision could become difficult to 

enforce. Compliance with federal financial requirements is generally 

certified annually through the Single State Audit.14 We spoke to many 

auditors who were in the midst of developing audit plans to address 

compliance with the new spending test. Several told us that developing 

these plans was relatively straightforward; the auditor should simply be 

able to establish a baseline for all the MOE expenditures the state was 

claiming and then trace those programs back to 1995 and certify that 

spending claimed for MOE was indeed new spending. However, these 

plans could become more complex if states frequently changed the 

14Rather than being a detailed review of individual grants or programs, a single audit is an 

organizationwide financial and compliance audit that focuses on accounting and 

administrative controls. A single audit is designed to advise federal oversight officials and 

program managers on whether an organization’s financial statements are fairly presented 

and to provide reasonable assurance that federal financial assistance programs are managed 

in accordance with applicable laws and regulations. GAO supports the single audit concept 

for auditing federal assistance programs and believes it is the fundamental mechanism for 

testing compliance with expenditure provisions in TANF.
Page 24 GAO-01-828 Welfare Reform

expenditures they were counting from one year to the next (i.e., changed 

the programs for which they needed baselines.) For example, auditors in 

California said that they would expect the lead TANF agency to certify the 

baseline for the new spending test and they would audit the certification. 

Because all expenditure data is archived after 5 years, auditing the annual 

certification would be especially difficult and time consuming if the state 

changes the programs it uses to meet its MOE requirement from year to 

year. Officials in Colorado and New York, states that expressly prohibit 

their counties from supplanting, also confirmed that enforcement of their 

own state prohibitions is weak and that compliance is very difficult to test. 

Furthermore, acquiring enough knowledge about every county’s social 

services budget in order to establish a reliable baseline would be extremely 

costly and might outweigh the benefits. 

Net Fiscal Effects of 

Funding Shifts Varied 

Among States 

Once state funds are supplanted with federal funds they are “freed-up” and 

become part of the larger pool of general revenues. While budgets are a 

good blueprint to measure policy decisions, looking only at a specific 

change authorized in a budget may be misleading. For example, if a state 

supplanted federal funds for state funds, then shifted its own funds into 

other programs that serve the working poor, the net impact of these shifts 

would be the same as if they used federal funds directly to fund these other 

programs. Accordingly, the impact of the funding shifts must be viewed in a 

broader context consistent with the new objectives and goals of TANF. In 

fact, under our broadest definition of TANF-related social services, eight 

states maintained or increased their net investments in constant dollars for 

programs that serve low-income families and individuals as they move from 

welfare to work or strive to stay off public assistance rolls; only New York 

and Wisconsin decreased their net investment in these programs. 
Page 25 GAO-01-828 Welfare Reform

To provide a broader context for considering the effects of funding shifts, 

we reviewed state expenditures of both federal and state funds on a wide 

array of social service programs that target assistance to low-income 

individuals and families in order to help them avoid dependency on public 

assistance. We surveyed15 states for their total expenditures on these 

programs in 1995 (to establish a prewelfare reform baseline) and for 2000 

(to measure any change in total spending). We asked states to break down 

their total expenditures by funding source—state funds or federal funds. 

Under AFDC, the fiscal partnership between the federal government and 

the states was defined by the federal match rate each state received to help 

finance its welfare programs.16 Under TANF, the block grant is fixed—

states decide how much of the federal grant to spend and how much to 

save. First, a state decides how much to spend in total on a set of 

programs. Second, a state decides the right mix of federal and state funds 

(subject to the MOE limitation) to use to finance these programs. This 

“mix” is the new fiscal balance and representative of the share of funding 

from each partner—the states and the federal government. Essentially the 

state controls both the state and federal share. In our analysis, therefore, 

federal spending is not defined by the level of the TANF grant allocated to 

each state but rather by how much of the grant the state chose to spend.

Further complicating our analysis is the fact that the populations served by 

the AFDC program and the TANF program are dramatically different. 

Under AFDC, caseload was defined principally by the number of families 

receiving a cash assistance payment. Under TANF, however, there is no 

single definition of a “case.” Because states are free to use TANF funds to 

finance programs with a variety of different eligibility requirements, 

caseload can vary by state, and even by program within a state. This means 

that while a family might be eligible for TANF-funded child care subsidies, 

the same family might not be eligible for—or request—monthly cash 

assistance benefits., Because cash assistance caseloads have fallen in 

recent years, a decline in welfare expenditures might be expected. It might 

be unreasonable, for example, to expect a state to maintain a higher level of 

expenditures on cash assistance while fewer people sought assistance. 

15We adapted a survey developed by Deborah A. Ellwood and Donald J. Boyd of The Nelson 

A. Rockefeller Institute of Government for their report “Changes in State Spending on Social 

Services Since the Implementation of Welfare Reform: A Preliminary Report (for more 

information on our survey see appendix I of our report). 

16Each state defined eligibility within federal guidelines and set benefit levels. The federal 

government paid from 50 percent to 79 percent of the costs.
Page 26 GAO-01-828 Welfare Reform

However, because TANF is intended to serve a broader purpose than did 

AFDC, it is reasonable to expect that states might have used some TANF 

funds to invest in programs that serve the goals of TANF rather than use 

them to expand programs targeted only to the original AFDC population. 

Thus, it is appropriate to consider cumulative categories of welfare 

expenditures in order to understand how states financed the transition of 

low-income families from dependence to productive employment. 

To this end, we grouped individual program spending into four cumulative 

categories: 

• Basic welfare services: cash assistance grants, training programs, and 

diversion payments.

• Support for the working poor: category 1 programs plus programs that 

many states use to provide transitional assistance to working poor 

families, including child care subsidies, transportation subsidies, a state 

EITC, or low-income housing assistance.

• Health care: category 2 programs plus health care expenditures for lowincome families and individuals. 

• Other TANF-related social services: category 3 programs plus other 

TANF-related social service programs such as child welfare, transitional 

services for the developmentally disabled, substance abuse treatment, 

and mental health services. 
Page 27 GAO-01-828 Welfare Reform

In the body of this report, we discuss two key aspects of fiscal trends in 

1995 and 2000: (1) state spending in each category in constant 1995 dollars 

and (2) the percent change in the state-financed and federal-financed 

portions of total expenditures. To observe a net change in spending within 

a category the impact of both measures must be assessed. For example, if a 

state increases state funding on a set of programs and federal spending 

increases by a larger amount (or the state draws down even more federal 

funds), the state-financed share of total expenditures would decrease even 

though the state’s investment in dollar terms increased. Conversely, if a 

state reduced state spending for a particular set of programs on which the 

decrease in federal spending was larger, the state-financed share of total 

expenditures would have increased even though the state’s investment in 

dollar terms decreased. So, in order to observe a net divestiture of state 

funds in our analysis, for example, two conditions must be met: (1) a state 

must have reduced its own spending in dollar terms from 1995 levels17 and 

(2) the state-financed portion of total spending must have also declined 

from 1995. 

Category 1: Basic Welfare 

Services

Under the most narrow definition of welfare (Category 1)—one in which 

the definition of a case is similar to that under AFDC prewelfare reform—

total spending (federal and state combined) generally declined, but 

somewhat less than the dramatic decline in the number of cash assistance 

families. The correlation between spending and caseload is not perfect 

even in this most narrow definition of welfare spending. In large part this is 

because the orientation of most states’ welfare programs towards jobs 

skills and job readiness programs required increased investments in workrelated activities; as cash assistance budgets were declining, more 

recipients were required to participate in work or work-related training 

programs. Significantly, while spending dropped in this traditional 

category under TANF, a comparable caseload decline under the old openended matching design would have triggered a more substantial cut in 

spending because of the way in which AFDC was financed. 

In eight states, total expenditures on these programs declined more than

35 percent in real terms although caseloads declined by more than 

17We conducted our analysis in both nominal dollars and constant (real) 1995 dollars. While 

either basis leads to similar results, for clarity’s sake, we discuss our findings in terms of real 

dollars throughout this report. A discussion in nominal dollars may be found in state 

appendixes II-XI.
Page 28 GAO-01-828 Welfare Reform

45 percent over the same period. (See table 1.) The other two states—

Texas and Louisiana—present a different picture. Spending in these two 

states with historically low benefit levels did not correlate with the states’

caseload declines. Although caseloads declined by more than 50 percent in 

both states, total spending remained constant in Texas and declined by 

about 20 percent in Louisiana. As a result, spending per family more than 

doubled in both states. These two states also increased their monthly cash 

assistance grants—in 1999 Texas raised its monthly benefits for the first 

time in 15 years while Louisiana increased its benefits in 2000 for the first 

time since 1981. Although notable, this probably had little effect on overall 

spending trends in this category. A more likely influential factor was the 

rapid increase in new spending on employment and training.

Table 1: Changes in Basic Welfare Services

Note: Percent change in total expenditures calculated using 1995 dollars.

Source: GAO survey and analysis of state expenditure data.

While all 10 states reduced their own spending on Category 1 programs, we 

observe more varied trends in terms of the fiscal partnership. (See table 2.) 

In 6 of the 10 states (see bolded text in table 2) the state-financed share of 

total expenditures declined relative to 1995 levels. Of the remaining four 

states, one maintained its share of spending, and three spent more of their 

own funds on these activities than the federal government relative to the 

1995 ratios.

State

Percent change in total

(federal and state)

expenditures

(State fiscal years

1995 - 2000)

Percent change in families

receiving cash assistance

(January 1995 to June

2000)

Colorado -64 -72

California -47 -47

Wisconsin -46 -78

Oregon -45 -58

Maryland -44 -64

Michigan -42 -66

Connecticut -42 -55

New York -37 -46

Louisiana -21 -69

Texas 0 -54
Page 29 GAO-01-828 Welfare Reform

As noted above, a state’s ability to alter the mix of federal and state funds 

used to finance its welfare program depends on whether or not it has 

enough expenditures in other programs—outside the narrow definition of 

basic welfare services—to meet its MOE requirement. Although the three 

states—New York, California, and Wisconsin—that increased their share of 

total expenditures on these activities in 2000 also reduced their own 

spending on these programs, they found that the MOE limited their ability 

to further divest funds.

Table 2: Category 1—State Expenditures on Basic Welfare Services (State Fiscal 

Years 1995 and 2000)

Note: Percent change in state funds calculated using 1995 dollars.

Source: GAO survey and analysis of state expenditure data.

Category 2: Support for the 

Working Poor

While six states reduced the level of state resources devoted to basic 

welfare programs (Category 1) in both constant dollar terms and as a share 

of total expenditures, many state officials suggested that states have used 

these “freed-up” resources to invest in new (or expand existing) programs 

using a broader definition of assistance to low-income families, such as 

child care programs; work-supports, such as a state-EITC; and other 

postemployment transitional services—essentially, support for the working 

poor (Category 2). When considering states’ cumulative funding for this 

broader category, five states still divested some of their resources from 

these programs in terms of both constant dollars and percentage-share of 

total expenditures; Texas was the only state that did not reduce its own 

State

Percent change in state

funds

Percent change in statefinanced portion of total

expenditures

Oregon -82 -22

Colorado -76 -14

Maryland -56 -9

Connecticut -49 -6

California -44 +3

Michigan -42 0

New York -34 +4

Louisiana -28 -2

Texas -22 -8

Wisconsin -4 +32
Page 30 GAO-01-828 Welfare Reform

spending in dollar terms from 1995 levels —instead, it actually increased 

spending in dollar terms on Category 2 programs. (See table 3.) It is worth 

noting, however, that the states’ share of total spending in these five states 

declined less than those observed in Category 1. Moreover, states’ shares 

for this category are cumulative and reflect both their shares in Category 1 

and Category 2. When looking at the spending for Category 2 alone, some 

states with large reductions in Category 1 programs significantly increased 

funds for programs that were added to the analysis in Category 2—i.e., 

programs that more broadly support the working poor. For example, in 

Colorado, state spending declined by 76 percent in Category 1 compared to 

only a 7-percent decline in Category 2. Because state spending tripled on 

child care and other work support programs—programs appearing in our 

analysis for the first time in Category 2—the declines observed in Category 

1 were largely offset.

Table 3: Category 2—Expenditures on Programs Supporting the Working Poor 

(State Fiscal Years 1995 and 2000) 

Note: Percent change in total and state funds calculated using 1995 dollars.

Source: GAO survey and analysis of state expenditure data.

Category 3: Support for the 

Working Poor and Related 

Health Care Costs

State officials cite many other budget priorities that have demanded their 

attention in recent years. Many of these priorities also benefit low-income 

families but are not included in Categories 1 and 2 of our analysis of 

spending under welfare reforms. For example, some states expanded 

State

Percent change in

total funds

Percent change in

state funds

Percent change in

state-financed

portion of total

expenditures

New York -25 -20 +5

Connecticut -19 -21 -2

California -15 -12 +2

Oregon -12 -32 -7

Wisconsin -11 -11 0

Maryland -9 -17 -4

Michigan -4 -4 0

Colorado +2 -7 -3

Louisiana +2 -7 -2

Texas +28 +11 -6
Page 31 GAO-01-828 Welfare Reform

health care services for low-income families and their children. During the 

time frame of our study, the federal/state partnership to provide health 

insurance to low-income children (The State Children’s Health Insurance 

Program—SCHIP) was enacted. In addition, Wisconsin and Oregon began 

enhanced Medicaid programs for low-income individuals not eligible for 

Medicaid. In Oregon, total health care spending for the low-income 

working poor tripled since 1995 while the state-funded share of these costs 

more than doubled. 

Although TANF funds cannot be used directly to expand access to 

Medicaid and there are limitations on the states’ ability to use their MOE 

funds to expand access to Medicaid, we asked states to report on certain 

health care expenditures given the importance of this key benefit in helping 

people move into the workforce. Specifically, we asked states to provide 

expenditure data on their health care-related costs for low-income 

individuals but asked them to exclude any costs associated with their 

elderly population, including long-term and institutional care. State 

funding for low-income health programs is generally driven by the federal 

matching requirements of programs such as Medicaid and SCHIP rather 

than the TANF program. Accordingly, from this point forward in this report, 

any observable shifts in the federal/state fiscal balance cannot be solely 

attributed to changes brought about through the flexibility of the TANF 

block grant or its MOE requirement. Nevertheless, our study still reflects 

the use of freed-up funds from welfare programs to finance new or 

expanded programs in health care for the same population. 

Total spending on the cumulative costs of basic welfare services plus other 

programs supporting the working poor, including their health care costs 

(Category 3), continues to vary considerably among the states. 

Nevertheless, as we broaden the scope of our analysis, states appear more 

likely to have maintained or increased their investments in these programs. 

(See table 4.) Accordingly, only three states (see bolded text in table 4)—as 

compared to six states in Categories 1 and 2—appear to have reduced their 

investments in both constant dollar terms and as a percentage share of 

total funds. Three states have increased their investment in these 

programs, two (Michigan and California) have maintained the fiscal 

balance, and while the remaining two states (Maryland and Texas) shifted 

the fiscal balance slightly in their favor, they nevertheless increased their 

own investment in these programs in dollar terms.
Page 32 GAO-01-828 Welfare Reform

Table 4: Category 3—Expenditures on Programs Supporting the Working Poor and 

Related Health Care Costs (State Fiscal Years 1995 and 2000) 

Note: Percent change in total and state funds calculated using 1995 dollars.

Source: GAO survey and analysis of state expenditure data.

Because money is fungible, this analysis cannot determine with any 

certainty whether the particular state funds freed up by TANF funds were 

used to finance expansions in health care for low-income individuals or 

families. However, it does show that in five states state funding increased in 

dollar terms for these programs over the study period. In fact, in Oregon 

and Colorado, total expenditures on health care increased dramatically and 

the state share of total expenditures slightly increased relative to the 

federal share. Only three states (see bolded text in table 4) reduced their 

investments in these programs in constant dollar terms as well as in terms 

of the state-financed share of total expenditures.

Category 4: TANF-Related 

Social Services

We further expanded the definition of assistance to test whether states may 

have used their freed-up funds to expand other social service programs for 

low-income families by asking states to report their expenditures in 1995 

constant dollars on a wide range of services, including child welfare, 

mental health services, substance abuse programs, and programs designed 

to help the developmentally disabled become more self sufficient 

(Category 4—Other TANF-related Social Services). Again, we asked states 

to exclude any costs that were not transitional in nature, such as costs 

associated with long-term institutional care. 

State

Percent change in

total funds

Percent change in

state funds

Percent change in

state-financed

share of total

expenditures

Connecticut -10 -11 -1

California -6 -7 0

New York -2 -9 -5

Michigan -1 -1 0

Wisconsin +2 -3 -2

Louisiana +2 +8 +1

Texas +12 +11 -1

Maryland +16 +12 -1

Colorado +46 +56 +3

Oregon +72 +81 +2
Page 33 GAO-01-828 Welfare Reform

As expected, states continue to be more likely to have maintained or 

increased their fiscal commitments to Category 4 programs—the most 

macro level of our analysis. (See table 5.) Only two states (see bolded text 

in table 5)—compared to three states in Category 3—appear to have 

reduced the amount of funds invested in these programs in terms of 

constant dollars and percentage share of total funds. Eight states increased 

their investment in this broad program area. In terms of the overall fiscal 

balance between the federal government and these eight states, most 

maintained or increased the state-financed share of total expenditures 

relative to 1995 levels.

In some states the analysis provides a dramatically different picture as we 

consider broader definitions of spending categories. For example, in 

Category 1 programs, of the 10 states in our study, Oregon and Colorado 

displayed the most severe spending reductions in both constant dollar 

terms as well as percentage share of total expenditures: -82 percent 

(dollars) and -22 percent (share); and -76 percent (dollars) and -14 percent 

(share), respectively. In Category 4, however, these same states show the 

most dramatic increases in investments in these programs: 42 percent 

(dollars) and 52 percent (share) in Colorado; and 61 percent (dollars) and 

65 percent (share) in Oregon. 

Table 5: Category 4—Expenditures on TANF-Related Social Services for LowIncome Families and the Working Poor (State Fiscal Years 1995 and 2000)

Note: Percent change in total and state funds calculated using 1995 dollars.

Source: GAO survey and analysis of state expenditure data.

State

Percent change in

total funds

Percent change in

state funds

Percent change in

state share

New York -4 -11 -5

Connecticut -1 +2 +2

Louisiana +5 +13 +2

California +5 +5 0

Wisconsin +7 -1 -4

Michigan +13 +15 +1

Maryland +17 +11 -3

Texas +19 +17 -1

Colorado +42 +52 +3

Oregon +61 +65 0
Page 34 GAO-01-828 Welfare Reform

States’ Contingency 

Plans Are Undeveloped

Paradoxically, while much attention has been placed on whether states 

have replaced their own spending with federal funds, states have also been 

under considerable scrutiny for not spending their TANF funds more 

quickly. Finding the right balance between saving for future needs and 

investing resources today in programs to help people make the transition 

from welfare to work continues to be one of the main challenges states face 

as they develop strategies to address the needs of low-income families. If 

states wish to set aside reserves for future welfare costs, they have two 

options: they can save federal TANF funds or they can save their own 

funds. If they elect to save federal TANF funds, they must keep these funds 

in the U.S. Treasury until the funds are needed.

As of September 30, 2000, states reported leaving $8.6 billion in unspent 

TANF funds at the U.S. Treasury; this amounts to 13.5 percent of the total 

TANF funds awarded since 1997. HHS reporting requirements do not ask 

states to signal their intentions for these funds. As a result, congressional 

decisionmakers lack reliable information on whether states are saving 

adequately for a “rainy day.” However, the disparity in the reported 

balances among the states suggests that some states may not be well 

prepared to address any increased demand in their welfare programs while 

others may have saved substantially more than they might need. Although 5 

of the 10 states in our study consider a portion of their unspent funds to be 

“rainy day funds,” it does not appear that the amounts designated as 

reserved were calculated based on any sort of contingency planning or 

analysis.

Impact of External Factors 

on TANF Caseloads Is 

Uncertain

As we previously reported, it is unclear what impact a major economic 

downturn or recession will have on welfare participation given the 

significant reforms in national welfare policy.18 While research literature 

generally suggests that caseloads will rise in an economic downturn, there 

is substantial uncertainty regarding the extent of the increase. However, 

any increase in caseload will almost certainly mean higher costs. 

During a fiscal crisis, state policy makers face difficult choices regarding 

whom to serve, for how long, and with what services. Each of these “hard 

choices” must be financed in the context of fiscal limitations—including 

legislative restrictions, constitutional balanced budget mandates, or 

18Welfare Reform: Challenges in Saving for a “Rainy Day” (GAO-01-674T, April 26, 2001).
Page 35 GAO-01-828 Welfare Reform

conditions imposed by the bond market—on a 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. This can 

exacerbate budgetary stress caused by caseload volatility. 

For these reasons prudent fiscal planning, especially contingency 

budgeting for a fiscal rainy day, becomes particularly important. In general, 

during any sort of 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.19 

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. Since the fiscal risks of welfare programs 

have now largely shifted to the states, it is reasonable for Congress to 

inquire as to whether states are prepared for these risks.

Data on State Reserves 

Have Significant Limitations 

Although many might view the unspent balances left at the U.S. Treasury as 

a “de facto rainy day fund” for future welfare costs, states do not report 

unspent balances in a consistent manner. This makes it difficult to 

ascertain how much of these balances are truly uncommitted and therefore 

available for future contingencies. As a result, federal policymakers lack 

complete, reliable information to help assess states’ plans for economic 

contingencies, including whether the levels of available funds are adequate, 

and whether all states have access to these funds.

Current Reporting Requirements 

Do Not Clarify the Nature of 

State Reserves

Reporting requirements should enable collection of data that will assist 

policymakers in their oversight responsibilities. However, largely because 

welfare administrative structures differ dramatically across states, 

information on unspent TANF balances is not compiled in the same way in 

all states. This makes it difficult to ascertain how much of these balances 

are truly uncommitted and therefore available for future contingencies. As 

a result, the information on unspent balances is not comparable, and 

provides little useful information on the nature and adequacy of states’

resources for future fiscal risks. 

19For additional information, see Budgeting for Emergencies: State Practices and Federal 

Implications (GAO/AIMD-99-250, September 30, 1999).
Page 36 GAO-01-828 Welfare Reform

HHS regulations regarding unobligated and unliquidated balances also 

contribute to a lack of clarity.20 Under HHS regulations, if a state has 

allocated a portion of its TANF grant to a rainy day fund, the state must 

report these balances as unobligated. However, unobligated balances 

include more than these rainy day fund allocations. These balances can 

also include funds for which the state has made no spending plans or funds 

the state has reserved for activities in future years. As a result, it is 

impossible to tell from the unobligated balances alone whether a state has 

contingency plans. 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.

Unspent TANF funds may also be reported as unliquidated obligations. 

These are funds for which, 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 countyadministered welfare program. However, it is unclear how much of these 

unspent balances are actually committed for future needs. For example, 

both California and Colorado have county-administered welfare systems. 

These states pass most of their annual block grants directly to the counties. 

As caseloads have continued to decline in both states, the budgets overestimated actual expenditures leaving considerable balances. Although 

these funds remain in the U.S. Treasury until the 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 only about $2.5 million in unobligated balances, implying 

that nearly all these funds are earmarked. Recently, California amended its 

state statute to allow the state to re-obligate some of these funds, if 

necessary, among counties. Colorado, which reported about $95 million in 

unliquidated obligations as of September 30, 2000, and passes virtually all 

TANF resources to the counties, did likewise. As of June 30, 2000 the state 

20Under HHS regulations the states use two categories to report on the status of their 

unspent TANF 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.
Page 37 GAO-01-828 Welfare Reform

estimated that counties hold about $67 million in reserves, or about 70 

percent of the total unliquidated obligations, for future contingencies. 

As the above examples illustrate, the difference between unobligated 

balances and unliquidated obligations is often unclear, and varies by state. 

A significant portion of California’s and Colorado’s unspent funds are not 

yet actually committed for a specific expenditure 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.

California Holds Reserves in 

Counties

In addition, we found that in California, the confusion regarding the proper 

reporting of certain expenditures further blurs the aggregate levels of 

unspent TANF balances. California has transferred more than $1 billion of 

the state’s TANF dollars to its counties in the form of incentive payments—

yet these funds remain unspent and are on deposit in county bank 

accounts. As noted previously, California relies on its counties to define 

welfare priorities at the local level, and California transfers most of its 

federal funds to the counties to finance programs that help make the 

transition from welfare to work. For most services the counties receive 

federal funds as they need them and until that time the funds remain in the 

federal Treasury. However, one state program pays counties incentive 

payments that are designed, in part, to motivate the counties to help the 

state meet certain TANF performance goals. Specifically, the state makes 

awards to its counties based on the number of welfare cases that have left 

the rolls for employment and the number of cases the counties have 

diverted from the rolls and are employed. To date the counties have 

received awards totaling more than $1 billion. These funds are federal 

TANF funds that have been drawn from the U.S. Treasury and deposited 

into county bank accounts. 

According to state law, counties must spend these funds on TANF-related 

purposes. The state has also issued guidance to the counties that any 

interest earned while these funds are on deposit must be reinvested into 

the TANF program. Apart from the aforementioned guidance, state statute 

defers to the counties regarding how best to use the funds. While state 

officials have said that these incentive payments were not intended for 
Page 38 GAO-01-828 Welfare Reform

counties to use for contingency budgeting, counties are not prohibited 

from using these funds to cover unexpected costs if needed.

In February 2001, state officials reported that counties have spent only 

$46 million—about 4 percent—of these funds. This means counties in 

California have about $1 billion in unspent TANF funds on account that are 

not included in the “unobligated balances” totals reported to HHS. HHS 

believes that California could be in violation of CMIA which seeks to limit 

the interest costs to both federal and state governments by coordinating 

the timing of a states’ draw down from the Treasury with the timing of the 

state’s expenditure needs. This coordination ensures that the timing of a 

state’s draws do not favor either party and neither partner incurs 

unnecessary interest costs. California maintains that these payments are 

valid expenditures to service providers—their counties—under a 

performance-based agreement to administer welfare services. 

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.21 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 in implementing 

this recommendation, and HHS’ final regulations, issued on April 12, 1999, 

did not address the 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. 

21Welfare Reform: Early Fiscal Effects of the TANF Block Grant (GAO/AIMD-98-137, August 

18, 1998).
Page 39 GAO-01-828 Welfare Reform

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.22 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 has prompted some states to draw down and spend their 

TANF funds rather than leave them in the Treasury.

Contingency Planning 

Receives Little Attention as 

States Cite Few Incentives 

to Save

As we have previously mentioned, states can save for a rainy day in two 

ways: they can save federal TANF funds and/or they can save their own 

funds. However, states have noted significant disincentives with both 

options. As previously noted, state officials voiced concern that 

accumulating unspent federal TANF balances might signal that these funds 

are not needed and that they have been under considerable pressure to 

spend their TANF grants more quickly. Similarly, although some states have 

accumulated a portion of their own funds in general purpose state rainy 

day funds, these funds are not a guaranteed safety net—welfare would 

have to compete with other programs for these dollars in the event funds 

are needed. Moreover, dedicated state-funded welfare reserves are 

expensive because these funds cannot count towards a state’s MOE.

Although some states consider portions of their unobligated TANF 

balances to be rainy day funds, it does not appear that the amounts 

reserved were based on any kind of contingency planning or analysis by the 

22Block Grants: Federal-State Cooperation in Developing National Data Collection 

Strategies (GAO/HRD-89-2, November 29, 1989) and Block Grants: Federal Data Collection 

Provisions (GAO/HRD-87-59FS, February 24, 1987).
Page 40 GAO-01-828 Welfare Reform

state. According to NGA, few states have engaged in a systematic fiscal 

planning process to project their needs under a variety of economic 

scenarios. Our review of 10 states supports NGA’s findings. Five 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 do not appear to 

have been determined through a fiscal planning process that reflects 

budgetary assumptions about projected future needs. Instead, these states 

merely designate residual TANF funds not already appropriated by the 

state legislature for other purposes as constituting the state’s welfare rainy 

day fund.

Although many states have healthy general-purpose rainy day funds for 

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. Reserving 

funds specifically for welfare requires state decisionmakers to make tradeoffs among competing needs. 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. As a result, it is a very expensive proposition indeed for a state to 

budget both for a welfare reserve and to meet its MOE.

In state fiscal year 2001, Maryland 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. In effect, Maryland was able to draw down federal 

funds and save them for future needs rather than use those funds to expand 

existing or create new programs.

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). 
Page 41 GAO-01-828 Welfare Reform

The Contingency Fund is authorized through 2001, at which time it expires. 

The President’s FY 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.23 

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. 

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. However, this 

could prove to be too demanding. 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 (known as “separate 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 would consider turning to the Contingency Fund. 

23The Adoption and Safe Families Act of 1997 reduced the contingency fund for state welfare 

programs by $40 million over four years (P.L. No. 105-89, §404, 111 Stat. 2134).
Page 42 GAO-01-828 Welfare Reform

In 1997 seven states24 and the District of Columbia qualified for 

contingency funds. However, only two states requested and were awarded 

contingency funds—North Carolina and New Mexico. In the end, only New 

Mexico complied with the Fund’s requirements and accepted $2 million. No 

state has used the Fund since 1997.

Equally important as the requirement that states raise their own financial 

commitment in order to gain access to additional federal funds is a 

requirement that states share in all additional program costs—even beyond 

the MOE requirements. Requiring a match encourages states to be more 

cost-conscious than if the costs of an expanding caseload were covered 

only with federal dollars. While the Contingency Fund requires states to 

match all federal dollars at the states’ FMAP rate,25 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 3.)26 Prorating a 

state’s draws from the Contingency Fund—especially if the state qualifies 

for a period that spans 2 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.

24These states are Alaska, California, Hawaii, New Mexico, New York, North Carolina, and 

Washington.

25Under 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 83 percent of poorer states.

26For more information see Welfare Reform: Early Fiscal Effects of the TANF Block Grant.
Page 43 GAO-01-828 Welfare Reform

Figure 3: The Contingency Fund’s Annual Reconciliation Process

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.

Concluding 

Observations

While addressing the needs of low-income families remains a joint federalstate responsibility, TANF changed the nature of the fiscal relationship 

between federal and state governments in this area. As we have reported in 

the past, block grants prompt trade-offs between federal and state control 

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 the 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.
Page 44 GAO-01-828 Welfare Reform

over program finances, accountability, and administration. The challenge 

is to strike a balance between providing states with the reasonable 

flexibility and discretion needed both to achieve efficiencies and to adapt 

federal programs to differing local needs while at the same time retaining 

accountability for achieving certain broad national goals. While policymakers should use data on state spending and performance when designing 

any grant program, the design of block grant programs ultimately involves 

philosophical judgments about the proper roles and relationships among 

levels of government in our system. 

Within this context, Congress will consider trade-offs in the fiscal design of 

the TANF program as it moves to reauthorize the program. The design of 

the grant—its fiscal requirements, allocation provisions, funding flexibility, 

and accountability provisions—has an important bearing on the federalstate fiscal balance. By shifting from an open-ended matching to a closedended block grant program, TANF shifted greater fiscal responsibilities to 

the states for allocating both federal and state resources across activities 

and for bearing the fiscal risks associated with the impacts of an economic 

downturn on program needs. The design of the TANF grant enabled the 

states to reduce their spending to a moderate extent as caseloads declined, 

with a floor established by the MOE requirement. The grant level was also 

high enough to permit states to plan ahead and perhaps create reserves for 

use should case levels increase in less robust economic periods. The higher 

grant levels arguably should inspire states to create reserves for the future 

in order to avoid fiscal stress during less robust economic times. 

Reflecting on the states’ fiscal activities in the past 5 years, our study can 

help provide insights on key fiscal design questions for the reauthorization 

debate:

• How has the fiscal design of the program affected the balance of fiscal 

responsibilities between federal and state governments in terms of 

addressing the goals of the program; what effects might proposed 

changes have on this balance?

• Does the program enable or promote the saving of reserves at both 

federal and state levels to address a future “rainy day”? 
Page 45 GAO-01-828 Welfare Reform

Federal/State Fiscal Balance In a previous study on the design of federal grant programs, we noted that 

federal grants do not necessarily have the effect of augmenting spending in 

aided areas on a dollar-for-dollar basis, since a portion of the federal funds 

are often used by states to replace some of their own funds. We observed 

that several factors influenced the potential for fiscal substitution including 

(1) the breadth of activities for which the grant can be used, (2) the 

presence and design of MOE and/or nonsupplant provisions, and (3) the 

extent of states’ prior investment on the aided activities. Under TANF, each 

of these factors has, in fact, played an important role in defining the new 

fiscal balance between federal and state governments.27

Our study suggests that states did reduce their support for basic welfare 

services in the face of declining caseloads, with the federal government 

picking up a greater share of the costs for this narrow category of activity. 

Replacing state funds with TANF funds was a common budgetary practice 

in all 10 of the states, and entirely legal under the federal program. At the 

same time, when looking at the broadest level of TANF-related social 

services, it is apparent that most states have maintained or even increased 

their own investment over time to address the overall needs of low-income 

families. 

The design of the grant influenced these results. The increased flexibility in 

TANF increased the potential for states to use federal funds in areas of 

traditional and long-standing state support. However, that same flexibility 

also enabled states to focus their efforts on TANF’s broader goals of 

supporting work and self-sufficiency for low-income families.

The absence of a nonsupplant provision for TANF funds—similar to the 

“new spending test” on state MOE funds—permitted direct substitution of 

federal for state funds. However, even with this substitution, the range of 

activities eligible for TANF funding was broad enough to enable states to 

identify enough state-funded activities to meet their MOE. Unlike a 

nonsupplant provision, the MOE was not designed to stop reallocation of 

state funds within TANF-eligible services. Instead, it was intended to limit 

the extent to which states could use federal funds for fiscal relief. Indeed, 

it appeared to play a strong role in limiting the degree to which states could 

reduce their spending to fully reflect the sharp drop in cash assistance 

caseloads. 

27Federal Grants: Design Improvements Could Help Federal Resources Go Further 

(GAO/AIMD-97-7, December 18, 1996).
Page 46 GAO-01-828 Welfare Reform

If states used TANF funds to replace state funds counted for MOE, they had 

to increase their own spending on other low-income programs to satisfy the 

MOE requirement. Moreover, even though MOE permitted states to reduce 

their spending by 20-25 percent from the base year, it can be argued that the 

requirement caused some states to spend more than they otherwise would 

have spent in light of the more than 50 percent drop in caseloads. Given the 

impact that MOE appears to have had on state spending to date, any 

changes in the level and design of this requirement could have major 

consequences for the federal-state fiscal balance for this program. 

That different observers and actors will have different views of 

supplantation is to be expected. Some would argue that allowing 

supplantation of any kind increases the likelihood that states could weaken 

their commitment to the core services (e.g., cash assistance) on which lowincome families depend most and shift more of the financing for these 

services to the federal government under the guise of program flexibility. 

Potentially, supplantation permits states to convert federal TANF funds 

into a kind of general revenue sharing program with very little incremental 

impact on poverty. Although most states did supplant within the narrowest 

category of spending in our analysis, given the stated purposes of 

PROWRA, this is too narrow a perspective. Since TANF is intended to serve 

the broader purpose of helping low income families achieve greater levels 

of self sufficiency, the focus should be not only on how specific grant funds 

were spent but rather on how states allocated federal and state funds more 

broadly to address this outcome. Accordingly, focusing on the act of 

supplantation alone in the narrowest category of spending provides a 

misleading perspective of the fiscal impact of the program. A more 

complete analysis would address the impact of the states’ broader fiscal 

actions on the goals of TANF.

These differing perspectives inform the debate over whether or not to add a 

nonsupplant provision to the TANF program during reauthorization. Some 

argue that creating a nonsupplant provision similar to that found in other 

federal grant programs would help ensure that all federal funds supplement 

existing state spending. While the program’s MOE provision places a floor 

under state spending for the broad area of assistance to low-income 

families, a nonsupplant provision would be aimed at preventing states from 

using federal funds to replace state funds for specific activities. Some have 

argued that the absence of a nonsupplant provision undermines the goal of 

the “new spending test” because this test applies to activities states count 

toward MOE but not to activities on which federal TANF funds are spent. 
Page 47 GAO-01-828 Welfare Reform

However, any consideration of a nonsupplant provision should recognize 

that such a provision could have significant adverse effects as well. Such a 

provision would penalize states that took the initiative to start programs 

before the federal TANF program became available. The states that began 

programs using state funds before the federal grant would be locked in to 

maintaining their own spending commitments to these activities while 

other states without such prior commitments could fund such activities 

entirely with federal dollars. Thus, a nonsupplant provision not only would 

appear to reward states for inaction but also could serve to induce states to 

defer program innovation until federal funds become available. In this 

context it is worth noting that in our study, supplanting tended to be 

concentrated in states with prior investments in programs supporting the 

working poor; states with relatively low levels of state effort did not have 

the kind of investment that prompted supplanting in the first place. Given 

this perspective, supplantation could be seen as rewarding these states for 

their past fiscal initiative without further reducing benefits in low-effort 

states.

Once accountability shifts to the broader goals supported by the block 

grant program, many would argue that states should have the flexibility to 

shift funds across activities within the broader umbrella of social services 

for lower income families to best meet the broad goals of the program. 

Indeed, states in our study took advantage of this flexibility by using TANF 

funds to free up state funds to fund broader activities supporting lowincome families. Just as the absence of a nonsupplant provision creates 

the potential for the grant to become a general fiscal relief program, the 

presence of such a provision might limit the intended breadth of the block 

grant by locking states into pre-established funding priorities. From this 

perspective, a broad-based maintenance-of-effort provision—such as the 

TANF MOE requirement—calling for states to maintain spending across a 

wide range of relevant programs might both limit substitution while 

providing greater state discretion than a traditional nonsupplant 

requirement. 
Page 48 GAO-01-828 Welfare Reform

Whether or not Congress imposes a nonsupplant provision regarding TANF 

funds, given the intent of the block grant, federal oversight should focus on 

the broader fiscal balance, i.e., the way states use multiple federal and state 

funding streams to support the overall goals of the program. As we have 

said, focusing on more narrow categories of spending can be misleading for 

broad purpose grants;28 federal funds for any one specific program tend to 

lose their fiscal identity and become integrated with funds from related 

federal and state programs. Furthermore, in the case of TANF, the 

performance outcomes call for states to bring to bear a wide range of 

related federal, state, and local funding streams to make a difference for 

low-income families. Accordingly, periodic reporting for the entire federalstate fiscal effort is important. As we have said, we found that states 

generally maintained or increased their support for the broadest category 

of assistance for low-income families. However, it will be important for the 

Department of Health and Human Services periodically to gather 

information on these broader measurements of the federal-state fiscal 

balance so that Congress can monitor this important indicator in the future, 

particularly as the economy changes and potential caseload demands for 

programs and services increase. 

HHS should undertake this effort in concert with states to ensure that the 

reports accurately reflect a broader fiscal picture. Although such reporting 

may constitute an additional burden to the states, following a select sample 

of states over a period of years and relying on independent researchers to 

gather the data across consistent categories every few years could mitigate 

such burdens. Further, states have an interest in maintaining congressional 

confidence in the quality of this information. The past history of block 

grants at the federal level suggests that nationally consistent information is 

often necessary to maintain support within Congress for continued funding 

and flexibility. In the absence of uniform information, policymakers can 

lose confidence in state implementation and are often pressed to intervene 

in block grant programs based on examples that may not be representative 

of states’ overall track record. 

Planning for Future 

Contingencies 

Both the states and the federal government have a significant interest in 

preparing TANF to meet challenges in times of fiscal distress. While the 

shift from the open-ended match of AFDC to the fixed-dollar TANF block 

28For more information, see Grant Programs: Design Features Shape Flexibility, 

Accountability, and Performance Information (GAO/GGD-98-137, June 22, 1998)
Page 49 GAO-01-828 Welfare Reform

grant under PRWORA provided states with increased program flexibility, 

and sometimes, fiscal relief, it also increased the states’ exposure to fiscal 

risks in the event of an economic downturn or increased program costs. 

Clearly, this gives states an interest in planning for future needs. Similarly, 

the fact that the federal government recognized its continued federal role in 

assisting low-income families, coupled with the fact that those states that 

fail to engage in contingency planning could, when faced with fiscal 

pressures, turn to the federal government for help creates a federal interest 

in the viability of TANF in times of economic stress. 

In testimony this past April we offered for congressional consideration 

several options that might improve the federal contingency mechanism as 

well as strengthen states’ incentives to “save for a rainy day.”

29 

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 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 

29Welfare Reform: Challenges in Saving for a “Rainy Day” (GAO-01-674T, April 26, 2001).
Page 50 GAO-01-828 Welfare Reform

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 

a portion of their MOE and (2) allow states to draw down their entire TANF 

grants and save these funds in their own treasuries. There are pluses and 

minuses to each—and the exact design and implementation will be 

important in determining the actual impact of any change.

Allowing states to count rainy day funds towards part of their MOE would 

give them a greater incentive to create such funds. However, “maintenance 

of effort” implies an actual expenditure and has played a critical role in 

limiting supplantation. 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—thus resulting in no net increase in spending in 

this area. This effect could be mitigated by limiting the amount of rainy day 

funds that could count towards a state’s MOE. In addition, as we suggested 

in our April testimony, states could be required both to certify that state 

rainy day funds were auditable and to establish criteria for the size of the 

fund and the release of funds from it. 

Some state officials have said that requiring states to keep unspent TANF 

funds in the U.S. Treasury provides a disincentive to save these funds. As 

noted earlier, they believe that these balances could be attractive targets 

for rescission by Congress. If states could keep unspent TANF funds in 

state accounts instead, these officials suggest, states would have more of 

an incentive to save for contingencies. Such a provision would mean 

outlays would be recognized at the time of the grant award rather than 

when the money is spent for a program need.

There are significant issues associated with this proposal. First, regardless 

of where these federal funds are “stored,” states are accountable for the 

use of these funds in accordance with the law. Congress would still need 

consistent, reliable, and auditable information on the funds. Second, such a 

proposal would affect the measured federal surplus. Since outlays would 

be recognized when the states received their grants, more outlays would be 

recorded sooner. If states draw down all unspent balances in a single year, 

the outlays recorded for the TANF program would shift and the budget 

surplus drop by that amount in the near term. 
Page 51 GAO-01-828 Welfare Reform

In addition, the federal government would incur interest costs while states 

could earn interest on grant money drawn down from the U.S. Treasury but 

not yet spent by the states. This would violate CMIA, which prohibits states 

from drawing down funds until those funds are needed and so helps ensure 

that neither the states nor the federal government incur unnecessary 

interest costs (or forgoes interest income) in the course of federal grant 

disbursement. CMIA also promotes transparency since states’ unspent 

balances remain visible in the federal Treasury rather than spread through 

the various state treasuries—although given the measurement problems 

discussed earlier, this may overstate the quality of current information.

To provide TANF an exemption from a governmentwide grant policy that 

settled years of intergovernmental conflicts between federal and state 

administrators would require justification. The permanent nature of the 

appropriation to each state and the significant devolution of 

responsibilities and fiscal risk to states may argue for an exemption from 

CMIA. If Congress wished to provide this exemption without abandoning 

fiscal neutrality between the federal and state governments, it could 

require states to reimburse the U.S. Treasury for any interest the states earn 

on TANF drawdowns. Under such a provision the states would hold the 

funds, but the earnings on the funds would remain as if the funds were in 

the U.S. Treasury. Similarly, requiring better reporting on states’

expenditures and reserves could mitigate the damage to transparency.

Recommendations for 

Executive Action

Given the breadth of the goals for the TANF program, understanding the 

overall federal-state fiscal balance covering the broad range of TANFrelated social services is important for national oversight of the program. 

However, little information is currently gathered systematically on 

expenditures on the broad array of social services we surveyed for this 

report. In order to inform decisionmakers on the status of the federal-state 

fiscal balance, the Secretary of Health and Human Services should consult 

with the states to explore cost-effective ways to periodically gather data 

revealing the federal-state fiscal balance relevant to achieving the broader 

programmatic goals of the TANF program. The categories used in this 

report could constitute a basis for these periodic reports. 

We also reiterate our prior recommendation that the Secretary work with 

the states to provide for more transparent reporting by the states of their 

plans for the unspent TANF balances. Such plans can enhance 

congressional oversight and provide the states with an opportunity to 

better demonstrate their plans and needs for federal funding.
Page 52 GAO-01-828 Welfare Reform

Agency Comments We received comments from HHS, which are reprinted in appendix XIII. In 

addition, each of appendixes II through XI was reviewed by officials in the 

relevant states and their comments were incorporated as appropriate. We 

also provided copies of the draft report to the National Governor’s 

Association (NGA) and the National Conference of State Legislatures 

(NCSL). NCSL provided official comments. NGA did not provide official 

comments, but senior analysts provided us with substantive informal 

comments on the draft. We incorporated these comments, NCSL’s 

comments, and technical comments from HHS as appropriate. NGA staff 

and NCSL both commented that the report was balanced. NCSL noted that 

the report “clearly puts TANF spending in context of how states make 

policy and budget decisions and will enhance the upcoming debate over 

welfare reform reauthorization.” At the same time both NGA staff and 

NCSL expressed concern that some readers could use the data in this 

report to criticize states’ decisions to shift state funds from Category 1 to 

broader TANF-related purposes. Our report acknowledges that these shifts 

were prompted by a number of factors including the declining caseloads 

and the breadth of TANF’s goals. These funding shifts are a result of policy 

choices made by the states—we do not impose a value judgement on the 

appropriateness of these choices. Moreover, we point out that these shifts 

are not only legal, but are encouraged by TANF law. We continue to believe 

analysis across the full range of categories is important to providing a more 

complete picture of state choices. 

With regard to our recommendation to explore ways periodically to gather 

data revealing the federal-state fiscal balance covering the broad range of 

TANF-related services, HHS agreed that “comprehensive, timely data from 

the states will be essential during TANF reauthorization,” but suggested 

that unspecified legislative restrictions and cost constraints could hamper 

its ability to collect this essential information. We believe that all data 

collection should be cost-effective. We note that the Department agrees 

that this information is essential for TANF reauthorization; at this stage we 

suggest that the necessary data might be obtained through incremental 

adjustments to and leveraging of the current reporting requirements and 

existing research. In addition, as part of the reauthorization debate all data 

collection requirements might be examined with an eye to focusing 

reporting requirements on the data that Congress, the states, and the 

Department consider most useful in assessing progress towards meeting 

the goals of welfare reform. As part of that re-examination, the Department 

could note any legislative changes necessary to facilitate this process.
Page 53 GAO-01-828 Welfare Reform

As agreed with your offices, we are sending copies of this report to the 

Secretary of Health and Human Services, appropriate congressional 

committees, and other interested parties. We will also make copies 

available to others upon request.

If you or your staff have any questions about this report, please contact me 

on (202) 512-9573 or Thomas M. James on (202) 512-2996. Individuals 

making key contributions to this report included Bill J. Keller, Patricia L. 

Elston, Jacqueline M. Nowicki, Raymond G. Hendren, and Marcus G. 

Melton.

Paul L. Posner

Managing Director

Federal Budget Issues and Intergovernmental Relations
Page 54 GAO-01-828 Welfare Reform

Appendix I

Scope and Methodology ApApenednxidexiIs

Scope To meet our objectives, we studied TANF-related budget decisions and 

collected data on social service expenditures in 10 states—California, 

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

Texas, and Wisconsin. These 10 states—the same states we studied in 

1998—were chosen because they represent a diverse array of 

socioeconomic characteristics, geographic locations, experiences with 

state welfare initiatives, and state fiscal and budget issues.1

 Although 

differences in the way states present their social services budgets and the 

way they finance their programs make any generalizations difficult, our 

case study analysis of these 10 states, with their diverse approaches to 

financing welfare reforms, provides opportunities to highlight critical 

financing issues states face implementing their welfare reforms. 

Methodology To provide background information and context to our discussion on how 

states are using federal and state funds to finance programs to help the 

poor, we reviewed and summarized state welfare plans, program 

documents, and other supporting documentation. We discussed state 

welfare programs with state program and budget officials, legislative 

analysts, and local welfare advocacy groups. We reported on features of 

state welfare programs in place by state fiscal year 2001.

1

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

August 18, 1998).
Appendix I

Scope and Methodology

Page 55 GAO-01-828 Welfare Reform

Supplantation in the State 

Budget

A discussion of whether a state uses federal TANF funds to supplant state 

funds depends in large part on the definition of supplantation. Much of the 

controversy over whether states have used federal funds to replace their 

own spending, and the extent to which they have done so, hinges on this 

definition of supplantation. In this analysis we used a rather limiting 

definition of supplantation, one used by the former Chair of the Human 

Resources Subcommittee, Committee on Ways & Means, House of 

Representatives in a letter to Governors dated March 15, 2000, which 

defines supplantation as the act of “replacing state dollars with TANF 

dollars on activities that are legal uses of TANF funding.” A limiting 

definition is justified because all funds are interchangeable. The effect of 

any state decision to use federal funds to supplant its own funds is first to 

enlarge the pool of state general fund resources available to finance any 

state program, how the state then establishes priorities for funding new 

and existing programs—essentially, how it will use its freed-up funds—

must be viewed apart from its decision to supplant.2

 

In order to gauge the extent to which a state used TANF funds to free up 

state funds, we analyzed state budgets and supporting budget 

documentation. We identified instances where the state changed how it 

financed certain programs by replacing state funds from its currentservices baseline3

 budget with federal TANF funds through state fiscal year 

2001. We also gathered information on the general fiscal environment that 

existed in each state as these budget choices were made, other spending 

priorities that competed for state funds, any fiscal crises in the states, and 

interactions with other federal programs.

While it is difficult to tell with certainty how a state uses its freed-up funds, 

the decision to supplant is often made through the state’s appropriation or 

2

Most academic studies that seek to assess the extent to which states use federal funds to 

supplant their own define supplantation as a decrease in state spending from what the state 

would have spent if more federal funds had not been made available. These studies gather 

historical data on state spending, control for certain demographic variables such as 

caseload changes, identify trends in state spending, and then extrapolate those trends. The 

studies compare the trends with actual expenditure data and explain any variance from the 

trends as supplantation.

3

A current-services baseline budget assumes the continuation of current policies and 

reflects anticipated costs of ongoing programs and activities without policy changes. It 

generally includes allowances for inflation and changes in caseload. Proposed policy 

changes that would affect the costs of programs are compared to the current-services 

baseline to estimate the budgetary impact.
Appendix I

Scope and Methodology

Page 56 GAO-01-828 Welfare Reform

budget process, which is often accompanied by analyses of different policy 

options for the use of any freed-up funds and can influence policymakers’

decisions to approve the switch in financing. In reviewing these analyses it 

is possible to understand the choices facing decisionmakers as they decide 

among the different ways to use federal and state funds, to finance 

programs that benefit low-income families and other needy individuals. To 

describe the motivation for states to use federal TANF funds to free up 

state funds, we interviewed key staff from the state welfare agencies, state 

budget offices, legislative fiscal analysts offices, as well as some state 

legislators with oversight responsibilities for welfare reform. 

Spending Trends From 1995-

2000

While budgets are a good blueprint to measure policy choices, looking only 

at a specific change authorized in a budget may be misleading. For 

example, if a state supplanted federal funds for state funds, then shifted its 

own funds into other programs that serve the working poor, the net impact 

of these shifts would be the same as if it used federal funds directly to fund 

these other programs. Accordingly, the impact of the funding shifts must be 

viewed in a broader context consistent with new objectives and goals of 

TANF; which are to

• provide assistance to needy families so that children may be cared for in 

their homes or in the homes of relatives,

• end the dependence of needy parents on government benefits by 

promoting job preparation, work, and marriage,

• prevent and reduce the incidence of out-of-wedlock pregnancies, and

• encourage the formation and maintenance of two-parent families.

To provide this broader context for considering the effects of funding 

shifts, we reviewed state expenditures of both federal and state funds on a 

wide array of social service programs that meet these objectives. In this 

analysis, a federal expenditure is not defined by the level of the TANF grant 

allocated to each state but rather by how much of the grant the state chose 

to spend. Essentially, the states control both the state and federal share 

and thus control the “fiscal balance.” Under AFDC, the fiscal partnership 

between the federal government and the states was defined by the federal 

match rate each state received to help finance its welfare programs. Under 

TANF, the block grant is fixed—states decide how much of the federal 

grant to spend and how much to save. 
Appendix I

Scope and Methodology

Page 57 GAO-01-828 Welfare Reform

This “fiscal balance” is key to understanding how the partnership between 

the federal government and the state in financing welfare services may 

have changed. In order to measure post-PRWORA changes in the mix of 

federal and state funding across TANF-related social services, we asked the 

10 states to provide expenditure data on programs that provide social 

services to the needy. To facilitate gathering this information, we adapted 

a fiscal survey developed by the Nelson A. Rockefeller Institute of 

Government.4

 Specifically, we asked for state and federal expenditures on 

a variety of programs that targeted assistance to low-income families and 

individuals in state fiscal years 1994-1995 and 1999-2000, and we verified 

the data they reported to us against their own accounting records. To 

improve the alignment of our survey data with TANF’s goals, we excluded 

social services expenditures targeted to the elderly and those services that 

were not transitional in nature. 

We used the survey as a tool to encourage states to view these programs 

broadly, and not to limit their survey responses just to those programs that 

received TANF funding. The survey allowed us take a comprehensive look 

at state social service program budgets. Generally, we asked the State 

Budget offices to help us coordinate the survey responses. In their 

oversight role of the entire state budget, these offices had a broader view of 

state funding priorities than the State Social Services departments, or any 

one specific department, which focus primarily on their own budgets. We 

asked state budget and program officials to identify programs that met our 

survey criteria, whether or not these programs were funded with TANF or 

MOE dollars (see appendix XII for our survey criteria instructions), and to 

provide us with expenditures on these programs for their state fiscal years 

1995 and 2000. Our focus on the state fiscal year as opposed to the federal 

fiscal year allowed states to provide us with data directly from their 

accounting records without having to make adjustments to the federal 

fiscal year. 5

 Since our objective was to examine changes in the way states 

have used federal and state funds to finance programs that help the poor, 

this focus on the state fiscal year is adequate. Moreover, since state 

decisions to supplant federal funds for their own were made in the context 

4

“Changes in State Spending on Social Services Since Implementation of Welfare Reform: A 

Preliminary Report.” Ellwood and Boyd, February 2000.

5

Seven of the 10 states in our review begin their fiscal year on July 1 and end on June 30. 

The other three states are all different; in New York it begins on April 1 and ends on

March 31, in Texas it begins on September 1 and ends on August 31, and in Michigan it 

begins on October 1 and ends on September 30.
Appendix I

Scope and Methodology

Page 58 GAO-01-828 Welfare Reform

of their budget deliberations, the survey’s focus on the state fiscal year 

complemented our analysis of state budget decisions. 

Once the state program and budget officials identified the programs to 

include in the survey, we verified through program documentation and 

discussions with these state officials that the program descriptions, 

targeted beneficiaries, and program goals met the survey criteria. We 

worked closely with state officials to complete the survey instrument (see 

appendix XII) with data from state accounting records.6

 We verified with 

officials from the State Auditor’s offices that state expenditure system 

controls had been tested and verified. As noted previously, a federal 

expenditure, for the purposes of this analysis, is not defined by the federal 

allocation to the state, rather by how much the state chooses—or in some 

cases is required—to spend on the aided activity. For this reason, we did 

not consider a number of 100-percent federally funded programs that do 

not flow through the state budget. For example, the Food Stamps program 

is administrated by the state and the shared administrative costs are 

included in the survey but the value of the food stamp coupons disbursed in 

the fiscal year, borne 100 percent by the federal government, is not. 

In our analysis we aggregated state expenditure data by program category, 

allowing us to group programs into four categories—Basic Welfare 

Services (Category 1), Support for the Working Poor (Category 2), Health 

Care (Category 3), and Other TANF-related Social Services (Category 4). 

The analysis is cumulative; that is, all expenditures in Category 1 are 

included in Category 2, and so on. See figure 1 for a description of the 

types of programs that are included in our spending categories. We 

aggregated program spending in order to make comparisons among states 

in how they design and fund their strategies to address TANF’s goals. State 

budget structures are very different; some states place all their needs-based 

employment and training programs within their social services budgets; 

other states place these programs in their economic development agencies. 

These differences make comparisons of state budgets and expenditures 

difficult. In asking states to report spending on individual programs, 

regardless of which state agency oversaw these programs, and then 

aggregating the programs into the same categories for each state, we were 

able to compare state expenditure trends across all states. Given the 

6

In some cases state accounting records were not closed out when we completed our survey 

instruments. In those cases, working with state program and budget analysts, we estimated 

state fiscal year 2000 expenditures based on actuals to date or historical spending patterns. 
Appendix I

Scope and Methodology

Page 59 GAO-01-828 Welfare Reform

differing views of supplantation, our categories were designed to provide 

decisionmakers with information on shifts in spending on the widely 

different—and increasingly broad—strategies employed by the states to 

achieve the goals of the TANF program. 

Our first category includes programs that are linked closely with the goals 

and objectives of the former welfare programs, namely cash assistance 

payments and some job training programs. Our second category adds 

programs that many view as supplements to those basic welfare services. 

The additions include programs that help families make the transition from 

welfare to work or avoid welfare altogether. For example, child care 

subsidies and rental assistance payments can help parents remain working 

even if they are working in low-wage jobs; family formation and pregnancy 

prevention programs are also included in this category as they address 

specific TANF goals. Our third category adds health care costs to the types 

of programs already discussed. The inability of many low-income families 

to gain access to health insurance once they leave the welfare rolls has 

been recognized as a major barrier hindering their ability to attain selfsufficiency. PRWORA delinked the AFDC program from the Medicaid 

program, but in an effort to safeguard access to health insurance for 

eligible low-income families, the act required states to implement a 

separate Medicaid eligibility category which ensured that eligible lowincome families could qualify for Medicaid even if they were no longer 

receiving cash assistance. Improving access to health insurance, especially 

for low-income individuals, has been in the forefront of this country’s 

domestic policy debate for the last few years. During this time frame, 

states were encouraged to participate in a new federal health insurance 

program for low-income children—the States’ Children’s Health Insurance 

Program (SCHIP)—who were not eligible for Medicaid. Moreover, some 

states expanded access to health insurance to other low-income individuals 

not eligible for Medicaid. Adding states’ health care expenditures to our 

analysis recognizes the costs of these programs and states’ investments in 

strategies to help families make the transition from welfare to work. 

Finally, our last category recognizes the full breadth of programs that some 

states use to develop strategies to achieve TANF’s goals. These program 

include child welfare programs, substance abuse programs, mental health 

programs, and programs that help the developmentally disabled attain a 

level of self-sufficiency. While many of these state programs do not have 

income standards to determine eligibility, many states are able to certify 

that some of the participants in these programs meet the eligibility 

requirements set forth in their TANF plans and can claim TANF funds for 

these expenditures. As such, states are able to supplement, or supplant 
Appendix I

Scope and Methodology

Page 60 GAO-01-828 Welfare Reform

from, these existing programs—or create new programs—as part of their 

strategy to achieve their TANF goals.

State Contingency Plans To describe the measures states are taking to “save for a rainy day” and to 

analyze the impact these actions have on TANF reserve balances at the U.S. 

Treasury, we analyzed the ten states’ budgets as well as the quarterly 

financial reports they are required to file with HHS on the status of TANF 

funds they have been awarded to date. In addition, we interviewed 

program and budget officials to determine the states’ plans for their 

unspent federal TANF funds. In particular, we asked states that have set 

aside some of their federal funds for contingencies for information on how 

the size of these reserved funds were determined. We also interviewed 

officials in all 10 states to determine how they might mitigate the impact of 

an economic downturn on their program budgets if changes in the 

economy caused welfare rolls to swell and costs to rise. To obtain 

information on the levels of unspent TANF funds in all 50 states we 

reviewed financial data reported by the states to HHS.

We requested comments on a draft of this report from HHS, NGA and 

NCSL. These comments are discussed in the letter and HHS’ comments are 

reprinted in appendix XIII. In addition, we provided drafts of each state 

appendix to the appropriate state officials for technical review and have 

incorporated their comments where appropriate.
Page 61 GAO-01-828 Welfare Reform

Appendix II

California ApendxiI

Background

a

California received an additional $45 million in federal TANF funds in 2000 and $36 million in 2001 as 

bonuses for successful outcomes.

b

Caseloads as reported to HHS for January 1995 and June 2000 and rounded to the nearest 

thousand. Caseload data for 2000 do not include 63,000 families receiving assistance through a 

separate state program.

California implemented its welfare reform program called California Work 

Opportunity and Responsibility to Kids (CalWORKS) in January 1998. The 

program provides cash aid and services to eligible needy California 

families, with the goal of ensuring that individuals who work are better off 

financially than if they do not work.

To be eligible for cash aid, generally adults in families must engage in workrelated activities or lose their eligibility. Most are assigned immediately to 

job search activities, and if unsuccessful after 4 weeks, may be assigned to 

other work-related activities such as job training, education, counseling, or 

substance abuse treatment. Cash assistance includes the monthly 

assistance payment, and diversion payments made in lieu of monthly 

assistance, where appropriate and in accord with county policies. The 

maximum monthly assistance payment was increased in 2000 and ranges 

from $626 for a family of three in high-cost counties to $596 in low-cost 

counties. In addition to cash assistance, single parents may receive the 

first $50 of the current month’s child support collected on the families’

behalf.1

 Families are eligible for cash assistance if their adjusted incomes 

are less than the payment level, and they remain eligible for up to 5 years as 

long as their adjusted incomes do not exceed the payment level. After that 

time, the children may continue to receive assistance. 

State fiscal year: July 1-June 30

Budget cycle: Annual 

TANF grant:a $3.734 billion

75% MOE: $2.727 billion 

Cash assistance caseload:b 926,000 families in 1995

489,000 families in 2000

47 percent decline

1

The state and federal governments may retain collections as reimbursement for cash 

assistance payments made to these families. California has chosen instead to give its full 

share to CalWORKS families.
Appendix II

California

Page 62 GAO-01-828 Welfare Reform

While they are participating in program activities, CalWORKS families may 

receive help with child care, transportation, and related expenses. 

Depending on the policy of the county in which they reside, families who 

leave assistance for employment may continue to receive casemanagement and supportive services for 1 year. Transitional medical 

assistance is available for 1 year and to the extent funding is available, 

subsidized child care can be authorized for up to 2 years or longer if the 

families’ incomes remain below 75 percent of the state median income.2

 

Two-parent families and recent legal immigrants not eligible under TANF 

are in separate programs that are funded entirely with state funds and used 

to count towards the state’s MOE.

California administers its welfare program through its 58 counties. The 

counties pay cash assistance directly to welfare families and have 

considerable policy and programmatic discretion in managing cases and 

providing services. The state allocates its federal TANF and state MOE 

funds to the counties in the form of block grants and, in turn, requires that 

counties invest a portion of their own funds toward the MOE. About 

$141 million in county funds was counted toward the MOE in 1999. 

Counties have received additional federal TANF funds from the states as 

performance incentive payments for successful program outcomes and are 

permitted to use these funds for any TANF purpose.

Supplantation in the 

State Budget

In California, since passage of TANF, it appears that the Governor and 

legislature have enacted budgets that fully support the state MOE and have 

managed to balance competing priorities with no evidence of 

supplantation. For the most part, we found little evidence that the state 

had engaged in major shifts in the methods of financing its welfare 

programs. The state has devolved the funding for program development 

and implementation to the counties, leaving few opportunities for the state 

to shift federal funds into budget accounts that had previously been funded 

with state funds. Further, when asked about possible supplantation by the 

counties, state officials responded that their monitoring has not yielded any 

indication that counties have used federal TANF or state MOE funds to free 

up their own county funds. State officials also considered county-level 

supplantation unlikely, because few counties operate programs with their 

2

According to state officials families, who actually receive child care subsidies are at much 

lower income levels, usually between 35 and 50 percent of SMI.
Appendix II

California

Page 63 GAO-01-828 Welfare Reform

own funds that could be considered allowable candidates for TANF funds, 

leaving few opportunities for supplantation.

At several points in their budget deliberations, California’s Governor and 

legislature considered the opportunities afforded by lower caseloads and 

fixed federal funding to free up state general funds. For example, the state 

recently learned that it met 1997 work participation rates, which qualified 

the state for a 75 percent, rather than 80 percent, MOE. As a result, the 

state can retroactively claim some of its unspent TANF balances in lieu of 

the state funds that it spent in 1997. In his budget proposal for state fiscal 

year 2001-2002, the Governor recommended using some of the state’s 

unspent federal TANF balances to reimburse the state for $154 million it 

spent in 1997 to meet its $2.9 billion MOE requirement. In another 

example, California assumed financial responsibility after 1995 for 

providing nonemergency health care, primarily preventive in nature, to 

recent legal immigrants who are not eligible for TANF. Legislative analysts 

have suggested that the state count its investment in this program as MOE, 

reduce the state’s investment in CalWORKS by an equivalent amount, and 

use TANF funds to make up the difference. CalWORKS would remain 

intact and fully funded. One analyst explained that the proposal would help 

reduce reserves of unspent TANF balances, yield state savings, and, at the 

same time, effectively restore federal funds that were previously available 

for this service. 
Appendix II

California

Page 64 GAO-01-828 Welfare Reform

Spending Trends From 

1995 to 2000

Figure 4: California’s TANF-Related Expenditures for State Fiscal Years 1995 and 

2000

To assess how state budget decisions might have affected spending, we 

collected data on California’s use of state and federal funds. The results are 

grouped into four categories, as shown in figure 4 and described further in 

appendix I. Each category is identified on the graph by two bars—one for 

spending that occurred in state fiscal year 1995 and one for spending that 

occurred in state fiscal year 2000. From left to right, the categories are 

cumulative. Expenditures for basic welfare services, such as cash 

assistance and job training, are included in expenditures for support of the 

working poor. These expenditures in turn are included in expenditures for 

0

5,000

10,000

15,000

20,000

25,000

State

Federal

Basic welfare 

services

Support for 

working poor

Support for 

working poor +

health care

TANF-related

social services

95 00 95 00 95 00 95 00

1995 dollars in millions
Appendix II

California

Page 65 GAO-01-828 Welfare Reform

support of the working poor plus health care. Finally, all expenditures are 

included in social services expenditures.

It is clear from figure 4 that total spending in California has declined in real 

terms for the first three categories, but has increased in the last category 

which includes all social services. The majority of California’s MOE 

requirement is met through its cash assistance payments. As caseloads 

have fallen in California, total spending on basic welfare services declined 

from $6.3 billion to $3.6 billion in nominal dollars from state fiscal years 

1995 through 2000. (See table 6.) In real terms, this represents a drop of 47 

percent. Although total cash assistance payments have declined, the state 

still must meet a fixed MOE requirement. Given the state’s strategy in 

meeting its MOE, the state’s contributions to these programs has increased 

from 48 to 51 percent of the total. As a result, California now finances a 

greater share of the total program costs for basic welfare services than it 

did prior to welfare reform.

Table 6: California’s TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

Combined spending on support for the working poor which includes basic 

welfare services as well as other benefits, employment services, and child 

care for both welfare recipients and the working poor, has declined slightly 

from $10 billion to $9.3 billion in nominal dollars from state fiscal years 

1995 to 2000; this represents a real decline of about 15 percent. Although 

less is being spent, the state share of program spending rose from 61 

percent in 1995 to 63 percent in 2000.

Dollars in millions

Nominal

Real 

(expressed in 1995 dollars)

1995 2000 1995 2000

Basic welfare services

Total funds $6,252 $3,618 $6,252 $3,301

State funds $2,998 $1,829 $2,998 $1,669

Support for the working poor

Total funds $9,962 $9,283 $9,962 $8,470

State funds $6,037 $5,843 $6,037 $5,331
Appendix II

California

Page 66 GAO-01-828 Welfare Reform

When health care expenditures are added to the totals described above, 

combined spending increased slightly in nominal dollars, from $17.1 billion 

to $17.6 billion from state fiscal years 1995 through 2000, but not enough to 

keep up with inflation (see table 7). Instead, in real terms, total spending 

declined by 6 percent. During this time, the state’s share has remained 

constant at 56 percent of total expenditures, with federal funds making up 

the remaining 44 percent.

Table 7: California’s TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

However, when expenditures for child welfare and other social services, 

such as substance abuse and mental health treatment are included, total 

expenditures increased in both nominal and real terms from state fiscal 

years 1995 through 2000. Countering the decline in spending on basic 

welfare services, total child welfare expenditures increased by two-thirds 

and other social services expenditures doubled. In this area, the state 

maintained its investment at 56 percent of total expenditures from 1995 

through 2000.

Additional federal safety-net programs provide food assistance and 

supplemental security income for needy families and children in California. 

For example, the federal government provided about $2.5 billion in food 

stamp benefits to low-income individuals in California in 1995 and 

$1.8 billion in 2000. In addition, from 1995 through 2000, federal 

supplemental security income payments increased from $3.4 billion to 

$4 billion, with about 65 percent of these benefits going to individuals 

under 65 years of age.

Dollars in millions

Nominal

Real 

(expressed in 1995 dollars)

1995 2000 1995 2000

Support for the working poor plus health care

Total funds $17,146 $17,586 $17,146 $16,046

State funds $9,579 $9,756 $9,579 $8,902

TANF-related social services

Total funds $20,634 $23,809 $20,634 $21,724

State funds $11,525 $13,289 $11,525 $12,125
Appendix II

California

Page 67 GAO-01-828 Welfare Reform

Rainy Day Funds California budgets nearly all of its annual block grant, reserving very little 

for future contingencies. It had no TANF reserve set aside until state fiscal 

year 2000-01 when it appropriated about $50 million in federal TANF funds 

to a reserve account.3

 Even though the state does not have significant 

reserves for contingency purposes, the state does have substantial reserves 

of unspent funds. According to the financial reports filed by the state with 

HHS as of September 30, 2000, the state reports $1.6 billion in total unspent 

TANF funds, almost half of its TANF grant for any given year. (See table 8.)

Table 8: Unspent TANF Funds in California as of September 30, 2000

a

Subsequent amended reports submitted by California reduced unliquidated obligations for this period 

to $612 million.

Source: HHS’ Administration for Children and Families.

Most of the state’s unliquidated funds have been obligated to counties in 

their annual single allocation. In its second year under TANF, California 

kept tight control of funds, issuing separate allocations to counties for each 

expenditure category. Because this process limited counties’ flexibility and 

made it difficult for the counties to reform their welfare programs in a 

timely fashion, the state changed its strategy in its second year under TANF. 

Now the state allocates the majority of program funds to counties in broadpurpose single allocations that are viewed as block grants. These 

allocations represent the maximum amount of reimbursement that the 

counties can expect from the state for their basic CalWORKS expenditures. 

When the state accounts for its TANF block grants on its quarterly financial 

reports to HHS, the state reports its allocations to counties as obligations in 

accordance with federal regulations. The allocations are typically made in 

July after the state has enacted its budget. Therefore, California’s TANF 

obligations typically spike in the last quarter of the federal fiscal year as a 

result of its allocation process.

3

TANF funds held in reserve must be left in the U.S. Treasury until expended.

Dollars in millions

Unobligated

TANF Funds

Unliquidated obligations

of TANF funds

Total unspent

funds

Unspent funds as a

percent of annual

TANF grant

$3 $1,637a $1,640 44%
Appendix II

California

Page 68 GAO-01-828 Welfare Reform

Counties operate on a cash accounting basis, submitting claims for 

reimbursement of expenditures that they have made for CalWORKS from 

their block grant allocations. When the state receives county claims for 

reimbursement, the state reports these as expenditures on federal forms. 

Unliquidated obligations represent the difference between what the state 

has allocated to the counties and what the counties have spent on actual 

cases. Because spending on the TANF programs has declined 

proportionally with the decline in caseloads, the state continues to report 

high levels of unliquidated obligations. However, state officials maintain 

that as the counties make progress implementing welfare reforms they are 

liquidating their TANF obligations more quickly so that each year the level 

of reported unliquidated obligations has decreased. Based on current 

expenditure projections, these officials do not expect high levels of 

unliquidated obligations to continue. 

Recently, the state amended its statute so that these funds can be reallocated from counties where they may not be needed to counties that are 

running short. Because the state has the discretion to reobligate these 

unspent funds from counties with ample reserves to counties with greater 

unmet needs, these unspent funds—currently reported as “unliquidated 

obligations”—are a potential source of funds that state can use as long as 

some counties continue to carry-forward large unspent balances.

California also has another significant source of unspent TANF funds that 

can be used by the counties to finance increased costs in the event of 

economic contingencies. California has transferred more than $1 billion of 

the state’s TANF dollars to its counties in the form of incentive payments—

yet most of these funds remain unspent and are on deposit in county bank 

accounts. This state program pays counties incentive payments that are 

designed, in part, to motivate the counties to help the state meet certain 

TANF performance goals. Specifically, the state makes awards to its 

counties based on the number of welfare cases that have left the rolls for 

employment and the number of cases the counties have diverted from the 

rolls and are employed. To date the counties have received awards totaling 

about $1.1 billion. These funds are federal TANF funds that have been 

drawn from the U.S. Treasury and deposited into county bank accounts. 

According to state law, counties must spend these funds on TANF-related 

purposes. The state has also issued guidance to the counties that any 

interest earned while these funds are on deposit must be reinvested into 

the TANF program. Apart from the aforementioned guidance, state statute 

defers to the counties regarding how best to use the funds. The program 
Appendix II

California

Page 69 GAO-01-828 Welfare Reform

was authorized in 1997 as part of the legislation that established 

CalWORKS and the first awards were paid in 1999. While state officials 

have said that these incentive payments were not intended for counties to 

use for contingency budgeting, counties are not prohibited from using 

these funds to cover unexpected costs if needed. In fact, some counties 

regard the incentives as their reserve funds, according to one state official.

In February 2001, state officials reported that counties have spent only 

$46 million—about 4 percent—of these funds. This means counties in 

California have about $1 billion in unspent TANF funds on account that are 

not included in the “unobligated balances” totals reported to HHS. HHS 

believes that California is in violation of CMIA, which seeks to limit the 

interest costs to both federal and state governments by coordinating the 

timing of a states’ draw downs from the Treasury with the timing of the 

states’ expenditure needs. This coordination ensures that the timing of a 

state’s draws do not favor either party and neither partner incurs 

unnecessary interest costs. California maintains that these payments are 

valid expenditures to service providers—their counties—under a 

performance-based agreement to administer welfare services. 
Page 70 GAO-01-828 Welfare Reform

Appendix III

Colorado ApendxiI

Background

a

Colorado receives between $3 million and $10 million in annual supplements because the state’s preTANF population growth exceeded 10 percent.

b

HHS found that in 1999 not enough of Colorado’s two-parent caseload was engaged in work activities 

to meet the higher participation rates required for that group and approved the state’s Corrective Action 

Plan on April 27, 2001. Because the state did not meet the requirement, it will be held to an 80-

percent MOE of about $88 million.

c

Caseloads as reported to HHS for January 1995 and June 2000 and rounded to the nearest 

thousand.

Colorado implemented its welfare reform program called Colorado Works 

in July 1997 with the goal of promoting personal responsibility and enabling 

needy families to become self-sufficient. To achieve this goal, the state has 

given each county social services agency the flexibility to select an 

approach to program design and service delivery that the county agency 

considers likely to yield success. Under the program, cash assistance 

caseloads have declined steadily through mid-2000.

Colorado contracts with its 63 counties for the operation of Colorado 

Works through a memorandum of understanding and allocates most of its 

federal TANF and state MOE funds—about $140 million in state fiscal year 

2000—in the form of block grants. The counties are required to invest a 

portion of their own funds to help make up the required state MOE, 

equivalent to 20 percent of the county’s 1995 expenditures on these 

programs. 

To receive cash assistance, applicants must sign individual responsibility 

contracts or treatment plans immediately and participate in work related 

activities within 24 months, or earlier in accordance with county 

requirements. Counties determine the type of work activities that are 

available and whether other activities, such as mental health and substance 

abuse treatment, can be considered work-related. The state has set the 

minimum standard benefit amount at $357 per month for a family of three, 

virtually unchanged since before TANF, but individual counties may set 

State fiscal year: July 1-June 30

Budget cycle: Annual

TANF grant:a $136 million 

75% MOE: $83 millionb

Cash assistance caseload:c 39,000 families in 1995

11,000 families in 2000

72 percent decline
Appendix III

Colorado

Page 71 GAO-01-828 Welfare Reform

higher levels. Needy families with children whose adjusted incomes do not 

exceed the state’s cash assistance levels are eligible for the program. 

Those who participate may also receive other benefits, such as 

transportation, clothing, or education payments. Families may receive 

cash assistance for no more than 5 years, in accordance with TANF law. In 

lieu of ongoing cash assistance, eligible families and, at county option, 

other needy families may receive single, lump-sum diversion payments. 

Recent immigrants not eligible for TANF are served in a separately funded 

program.

Families who succeed in finding jobs may achieve earnings that make them 

ineligible for Colorado Works. For example, a single parent−with two 

children--earning the minimum wage for a 40 hour work week would no 

longer qualify for cash assistance. However, the family would qualify for 12 

months of additional medical assistance. When they exhaust those 

benefits, the families may continue to receive health care for their children, 

because the state has streamlined the application and enrollment process 

and replaced the Children’s Health Insurance Program (CHIP) monthly 

premiums with nominal enrollment fees to cover families with incomes 

between 151 and 185 percent of poverty. Also families with incomes that 

do not exceed $75,000 may be eligible for services and benefits such as 

emergency aid and family preservation services as described in individual 

county plans. 

Supplantation in the 

State Budget

We found little evidence in Colorado of the state’s use of federal funds to 

replace state funds. State officials contend that supplantation is less likely 

in Colorado than might be the case in other states for two reasons. First, 

counties wield a great deal of political power in Colorado. Since most of 

the TANF funds the state receives are immediately allocated to the 

counties, the state retains very little budgetary control over TANF funds. 

Most state and county officials we spoke with agreed that politically it 

would be very difficult if the state were to use TANF funds to replace state 

funding in other programs, because it would mean that there would be 

fewer TANF funds to appropriate to the counties. Second, the counties are 

less likely to supplant funds because, according to a state official, most 

have not had significant budgetary resources allocated to TANF-related 

program areas from which they could supplant. In addition, in its state 

welfare reform legislation, the state imposed an explicit prohibition against 

counties using their block grants to supplant county general funds. 
Appendix III

Colorado

Page 72 GAO-01-828 Welfare Reform

Although most of the state’s block grant is passed through to the counties, 

the state has kept two modest reserves of TANF funds for use at the state’s 

discretion. (See “Rainy Day Funds” section of this appendix for more 

information.) In state fiscal year 2000, the state reassessed the way these 

two reserve funds were financed as they had accumulated significant 

balances and had never been drawn upon. The counties were amassing 

significant reserves as well since actual expenditure rates were lower than 

their annual allocations. In reassessing the financing mechanism for the 

state reserves, the state had about $20 million that it could use for other 

purposes. Of this total amount, the state used about $7 million to refinance 

a number of state-funded programs which freed-up a like amount of state 

funds. These “freed-up” state funds were used to finance a new reading 

initiative for elementary school children. 

Spending Trends From 

1995 to 2000

Figure 5: Colorado’s TANF-Related Expenditures for State Fiscal Years 1995 and 

2000

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

State

Federal

Basic welfare 

services

Support for

working poor

Support for

working poor +

health care

TANF-related

social services

95 95 95 

1995 dollars in millions

00 00 00 95 00
Appendix III

Colorado

Page 73 GAO-01-828 Welfare Reform

To assess how state budget decisions might have affected spending we 

collected data on Colorado’s use of state and federal funds. The results are 

grouped into four categories, as shown in figure 5 and described further in 

appendix I. Each category is identified on the graph by two bars--one for 

spending that occurred in state fiscal year 1995 and one for spending that 

occurred in state fiscal year 2000. From left to right, the categories are 

cumulative. Expenditures for basic welfare services such as cash 

assistance and job training are included in expenditures for support of the 

working poor. These expenditures in turn are included in expenditures for 

support of the working poor plus health care. Finally, all expenditures are 

included in social services expenditures.

States prepare, authorize, and execute their budgets differently and, as a 

result, it is very difficult to compare state budgets as they are presented by 

each state. One of the challenges in our methodology was to ensure, to the 

extent possible, that comparable program expenditures were presented 

similarly for each state. For the most part, expenditures for social services 

are made out of states’ general funds and federal funds—as opposed to 

states’ capital funds which finance large scale construction and 

infrastructure budgets. In Colorado, constitutional and statutory 

restrictions limit expenditure growth and the size of the state’s rainy day 

fund. Thus, in any given year if state revenues exceed expenditures, the 

state rebates the surplus to taxpayers. A number of the rebates the state 

offered in state fiscal year 2000 were targeted to low-income taxpayers, but 

these rebates were authorized on a onetime basis only and contingent on 

certification by the State Revenue Department that a state general fund 

surplus occurred. Because these expenditures were never factored into 

the states’ baseline budget we did not consider them in our analysis of state 

spending trends. Essentially we believe that these rebates did not present 

decisionmakers with the same choices presented decisionmakers in other 

states and should not be considered in our analysis of whether states used 

TANF funds to supplant their state funds.

Nevertheless, these targeted rebates were considerable. In state fiscal year 

2000, the state temporarily expanded its EITC from 8.5 percent of the 

federal credit to 10 percent at a cost of about $32 million. It also 

temporarily increased the child care tax credit to targeted to families with 

incomes less than $64,000 at a cost of about $61 million. If we had included 

the rebates in our analysis, these expenditures would have appeared first in 

our Category 2—Support for the Working Poor and cumulatively 

throughout Categories 3 and 4.
Appendix III

Colorado

Page 74 GAO-01-828 Welfare Reform

In line with the caseload declines, total spending on basic welfare services 

declined dramatically between 1995 and 2000—from $155 million to about 

$61 million. (See table 9.) This represents a drop of about 64 percent in 

real terms, but state spending declined even further—by 76 percent in real 

terms—from $70 million to about $17 million. Accordingly, the share of the 

programs now financed with state funds declined from about 45 percent of 

the total in 1995 to about 31 percent in 2000.

Table 9: Colorado’s TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

However, for expenditures on a broader array of programs that support the 

working poor, total expenditures increased 2 percent in real terms. This 

trend was driven by increased spending of federal funds in child care and 

child development programs. Despite the increase in total spending on this 

category, the share of the expenditures financed with state funds declined 

by about 7 percent in real terms. (See table 9.) However, as noted 

previously, the state targeted $93 million in rebates of the state’s surplus in 

2000 to low-income families. 

Dollars in millions

Nominal

Real 

(expressed in 1995 dollars)

1995 2000 1995 2000

Basic welfare services

Total funds $155 $61 $155 $55

State funds $70 $19 $70 $17

Support for the working poor

Total funds $340 $380 $340 $347

State funds $127 $129 $127 $118
Appendix III

Colorado

Page 75 GAO-01-828 Welfare Reform

Table 10: Colorado’s TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

By expanding our expenditure analysis to include the costs of health care 

for the working poor, we find that the state has increased both the total 

level of spending as well as the share of the total it finances from state 

funds. Total spending on programs supporting the working poor and their 

related health care costs rose by about 46 percent in real terms from 1995 

to 2000. The share of those expenditures the state financed out of state 

funds rose even further, however, by about 56 percent. Accordingly, the 

share financed by the state increased since 1995 when it financed about

43 percent of total costs; in 2000, the state’s share was 46 percent.

Under the broadest definition of TANF-related social services including 

child welfare programs, transitional services for the developmentally 

disabled, mental health services, and substance abuse programs—

cumulative expenditures on those programs as well as those previously 

discussed in this analysis rose by 42 percent in inflation adjusted terms. 

The state’s share of the total rose even more, however, and as a result the 

state now finances a larger share of the total costs. In 1995, the state 

financed 47 percent of the total and, in 2000, it financed 50 percent of the 

total.

Additional federal safety-net programs provide food assistance and 

supplemental security income for needy families with children in Colorado, 

but are not shown in figure 5. The federal government provided 

$213 million in food stamp benefits to low-income individuals in the state in 

1995, and $130 million in 2000. In addition, from 1995 to 2000, federal 

supplemental security income payments increased from $216 million to 

Dollars in millions

Nominal

Real 

(expressed in 1995 dollars)

1995 2000 1995 2000

Support for the working poor plus health care

Total funds $894 $1,436 $894 $1,309

State funds $385 $657 $385 $600

TANF-related social services

Total funds $1,188 $1,842 $1,188 $1,681

State funds $555 $924 $555 $843
Appendix III

Colorado

Page 76 GAO-01-828 Welfare Reform

about $239 million in nominal dollars—about 82 percent of these benefits 

went to individuals under 65 years of age.

Rainy Day Funds Colorado has established reserves of TANF funds; a short-term emergency 

fund for the state Department of Human Services to use to address 

contingencies, a long-term reserve that could be used in the event of an 

economic downturn, and a county reserve fund. Since Colorado allocates 

most of its TANF block grant to counties, some counties have been able to 

amass significant reserves. While these reserves remain in the U.S 

Treasury until the counties need them, these funds remain under county 

control. The fundamental purpose of the county reserves is to provide for 

the maximum amount of flexibility to counties to implement the provisions 

of welfare reform to meet local needs. However, many county officials 

view these reserves as the first line of defense for the counties to turn to in 

the event of a recession. 

Because TANF funds are allocated to the counties under the memorandum 

of understanding, the state records all TANF funds including the county 

reserves as an obligation by the state even though the county might not 

have made specific decisions regarding their plans for these funds. As of 

June 30, 2000, the end of the state’s fiscal year, the state estimated that the 

counties held about $67 million in reserves. The state’s TANF financial 

reports for the end of the federal fiscal year 2000—September 30, 2000—

however, record no unobligated balances but $94 million in unliquidated 

obligations. (See table 11).

Table 11: Unspent TANF Funds in Colorado as of September 30, 2000

Source: HHS’ Administration for Children and Families.

In addition to the county reserves, the state maintains both its short-term 

and long-term reserves. The “Short-term Emergency Works Fund” receives 

an annual appropriation of $3 million of federal TANF funds. These funds 

are provided to the state Department of Human Services to use in response 

Dollars in millions

Unobligated

balance

Unliquidated

obligations

Total unspent

funds

Unspent funds as a

percent of annual

TANF grant

0 $94.2 $94.2 69%
Appendix III

Colorado

Page 77 GAO-01-828 Welfare Reform

to counties for emergencies. Depending on the circumstances, the 

counties are required to deplete their allocation and their reserve before 

gaining access to these emergency funds. At the end of the state fiscal year, 

the balance in the fund is reduced to zero and any funds not expended are 

transferred to the “Long-term Works Reserve Fund.”

The long-term reserve was designed to provide the state and the counties 

with enough funds to continue the state’s welfare program in the event of 

an economic downturn. The state’s Department of Human Services (DHS) 

developed a model to forecast how the state’s welfare costs might respond 

under a variety of economic scenarios. Although DHS presented the 

results of the model to the legislature as a basis for determining the 

appropriate size for the Long-term Works Reserve Fund, a legislative 

analyst told us the model was flawed. While the model forecasts changes 

in caseloads, it multiples the higher caseloads by a factor that is less than 

the minimum monthly assistance grant for a family of three. The model 

does not factor in other costs for employment and training programs, child 

care subsidies, or any other transitional service. 

The state funds the long-term reserve a number of ways. First, at the end of 

the state fiscal year, it assesses each county’s expenditures against its 

allocation. Counties retain the first 20 percent of their unspent balance 

and fifty percent of the remaining unspent balance. The remainder reverts 

to the state’s Long-term Reserve Fund. In addition, each year the balance 

from the state’s short-term reserve reverts to the long-term reserve, as well 

as any federal TANF funds made available to the state—e.g., through the 

high performance bonus—that have not otherwise been appropriated or 

spent. While the funds in the long-term reserve are federal TANF funds and 

can only be used for the Colorado Works program, there is no statutory 

prohibition against the legislature making appropriations from these funds 

for a number of TANF-related purposes, in addition to an economic 

contingency.
Page 78 GAO-01-828 Welfare Reform

Appendix IV

Connecticut ApendxiIV

Background

a

Connecticut received $2.5 million in 2000 and $2.6 million in 2001 in federal TANF funds as bonuses 

for successful program outcomes.

b

Caseload as reported to HHS for January 1995 and June 2000 and rounded to the nearest thousand.

Connecticut launched its statewide welfare program, Jobs First, in January 

1996, based on earlier demonstration programs operated under federal 

waivers that began in 1995 and continue through September 2001. The 

purpose of Jobs First is to encourage able-bodied individuals to actively 

seek, obtain, and retain employment.

To receive cash assistance, job-ready adults in families must look for work 

immediately, in accordance with the program’s work-first philosophy. As 

an incentive, families may continue to receive their full monthly cash 

assistance payments while they are working as long as their earnings are 

below the federal poverty level and they have not exceeded the program’s 

time limits on cash receipt. Families in Jobs First may also retain up to 

$100 in child support collected on their behalf by the state agency without 

any reduction in their cash assistance, and they are eligible for medical 

assistance. They may also receive help with transportation and child care, 

if necessary to facilitate their employment or job search. 

The maximum cash assistance payment is $543 a month for a family of 

three, an amount unchanged since the enactment of TANF. However, 

eligibility for assistance has eased, as permitted under TANF, making 

families eligible with incomes at or below 75 percent of the state’s median 

income, which approximates 335 percent of the federal poverty rate. 

Alternatively, eligible applicants may choose diversion payments equivalent 

to 3 months of cash assistance and forgo assistance under the Jobs First 

program. Receipt of cash assistance under Jobs First is limited by state law 

to 21 months for those considered job ready but may be extended in 

State fiscal year: July 1-June 30

Budget cycle Biennial

TANF grant:a $267 million 

75% MOE: $183 million $183 million 

Cash assistance caseload:b 61,000 families in 1995

27,000 families in 2000

55 percent decline
Appendix IV

Connecticut

Page 79 GAO-01-828 Welfare Reform

increments of 6 months for families with incomes below the monthly cash 

assistance payment level. 

Families who lose assistance due to time limits and who do not have 

income at or above the cash assistance payment standard are referred to 

the state-funded safety net program called Worksteps for counseling, food, 

clothing, and up to 12 months of vouchers for rental assistance. Working 

families who leave Jobs First may receive transitional medical assistance 

for 2 years after they leave the program. Subsidized health care is also 

available to children of the working poor whose incomes are at or below 

185 percent of the poverty level. Working families may receive subsidized 

childcare if their incomes are below 75 percent of the state median income. 

Needy two-parent families who meet eligibility guidelines are served under 

a separate, state program with policies similar to Jobs First. Recent legal 

immigrants who are not eligible for TANF may receive cash and medical 

assistance under a separate program supported with state funds. Both 

these programs count towards state MOE.

The state operates Jobs First directly through its social service offices 

located in five regions that determine eligibility and arrange for electronic 

payments of cash assistance. Since 1998, job training and employment 

services are provided through the state’s Department of Labor and its 

regional workforce boards and subcontractors. In addition to Jobs First 

and related programs, TANF funds are used to support child welfare and 

substance abuse services as well as teenage pregnancy prevention pilots in 

eight urban and one rural area. 

Supplantation in the 

State Budget

Connecticut’s policy is to draw down its entire TANF grant, leaving nothing 

in reserve. Historically, most of Connecticut’s TANF grant has been 

expended through traditional welfare programs within the control of the 

state social services agency. As caseloads have fallen, it has become 

increasingly difficult for the agency to spend the entire grant and at the end 

of federal fiscal year 1999, the state reported nearly $40.7 million of 

unspent TANF funds. Budget officials said they asked the agency to 

pursue options that would allow the state to use TANF funds instead of 

state funds in programs operated outside the agency. Using TANF funds, 

the agency hired a contractor to help identify such program expenditures, 

and in June 2000, retroactively drew down $40 million of its TANF balances 

for expenditures the state made in 1999. In addition to these direct-TANF 

claims, by maximizing the amount of TANF funds it transfers to the Social 
Appendix IV

Connecticut

Page 80 GAO-01-828 Welfare Reform

Services Block Grant, the state also frees up its funds from the budgets of a 

variety of other state-funded programs. The state has reported saving 

about $24 million a year in state funds through this transfer mechanism.

The state initiated expansions in child welfare programs and early 

childhood development programs with state funds between 1995 and 2000; 

once significant TANF-savings were achieved as a result of the large 

decreases in cash assistance caseloads, state budget officials contend that 

these savings were then reinvested into those child welfare and early 

childhood development programs. State officials said that the 

expenditures the contractor helped them identify were—in large 

measure—from these child welfare and early childhood development 

programs.

Given current caseload levels, state budget officials said that in limiting the 

use of TANF funds to only those programs operated by the state social 

services agency it would continue to be difficult to spend the state’s entire 

TANF grant. As a result, the state will most likely continue to claim the full 

TANF grant each year in order to cover expenditures in other departments 

which had previously been paid for with state funds State budget officials 

said that program expansion is difficult in Connecticut because of a 

spending cap that applies to both federal funds and state funds and 

therefore limits the growth of new programs and new spending regardless 

of the source of financing.
Appendix IV

Connecticut

Page 81 GAO-01-828 Welfare Reform

State Spending Trends 

From 1995 to 2000

Figure 6: Connecticut’s TANF-Related Expenditures for State Fiscal Years 1995 and 

2000

To assess how state budget decisions might have affected spending, we 

collected data on how Connecticut uses both state and federal funds in its 

TANF-related social services programs. The results are grouped into four 

categories, as shown in figure 6 and described further in appendix I. Each 

category is identified on the graph by two bars--one for spending that 

occurred in state fiscal year 1995 and one for spending that occurred in 

state fiscal year 2000. From left to right, the categories are cumulative. 

Expenditures for cash assistance and employment training are included in 

expenditures for support of the working poor. These expenditures in turn 

are included in expenditures for support of the working poor plus health 

care. Finally, all expenditures are included in social services expenditures.

Spending on cash assistance payments in Connecticut has gone down by 

about $250 million in nominal dollars from state fiscal year 1995 through 

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

State

Federal

Basic welfare 

services

Support for

working poor 

Support for

working poor +

health care

TANF-related

social services

95 00 95 00 95 00 95 00

1995 dollars in millions
Appendix IV

Connecticut

Page 82 GAO-01-828 Welfare Reform

2000, as caseloads have declined and the monthly assistance level has 

remained constant. (See table 12.) At the same time, spending on job 

training has increased by about $40 million so that it nearly equals the 

amount spent on cash assistance. Adjusted for inflation, overall spending 

on cash assistance and job training has declined 42 percent. The state’s 

share of cash assistance and job training costs has fallen relative to the 

federal share. Where the state paid about 52 percent of these costs in 1995, 

it paid only 46 percent in 2000. 

Table 12: Connecticut’s TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

Looking at the broader picture of expenditures for welfare recipients and 

the working poor in Connecticut that includes the totals above and child 

care shows less steep declines. (See table 12.) Combined expenditures fell 

by $120 million from 1995 through 2000 in nominal dollars, a drop of 19 

percent in real terms. The decline is moderated because the 

aforementioned reductions in cash assistance are offset to some extent by 

increases elsewhere. Spending on child care accounts for the largest 

increase, more than doubling to $181 million in 2000. Budget officials note 

that some of the additional funds targeted for child care remain unspent; it 

is unclear whether this is because demand has leveled off or available child 

care is difficult to access. The state paid 57 percent of all these costs in 

1995; by 2000 its share had dropped by 2 percent relative to the federal 

share. 

Total spending on health care costs for low-income individuals and families 

increased by nearly $100 million, but the increase was not enough to offset 

the reductions in programs to support the working poor and basic welfare 

Dollars in millions

Nominal

Real 

(expressed in 1995 dollars)

1995 2000 1995 2000

Basic welfare services

Total funds $574 $365 $574 $333

State funds $300 $168 $300 $153

Support for the working poor

Total funds $1,087 $967 $1,087 $883

State funds $618 $534 $618 $488
Appendix IV

Connecticut

Page 83 GAO-01-828 Welfare Reform

services. (See table 13.) When healthcare expenditures are added to the 

totals described above, combined spending shows a slight decline of 

$24 million in nominal dollars from state fiscal years 1995 through 2000, 

representing a decline of 10 percent in real dollars. However, the state’s 

share of funding has remained stable—about 56 percent—since 1995. 

Table 13: Connecticut’s TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

In contrast, a different trend appears when costs of child welfare and other 

social services such as services for those with developmental disabilities, 

substance abuse problems, and mental health needs are included in the 

totals above. Expenditures for all social services declined slightly in real 

terms from 1995 through 2000 (see table 13), but state spending shows a 

small increase. Costs of these services have been borne primarily by the 

state, but some shifts occurred between 1995 and 2000, such that the 

federal share of child welfare increased modestly—as evidenced by the 

state’s use of TANF funds in place of state funds in these programs—while 

the state share of other services increased modestly. Overall for TANFrelated expenditures on social services that include basic welfare services, 

support for the working poor, child care and health care, the state’s 

investment has increased relative to the federal investment; the state share 

rose from 61 percent in 1995 to about 63 percent in 2000. 

Additional federal safety-net programs provide food assistance and 

supplemental security income for needy families and children in 

Connecticut. For example, the federal government provided $204 million 

in food stamp benefits to low income individuals in Connecticut in 1995 

and $197 million in 2000. In addition, from 1995 to 2000, federal 

Dollars in millions

Nominal

Real 

(expressed in 1995 dollars)

1995 2000 1995 2000

Support for the working poor plus health care

Total funds $2,567 $ 2,543 $2,567 $2,320

State funds $1,452 $1,417 $1,452 $1,293

TANF-related social services

Total Funds $3,371 $3,664 $3,371 $3,343

State Funds $2,060 $2,229 $2,060 $2,097
Appendix IV

Connecticut

Page 84 GAO-01-828 Welfare Reform

supplemental security income payments increased from $176 billion to 

$223 billion with about 82 percent of these benefits going to individuals 

under 65 years of age.

Rainy Day Funds According to budget officials, Connecticut employs a unique system of 

budgeting they term “gross budgeting.” An agency receives an 

appropriation deemed sufficient to cover its priorities for the budget year 

without regard to the source of funding. The agency is expected to allocate 

its expenditures to the appropriate federal or state funding source and 

document all claims to federal funds. This claiming process is revisited at 

year-end to ensure that the agency maximizes the use of federal funds 

available. 

As noted previously, Connecticut’s budgetary policy is to spend its entire 

TANF grant, leaving no balances at the U.S. Treasury. State officials said 

their budget strategy is to provide the agency with the financing it needs to 

accomplish its objectives and to require the agency to find a way to claim 

all available federal funding. In addition, state budget officials explained 

that there was concern that any balances left might be rescinded by the 

Congress. 

In line with its policy, Connecticut reports no unspent TANF funds through 

September 30, 2000. (See table 14.)

Table 14: Unspent TANF Funds in Connecticut as of September 30, 2000

Source: HHS’ Administration for Children and Families.

Accordingly, Connecticut does not have a TANF rainy day fund. The state 

does not have a formal mechanism or fund to prepare for shortfalls in 

funding for its future social service needs. Budget officials said that the 

state has always placed a priority on serving the needy and historically has 

found a way to finance these programs.

Unobligated

TANF funds

Unliquidated obligations

of TANF funds

Total unspent

funds

Unspent funds as a

percent of TANF

annual grant

0 0 0 0%
Page 85 GAO-01-828 Welfare Reform

Appendix V

Louisiana ApendxiV

Background

a

Louisiana receives from $4 million to $13 million in annual TANF supplements because the state’s 

pre-TANF expenditures per poor person were less than 35 percent of the national average. In addition, 

Louisiana received a bonus of $3.7 million in 2000 for positive program outcomes.

b

Caseload as reported to HHS for January 1995 and June 2000 and rounded to nearest thousand.

The welfare reform that took effect in Louisiana in January 1997 consists of 

two components: (1) a cash assistance component called the Family 

Independence Temporary Assistance Program (FITAP) and (2) an 

employment and training component called FIND Work. The overall goal is 

to decrease long-term dependency on cash assistance through the 

promotion of job preparation and work. 

Although work is the goal, the program is not based on a strict work-first 

approach. Instead, families may receive cash assistance for up to 2 years, 

the limit set in TANF law, before they are required to participate in work 

activities or lose their eligibility for continued assistance. Those who are 

completing education or training programs, actively seeking work, 

employed a short time with limited earnings, or otherwise exempt may 

continue to receive cash payments beyond the 2 years. Those who are not 

exempt and who have received cash assistance for 2 years must wait 

another 3 years before they are eligible for cash assistance again. After the 

equivalent of 5 years of cash receipt, they are ineligible, in accordance with 

TANF. 

The maximum cash payment for a family of three is $240 a month, an 

increase from the $190 a month that was in effect from 1981 through 2000. 

Needy families with children whose adjusted incomes are below the 

payment level are eligible for cash assistance. State policy requires that 

applicants be screened for drug abuse and, where appropriate, assessed, 

tested, and treated. To facilitate their participation in activities under the 

FIND Work component, families may receive transportation subsidies up to 

$60 a month, child care, and case management. Subsidized jobs may be 

State fiscal year: July 1-June 30

Budget cycle: Annual

TANF grant:a $164 million

75% MOE: $55 million

Case assistance caseload:b

 82,000 families in 1995 

 26,000 families in 2000

 69 percent decline
Appendix V

Louisiana

Page 86 GAO-01-828 Welfare Reform

provided where unemployment is high in order to help meet work 

participation requirements. To provide a financial incentive to work, 

families who obtain unsubsidized jobs may continue to receive their full 

cash assistance payments for 6 months, if their earnings are within certain 

limits. When their earnings make them ineligible for monthly cash 

assistance, they may receive 12 months of transitional medical and child 

care assistance. 

For needy children who are not in the care of their parents, Louisiana 

instituted a kinship care program in March 2000. Under this program, 

needy children are eligible for a monthly cash payment if they are legally in 

the care of relatives other than their parents, and if the relatives’ income is 

less than 150 percent of the federal poverty level. In July 2000, the state 

expanded its teen pregnancy prevention efforts, in line with the new TANF 

goals.

A single state agency in Louisiana administers both FITAP and FIND Work. 

State staffs working out of offices in the local parishes1

 throughout the 

state process applications and determine eligibility for cash assistance 

payments that are made electronically. Work-related activities and other 

services are provided under contracts with the state agency.

Supplantation in the 

State Budget

We found little evidence of supplantation in Louisiana’s budget since TANF 

was enacted. A state-funded teenage pregnancy prevention program was 

moved to the state social services agency in state fiscal year 2000, 

expanded statewide, and funded with $3.5 million in TANF funds instead of 

state funds. The freed-up state funds were used on other state priorities.

According to senior budget officials, the lead TANF agency in the state—

the Department of Social Services (DSS)—controls the use of the federal 

TANF funds in the budget process. Senior DSS officials said that they have 

been very concerned about the perception federal oversight authorities 

might get of Louisiana if the stateLouisiana used the TANF funds to replace 

state funds—even if the rules allowed it. The executive budget office and 

the legislature have largely deferred to the agency when budgeting for 

TANF. 

1

Parishes are similar to counties in that they are a subunit of government.
Appendix V

Louisiana

Page 87 GAO-01-828 Welfare Reform

State budget officials said that state general funds for social services are 

relatively scarce, and there are very few programs financed with state 

funds that are not already being used to match federal funds in other 

programs or to meet the TANF maintenance-of-effort requirement. Given 

the span of control of DSS, there is little incentive for the agency to look 

outside its own budget for programs that could be financed with TANF 

funds. Thus, the cautious approach to replacing state funds with TANF 

funds is due, in part, to the limited role played by the state budget office 

and the legislature in directing the use of the TANF funds to other areas 

within the state budget.

Spending Trends From 

1995 to 2000

Figure 7: Louisiana’s TANF-Related Expenditures for State Fiscal Years 1995 and 

2000

To assess how state budget decisions might have affected spending, we 

collected data on how Louisiana uses state and federal funds to finance its 

TANF-related social services expenditures. The results are grouped into 

four categories, as shown in figure 7 and described further in appendix I. 

0

500

1,000

1,500

2,000

2,500

3,000

State

Federal

Basic welfare 

services

Support for 

working poor

Support for

working poor +

healthcare

TANF-related

social services

95 00 95 00 95 00 95 00

1995 dollars in millions
Appendix V

Louisiana

Page 88 GAO-01-828 Welfare Reform

Each category is identified on the graph by two bars—one for spending that 

occurred in state fiscal year 1995 and one for spending that occurred in 

state fiscal year 2000. From left to right, the categories are cumulative. 

Expenditures for cash assistance and employment training are included in 

expenditures for support of the working poor. These expenditures in turn 

are included in expenditures for support of the working poor plus health 

care. Finally, all expenditures are included in social services expenditures.

Spending of combined state and federal funds for cash assistance and job 

training in Louisiana has declined by 21 percent in real terms from 1995 

through 2000 as the number of families receiving cash assistance has fallen. 

The state’s investment has declined from $69 million to $55 million—a real 

drop of 28 percent. The state’s share of total expenditures slipped declined 

from 23 percent in state fiscal year 1995 to 21 percent in 2000. Federal 

funds make up the difference and continue to support most of the costs of 

cash assistance and job training in Louisiana, as is evident in table 15. 

Table 15: Louisiana’s TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

Real gains are shown in total spending on programs that support the 

working poor by helping low-income families transition—or stay—off 

public assistance. In addition to FITAP, these services include child care, 

transportation subsidies, and employment services. Total spending rose by 

nearly $60 million—a real gain of about 2 percent. Driving this trend is 

increased spending on child care, which more than tripled from 1995 

through 2000. However, the state used federal funds to finance most of this 

increase. While state spending remained virtually unchanged in nominal 

terms, it declined by about 7 percent in real terms. Again, the state’s share 

Dollars in millions

Nominal

Real 

(expressed in 1995 dollars)

1995 2000 1995 2000

Basic welfare services

Total funds $305 $263 $305 $240

State funds $69 $55 $69 $50

Support for the working poor

Total funds $522 $581 $522 $530

State funds $117 $120 $117 $109
Appendix V

Louisiana

Page 89 GAO-01-828 Welfare Reform

of total expenditures has slipped declined from 23 percent in state fiscal 

year 1995 to 21 percent in 2000.

Total spending on traditional welfare programs, supportive services for the 

working poor, and their related health care costs grew by about 2 percent 

in real terms from 1995 through 2000. In nominal dollars total expenditures 

increased from $2.1 billion to $2.3 billion, as shown in table 16. State 

spending rose by nearly $100 million—or 8 percent in real terms. Federal 

spending stayed relatively constant in real terms. The relative shares of the 

costs of these programs changed as a result. The state now finances about 

28 percent of these programs, but in 1995 it financed about 26 percent. 

Table 16: Louisiana’s TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

An upward trend is also evident when costs of child welfare and other 

social services such as those for substance abuse, mental health, and 

developmental disabilities, are included in the totals above. Total 

expenditures for all social services increased from $2.3 billion to 

$2.7 billion in nominal dollars from state fiscal years 1995 through 2000—

an increase of 5 percent in real terms. State spending increased by about 

13 percent in real terms. The state share of all these programs costs rose 

from about 28 percent in 1995 to about 31 percent in 2000.

Additional federal safety-net programs provide food assistance and 

supplemental security income for needy families and children in Louisiana. 

The federal government provided $634 million in food stamp benefits to 

low-income individuals in Louisiana in 1995 and $452 million in 2000. In 

addition, from 1995 to 2000, federal supplemental security income 

Dollars in Millions

Nominal

Real 

(expressed in 1995 dollars)

1995 2000 1995 2000

Support for the working poor plus health care

Total funds $2,083 $2,339 $2,083 $2,134

State funds $543 $643 $543 $587

TANF-related social services

Total funds $2,338 $2,681 $2,338 $2,446

State funds $663 $821 $663 $749
Appendix V

Louisiana

Page 90 GAO-01-828 Welfare Reform

payments increased from $715 million to $745 million, about 85 percent of 

which went to individuals under the age of 65.

Rainy Day Funds Louisiana has left a large share of its TANF funds unspent. As of 

September 30, 2000 Louisiana reported about $169 million in unspent TANF 

balances, more than the state’s annual block grant award and about 

26 percent of the cumulative TANF funds awarded to the state since 1996. 

(See table 17.) While these funds must remain in the U.S. Treasury until 

they are needed, state program officials said that they consider these 

balances to be a contingency fund. They added that they would use the 

funds to cover unexpected program costs in the event the appropriations 

estimates were too low. Budget officials told us that no study had been 

conducted on how much the state would need to maintain in a reserve in 

order to be able to finance its welfare program during an economic 

downturn. DSS budget officials said they were concerned about the impact 

a recession might have on the program’s budget and sought to set aside a 

significant TANF reserve to ensure that the state had access to additional 

program funds. While DSS did not establish a specific balance for its 

reserve, budget officials believe that now that it has reached the level of the 

state’s annual block grant they might have a better chance of making their 

case in the legislature for using more of the future grants to create new 

programs or expand existing programs.

Table 17: Unspent TANF Funds in Louisiana as of September 30, 2000

Source: HHS’ Administration for Children and Families.

State program and budget officials acknowledge that the budget climate in 

the state makes it very difficult to raise spending for social services even if 

the state can use federal funds to finance the programs. Once new 

programs are enacted they create new constituencies that will continue to 

demand services. These officials expressed concerns that if federal 

funding were ever reduced or some restrictions placed on the block grant 

Dollars in millions

Unobligated

TANF funds

Unliquidated

obligations of

 TANF funds

Total unspent

funds

Unspent funds as a

percent of annual

TANF grant

$169 0 $169 103.1%
Appendix V

Louisiana

Page 91 GAO-01-828 Welfare Reform

that affected the state’s flexibility, the state would have to find a way to 

finance the program with its own funds.

State program officials said that they have known for some time that in 

order to spend more of the TANF funds that were available on a declining 

caseload, they would have to expand programs or create new programs 

and services to help FITAP families transition into the workforce. They 

also said that it is very difficult to get the legislature to act on these 

requests. For example, they said it took 3 years to negotiate an increase in 

the monthly cash grant for a family of three from $190 to $240. This 

increase, which took place in state fiscal year 2000 was the first increase in 

grant levels since 1981. Based on current caseload projections this 

increase in the cash grant was expected to cost an additional $18.6 million 

per year and was funded entirely with federal TANF funds. During the same 

fiscal year the state expanded access to its subsidized child care program—

at a cost of $24 million, financed entirely with TANF funds—that was 

expected to serve an additional 8,000 eligible children.

Although legislative analysts disagreed with the department’s assessment 

that the legislature has opposed expanding the use of TANF funds, they 

acknowledged that there is a conservative political environment in the 

state. They added, however, that they plan to begin pressing DSS to 

explore more options for spending the state’s TANF resources and for 

slowing the growth in unspent balances.
Page 92 GAO-01-828 Welfare Reform

Appendix VI

Maryland ApendxiVI

Background 

a

Caseloads as reported to HHS for January 1995 and June 2000 and rounded to the nearest 

thousand.

Maryland’s welfare reform effort, known as the Family Investment Program 

(FIP), was initiated in October 1996. The program represents a major shift 

from an income maintenance focus to one that seeks to promote family 

independence through work, personal and family responsibility, and 

community involvement.

To receive cash assistance under FIP, adults in eligible families must be 

willing to seek work immediately. The maximum cash assistance level for a 

family of three is $439 a month, an amount that has increased since passage 

of TANF to keep pace with inflation. Medical assistance coverage is 

automatic for families receiving cash aid. Needy families with children 

whose adjusted incomes are below the monthly cash assistance levels are 

eligible for FIP. 

Support services available to FIP families vary by county and may include 

transportation, child care, referral to family planning, and substance abuse 

treatment in addition to assessment, job search, and employment services. 

In place of monthly cash assistance, diversion payments are available to 

eligible families, according to policies established by each county. After 3 

months of cash receipt, a working family may receive child care and 

medical assistance for up to 12 additional months. 

Working low-income families may be eligible for the state’s earned income 

tax credit. Separate, state-funded programs are offered for needy twoparent families, legal immigrants not otherwise eligible for TANF, children 

in the care of relatives who are not their parents, and certain other groups. 

These programs, and the state’s earned income tax credit (EITC), are used 

toward the state’s MOE.

State fiscal year: July 1-June 30

Budget cycle Annual

TANF grant: $229 million 

75% MOE: $177 million 

Cash assistance caseload:a 81,000 families in 1995 

29,000 families in 2000

64 percent decline
Appendix VI

Maryland

Page 93 GAO-01-828 Welfare Reform

A single Maryland state agency supervises FIP, which is administered at the 

local level by county social service agencies and by contract with 

nonprofits and other organizations. In addition to FIP, TANF funds are 

used to support a broad array of other programs. These include programs 

that provide work opportunities for youth, summer activities designed to 

lower school drop-out rates, home visits with expectant parents who are at 

risk of welfare dependency, family support centers, independent living 

skills for teen parents, family preservation, and other child welfare 

services.

Supplantation in the 

State Budget

In preparing the FIP budget for state fiscal year 2001, the state sought to 

replace state funding in a variety of program accounts with federal TANF 

funds. However, instead of using the freed-up state funds for other 

spending priorities Maryland set them aside in the Dedicated Purpose 

Account—essentially a rainy day fund that can only be spent on programs 

for low-income families. State budget officials suggested that substituting 

state funds with TANF funds in this way was a more fiscally prudent 

approach for using their unspent TANF balances than spending all savings 

on expanding programs and services. They said that their decision was 

rooted in concerns that Congress would recategorize the block grant and 

restrict state flexibility, or rescind TANF funds left unspent by the states. 

There was also concern that the TANF block grant might be reduced in 

reauthorization, and if this occurred, the state could be left with high 

expectations and demands for services previously funded with federal 

dollars that would have to be continued with state dollars. These concerns, 

coupled with the desire to prepare for economic contingencies, motivated 

the state to consider using unspent TANF funds to replace state funds 

which were then set aside in the Dedicated Purpose Account.

Maryland’s fiscal year 2001 budget used $30 million in federal TANF dollars 

to continue several programs formerly supported with state funds. A state 

budget official said that if the FIP caseload and expenditures remain stable, 

then there will be sufficient TANF funds available over the next 2 years to 

continue to finance these programs and to allow the state to deposit its 

freed-up funds in the Dedicated Purpose Account. The state also 

retroactively adjusted its state fiscal year 2000 appropriations and 

authorized a shift of $22.3 million in state funds out of several child welfare 

and pregnancy prevention programs. 
Appendix VI

Maryland

Page 94 GAO-01-828 Welfare Reform

Spending Trends From 

1995 to 2000

Figure 8: Maryland’s TANF-Related Expenditures for State Fiscal Years 1995 and 

2000

To assess how state budget decisions might have affected spending, we 

collected data on how Maryland uses both state and federal funds in its 

TANF-related social services programs. The results are grouped into four 

categories, as shown in figure 8 and described further in appendix I. Each 

category is identified on the graph by two bars—one for spending that 

occurred in state fiscal year 1995 and one for spending that occurred in 

state fiscal year 2000. From left to right, the categories are cumulative. 

Expenditures for basic welfare services like cash assistance and 

employment training are included in expenditures for support of the 

working poor. These expenditures in turn are included in expenditures for 

support of the working poor plus health care. Finally, all expenditures are 

included in TANF-related social services expenditures.

0

500

1,000

1,500

2,000

2,500

3,000

State

Federal

Basic welfare 

services

Support for 

working poor

Support for

working poor +

health care

TANF-related

social services

95 00 95 00 95 00 95 00

1995 dollars in millions
Appendix VI

Maryland

Page 95 GAO-01-828 Welfare Reform

Spending on basic welfare services in Maryland has been cut from 

$417 million in state fiscal year 1995 to $257 million in 2000 as a direct 

result of the smaller caseload. (See table 18.) In real terms, spending has 

declined 44 percent, despite higher monthly cash assistance payment levels 

for FIP families. Before welfare reform was enacted, the state contributed 

about 41 percent of the expenditures in these areas. Since welfare reform 

was enacted, however, the state’s and counties’ contributions for cash 

assistance and job training has dropped to 32 percent. 

Table 18: Maryland’s TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

The spending decline is less steep when programs that provide support for 

the working poor are also considered. In this category, spending slipped 

from $837 million in 1995 to $835 million in 2000 in nominal dollars. 

Adjusted for inflation, this represents a decline of 9 percent. In line with the 

state’s decision to make child care more affordable and accessible, child 

care spending has grown by $47 million so that it nearly equals spending on 

cash assistance. Since 1995, Maryland’s share of spending on these 

programs has declined by about 4 percent.

When we include health care expenditures in our analysis, the trend is 

reversed—total spending increases from $1.2 billion to $1.5 billion over the 

same time period. (See table 19.) This represents an increase in real terms 

of about 16 percent. Combined federal-state spending on health care for 

the working poor as well as those in FIP has nearly doubled to $695 million. 

Since 1995, Maryland’s share of all spending on basic welfare services, 

support for the working poor, and health care has declined only slightly—

by about 1 percent.

Dollars in millions

Nominal

Real 

(expressed in 1995 dollars)

1995 2000 1995 2000

Basic welfare services

Total funds $417 $257 $417 $ 234

State funds $170 $ 81 $170 $74

Support for the working poor

Total funds $837 $835 $837 $762

State funds $377 $345 $377 $315
Appendix VI

Maryland

Page 96 GAO-01-828 Welfare Reform

Table 19: Maryland’s TANF-Related Expenditures

Source: GAO survey and analysis of state fiscal survey.

An upward trend in total spending is also evident when costs of child 

welfare, juvenile justice, and other social services such as services for the 

developmentally disabled, substance abuse treatment, and mental health 

services are included in the totals above. Expenditures for all TANFrelated social services increased from $2.3 billion to $2.9 billion in nominal 

dollars from state fiscal year 1995 to state fiscal year 2000. In real terms, 

this represents an increase of 17 percent. On average for all services 

included in our survey, Maryland funds about 54 percent of costs, down 

about 3 percent since welfare reform was enacted.

Additional federal safety-net programs provide food assistance and 

supplemental security income for needy families with children in Maryland, 

but they are not shown in figure 8. The federal government provided

$366 million in food stamp benefits to low-income individuals in Maryland 

in 1995, and $204 million in 2000. In addition, from 1995 to 2000, federal 

supplemental security income payments increased from $333 million to 

$411 million in nominal dollars—about 80 percent of these benefits went to 

individuals under 65 years of age.

Rainy Day Funds Maryland is the only state in our study to set aside state funds rather than 

federal funds for economic contingencies. As early as 1997, Maryland 

placed $15.7 million of its state general funds in the Dedicated Purpose 

Account for welfare programs, and in 2001, the state deposited an 

additional $52 million in state funds into this account. But as previously 

Dollars in millions

Nominal

Real 

(expressed in 1995 dollars)

1995 2000 1995 2000

Support for the working poor plus health care

Total funds $1,208 $1,530 $1,208 $1,396

State funds $560 $689 $560 $628

TANF-related social services

Total funds $2,261 $2,897 $2,261 $2,644

State funds $1,273 $1,552 $1,273 $1,416
Appendix VI

Maryland

Page 97 GAO-01-828 Welfare Reform

noted, Maryland found a way to transfer the costs of saving state funds to 

the federal government. 

As with states that set aside a portion of their federal TANF block grant 

funds for a rainy day, the levels of Maryland’s reserves do not appear to be 

based on any sort of contingency planning or analysis. While an economic 

model which forecasted how caseloads—and related costs—might respond 

under a variety of economic scenarios was presented to the legislature, a 

senior budget official acknowledged that the amount deposited in the 

Dedicated Purpose Account was based on the amount of state funding that 

could be replaced with federal TANF funds.

In Maryland there are several safeguards in place to help ensure that these 

funds remain in reserve until they are needed to finance budget shortfalls in 

welfare programs. The executive branch must get legislative approval for 

any appropriation from the fund, and under state statute, funds deposited 

to a dedicated purpose reserve must be spent on purposes for which the 

fund was established. If, after 4 years, the funds are not spent, they revert 

to the state’s general purpose rainy day fund. However, the state can 

reauthorize the dedicated reserve fund for an additional four years, as it did 

with the original $15.7 million deposited to the fund in 1997. Senior budget 

officials said that they expect the state legislature to continue to 

appropriate these funds for their designated purpose—the state’s welfare 

program.

Although Maryland has shifted TANF funds into various state programs 

outside of FIP, the state has accumulated significant reserves of unspent 

TANF funds, representing 45 percent of its annual grant. See table 20 for 

the TANF funds that the state reported as unspent through September 20, 

2000.

Table 20: Unspent TANF Funds in Maryland as of September 30, 2000

Source: HHS’ Administration for Children and Families.

Dollars in millions

Unobligated

TANF funds

Unliquidated obligations

of TANF funds

Total unspent

funds

Unspent funds as a

percent of TANF

annual grant

$49.5 $54.2 $103.7 45.3%
Appendix VI

Maryland

Page 98 GAO-01-828 Welfare Reform

Amounts reported as unobligated are due in large part to delays in getting 

the new program up and running and to the larger than expected drop in 

the number of families the program is serving, according to a senior budget 

official. Funds reported as unliquidated are due primarily to the structure 

of the state’s operation and its reliance on county social service agencies 

and other contractors for the provision of services. 

Unlike other states with county-administered welfare programs, Maryland 

records obligations of TANF funds only when the counties enter into 

contracts for specific services or have been billed for services already 

provided. Many local social service offices were not ready for the 

significant changes required by welfare reform, and they were slow to start 

spending the federal and state funds that were available. Even after these 

programs were established, the program management inexperience of 

many local social service personnel contributed to delays in disbursing 

funds. 

In developing the state’s 2001 budget, Maryland included about $160 million 

in unspent TANF funds in addition to its annual block grant. The state 

dramatically increased spending on child care by raising the income 

eligibility requirements and thereby allowing more families access to the 

subsidies. State officials said that these budget actions, once fully 

implemented, should succeed in drawing down the unspent TANF 

balances. In fact, according to budget estimates, the state’s basic TANF 

grant is not sufficient to sustain this level of funding in future years. If 

budget forecasts prove accurate, some analysts predict the state will have 

to cut back some funding from these new programs or increase the levels 

of general funds it contributes to maintain the programs’ funding levels.
Page 99 GAO-01-828 Welfare Reform

Appendix VII

Michigan ApendxiVI

Background

a

Michigan received an additional $3 million in federal TANF funds in 2000 as a bonus for work-related 

program outcomes and $20 million in both 1999 and 2000 for reductions in out-of-wedlock births.

b

Caseloads as reported to HHS for January 1995 and June 2000 and rounded to the nearest 

thousand.

Under a series of waivers of federal rules, Michigan initiated its welfare 

reform program from 1992 through1996 through incremental policy 

changes applied to a research and demonstration project. The statewide 

program that resulted in October 1996 from these early experiments 

consists of two components: a cash assistance component called the 

Michigan Family Independence Program (FIP) and an employment and 

training component called Work First. As the name implies, the program is 

guided by work-first principles, and seeks to help families achieve the 

maximum possible self-support and independence.

To receive cash assistance, the adult in the family must participate in work 

or related activities within 2 months of enrollment unless he or she meets 

established criteria for deferrals from work requirements. The maximum 

amount of cash assistance paid has not changed since passage of TANF and 

is $459 per month for a family of three living in Wayne County, the state’s 

most populous county. Needy families with children whose adjusted 

incomes are below the monthly cash assistance levels are eligible for the 

program. Once they become eligible, there is no time limit on families’

receipt of cash assistance, because families in need of assistance will be 

supported with state funds when federal TANF funds can no longer be 

used. In addition to cash assistance, families may receive up to $50 in child 

support collected by the state agency on their behalf.1

State fiscal year: October 1-September 30

Budget cycle: Annual

TANF grant:a $775 million 

75% MOE: $469 million

Cash assistance caseload:b 207,000 families in 1995

71,000 families in 2000

66 percent decline

1

The remainder is retained by the state and federal governments as reimbursement for cash 

assistance payments made to these families.
Appendix VII

Michigan

Page 100 GAO-01-828 Welfare Reform

After attending orientation and signing a personal responsibility plan and 

family contract, program participants are assigned to job search, 

subsidized work, or other activities. To make it possible for participants to 

work or attend other required activities, they may receive case 

management services, emergency assistance, transportation, subsidized 

child care, rental subsidies for up to 2 years, and individual development 

accounts for future education or home ownership. These services and 

benefits are supported with TANF funds and are also available to families 

with incomes below 200 percent of the federal poverty level who are not 

enrolled in the program. When program participants find work and no 

longer need cash assistance, they remain eligible for transitional childcare 

and medical assistance.

Outside of the program, TANF funds are used for several activities that are 

designed to help prevent poverty, promote child welfare by allowing 

children to remain in their own homes, and encourage family formation. 

These include state’s supplemental security income payments, family 

preservation and support services, and family planning and teen pregnancy 

prevention efforts. They also include subsidies to families with incomes up 

to $60,000 to allow them to care for their disabled children in their homes 

and subsidies to families with incomes under 500 percent of the federal 

poverty level who adopt special needs children. In addition, Michigan 

helps families with incomes below 80 percent of median income levels 

obtain affordable housing by subsidizing down payments and repairs. 

Michigan’s program is operated by two state agencies. One agency 

provides cash assistance directly to welfare recipients and the other 

develops agreements with local providers, called Michigan Works! 

Agencies, for employment and training services. 

Supplantation in the 

State Budget

Since 1998, Michigan has used TANF funds to replace about $126 million of 

state funds in a variety of state programs. For example, according to a 

legislative fiscal analysis, in 1998 the state shifted about $34 million in 

general funds out of about 10 program accounts and replaced these funds 

with federal TANF funds, and in state fiscal year 1999 the state found about 

$46 million in seven additional programs. In the single largest example of 

supplantation, the state began using $27 million in TANF funds in state 

fiscal year 2000 to finance a low-income homestead tax credit that had 

been financed with state funds since 1973, and the state funds were used to 

finance other priorities.
Appendix VII

Michigan

Page 101 GAO-01-828 Welfare Reform

State budget officials said that even though the state has enjoyed healthy 

finances, it has been very difficult for the state agency administering FIP to 

get state funds beyond what is needed to cover the MOE requirement. As a 

result, a number of new welfare-related initiatives are funded with federal 

dollars. They added that the state’s policy is to maximize the use of federal 

funds whenever possible. Given this budget environment, when Michigan 

has to come up with additional state funds for the state agency, a senior 

budget official said they have to find ways to come up with general funds 

savings in order to offset the need for additional state resources. 

In state fiscal year 2000, Michigan had to finance a $160.7 million 

supplemental appropriations bill for the state agency administering FIP. 

About $80.6 million of this total were state funds which were needed to pay 

federal fines relating to its child support enforcement program, to increase 

food stamp compliance, and to cover certain child welfare activities funded 

in the prior fiscal year with TANF funds but not allowed under the final 

TANF rules. State officials said that there was little political appetite in 

Michigan to begin new programs that would require outlays of state funds. 

The supplemental bill requiring additional state funds helped set the stage 

for the state fiscal year 2001 budget debate. Since a provision in TANF law 

limits what a state can count toward their MOE requirement, Michigan 

claimed only a portion of the homestead credit to count towards its MOE 

requirement. This provision, called the “new spending test,” stipulates that 

when states use expenditures on programs that were not part of the old 

AFDC programs to count towards its MOE requirements, they can only use 

those expenditures that represent an increase over what the state spent on 

the programs in the base year of 1995. State budget officials argue that this 

penalizes Michigan compared to other states for having a low-income tax 

credit before TANF was enacted; a state with no tax credit in existence 

could enact one using only TANF funds. As a result, these officials 

maintained that it was reasonable to expect Michigan to refinance its tax 

credit with TANF funds, putting the state on par with other—less 

generous—states. 
Appendix VII

Michigan

Page 102 GAO-01-828 Welfare Reform

Spending Trends From 

1995 to 2000

Figure 9: Michigan’s TANF-Related Expenditures for State Fiscal Years 1995 and 

2000

To assess how state budget decisions might have affected spending, we 

collected data on how Michigan used their federal and state funds to 

finance TANF-related social service expenditures. The results are grouped 

into four categories, as shown in figure 9 and described further in appendix 

I. Each category is identified on the graph by two bars—one for spending 

that occurred in state fiscal year 1995 and one for spending that occurred in 

state fiscal year 2000. From left to right, the categories are cumulative. 

Expenditures for cash assistance and employment training are included in 

expenditures for support of the working poor. These expenditures in turn 

are included in expenditures for support of the working poor plus health 

care. Finally, all expenditures are included in social services expenditures.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

State

Federal

Basic welfare 

services

Support for 

working poor

Support for

working poor +

health care

TANF-related

social services

95 00 95 95 00 00 95 00

1995 dollars in millions
Appendix VII

Michigan

Page 103 GAO-01-828 Welfare Reform

For cash assistance and job training, total spending has fallen from 

$1.6 billion to $1.0 billion. (See table 21.) Adjusted for inflation, this 

represents a decline of 42 percent. State spending2

 also declined from 

$835 million to $527 million in nominal dollars, for a drop of 42 percent in 

real terms. As a result, the state share of spending has remained relatively 

constant at about 51 percent since state fiscal year 1995. 

Table 21: Michigan’s TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

When spending on a broader array of programs that provide support for 

low-income families and the working poor is examined, the decline in total 

spending is less pronounced. In this broader area, combined federal-state 

spending remained relatively stable. (See table 21.) In real terms, this 

represents a decrease of 4 percent, but considering that cash assistance 

caseloads have fallen by nearly 66 percent, it suggests a strong 

commitment of resources to these programs. Notably, total expenditures 

increased by nearly $500 million in child care, $131 million in employment 

support and job training programs, and $67 million in housing assistance. 

Michigan’s share remained stable as well, with the state continuing to 

contribute about 50 percent of the costs of these activities. 

Spending on health care programs for this population, combined with 

support for the working poor, shows little change in either total spending 

2

In referring to state spending in this section, we include county generated funds that are 

used to count towards state match and MOE requirement.

Dollars in millions

Nominal

Real

(expressed in 1995 dollars)

1995 2000 1995 2000

Basic welfare services

Total funds $1,621 $1,031 $1,621 $941

State funds $835 $527 $835 $481

Support for the working poor

Total funds $3,401 $3,562 $3,401 $3,250

State funds $1,711 $1,778 $1,711 $1,622
Appendix VII

Michigan

Page 104 GAO-01-828 Welfare Reform

or in the composition of spending—state funds vs. federal funds (see table 

22). The state continues to finance about 48 percent of these programs.

Table 22: Michigan’s TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

Our survey also captured spending on a number of other social service 

programs that are geared towards meeting the needs of Michigan’s lowincome families and the working poor. These programs include child 

welfare, mental health, and substance abuse programs—all programs that 

can benefit from TANF funding. Real spending increases are evident when 

these costs are included in the totals above. Total spending increased from 

$7.8 billion to $9.6 billion in nominal dollars—an increase of 13 percent in 

real terms from state fiscal years 1995 to 2000. Total spending on social 

services such as developmental disabilities, mental health, and substance 

abuse alone has increased by over $1 billion, whereas child welfare and 

juvenile justice increased by over $200 million. For all social services 

combined, state spending outpaced the federal spending. As a result, the 

state now pays a slightly higher share of the costs of these programs—

about 53 percent in 2000 compared with 52 percent in 1995. 

Additional federal safety-net programs provide food assistance and 

supplemental security income for needy families with children in Michigan, 

but are not shown in figure 9. The federal government provided 

$807 million in food stamp benefits to low income individuals in Michigan 

in 1995, and $338 million in 2000. At the same time, federal supplemental 

security income payments increased from $878 million to $997 million in 

nominal dollars—about 89 percent of these benefits went to individuals 

under 65 years of age.

Dollars in millions

Nominal Real

1995 2000 1995 2000

Support for the working poor plus health care

Total funds $5,973 $6,480 $5,973 $5,912

State funds $2,853 $3,095 $2,853 $2,824

TANF-related social services

Total funds $7,783 $9,633 $7,783 $8,790

State funds $4,006 $5,066 $4,006 $4,623
Appendix VII

Michigan

Page 105 GAO-01-828 Welfare Reform

Rainy Day Funds Michigan does not have a TANF-specific rainy day fund. However, the state 

does have a large general fund reserve—the Budget Stabilization Fund. As 

of September 30, 2000, the fund had a balance of $1.3 billion. This fund is 

available to finance the state’s spending needs during an economic 

downturn when state revenues fall short of expectations, including any 

shortfalls in the state’s TANF program. State officials said that during the 

recession in the early 1990s, most state departments were required to cut 

back spending. The Budget Stabilization Fund was used to minimize the 

degree to which cuts were needed. The state welfare agency’s budget 

returned to prerecession baseline levels as soon as the fiscal crisis was 

over.

Officials told us the state’s decision to forgo a dedicated welfare reserve 

was influenced largely by its wish to avoid leaving any TANF funds unspent 

at the U.S. Treasury. In state fiscal year 2000-01 the governor proposed 

leaving nearly $85 million unbudgeted—although this is not strictly a rainy 

day fund, it would have been a source of funds the state could have used in 

a fiscal crisis. During the budget process, the state House of 

Representatives recommended establishing a $25 million rainy day fund 

reserve and increased spending on other TANF-related services to use the 

remaining $60 million the governor had left unbudgeted. However, the 

state Senate did not go along with that provision. A senior analyst with the 

state’s Senate Fiscal Agency said that concerns that unspent TANF funds 

might signal to the U.S. Congress that these funds were not needed 

prompted the state Senate to commit virtually all of the available TANF 

funding. The supplemental appropriations bill was also designed, in part, to 

reduce Michigan’s TANF surplus remaining in the U.S. Treasury—again 

because these balances had attained a heightened visibility and raised 

concerns that they might be rescinded by the U.S. Congress. 

Michigan administers its welfare program directly through its state offices 

and does not rely extensively on subgrantees or contractors to provide 

services. Those eligible for specific services generally deal directly with 

the Family Independence Agencies Offices around the state. As a result, 

the state does not record significant levels of TANF obligations that remain 

unliquidated for extensive periods. Table 23 shows the TANF funds that 

Michigan reported as unspent as of September 30, 2000.
Appendix VII

Michigan

Page 106 GAO-01-828 Welfare Reform

Table 23: Unspent TANF Funds in Michigan as of September 30, 2000

Source: HHS’ Administration for Children and Families.

Even though Michigan reports considerable levels of unobligated balances, 

this does not mean either that the state has no plans to use those funds or 

that these funds have been set aside in a rainy day fund. In fact, in state 

fiscal year 2000-01, the state appropriated almost its entire block grant and 

all TANF funds left unspent from earlier fiscal years. The final enrolled bill 

left only $500,000 unbudgeted out of more than $844 million in TANF funds 

available. The budget contains nearly $760 million to finance ongoing 

expenditures in the states’ welfare program and about $85 million to 

finance new projects such as a child care rate increase and teen parent 

counseling programs. Although these programs have been enacted and 

funded through the state’s appropriation process, the majority of the funds 

used will remain unobligated until the programs are established and 

incurring expenses. This is because the state will operate these programs 

directly and so cannot record an obligation of funds until they are actually 

expended.

State budget officials said that Michigan should be able to deal with 

increased caseloads, even within the existing state agency budget. Many of 

the new programs funded from the supplemental were one time initiatives, 

which adds flexibility to the state budget process, because if resources 

become tight in other programmatic areas the funds used to finance these 

one time initiatives could be used elsewhere. The officials added that, even 

though the budgets essentially authorized the expenditure of the entire 

TANF grant, the state would continue to carry forward some unused TANF 

funds which could be canceled and re-appropriated to more pressing needs 

at the state agency that operates FIP. 

In addition, budget analysts from both the legislative and executive branch 

in Michigan suggested that the state typically overestimates the resources 

needed for many of these new programs. It is unclear how many people will 

enroll in the new programs or even how much they will cost. Historically, 

analysts agree the state has not spent all TANF funds it has appropriated 

Dollars in millions

Unobligated

TANF funds

Unliquidated

Obligations of

TANF funds

Total unspent

funds

Unspent funds as a

percent of annual

TANF grant

$200.0 $14.1 $214.1 28%
Appendix VII

Michigan

Page 107 GAO-01-828 Welfare Reform

and they expected it is likely with these new programs as well so there will 

continue to be some level of unused TANF funds, even with the new 

expansions.
Page 108 GAO-01-828 Welfare Reform

Appendix VIII

New York ApendxiVI

Background

a

New York received an additional $8 million in federal TANF funds in 2000 as a performance bonus.

b

Caseloads as reported to HHS for January 1995 and June 2000 and rounded to nearest thousand.

New York launched its welfare reform program in August 1997 with the 

passage of state legislation creating the Family Assistance (FA) program. 

The goal of the program is to promote self-sufficiency by providing 

temporary and transitional assistance for needy families, along with 

services designed to increase employment and job retention. 

When families apply for FA, the adults are assessed to determine their job 

readiness. Those considered job ready are encouraged to seek work 

immediately. Under the state’s policy, families may receive cash assistance 

for up to 24 months before adults must obtain employment or participate in 

assigned activities, but localities may establish shorter time frames for job 

ready adults. The amount of cash assistance families can receive varies by 

location and family size. For example, in one downstate county a family of 

three may receive a maximum of $703 while in an upstate county the 

maximum is $499. These payment levels have not changed since the 

enactment of TANF. Families whose adjusted incomes are below cash 

assistance levels are eligible for FA. In addition to cash assistance, a family 

may receive up to $50 a month in child support collected on its behalf.1

 

Families who receive monthly cash assistance payments for the equivalent 

of 5 years are not eligible for receipt of TANF cash assistance, in 

accordance with the TANF law. 

Under a separate safety-net program supported by state and local funds, 

families who reach the 5-year time limit may continue to receive assistance, 

State fiscal year: April 1-March 31

Budget cycle Annual

TANF grant:a $2.443 billion

75% MOE: $1.719 billion

Cash assistance caseload:b 461,000 families in 1995

248,000 families in 2000

46 percent decline

1

The remainder is retained by the state and federal governments as reimbursement for cash 

assistance payments made to these families.
Appendix VIII

New York

Page 109 GAO-01-828 Welfare Reform

but the assistance is not paid in cash to the adults in these families. 

Instead, the assistance takes the form of payments made directly to 

landlords and utility companies to cover costs such as housing and heating. 

Recent immigrants who are ineligible for TANF cash assistance under 

TANF law, children living apart from adult relatives, and other needy 

individuals may also be eligible for the safety-net program. They may 

receive direct cash payments each month for up to 2 years, and 

subsequently, payments may be made to landlords and utility companies on 

their behalf, where deemed appropriate.

Provision of certain services to help families overcome barriers to selfsufficiency are mandated by the state, while other services vary in 

accordance with programs developed at the local level. The state requires 

that families be provided information on, and screening for domestic 

violence and that adults be screened and, if needed, treated for substance 

abuse. Under the state’s policy, family members may look for work for 

more than 6 weeks and may pursue 2 years of postsecondary education, 

although their participation in these activities does not count toward the 

work participation rates that states must achieve under TANF. For working 

families receiving cash assistance, subsidized child care is guaranteed, and 

it may be provided for other families with incomes up to 200 percent of 

poverty, depending on availability of funds and local agency policy. 

Families who find work and no longer receive monthly cash payments may 

continue to receive 12 months of transitional medical assistance. They may 

also be eligible for state and federal earned income tax credits or refunds 

and state child care tax credits or refunds. 

In addition to supporting the FA program, TANF funds are used to provide 

emergency, housing, and transportation assistance. They are also used for 

pregnancy prevention and family formation programs, in line with the new 

federal welfare goals, and for child welfare activities. 

Although the state oversees FA, it has devolved responsibility for program 

design and operation to local social service agencies in the state’s 57 

counties and New York City. The state supplements the localities’ basic FA 

programs with an appropriation funded entirely with TANF funds to 

provide other supportive services to help families avoid or ease their 

transition from public assistance. The localities must submit annual 

spending plans for social services for approval by the state agency that 

oversees these activities. To carry out their programs, the localities receive 

block grants from several state agencies to cover childcare, child welfare, 

employment and related services for TANF-eligible family members, and 
Appendix VIII

New York

Page 110 GAO-01-828 Welfare Reform

transitional services for families with incomes at or below 200 percent of 

poverty. Local agencies continue to be required to provide their share of 

funds to match state funds for basic cash assistance provided through the 

FA program in order to help meet the state’s MOE level. 

Supplantation in the 

State Budget

In 1997, we reported that New York used federal TANF funds to provide 

over $344 million in fiscal relief for the state and its counties. While it is 

possible for all states to replace state funds with federal funds once they 

meet their MOE requirement, in New York the level of fiscal relief possible 

depends on cost-sharing arrangements that were in place under the AFDC 

program and that continue under TANF. In New York, social services are 

provided by local government social service offices. These local offices 

provide services and then submit claims for reimbursement of those 

services to the state. Under the AFDC cost-sharing arrangements, the 

federal government paid 50 percent of the AFDC costs and the state and 

local governments shared the remaining costs equally. The state also had a 

general assistance program that provided support to individuals who were 

not eligible for the AFDC program, such as those who had no dependent 

children. The state and local governments also shared these costs. This 

arrangement continues under TANF; both the state and localities 

contribute equal shares towards the MOE requirement. Theoretically, once 

the MOE is met neither the state nor local governments need to make any 

further contributions and can rely on unspent TANF funds to finance the 

program for the rest of the year. However, caseloads have dropped, and the 

state has struggled to come up with enough expenditures to meet its MOE. 

Senior state budget officials said that this aspect of fiscal relief has been 

overemphasized in the budget debate and, in many respects, did not 

materialize as projected. In calculating the level of fiscal relief the new 

financing arrangement might bring, the budgets assumed relatively stable 

spending levels. That is, if the counties spent the same total amount, they 

could be reimbursed for a higher share of the total claim. New programs 

and services that could be offered to the ever-dwindling caseload were 

slow to start for a variety of reasons, which affected the new program’s 

outlay rates. As a result, total expenditures also fell—in line with a falling 

caseload—and the state found itself falling well short of the expenditures it 

would need to meet its MOE. 

The pressing fiscal issue in New York became one of how to meet the MOE 

under its cost-sharing arrangement. The state realized it would not meet 

its MOE requirement if expenditure rates continued at the current rate and 
Appendix VIII

New York

Page 111 GAO-01-828 Welfare Reform

it continued to reimburse counties with federal and state funds. Since the 

state operates on a cost-reimbursement basis with its localities, if the state 

were to have temporarily suspended the federal reimbursements, the effect 

would have been to pay for all costs with state and local funds making it 

easier to reach the state’s MOE. To resolve the potential MOE shortfall, the 

state halted any reimbursement to the localities for expenditures they 

made in the last quarter of the fiscal year. In so doing, the state counted all 

of the local expenditures toward the state’s MOE, but provided little in the 

way of fiscal relief to the counties. The state now monitors closely total 

expenditures and adjusts the federal share of the reimbursement to ensure 

that the state will meet its MOE each year.

While fiscal relief may not have materialized as a result of these costsharing arrangements, the state has been able to achieve significant fiscal 

relief in other ways. For example, as permitted by federal law, the state 

transfers TANF funds to the Social Services Block Grant (SSBG). State 

officials explain that, in the past, most of the SSBG funds were used to 

augment federal, state, and local funding for child welfare. In transferring 

TANF funds to SSBG for use in the child welfare system, the state has 

reduced the nonfederal share of these program costs considerably. Federal 

funds represented nearly 54 percent of child welfare program expenditures 

in state fiscal year 2000-2001 whereas the federal funds supported 

49 percent of spending on these programs in 1995. The state reports 

spending about $1.5 billion in total on child welfare programs in 2000. By 

shifting about 5 percent of those costs to the federal government, it realized 

savings of approximately $72 million.

More recently, however, the state has changed its approach to financing 

welfare programs. The state will maintain its traditional structure of 

reimbursing counties for basic welfare services and counting both the state 

and local share towards its MOE requirement. Beginning in state fiscal 

year 1997-1998, it created a number of new grants—funded exclusively 

with TANF funds—which provide resources to local social service agencies 

that they can use to develop new programs to serve the needs of both those 

still on the welfare rolls and those transitioning off the rolls. Under this 

new financing arrangement, the state and local share of total TANF 

program expenditures will decrease as the state maximizes use of federal 

funds. Because of fears that counties will take advantage of the flexibility 

of the TANF block grant and reduce their own commitment to some social 

service programs, the state prohibits counties from using any of the TANF 

funds to “supplant” their own spending on social services for needy 

families.
Appendix VIII

New York

Page 112 GAO-01-828 Welfare Reform

Spending Trends From 

1995 to 2000

Figure 10: New York’s TANF-Related Expenditures for State Fiscal Years 1995 and 

2000

To assess how state budget decisions might have affected spending, we 

collected data on how New York used state and federal funds to finance 

TANF-related social services. The results are grouped into four categories, 

as shown in figure 10 and described further in appendix I. Each category is 

identified on the graph by two bars--one for spending that occurred in state 

fiscal year 1995 and one for spending that occurred in state fiscal year 2000. 

From left to right, the categories are cumulative. Expenditures for cash 

assistance and employment training are included in expenditures for 

support of the working poor. These expenditures in turn are included in 

expenditures for support of the working poor plus health care. Finally, all 

expenditures are included in social services expenditures.

0

5,000

10,000

15,000

20,000

25,000

30,000

State

Federal

Basic welfare 

services

Support for

 working poor

Support for

working poor +

health care

TANF-related

social services

95 95 00 95 00 95 00 00

1995 dollars in millions
Appendix VIII

New York

Page 113 GAO-01-828 Welfare Reform

Table 24: New York’s TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

In New York, total expenditures in every category declined between state 

fiscal year 1995 and 2000. Spending on cash assistance, both to TANFeligible families and to those receiving safety-net assistance and enrolled in 

job training programs declined from $5.2 billion to $3.6 billion in nominal 

dollars. (See table 24.) Adjusted for inflation, spending on cash assistance 

and job training has declined 37 percent—in line with the drop in TANF 

caseloads. Although the state now finances a greater share of total 

expenditures,2

 this may be largely due to the struggles the state faced in 

meeting its MOE requirements. State officials concede that New York was 

slow to begin spending on new programs and, therefore, had to spend state 

funds first.

There has also been a decline in both federal and state funds spent on 

programs supporting the working poor which include child care, 

employment services, and other benefits as well as the cash assistance and 

job training described above. In state fiscal year 1995, the amount spent 

was $8.1 billion; by 2000, the amount was $6.7 billion in nominal dollars. 

This represents a decline of 25 percent in real dollars. Although less is 

being spent overall, the state’s share of expenditures in state fiscal year 

2000 is 5 percent higher than it was in state fiscal year 1995. (See table 24.)

Dollars in millions

Nominal

Real 

(expressed in 1995 dollars)

1995 2000 1995 2000

Basic welfare services

Total funds $5,188 $3,590 $5,188 $3,276

State funds $3,483 $2,534 $3,483 $2,312

Support for the working poor

Total funds $8,148 $6,659 $8,148 $6,076

State funds $5,380 $4,696 $5,380 $4,285

2

In referring to state spending in this section, we include county-generated funds that are 

used to count towards state match and MOE requirements.
Appendix VIII

New York

Page 114 GAO-01-828 Welfare Reform

We also tracked health care expenditures for our target population. (See 

table 25.) Including health care spending in our survey data does not 

change the picture. Total spending dropped 2 percent when adjusted for 

inflation. But the federal share of the costs of these programs increased by 

10 percent in real terms while state share decreased by 9 percent. As a 

result, the fiscal balance across this range of social services shifted 

significantly from 1995 to 2000. The state financed 61 percent of the costs 

of all these activities in 1995; in 2000 it financed 56 percent. 

Table 25: New York’s TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

The same trend holds when we broaden our survey to include other social 

services that are eligible for TANF funding—child welfare services, mental 

health programs, and substance abuse programs. Total spending declined 

by about 4 percent in real terms; state spending declined by about 

11 percent. The state share decreased from 63 percent in 1995 to 58 percent 

of program costs in 2000. 

Additional federal safety-net programs provide food assistance and 

supplemental security income for needy families with children in New 

York, but are not shown in figure 10. The federal government provided 

$2 billion in food stamp benefits to low income individuals in New York in 

1995, and $1.4 billion in 2000. In addition, from 1995 to 2000, federal 

supplemental security income payments increased from $2.1 billion to 

$2.7 billion in nominal dollars—about 73 percent of these benefits went to 

individuals under 65 years of age.

Dollars in millions

Nominal

Real 

(expressed in 1995 dollars)

1995 2000 1995 2000

Support for the working poor plus health care

Total funds $21,285 $22,910 $21,285 $20,904

State funds $12,955 $12,893 $12,955 $11,794

TANF-related social services

Total funds $26,133 $27,635 $26,133 $25,216

State funds $16,405 $16,045 $16,405 $14,640
Appendix VIII

New York

Page 115 GAO-01-828 Welfare Reform

Rainy Day Funds For its welfare reform program, the state has a dedicated reserve account 

called the New York Works compliance fund. The funds in this account are 

federal TANF dollars that the state has not budgeted for other TANFrelated purposes. These funds remain in the U.S. Treasury until the state 

needs them. Budget officials estimate that the balance in this fund was 

about $662 million as of September 30, 2000—the end of the last federal 

fiscal year. Under the state statute creating this fund, amounts are 

determined based on residual funds; it specifies that after making all 

authorized payments, any unspent TANF funds may be deposited to the 

compliance fund. Agencies that need additional funds can gain access to 

these funds with the approval of the state budget director. No legislative 

branch approval is required. The statute does not specify what criteria the 

state budget officer should use in deciding whether to grant an agency 

access to the fund.

In accordance with federal requirements, the TANF balances in the New 

York Works compliance fund are held in reserve at the U.S. Treasury. 

Federal regulations require states to report any TANF funds held for a rainy 

day as unobligated balances. (See table 26.) However, a significant share of 

what the state reports as unobligated is not part of the state’s rainy day 

fund because even though these funds are appropriated they are not 

obligated until the county has submitted a claim for reimbursement. Under 

federal regulations, the state must also report funds it will use to reimburse 

the counties for basic welfare services as unobligated until the state 

actually reimburses the counties for these expenditures. This is 

significantly different from the approach used in other county-administered 

welfare systems. (See appendix II for information on California and 

appendix III for information on Colorado.) In these states, funds are 

obligated when the state notifies the counties of their allocations. While 

even in these states federal regulations require that TANF funds remain at 

the U.S. Treasury until the counties need them for immediate expenditure, 

unspent TANF funds are recorded as an unliquidated obligation rather than 

simply an unobligated balance. 
Appendix VIII

New York

Page 116 GAO-01-828 Welfare Reform

Table 26: Unspent TANF Funds in New York as of September 30, 2000

Source: HHS’ Administration for Children and Families.

New York also reports a significant level of unliquidated obligations. Once 

the state determines the annual allocation levels for the new block grants 

to the counties, it can enter into an obligation for those funds. As in other 

states with county or contractor-administered welfare systems, this is a 

way in which the state reduces the level of unobligated TANF balances. 

State officials said that, in addition to ensuring that new program spending 

was predominately financed with federal funds, they were concerned that 

if they continued to report large unobligated balances, Congress might 

perceive that those funds were not needed by the state.

Dollars in millions

Unobligated

balance

Unliquidated

obligations

Total unspent

funds

Unspent funds as a

percent of annual

TANF grant

$761 $547 $1,308 53%
Page 117 GAO-01-828 Welfare Reform

Appendix IX

Oregon ApendxiIX

Background

a

Caseloads as reported to HHS for January 1995 and June 2000 and rounded to the nearest 

thousand.

Oregon was one of the earliest states to begin welfare reform, starting in 

1992 and going statewide with “Oregon Option” in July 1996 under federal 

waivers that remain in effect through June 2003. The program takes a 

“work-first” approach based on the state’s premise that work is better than 

welfare—which is temporary—and that all welfare recipients are capable 

of, and responsible for, making progress toward economic independence 

and family stability. 

To receive monthly cash assistance under the Oregon Option, adults must 

participate in work activities immediately. The maximum monthly 

assistance is $460 per month for a family of three, a level unchanged since 

1991. Needy families with children whose adjusted incomes are below the 

monthly cash assistance levels are eligible for the program. The list of 

work activities under the state’s waiver is broader than under TANF, and 

includes unlimited job search, education, and mandatory substance abuse 

and mental heath treatment as appropriate. Subsidized work is available, 

so some participants placed in temporary private sector jobs may receive 

subsidized wages instead of cash assistance and earn money in an 

individual account for their future education. Adults may receive cash 

assistance for no more than 24 out of 84 months, but under the state’s 

waiver the time they spend in work activities does not count toward the

24-month limit. Families in crisis may receive diversion payments or 

services such as child care, transportation, or work tools in lieu of monthly 

cash assistance.

Program participants who find work and go off cash assistance may receive 

subsidized child care, called Employment Related Day Care (ERDC), and 

medical services under the Oregon Health Plan if they meet the eligibility 

criteria. Both were initiated prior to TANF and serve the state’s lowState fiscal year: July 1-June 30

Budget cycle: Biennial

TANF grant: $168 million 

75% state MOE: $92 million 

Cash assistance caseload:a 40,000 families in 1995 

17,000 families in 2000 

58 percent decline
Appendix IX

Oregon

Page 118 GAO-01-828 Welfare Reform

income working poor. ERDC is available for families earning less than 

185 percent of poverty. Income limits are higher for ERDC than for the 

Option Program, and families participating in the state’s child care program 

are expected to contribute to the costs on a sliding scale, based on their 

incomes. The Oregon Health Plan is a demonstration program operating 

under a federal Medicaid waiver from 1994 through 2002. It is available to 

individuals with incomes up to 100 percent of the federal poverty level and 

to children in families with incomes up to 133 or 170 percent of poverty. 

The state human services agency administers the Oregon Option program 

through its branch offices and prime contractors in 15 districts. The 

branch offices determine eligibility, arrange for electronic payments of 

cash assistance, assess families’ needs, and refer families to local service 

providers. The prime contractors, such as community colleges and job 

training partnership agencies, provide training and job services directly and 

subcontract with local partner agencies for other services as needed. In 

2001 the state human services agency reorganized to provide more 

integrated management and services at both the state and local levels. 

In addition to supporting the Oregon Option program, TANF funds 

continue to be used for child welfare activities, such as family preservation, 

emergency care for children removed from their homes, and special foster 

care rates. In line with the new federal welfare goals, TANF funds are also 

used for pregnancy prevention and family formation programs statewide.

Supplantation in the 

State Budget

TANF funds used for the Oregon Option program and related activities 

appear to offer a greater variety of benefits and services to a greater 

number of families than might have been possible under AFDC. But the 

reduced cash assistance caseload also means that fewer TANF funds are 

needed to pay those benefits, which frees up more TANF funds that can be 

allocated to other state priorities. Since 1997, Oregon has used about

$122 million, or 18 percent, of its total TANF funds, to replace state funds in 

a variety of programs that serve low-income individuals and families. 

According to state officials, Oregon has increased state funding in other 

budget priorities serving these same beneficiaries. 
Appendix IX

Oregon

Page 119 GAO-01-828 Welfare Reform

State officials said that Oregon began its welfare reforms early and invested 

more state funds in its employment programs and ERDC than required to 

obtain the maximum federal matching grants. According to these officials 

when the state’s investment paid off and families started to become more 

self-sufficient and left the caseloads, less funding was needed to support 

the program. For example, in April 1999, the Governor’s recommended 

budget was adjusted to take into account lower utilization rates projected 

for the state’s EDRC child care program.1

 As a result of the lower 

projections, the state found that it had “over budgeted” the ERDC program 

by nearly $40 million. Oregon found that it could use the TANF funds to 

replace state general fund dollars in several other programs. In turn, the 

state general funds that were freed up helped support a $400 million 

increase in Oregon’s support for K-12 education programs.

State officials emphasize that Oregon is able to meet its MOE requirement, 

despite shifts in funding, because the state continues to spend generously 

on services for needy families and individuals. Furthermore, even though 

K-12 expenditures are generally not allowable MOE expenditures, these 

officials argue that by shifting some state funds away from the Oregon 

Option program and into education they are investing in a prevention 

strategy that will help reduce poverty in the long run by ensuring that the 

next generation has the skills needed to enter the job market. 

State officials said they have maintained their commitment to the state’s 

poor by continuing to finance the Oregon Option Program that has proven 

very successful at reducing dependency on public assistance. Also they 

have maintained their commitment to improved access to health care 

through the Oregon Health Plan that serves many who would otherwise be 

ineligible, such as families not meeting the Medicaid income test, childless 

couples, and the elderly. 

State officials also suggest that in freeing up state funds, Oregon was able 

to fund a variety of new programs and enhancements that would not 

otherwise have been funded. Examples include a $14.3 million program to 

provide services for high-risk youth, an $8 million expansion to the state’s 

alcohol and drug treatment program, and an $8 million expansion to a 

1

Funds for Oregon Option and other state programs and services are appropriated by the 

state legislature every 2 years when the legislature meets and acts on its biennial budget. 

When the legislature is not in session, adjustments to the authorized spending levels can be 

made by the legislature’s Emergency Board—this process is called rebalancing.
Appendix IX

Oregon

Page 120 GAO-01-828 Welfare Reform

variety of early childhood development programs. The officials 

acknowledged that because money is fungible, it is impossible to say 

precisely which programs were funded with the freed up funds, but they 

emphasize that new state spending would have been very difficult in the 

absence of budgetary tradeoffs that reduced state funding of the Oregon 

Option program.

Welfare advocates agree that Oregon invested state funds early and on its 

own initiative to support the Oregon Option program, the Oregon Health 

Plan, and subsidized child care. They disagree, however, about the current 

level of funding needed to continue the programs. They believe that 

continued reliance on caseload reduction to measure success in the 

program is misplaced. They note that although the state’s poverty rate is 

about the same as it was in 1995, the state’s population is growing, so the 

number of families eligible for cash benefits must be increasing. The 

advocates believe the state should focus its efforts on reaching these 

families that are eligible but are not receiving assistance. Further, they 

note that many of the families who remain in the Oregon Option program 

are among the hardest to serve and need more services than are currently 

provided. 
Appendix IX

Oregon

Page 121 GAO-01-828 Welfare Reform

Spending Trends From 

1995 to 2000

Figure 11: Oregon’s TANF-Related Expenditures for State Fiscal Years 1995 and 

2000

To assess how state budget decisions might have affected spending, we 

collected data on how Oregon used state and federal funds to finance 

TANF-related social services. The results are grouped into four categories, 

as shown in figure 11 in line with a methodology described further in 

appendix I. Each category is identified on the graph by two bars—one for 

spending that occurred in state fiscal year 1995 and one for spending that 

occurred in state fiscal year 2000. From left to right, the categories are 

cumulative. Expenditures for cash assistance and employment training are 

included in expenditures for support of the working poor. These 

expenditures in turn are included in expenditures for support of the 

working poor plus health care. Finally, all expenditures are included in 

social services expenditures.

0

2,000

4,000

6,000

8,000

10,000

12,000

State

Federal

Basic welfare 

services

Support for 

working poor

Support for

working poor +

health care

TANF-related

social services

95 00 95 00 95 00 95 00

1995 dollars in millions
Appendix IX

Oregon

Page 122 GAO-01-828 Welfare Reform

Our review of state expenditures shows a marked decline in total spending 

on basic welfare services. Total spending on these programs declined 

about 45 percent in real terms since 1995. (See table 27.) But the state 

realized greater savings overall; real state spending declined by 82 percent 

while federal spending on these programs declined 27 percent in real 

terms. In 2000, Oregon financed 10 percent of these programs’ costs, 

compared to the 32-percent share the state financed before welfare 

reforms. 

Table 27: Oregon’s TANF-Related Expenditures

Source: GAO survey and analysis of the state expenditure data.

While the cash assistance caseload has declined, programs that provide 

transitional welfare services—such as case management and the ERDC 

program—have experienced caseload growth, according to state 

documents. Our expenditure survey data confirm this observation. 

Although total spending declined dramatically (45 percent) in traditional 

welfare programs, spending on programs that broadly support the working 

poor declined by about 12 percent in real terms. However, the state 

continued to realize substantially more real savings than the federal 

government. As the state continued to shift its resources out of these 

programs, it has created a new fiscal balance. Before welfare reform, the 

state financed about 29 percent of the costs of programs broadly 

supporting the working poor and used federal funds to finance about 

71 percent. In state fiscal year 2000, it financed 22 percent of the costs and 

uses federal funds to finance the rest. 

State officials claim that the successes Oregon has achieved in its Oregon 

Options program have permitted it to transfer savings realized from a 

Dollars in millions

Nominal

Real

(expressed in 1995 dollars)

1995 2000 1995 2000

Basic welfare services

Total funds $255 $155 $255 $141

State funds $81 $16 $81 $15

Support for the working poor

Total funds $446 $430 $446 $392

State funds $130 $97 $130 $88
Appendix IX

Oregon

Page 123 GAO-01-828 Welfare Reform

smaller caseload to other programs, such as the Oregon Health Plan. 

Indeed, looking at expenditures on programs that support the working 

poor as well as health care costs related to these same individuals and 

families shows a dramatic increase in spending. Total spending rose 

72 percent in real terms from 1995 through 2000. (See table 28.) Real state 

spending rose about 81 percent, slightly more than federal spending, which 

increased 67 percent. State spending rose more than federal because, 

under Oregon’s Medicaid waiver, the state is covering individuals who are 

not categorically eligible for Medicaid. As a result of this shift, the state 

now finances a larger share of the costs associated with programs 

supporting the working poor and their related health care costs; the state 

share was about 34 percent in 1995 and 36 percent in 2000.

Table 28: Oregon’s TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

Our survey also captured spending on a number of other social service 

programs that are geared towards meeting the needs of states’ low-income 

families and the working poor. These programs include child welfare, 

mental health, and substance abuse programs. When considered along 

with other programs supporting the working poor, we see that spending on 

all these social service categories has risen about 61 percent since 1995. 

Driven largely by the expansions in the Oregon Health Plan, state spending 

on social services rose 65 percent and the federal spending rose 59 percent. 

Remarkably, despite the significant shifts in the way the state finances 

these programs, the federal-state fiscal balance has remained stable since 

1995. The state continues to finance about 39 percent of these programs 

and the federal government contributes about 61 percent.

Dollars in millions

Nominal

Real

(expressed in 1995 dollars)

1995 2000 1995 2000

Support for the working poor plus health care

Total funds $983 $1,849 $983 $1,687

State funds $334 $664 $334 $605

TANF-related Social Services

Total funds $1,303 $2,304 $1,303 $2,103

State funds $502 $909 $502 $829
Appendix IX

Oregon

Page 124 GAO-01-828 Welfare Reform

Additional federal safety-net programs provide food assistance and 

supplemental security income for needy families with children in Oregon, 

but are not shown in figure 11. The federal government provided 

$250 million in food stamp benefits to low-income individuals in Oregon in 

1995, and $174 million in 2000. In addition, from 1995 through 2000, federal 

supplemental security income payments increased from $181 million to 

$235 million in nominal dollars—about 85 percent of these benefits went to 

individuals under 65 years of age.

Rainy Day Funds Senior budget officials in Oregon said that the state’s policy is to spend all 

of its annual TANF grant, saving none of the federal moneys for a rainy day. 

Generally, state officials believe that cash assistance caseloads can be kept 

low if sufficient funds are invested in appropriate services to achieve 

families’ long-term self-sufficiency. They are committed to helping 

recipients find work, retain their jobs, and obtain the skills necessary to 

ensure their resiliency, even in a changing economy.

The state’s policy is to draw down all available funds, leaving nothing in 

reserve. Generally appropriation levels are set so that the full TANF grant 

will be spent. As with most states with biennial budgets, the “rebalancing 

process” in Oregon allows for the shifting of resources among program 

accounts outside the regular appropriations cycle. This allows the state to 

periodically reassess program needs even when the legislature is not in 

session. Oregon requires its agencies to regularly reassess its budgetary 

needs—or rebalance its budget—allowing for the transfer of funds into or 

out of program accounts. Each agency is required to submit its rebalance 

plan every 6 months.

Decisions made during Oregon’s budget process highlight some of the 

factors considered and the procedures involved in aligning appropriations, 

obligations, and expenditures. In March 2000, the state agency again 

prepared for its rebalancing process and found that the ERDC child care 

utilization rate was lower than expected, which would have resulted in 

about $8.2 million in unspent TANF dollars. To absorb these funds, the 

agency reduced the copayments that poor families had to pay and 

increased the subsidies, thus increasing the amount of TANF funds 

expended per child. In this way, the agency accomplished the state’s goal 

of spending all the TANF funds available, speeding the rate at which these 

TANF funds are spent and avoiding having to categorize them as 

unobligated balances. 
Appendix IX

Oregon

Page 125 GAO-01-828 Welfare Reform

Despite its lack of any contingency plans, Oregon reports that more than 

$40 million of cumulative TANF funds designated for the state as of 

September 30, 2000, remain unspent at the U.S. Treasury. Most of these 

unspent funds are shown as obligated but not liquidated because they have 

been committed through contracts or other agreements, or they are owed 

because services have been provided, although payments have not been 

made against these obligations. The remainder of Oregon’s unspent funds 

are shown as unobligated from a single year—1999. (See table 29.) 

Table 29: Unspent TANF Funds in Oregon as of September 30, 2000

a

Subsequent amended reports submitted by Oregon reduced the unobligated balance to zero.

Source: HHS’/Administration for Children and Families.

TANF funds dedicated to the Oregon Option program that are not used by 

the state agency or its branches are set aside for prime contractors in the 

15 districts for specific training and employment services. These funds are 

shown as unliquidated obligations because they are tied up in contracts. 

The prime contractors in turn execute subcontracts for additional support 

services. The system of contracts and subcontracts results in an inevitable 

time lag before obligated funds are shown as liquidated. Some time lags 

occur because subcontractors and contractors must submit claims, and the 

claims must be processed before TANF payments can be made. Other time 

lags occur because TANF funds are obligated in contracts with start and 

end dates that do not coincide with the federal fiscal year, so that funds 

obligated in one quarter may not be paid until the following quarter.

Dollars in millions

Unobligated

TANF funds

Unliquidated

obligations of

TANF funds

Total unspent

funds

Unspent funds as a

percent of annual

TANF grant

$4.8a $39.1 $43.9 2.6%
Page 126 GAO-01-828 Welfare Reform

Appendix X

Texas ApendxiX

Background

a

Texas receives between $13 million and $39 million in annual TANF supplements because the state’s 

pre-TANF expenditures per poor person were less than 35 percent of the national average. In addition, 

Texas received $16 million in federal TANF funds in 2000 and $24 million in 2001 as bonuses for 

successful outcomes.

b

Texas did not meet required work participation rates for two-parent families in 1997 and 1998, but 

subsequently complied with corrective action plans, thus avoiding any financial penalty or increased 

MOE.

c

Caseloads as reported to HHS for January 1995 and June 2000, rounded to the nearest thousand.

Texas implemented welfare reform between November 1996 and 

November 1997 with its employment and training program called 

CHOICES, an outgrowth of experiments started earlier under a waiver 

covering 1996-2002. CHOICES follows the work-first model, with the 

expectation that all Texans should support themselves and their families 

and that they should take the initiative in finding work, while program staff 

and services are available to assist them in achieving that goal. Under the 

program, the number of families receiving cash assistance declined until 

1999 and leveled off. The caseload has declined again over the first few 

months of 2001.

State fiscal year: September 1-August 31

Budget cycle: Biennial

TANF grant:a $486 million 

75% MOE:b $236 million 

Cash assistance caseload:c 280,000 families in 1995 

128,000 families in 2000

54 percent decline
Appendix X

Texas

Page 127 GAO-01-828 Welfare Reform

To receive cash assistance, applicants must be willing to seek work as soon 

as they enroll in the program. Under the Texas waiver, those with young 

children have been exempt from TANF work requirements, but the 

exemptions are gradually being phased out. In 1999, the state approved the 

first increase in the monthly cash assistance level in 15 years; now a family 

of three can receive up to $201 a month. Needy families with children 

whose adjusted incomes are below the monthly cash assistance levels are 

eligible. In addition, a family may receive up to $50 a month in child 

support collected by the state agency on the family’s behalf.1

 Texas also 

provides an annual $60 supplement for each TANF-certified child. If they 

meet poverty guidelines, grandparents 50 or older who care for TANFeligible children may receive one-time cash supplements up to $1,000, but if 

they accept these payments they are ineligible for cash assistance for 

1 year. Families in crisis may receive a one-time diversion payment of 

$1,000, but if so, they are ineligible for cash assistance for a year. 

CHOICES participants engaged in work or work-related activities may 

receive services to facilitate their participation, such as transportation 

assistance and help with other work expenses. Subsidized child care is 

guaranteed for those in CHOICES who participate in work activities, and 

where funding is available, to other families with incomes at or below 85 

percent of the state median income. Program participants may receive 

cash assistance for 1 to 3 years, depending on their education and prior 

work experience, at which time the adults become ineligible for 5 years. 

Those who lose cash assistance due to increased earnings or time limits 

may receive transitional medical assistance and subsidized child care for 

12 to 18 months. To reduce the likelihood that these children will have to 

depend on welfare, Texas provides grants toward a college education for 

recent high school graduates in families eligible or receiving cash 

assistance. 

Two state agencies cooperate in the administration of the program—one 

determines eligibility through its local offices and makes cash assistance 

payments electronically and the other provides work-related services, 

including child care subsides through contracts with 28 local workforce 

boards. The goal of the boards is to provide integrated services at each 

location that respond to local needs. The state requires that the local 

1

The remainder is retained by the state and federal governments as reimbursement for cash 

assistance payments made to these families.
Appendix X

Texas

Page 128 GAO-01-828 Welfare Reform

workforce boards provide matching funds in order to receive the maximum 

in federal child care funds. 

In addition to funding CHOICES, TANF funds support certain child welfare 

activities that were supported previously with federal welfare funds, such 

as child protective services. To prevent dependency and deal with the 

needs of hard-to-serve CHOICES participants, TANF funds are also 

invested in family formation, pregnancy prevention, mental health, 

developmental disabilities, and substance abuse treatment. 

Supplantation in the 

State Budget

Texas has used the flexibility afforded by TANF financing rules to fund a 

number of state priorities for needy families but has also used these funds 

to replace a significant amount of state funds. From 1998 to 2001, Texas 

budget analyses show that about $275 million of federal TANF funds were 

used to replace state funds, including $115 million in the 1998-1999 

biennium and $160 million in the 2000-2001 biennium. Texas budget 

officials and legislative analysts describe these shifts as changes in the way 

certain programs are financed—not supplantation—and note that state 

spending on social services has increased by more than this amount since 

federal welfare reform was enacted. For example, they claim that while 

$160 million in state funds was freed up as a result of shifts in TANF funds 

in the last biennium, this “refinancing” was part of a $400 million increase 

in state funding for health and human services programs for the needy in 

the last 2 years. 

The development of the 2000-2001 budget in Texas illustrates the complex 

relationship among federal policies regarding TANF funds and state 

decisions on the use of state funds. Historically, cash assistance and job 

training programs were funded with a combination of state and federal 

dollars. In 1995, federal funds represented just over 63 cents and state 

funds represented almost 37 cents of every dollar spent on cash assistance 

in Texas. In 1997, when Texas first deliberated how it would use the new 

TANF funds in its welfare program, state officials believed that cash 

assistance and training would be a good place to direct state resources to 

count toward the state’s MOE requirement. However, as caseloads 

dropped more quickly and steeply than anticipated, it became clear that the 

state funds appropriated for these purposes would not be sufficient to meet 

the state’s MOE requirement. A decision was made to fund job training 

primarily with federal TANF dollars and to direct state funds to other 

priorities that had projected outlay rates that would provide a more stable 

base to use as their MOE. 
Appendix X

Texas

Page 129 GAO-01-828 Welfare Reform

Child welfare programs were seen as a priority because of growing foster 

care caseloads and a state court ruling that called for heightened 

investigation and prevention of child abuse and neglect. Because spending 

on these programs was growing, these programs’ expenditures were 

viewed as a better source of MOE financing than CHOICES. The legislature 

increased appropriations for an expanded child welfare program and 

directed the state agency to count the state’s share of the increase towards 

it MOE. After reviewing final TANF regulations, however, state agency 

officials found that certain foster care expenditures included in the child 

welfare expansion could not be counted toward the MOE requirement. The 

state funds already appropriated for child welfare were not withdrawn, but 

state budget officials had to look elsewhere for allowable MOE 

expenditures. In the end, they identified as MOE a portion of state aid used 

to support preschool programs. Since this state aid is allocated based on 

the number of needy children in each district the state believes that a 

portion of it qualifies as an MOE expenditure. The state spent nearly 

$320 million on this effort in 2000.

Texas state officials maintain that the changes that they have made in 

program financing made it possible for the state to draw down more TANF 

funds. In so doing, the state reduced the levels of unspent balances 

remaining at the U.S. Treasury, but more importantly proponents of welfare 

program expansions gained political leverage to get new programs and 

program expansions enacted. A state official told us that the political 

environment in Texas makes it very difficult to fund program increases or 

new programs with state funds unless there are trade-offs in other 

programs to offset some of the new spending. The official said that the 

ability to refinance some existing programs with TANF funds in turn freedup some state resources, which helped ensure enactment of new state 

spending in other areas that also serve the low-income population.

While the advocate community agrees with state officials that the state has 

expanded its investment in programs that serve the social services needs of 

low-income families and individuals, they also note that once state funds 

are freed up, it is impossible to tell with certainty how those funds are 

ultimately used. Their concern is that funds designated for needy families 

eligible under TANF may have been used for other purposes, thus diverting 

state funds to other priorities.
Appendix X

Texas

Page 130 GAO-01-828 Welfare Reform

Spending Trends From 

1995 to 2000

Figure 12: Texas’ TANF-Related Expenditures for State Fiscal Years 1995 and 2000 

To assess how state budget decisions might have affected spending, we 

collected data on how Texas used state and federal funds to finance TANFrelated social services expenditures. The results are grouped into four 

categories, as shown in figure 12, and described in more detail in appendix 

I. Each category is identified on the graph by two bars—one for spending 

that occurred in state fiscal year 1995 and one for spending that occurred in 

state fiscal year 2000. From left to right, the categories are cumulative. 

Expenditures for cash assistance and employment training are included in 

expenditures for support of the working poor. These expenditures in turn 

are included in expenditures for support of the working poor plus health 

care. Finally, all expenditures are included in social services expenditures.

Texas is the only state in our study that saw nominal growth in total 

expenditures for basic welfare services—cash assistance and job training 

programs—between state fiscal years 1995 and 2000. Spending remained 

0

500

1,000

1,500

2,000

2,500

State

Federal

Basic welfare

services

Support for 

working poor

Support for

working poor +

health care

TANF-related

social services

95 00 95 00 95 00 00 95

1995 dollars in millions
Appendix X

Texas

Page 131 GAO-01-828 Welfare Reform

constant, in real terms, which is significant because Texas also experienced 

a 54 percent decline in the number of families receiving cash assistance 

over this same period. Spending on the training component of the 

CHOICES program drove this trend as the state invested heavily in these 

programs. The new investment was, in large part, financed with federal 

dollars. Our survey data show that while total spending on these programs 

grew from $710 million to nearly $780 million over the period, the state’s 

contributions declined from $254 million to $216 million (see table 30). As 

a result, while the state financed about 36 percent of these programs in 

1995, in 2000 it financed only about 28 percent.

Table 30: Texas’ TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

As in other states we surveyed, Texas officials claim that most of the state 

funds freed-up with TANF funds were reinvested in programs that support 

the broad goals of federal welfare reforms. Total spending rose 

significantly—28 percent in inflation adjusted dollars—among a group of 

programs that include those same basic welfare services as well as 

programs that provide transitional support for families moving from 

welfare to work (e.g. child care and child development, transportation 

subsidies, and other post-employment services). Although it is impossible 

to tell with any certainty what programs a freed up state dollar funded, the 

state did substantially increase its own investment in programs that 

broadly support the working poor—state spending rose by about 

11 percent in real terms from 1995 to 2000. (See table 30.) In line with the 

state’s budget strategy to maximize the use of federal funds, in 2000 federal 

funds represent a much larger share of these programs’ finances than 

Dollars in millions

Nominal

Real 

(expressed in 1995 dollars)

1995 2000 1995 2000

Basic welfare services

Total funds $710 $778 $710 $710

State funds $254 $216 $254 $197

Support for the working poor

Total funds $1,476 $2,066 $1,476 $1,885

State funds $638 $774 $638 $707
Appendix X

Texas

Page 132 GAO-01-828 Welfare Reform

before welfare reform. In 1995 the state financed about 43 percent of these 

programs, in 2000 the state share receded to 38 percent.

State spending on health care for the working poor rose faster than federal 

spending between 1995 and 2000 chiefly because the Medicaid match rate 

changed requiring the state to finance a greater share of that program than 

it did in 1995. When these state expenditures are combined with state 

spending on other programs supporting the working poor, the rate of 

spending outpaced inflation. Total federal and state spending rose—in real 

terms—by 12 percent, while state spending rose by 

11 percent. (See table 31.) 

Table 31: Texas’ TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

As noted previously, Texas has focused recently on expanding its child 

welfare programs and other social services. TANF funds can be used in all 

these programmatic areas provided they are used on TANF-eligible 

families. For example, Texas devoted more than $173 million of its TANF 

funds to child welfare activities in 2000 (39 percent of TANF funds spent in 

2000 compared to 14 percent of Title IV-A funds spent in 1995). In addition, 

these programs received a large share of state funding as well. For all 

social services, total federal and state spending rose 19 percent in real 

terms; real state spending kept nearly the same pace, rising 17 percent. As 

a result, the fiscal balance across the broadest category of social services 

spending has remained stable since 1995; the state financed 52 percent in 

1995 and in 2000 it financed about 51 percent.

Dollars in millions

Nominal

Real 

(expressed in 1995 dollars)

1995 2000 1995 2000

Support for the working poor plus health care

Total funds $4,648 $5,722 $4,648 $5,221

State funds $1,800 $2,181 $1,800 $1,990

TANF-related social services

Total funds $8,333 $10,908 $8,333 $9,953

State funds $4,361 $5,574 $4,361 $5,086
Appendix X

Texas

Page 133 GAO-01-828 Welfare Reform

Additional federal safety net programs provide food assistance and 

supplemental security income for needy families and children in Texas. 

For example, the federal government provided $2.3 billion in food stamp 

benefits to low income individuals in Texas in 1995 and $1.2 billion in 2000. 

In addition, from 1995 to 2000, federal supplemental security income 

payments to Texans increased from $1.4 billion to $1.6 billion, about 73 

percent of which went to individuals under the age of 65.

Rainy Day Funds The state has a statutorily established contingency fund for TANF 

expenditures. However, the state has not funded this account based on 

projections of future program needs. Rather an appropriation equal to the 

balance of all federal TANF funds not already appropriated for other 

purposes is made for this purpose every 2 years. The contingency 

appropriation requires that the expenditure of funds from this account be 

made only upon approval of the Governor and the Legislative Budget 

Board.2

 Although state general revenues are another potential source of 

rainy day funds, their use for cash assistance is limited by the state 

constitution to 1 percent of the total biennial budget.

After other state priorities were funded for state fiscal years 2000-2001, 

budget analysts estimated that $107 million would be available for the 

contingency fund. Federal regulations require that states report all rainy 

day funds as unobligated balances and therefore these funds are 

commingled with all other funds the state reports as unobligated. Soon 

after the beginning of the second year of its biennium (September 1, 2000), 

Texas reported $141.2 million in unobligated balances. (See table 32.)

2

The 10-member Legislative Budget Board was created by statute in 1949 for the primary 

purpose of developing recommended legislative appropriations for all agencies of the state 

government. Membership of the LBB is provided by law. The Lieutenant Governor is the 

Chairman, and the Speaker of the House of Representatives is Vice Chairman. Chairs of the 

House Appropriations Committee, House Committee on Ways and Means, Senate Finance 

Committee, and Senate State Affairs Committee are automatically members. The Lieutenant 

Governor appoints two additional members of the Senate, and the Speaker appoints two 

additional members of the House to complete the 10-member Board.
Appendix X

Texas

Page 134 GAO-01-828 Welfare Reform

Table 32: Unspent TANF Funds in Texas as of September 30, 2000

Source: HHS’ Administration for Children and Families.

An analysis of the balances Texas has left unobligated at the U.S. Treasury 

for future needs is complicated because these reported balances also 

represent funds the state has budgeted but has not yet spent. TANF funds 

for Texas are shown on federal reports as obligated to the extent that they 

are contracted out to state workforce boards for the CHOICES program, 

but are shown as unobligated where they are awaiting disbursement by 

state agencies that provide cash assistance and other services. About onequarter of TANF funds are contracted through the workforce boards and 

the remainder are split among several state agencies. 

Generally, CHOICES is run by local workforce boards that offer job 

training and education programs, child care subsidies, and other supportive 

services designed to help welfare recipients transition from welfare to 

work. Each year the state executes performance-based contracts with 

these boards, providing a variety of federal and state funds. When the state 

contracts with the boards for TANF-funded services, the state 

appropriately records this in reports to HHS as an obligation of federal 

funds. 

However, many other services are funded with TANF through state social 

service, child welfare, and substance abuse treatment agencies. Because 

these are state agencies, the TANF funds needed to provide services must 

be recorded as unobligated balances until the agencies have spent the 

funds or have contracted for provision of the services. 

Dollars in millions

Unobligated

TANF funds

Unliquidated obligations

of TANF funds

Total unspent

funds

Unspent funds as a

percent of annual

TANF grant

$141.2 $41.6 $182.8 37.6%
Page 135 GAO-01-828 Welfare Reform

Appendix XI

Wisconsin ApendxiXI

Background

a

Wisconsin received about $16 million in federal TANF funds in 2001 as a bonus for successful 

program outcomes.

b

Caseloads as reported to HHS for January 1995 and June 2000 and rounded to the nearest 

thousand.

Wisconsin was one of the first states to reform its welfare program, starting 

in 1987, and went statewide with its current program, Wisconsin Works 

(W-2), in September 1997. As a result, the decline in the state’s cash 

assistance caseload began at an earlier date and proceeded at a faster rate 

than in many other states, but by 2000 the number of families receiving 

cash assistance was relatively stable. In accordance with the state’s workfirst philosophy, the program serves those who are willing to work to their 

full capability. 

Eligible families receive cash assistance payments that are equivalent to 

hourly wages for time spent in work and other assigned activities, such as 

education or drug treatment. All families with children and incomes under 

115 percent of the federal poverty level are eligible. Once enrolled, the 

maximum monthly assistance a family can receive is $673, regardless of 

family size. This amount is paid when a family member performs 

community service work for 30 hours a week and participates in 10 hours 

of education and training. The amount is a 30-percent increase over the 

amount Wisconsin paid in 1995 for a family of three, making it one of the 

highest cash assistance payments in the nation. However, the payment is 

reduced for each hour that the family member fails to attend the assigned 

activity. In addition to cash assistance, parents may receive any child 

support that the state collects on their behalf.1

 Families participating in 

State fiscal year: July 1-June 30

Budget Cycle: Biennial

TANF Grant:a $318 million 

75% MOE: $169 million 

Cash Assistance caseload:b 74,000 families in 1995 

16,000 families in 2000

78 percent decline 

1

The state and federal governments may retain collections as reimbursement for cash 

assistance payments made to these families. Wisconsin has chosen instead to give its full 

state share to W-2 families.
Appendix XI

Wisconsin

Page 136 GAO-01-828 Welfare Reform

W-2 who have received monthly cash assistance payments for the 

equivalent of 5 years are ineligible for further receipt of cash assistance, in 

line with TANF law. 

For recent legal immigrants, the state has set aside its own state funds to 

pay cash assistance because federal law prohibits use of TANF funds for 

this purpose. Children receiving cash assistance whose parents are not 

eligible for TANF, such as those receiving supplemental security income, 

are served in a separate program and are not enrolled in W-2. 

Services and benefits available to W-2 participants include case 

management, job training, transportation assistance, and matching grants 

of up to $500 for vocational training. In addition, subsidized healthcare, 

called Badger Care, and child care are available to W-2 participants and 

other families with children and incomes up to 200 percent of the poverty 

level. Other support services were made available to families with incomes 

below 200 percent of poverty starting in mid-1999 under the state’s 

community reinvestment program. TANF funds are also used to support an 

earned income tax credit (EITC) as well as child welfare, juvenile justice, 

mental health programs, services for the developmentally disabled, 

substance abuse treatment activities, and incentives for contractors who 

meet performance goals.

Most of the federal and state funds for the W-2 program are obligated by a 

single state agency in contracts with local agencies that determine 

eligibility and provide cash assistance and services to program 

participants. W-2 is administered by over 70 local agencies, primarily 

county social services agencies, under 2-year, performance-based contracts 

with the state. 

Supplantation in the 

State Budget

The dramatic changes in Wisconsin’s cash assistance caseload as well as 

the breadth of services the state had decided to fund prompted budget 

officials to begin looking for creative ways to finance state programs for 

the working poor. In Wisconsin’s 1999-2001 biennial budget, the state used 

about $164 million of its TANF grant to replace state general funds. The 

state plans to continue using about $52 million of TANF funds per year to 

change the source of financing for these programs.2

 The largest single 

2

About $48 million of the total $164 million was used retroactively to adjust the 

appropriations level in the final year of the previous budget.
Appendix XI

Wisconsin

Page 137 GAO-01-828 Welfare Reform

program affected by the refinancing was the state’s tax credit program, the 

EITC. Each year Wisconsin plans to use about $52 million in federal TANF 

funds to finance the state tax credit that previously had been financed with 

state funds. Under current projections for use of TANF funds, the state will 

use about 16 percent of its annual block grant in this manner.

The circumstances surrounding the state’s decisions to use its federal funds 

in this way are illustrative of the nature of budget negotiations and the role 

that federal funds can play in influencing trade-offs among a variety of 

financing options. According to legislative members and staff we 

interviewed, when TANF was enacted in 1996, Wisconsin was already 

spending less than the MOE required them to spend because they had 

already instituted substantial reforms and had already achieved significant 

savings as a result of their reforms. So when MOE levels were pegged to 

state spending levels in 1994, it created a fiscal burden for Wisconsin. The 

state had to raise its spending in order to meet the 75 percent MOE level.

During the 1999-2001 budget deliberations, state budget analysts projected 

that the state would not meet its MOE requirement because the number of 

W-2 families receiving cash assistance had fallen so dramatically. Even 

with agreement on several new spending proposals, budget analysts 

calculated that the state would run $40 million short over the biennium. A 

shortfall of this size presented the state with a challenge. 

State budget officials predicted that it would be difficult to gain bipartisan 

approval in the legislature for new social service programs that required an 

investment of new state funds. The legislature had already enacted 

expansions to the state’s subsidized child care program to serve more lowincome families and had approved a new health care program for lowincome families—BadgerCare. Budget officials looked to existing 

programs already in the budget that might be used to meet the MOE. 

In the midst of the state’s budget negotiations, the final TANF regulations 

were issued that allowed use of TANF funds to establish or expand state 

EITC programs. State officials realized that the regulations permitted them 

to replace about $53 million a year in state funds that they were spending 

on their EITC with federal TANF funds. However, doing so still left them 

short of meeting their MOE requirement. The state had a shortfall to begin 

with, and the shift in funds only served to increase the shortfall. However, 

the legislative committee leadership realized that freeing up state general 

revenues provided funds it could use as leverage to ensure bipartisan 

support for a package of spending and revenue options. Some of the freed-
Appendix XI

Wisconsin

Page 138 GAO-01-828 Welfare Reform

up state general funds could be used for a property tax cut, and the rest to 

expand certain programs for the state’s low-income population. In addition, 

the expanded programs serving the low-income population could be used 

to meet the state’s MOE requirement so there would be no shortfall.

According to the committee leadership, the compromise also resulted in 

increased investment of the federal TANF funds in a variety of programs. 

The package presented during the negotiations afforded the committee the 

opportunity to bring TANF spending on new programs up even farther 

thereby increasing the state’s investment on low-income families. The 

leadership stressed that these new programs could not have been funded 

during the 1999-2001 biennium in the absence of the options arising from 

the freed-up state general funds.

Spending Trends From 

1995 to 2000

Figure 13: Wisconsin’s TANF-Related Expenditures for State Fiscal Years 1995 and 

2000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

State

Federal

Basic welfare 

services

Support for 

working poor

Support for

working poor +

health care

TANF-related

social services

95 00 95 00 95 00 00 95

1995 dollars in millions
Appendix XI

Wisconsin

Page 139 GAO-01-828 Welfare Reform

To assess how state budget decisions might have affected spending, we 

collected data on how Wisconsin used state and federal funds to finance 

TANF-related social services. The results are grouped into four categories, 

as shown in figure 13 and described further in appendix I. Each category is 

identified on the graph by two bars--one for spending that occurred in state 

fiscal year 1995 and one for spending that occurred in state fiscal year 2000. 

From left to right, the categories are cumulative. In other words, 

expenditures for cash assistance and employment training are included in 

expenditures for support of the working poor. These expenditures in turn 

are included in expenditures for support of the working poor plus health 

care. Finally, all expenditures are included in social services expenditures.

Given the dramatic decline in the cash assistance caseload, the decline in 

total spending on these basic activities would be expected. Since fewer 

families are receiving cash assistance, spending on cash assistance has 

plummeted despite the higher monthly assistance payment level. The 

decline in total real spending was 46 percent. (See table 33.) The decline in 

spending on cash assistance was partially offset by spending on job 

training, which more than tripled. In 2000, for every dollar spent on cash 

assistance, three dollars were spent on job training. Notably, however, and 

in line with the state’s struggles to meet its MOE requirement, state 

spending declined only marginally—about 4 percent—in real terms. As a 

result, the state now finances a greater share of these costs. Whereas the 

state financed 41 percent of the costs of these services in 1995, in 2000 it 

financed about 72 percent. 

Table 33: Wisconsin’s TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

Dollars in millions

Nominal

Real 

(expressed in 1995 dollars)

1995 2000 1995 2000

Basic welfare services

Total funds $412 $244 $412 $223

State funds $167 $176 $167 $161

Support for the working poor

Total funds $898 $881 $898 $804

State funds $497 $485 $497 $443
Appendix XI

Wisconsin

Page 140 GAO-01-828 Welfare Reform

Total federal and state spending on programs that more broadly support 

the working poor also declined over the same period. However, when 

viewed cumulatively, the steep decline in spending on basic welfare 

services was moderated by large investments in other programs. For 

example, spending on child care alone has increased by about $123 million. 

However, state spending on all components of support for the working 

poor declined by 11 percent, roughly the same decline seen in total 

spending. This indicates that the state has maintained its own investment 

in these programs. Wisconsin continues to finance about 55 percent of the 

costs of these programs with state funds.

In 1999, Wisconsin began enrolling certain low-income families without 

health insurance in a new statewide program called Badger Care. The 

program is supported by state funds and by two federal funding sources—

Medicaid and the State Children’s Health Insurance Program (SCHIP).3

 

Budget forecasts projected that spending would rise by about $100 million 

a year—a substantial new investment—once the new program was fully 

implemented. About a third of the increase was projected to have been 

funded with state funds. Given the nature of the matching grants, it is not 

surprising that federal spending would rise faster than state spending. (See 

table 34.) Overall, combined spending on support for the working poor 

plus health care grew by about 2 percent, while state spending declined 

about 3 percent in real terms. The state’s share of these total expenditures 

fell from 45 percent in 1995 to 43 percent in 2000. 

3

The two federal programs are matching grants: the federal government finances about

 71 percent of SCHIP program in Wisconsin and about 59 percent of the Medicaid program. 

In January 2001, the state received approval for its request to waive provisions of federal 

law that prohibit the use of SCHIP funds for services provided to adults. The state can now 

use the more favorable match rate (71 percent) to finance a larger share of its program.
Appendix XI

Wisconsin

Page 141 GAO-01-828 Welfare Reform

Table 34: Wisconsin’s TANF-Related Expenditures

Source: GAO survey and analysis of state expenditure data.

The decline in the state’s share of funding for programs supporting lowincome families that was first shown in our analysis of programs that 

support the working poor is reflected in the state’s spending on social 

services. Total spending on social services grew by about 7 percent; but 

state spending decreased by about 1 percent. Wisconsin’s share of 

spending on all social services that support the goals of TANF declined 

from about 48 percent in 1995 to about 45 percent in 2000. 

Additional federal safety-net programs provide food assistance and 

supplemental security income (SSI) for needy families with children in 

Wisconsin, but are not shown in figure 13. The federal government 

provided $227 million in food stamp benefits to low-income individuals in 

Wisconsin in 1995, and $115 million in 2000. In addition, from 1995 to 2000, 

federal supplemental security income payments increased from $362 

million to $374 million in nominal dollars—about 88 percent of these 

benefits went to individuals under 65 years of age.

Dollars in millions

Nominal

Real 

(expressed in 1995 dollars)

1995 2000 1995 2000

Support for the working poor plus health care

Total funds $2,591 $2,908 $2,591 $2,653

State funds $1,163 $1,238 $1,163 $1,129

TANF-related social services

Total funds $3,006 $3,518 $3,006 $3,210

State funds $1,455 $1,578 $1,455 $1,440
Appendix XI

Wisconsin

Page 142 GAO-01-828 Welfare Reform

Rainy Day Funds In 1997 Wisconsin created a $50 million reserve account for (1) its W-2 

program, (2) additional benefit payments for Milwaukee, and (3) benefits to 

children of SSI recipients. The state drew down most of the reserves it had 

set aside for the benefit payment for Milwaukee and children of SSI 

recipients by the end of the first biennium. The state approved a 

$102 million deposit to the Contingency Fund for the 1999-2001 biennium 

for the W-2 program. These funds are available to W-2 agencies in the event 

of an economic downturn.4

 However, disbursement from this fund must be 

approved by the Joint Finance Committee. In addition to the Contingency 

Fund—which is specifically set aside for a rainy day—the state left about 

$16 million in TANF funds unbudgeted over the biennium. 

State funds that are set aside for a rainy day must, under HHS regulations, 

be reported as unobligated balances. The state’s most recent submission 

for the end of federal fiscal year 2000 is difficult to reconcile with the state’s 

own budget outline. (See table 35.) This difficulty highlights the 

inadequacy of HHS’ financial reports to offer any insight into the states 

plans for their unspent balances.

Table 35: Unspent TANF Funds in Wisconsin as of September 30, 2000

Source: HHS’ Administration for Children and Families.

The data in table 35 is prepared at the end of the federal fiscal year and as 

such represents a snap shot in time rather than a flow of funds. A state 

budget official said that to avoid listing too much as “unobligated” it treats 

its Contingency Fund more like a revolving fund. For example, the balance 

in the Fund is always $102 million, but by the end of the federal fiscal year 

the state would obligate the balance to pay for ongoing program needs and 

then use the next fiscal year’s grant for the Contingency Fund. This state 

official said that, in part, the motivation to record obligations in this 

manner stems from regulations that limit the use of any unobligated TANF 

4

Unspent federal funds held in reserve for a rainy day must remain on deposit at the U.S. 

Treasury until the state needs them to make a payment.

Unobligated

balance

Unliquidated

obligations

Total unspent

funds

Unspent funds as a

percent of annual

TANF grant

$40.5 $252.2 $292.4 92%
Appendix XI

Wisconsin

Page 143 GAO-01-828 Welfare Reform

balances. He also expressed concern that if they reported significant 

unobligated balances, it might send a signal to Congress that those funds 

were not needed. 

The vast majority of Wisconsin’s unspent balances are claimed as 

unliquidated obligations. As noted previously, Wisconsin operates W-2 

through local contractors who provide the services available under the 

program. At the time the state signs the contracts, it reports the full 

amount of the federal funds involved as obligated, in accordance with 

federal regulations. The reported obligations are shown as unliquidated, 

however, until the local contractors provide or purchase services for W-2 

families. These contracts extend for 2 calendar years. In September 1999, 

the state signed 75 contracts that covered the period from January 1, 2000, 

to December 31, 2001. The total value of the contracts for 2 years of 

services and benefits is about $370 million, only $60 million more than the 

state’s annual block grant. 

But the state has other TANF-related expenditures that cannot be recorded 

as obligations because of the nature of the expenditures. For example, 

child care subsidies are paid as the services are rendered. While the state 

has an underlying commitment to pay child care subsidies to eligible 

families, the amount of the subsidy and the recipient’s eligibility for the 

subsidy depend on the recipient’s income and therefore a legal obligation, 

as required under the regulations, does not exist until the payment is made. 

So even though the state might project considerable outlays in its child care 

program, these future expenditures do not represent an obligation as 

defined by federal regulations until those expenditures are due.

No funds have been drawn from the Contingency Fund, and the Governor 

proposed to eliminate it for the 2001-2003 biennium. The $102 million on 

deposit will be transferred out of the state’s Contingency Fund and is 

projected to be spent on existing programs over the 2001-2003 biennium. 

The Governor’s proposed 2001-2003 budget projects that about $66 million 

will be left unbudgeted in the biennium’s first year, but that by the end of 

the second year of the biennium, projected spending will rise leaving only 

about $600,000 unbudgeted.
Page 144 GAO-01-828 Welfare Reform

Appendix XII

Survey Instrument ApendxiXI

Attachment 1

	





	

When completing the survey, please keep the following in mind:

1. Identify all state programs serving social service needs, particularly programs

targeted towards reducing dependence on public assistance.

2. Distribute a copy of the survey to all agencies that oversee these programs. Please

explain to these agencies what MOE means and what funds should be shown in the

MOE column.

3. Include all federal, state and local expenditures that are incorporated in the state

budget. For local expenditures, include local spending of locally raised revenue that

is incorporated in the state budget such as a local match. Include expenditures or

estimated expenditures only (not amounts budgeted or authorized).

4. Include TANF and MOE expenditures, as well as expenditures from any other funding

source for each program. Include all TANF spending; if some expenditures do not fit

into one of the specific program categories, include them in one of the lines labeled

“other.”

5. Provide expenditures for the state fiscal years of 1994-1995, 1998-1999, and estimated

expenditures for 1999-2000 (not the federal fiscal year).

6. Do not include capital expenditures.

7. Do not include indirect administrative costs or management information systems

(MIS) expenditures, but do include direct administrative costs such as case

management expenditures in relevant program line items. If case management was

included in administrative expenditures in 1994-1995, estimate and include where

relevant.

8. Include the costs of fringe benefits for state personnel. (A rough estimate of fringe

benefit costs is all that is necessary.)

9. Identify funding streams included in the columns labeled “Other” on a separate

worksheet.

10. For columns labeled “SSBG” (Social Services Block Grant): If state officials cannot

isolate spending on individual programs, obtain either estimates for these amounts,

or totals and document the general areas in which SSBG funds are spent. For TANF

funds transferred from TANF to SSBG document as SSBG expenditure with note on

level attributable to the transfer.

11. Compile and provide copies of all supporting documentation for the data entered in

the survey: e.g. expenditure reports, annual financial statements, or enacted budgets

(for fiscal year 2000 estimates).

12. When possible, identify caseload and eligibility criteria for each program in

supporting documentation.
Appendix XII

Survey Instrument

Page 145 GAO-01-828 Welfare Reform

Attachment 1

Suggested format for data submission:

For example, Line 2b, Training, could include expenditures from several programs

across two or more agencies. Each of these agencies would complete the survey as well

as provide the supporting documentation.

Agency 1

Dept of Social

Services

I II III IV

Work Preparation

and Education

b) training

Program w 0 0 18,000 6,000

Program x 250,000 0 2,000 0

Total 250,000 0 20,000 6,000

Agency 2

Dept. of Family

Employment

I II III IV

Work Preparation

and Education

b) training

Program y 650,000 40,000 0 4,000

Program z 100,000 10,000 0 0

Total 750,000 50,000 0 4,000

The various agencies’ contributions could be compiled centrally and summarized

State Summary

Totals

I II III IV

Work Preparation

and Education

b) training 1,000,000 50,000 20,000 10,000

Glossary of column headings:

IV-A: Former Aid to Families with Dependent Children (AFDC) program

IV-F: Former Job Opportunities and Basic Skills (JOBS) program

SSBG: Social Services Block Grant, title XX of the Social Security Act

TANF: Temporary Assistance for Needy Families

TANF-MOE: TANF Maintenance of Effort, see your state TANF director or

http://www.acf.dhhs.gov/programs/ofa/funds2.htm

MOE-SSP: Maintenance of Effort – Separate State Programs
Appendix XII

Survey Instrument

Page 146 GAO-01-828 Welfare Reform

Attachment 2

	







Line 1: Poverty Relief

Line 1a: cash assistance.

Include expenditures on cash payments or vouchers provided to families to meet

ongoing, basic needs, net of child support collections. Any cash assistance program that

was formerly funded by IV-A should be included here. (Note: This definition is adapted

from the definition of basic assistance in line 5a of the ACF-196 Financial Report.)

Line 1b: child support payments.

Include all child support collections from non-custodial parents that are passed on to

custodial parents who are receiving cash assistance through TANF, in excess of $50 per

monthly payment.

Line 1c: emergency assistance.

Include all expenditures for emergency assistance (the former IV-A program), including

prevention of eviction, utility cut-off, etc. Document, to the extent possible, how

emergency assistance funds are allocated.

Line 1d: food assistance.

Include expenditures on programs designed to provide food or nutritional assistance to

low-income people. Include state administrative expenses for Food Stamps. If known,

also provide federal expenditures on Food Stamps in your state fiscal year.

Line 1e: housing assistance.

Include expenditures on programs designed to provide housing assistance to low-income

people, such as vouchers, state low-income housing tax credits, or any other state

support for low-income housing efforts.

Line 1f: SSI supplements.

Include expenditures on state supplementation of the federal Supplemental Security

Income program. Do not include federal expenditures.

Line 1g: other.

Include expenditures on any other programs related to poverty relief that are not

included above. Describe such programs on an attached sheet.

Line 2: Work Preparation and Education

Line 2a: education.

Include expenditures on educational activities that prepare the recipients for work. For

example, include secondary education (including alternative programs); adult education,

GED, and ESL classes; education directly related to employment; education provided as

vocational educational training; and post-secondary education. Do not include education
Appendix XII

Survey Instrument

Page 147 GAO-01-828 Welfare Reform

Attachment 2

programs for children below high-school age. In this instance, limit spending to TANFeligible people.

(Note: This definition is adapted from the definition of education in line 6a2 of the ACF196 Financial Report.)

Line 2b: training.

Include expenditures on programs to prepare people who are not yet working with skills

to make them employable. Examples include skills development programs, community

service placements, etc. Do not include expenditures on people who are in the paid

workforce.

Line 2c: other.

Include expenditures on any other programs related to work preparation and education

that are not included above. Document programs descriptions on an attached sheet.

Line 3: Employment Support

Cells are shaded. Include expenditures in this category on lines 3a-3e below.

Line 3a: post-employment services.

Include expenditures on programs designed to keep people employed after they have

found employment. Examples include coaching to ensure that individuals arrive at work

on time, counseling to address problems that may arise in the workplace, and any other

case management services for this working population. If known, include spending for

on-the-job training.

Line 3b, c: state EITC.

Include expenditures on state earned income tax credits paid to families. Include state

and local tax credits that are designed to defray the costs of employment for low-income

families.

Line 3d: transportation.

Include the value of transportation benefits (such as allowances, bus tokens, car

payments, auto insurance reimbursement, and van services) provided to employed

families (related either to their work or related job retention and advancement activities)

and provided as a nonrecurring, short-term benefit to non-working families (e.g. during

applicant job search). (Note: this definition is adapted from the definition of

transportation in line 6c of the ACF-196 Financial Report.)

Line 3e: wage subsidies.

Include payments to employers or third parties to help cover the costs of employee

wages, benefits, supervision, or training. Also include any wage-related tax credits that

benefit employers.

(Note: This definition is adapted from the definition of work subsidies in line 6a1 of the

ACF-196 Financial Report.)
Appendix XII

Survey Instrument

Page 148 GAO-01-828 Welfare Reform

Attachment 2

Line 3f: other.

Include expenditures on any other programs related to employment support that are not

included above. Describe such programs on an attached sheet.

Line 4: Poverty Prevention

Cells are shaded. Include expenditures in this category on lines 4a-4d below.

Line 4a: diversion payments.

Include expenditures on nonrecurrent, short-term benefits to families in the form of cash

payments, vouchers, or similar form of payment to deal with a specific crisis situation or

episode of need. An example is an emergency rent payment to prevent eviction.

(Note: this definition is adapted from the definition of diversion payments in line 6g of

the ACF-196 Financial Report.)

Line 4b: family formation and pregnancy prevention.

Include expenditures on programs aimed to keep families together, prevent teen

pregnancy and prevent single parenthood. Examples of program expenditures are:

responsible fatherhood initiatives that will improve the capacity of needy fathers to

provide financial and emotional support for their children; premarital and marriage

counseling, and mediation services; counseling services or classes that focus on teen

pregnancy prevention; media campaigns to encourage young people to delay parenting

or to encourage fathers to play a responsible role in their children's lives; and incentives

for single parents to marry or for two-parent families to stay together.

(Note: this definition is identical to the section in ACF’s “Helping Families Achieve SelfSufficiency” guide entitled, “Appropriate Uses of Funds/Family Formation and

Pregnancy Prevention” at http://www.acf.dhhs.gov/programs/ofa/funds2.htm )

Line 4c: other.

Include expenditures on any other programs related to poverty prevention that are not

included above. Describe such programs on an attached sheet.

Line 5: Child Protection/Juvenile Justice

Cells are shaded. Include expenditures in this category on lines 5a-5c below.

Line 5a: child welfare.

Include expenditures on adoption assistance, foster care, and independent living

programs; on any program intended to prevent out-of-home placements, promote

reunification of families, or provide a safe environment for children; and on programs

that focus on child abuse prevention and neglect prevention. Examples of expenditures

include using funds for family counseling; parent support programs; appropriate

supportive services (e.g., referral services, child care, transportation, and respite care) to

caregiver relatives who can provide a safe place for a needy child to live and avoid his or

her placement in foster care; and screening families for risk of child abuse or neglect and

providing case management. (Note: Any cash assistance program that was formerly

funded by IV-A, such as cash assistance to needy caretaker relatives, should be included

in the “cash assistance” category.)
Appendix XII

Survey Instrument

Page 149 GAO-01-828 Welfare Reform

Attachment 2

Line 5b: juvenile justice programs.

Include expenditures on social services programs for youth who have violated the state

juvenile code. Do not include institutional spending.

Line 5c: other.

Include expenditures on any other programs related to child protection/juvenile justice

that are not included above. Describe such programs on an attached sheet.

Line 6: Other

Cells are shaded. Include expenditures in this category on lines 6a-6c below.

Line 6a: provider profits.

Include all bonuses, incentive payments or profits to contractors for provision of

services to low-income people.

Line 6b: substance abuse prevention and treatment.

Include expenditures on programs aimed to prevent alcohol, drug and tobacco abuse and

to provide intervention services to individuals with alcohol, drug and/or tobacco

dependency in their families. Examples of prevention programs are media campaigns,

educational programs and community-based planning programs. Examples of

expenditures on treatment include counseling, treatment facilities, and outpatient

medical care.

Line 6c: developmental disabilities.

Include expenditures on programs that provide services to individuals with

developmental disabilities and their families, including outpatient care and public

education, but excluding institutional facilities.

Line 6d: mental health services.

Include expenditures on programs that provide prevention and/or intervention services

to the mentally ill and their families, including community-based treatment facilities,

outpatient care and public education. Exclude all expenditures provided at/through

mental health institutions.

Line 6e: other

Include expenditures on any other programs that are not included above. Describe such

programs on an attached sheet.
Appendix XII

Survey Instrument

Page 150 GAO-01-828 Welfare Reform

Child Care/Child Development Spending Survey

1994 - 95 Child Care/Child Development Spending

Federal Expenditures TOTALS

Program Names CCDBG Other

TOTALS 0 0 0 00

1999 - 00 Child Care/Child Development Spending

Federal Expenditures TOTALS

Program Names CCDF Other CCDF-MOE CCDF-Match Other

TOTALS 0 0 0 0 00

State Expenditures

State Expenditures

Instructions for Child Care/Child Development:

Include expenditures on any child care or child development program, either custodial or educational, in-home or out-of-home, aimed at either 

working or non-working people, including pre-K programs, after-school programs, vouchers for child care, state expenditures on Head Start, and 

subsidies to child care centers, and child care tax credits (if available). Include programs for both TANF-eligible and non-TANF-eligible people. 

Please identify each child care/child development program in the spaces below and identify their funding streams. Please identify eligibility criteria 

for these programs, as well as caseloads (numbers of children, not families, if possible), on an attached sheet.

CCDBG - Child Care and Development Block Grant

CCDF - Child Care Development Fund
Appendix XII

Survey Instrument

Page 151 GAO-01-828 Welfare Reform

Healthcare Coverage Spending Survey

1994 - 95 Healthcare Coverage Spending

Federal Expenditures State Expenditures TOTALS

Program Names Title XIX Title XXI Other Title XIX Title XXI Other

TOTALS 0000000

1999 - 00 Healthcare Coverage Spending 

Federal Expenditures State Expenditures TOTALS

Program Names Title XIX Title XXI Other Title XIX Title XXI Other

TOTALS 0000000

Instructions for Healthcare Coverage Spending Survey:

Include expenditures on any healthcare program, in-home or out-of-home, aimed at either working or non-working people and their children, excluding longterm care. Include programs for both the TANF-eligible and non-TANF-eligible non-elderly population. Identify each program in the spaces below and their 

funding streams. Identify eligibility criteria for these programs, as well as caseloads on an attached sheet. For Medicaid-funded programs, identify target 

populations (e.g. "transitional assistance," "expansion population") where possible. State expenditures should capture local spending if it flows through the 

state budget (e.g. a local match). 
Appendix XII

Survey Instrument

Page 152 GAO-01-828 Welfare Reform

Federal Expenditures State Expenditures Local Expenditures TOTALS

I II III IV V VI VII VIII IX X

IV-A IV-F SSBG Other IV-A IV-F Other IV-A Other

1 Poverty Relief

a) cash assistance

b) child support payments

c) emergency assistance

d) food assistance

e) housing assistance

f) SSI supplements

g) other (please specify)

h) total 0000000000

2 Work Preparation and Education

a) education

b) training

c) other (please specify)

d) total 0000000000

3 Employment Support

a) post-employment services

b) state EITC- non-refundable

c) state EITC- refundable

d) transportation

e) wage subsidies

f) other (please specify)

g) total 0000000000

4 Poverty Prevention

a) diverson payments

b) family formation/preg. prev.

c) other (please specify)

d) total 0000000000

5 Child Protection/Juvenile justice

a) child welfare

b) juvenile justice programs

c) other (please specify)

d) total 0000000000

6 Other

a) provider profits

b) substance abuse prev. & treat.

c) developmental disabilities

d) mental health services

e) other (please specify)

f) total 0000000000

7 TOTALS 0000000000

State FY 1994 - 95 Social Services Spending Survey
Appendix XII

Survey Instrument

Page 153 GAO-01-828 Welfare Reform

State FY 1999-2000 Social Services Spending Survey (estimated)

Federal Expenditures State Expenditures Local Expenditures TOTALS

I II III IV V VI VII VIII IX

TANF SSBG Other TANF-MOE MOE- SSP Other TANF-MOE Other

1 Poverty Relief

a) cash assistance

b) child support payments

c) emergency assistance

d) food assistance

e) housing assistance

f) SSI supplements

g) other (please specify)

h) total 000 0 0 0 0 0 0

2 Work Preparation and Education

a) education

b) training

c) other (please specify)

d) total 000 0 0 0 0 0 0

3 Employment Support

a) post-employment services

b) state EITC- non-refundable

c) state EITC- refundable

d) transportation

e) wage subsidies

f) other (please specify)

g) total 000 0 0 0 0 0 0

4 Poverty Prevention

a) diverson payments

b) family formation/preg. prev.

c) other (please specify)

d) total 000 0 0 0 0 0 0

5 Child Protection/Juvenile justice

a) child welfare

b) juvenile justice programs

c) other (please specify)

d) total 0 0 0 0 0 0 0 0 0

6 Other

a) provider profits

b) substance abuse prev. & treat.

c) developmental disabilities

d) mental health services

e) other (please specify)

f) total 0 0 0 0 0 0 0 0 0

7 TOTALS 000 0 0 0 0 0 0
Page 154 GAO-01-828 Welfare Reform

Appendix XIII

Comments From the Department of Health 

and Human Services ApendxXiI
Appendix XIII

Comments From the Department of Health 

and Human Services

Page 155 GAO-01-828 Welfare Reform

See comment 1.

See comment 4.

See comment 3.

See comment 2.
Appendix XIII

Comments From the Department of Health 

and Human Services

Page 156 GAO-01-828 Welfare Reform

See comment 7.

See comment 6.

See comment 5.
Appendix XIII

Comments From the Department of Health 

and Human Services

Page 157 GAO-01-828 Welfare Reform
Appendix XIII

Comments From the Department of Health 

and Human Services

Page 158 GAO-01-828 Welfare Reform

GAO Comments 1. As we reported, many aspects of the MOE requirement play a 

significant role in the maintenance of the federal-state fiscal balance. 

We agree with HHS that many aspects of the MOE could be taken up 

during the forthcoming TANF-reauthorization debate. We believe that 

footnote 2 provides adequate information for the reader to understand 

the specifics of the states’ financing requirements. We also refer 

readers to our previous report for additional information on this 

important provision in the law.

2. We added footnote 8 on page 9 to clarify that HHS regulations restrict 

the use of TANF carry-forward funds and clarified our discussion of the 

“new spending test” on pages 23-24 of the report. 

3. Now on page 7 of the report.

4. See footnote 8. HHS suggests that the restriction on the use of state 

carry-forward funds may be a factor in explaining why states are using 

federal funds to pay an increased share of the costs of basic cash 

assistance. Clearly, regulations play an important role in state decisionmaking. However, in many of the states we reviewed this restriction 

was not the primary factor that influenced their budget decisions. 

Furthermore, many factors—regulations, the economy, and other state 

budgetary constraints—influence state decision-making; the fiscal 

balance is not static and will continually evolve. This is the primary 

reason we recommend that the department work with the states to 

gather data periodically to assess the federal-state fiscal balance 

relevant to achieving the broader goals of the TANF program. Such 

assessments will provide important information on how the myriad 

factors that influence state decision-making affect the fiscal balance.

5. We added footnote 20 to distinguish the two components of “unspent 

funds”—unliquidated obligations and unobligated balances. The body 

of report discusses our view that such distinctions have significant 

limitations because states do not report this information in a consistent 

manner.

6. We clarified our discussion of the “new spending test” on pages 23-24 of 

the report. 

7. In our discussion on pages 25-26 of this report we address the lack of 

nonduplicative case counts and the implications it has on our analysis. 
Appendix XIII

Comments From the Department of Health 

and Human Services

Page 159 GAO-01-828 Welfare Reform

Specifically, it becomes problematic when one tries to compare the 

level of effort under TANF with the level of effort under AFDC on a per 

case basis. Absent better data on caseloads, our focus on the fiscal 

balance was designed to address the extent to which states were using 

their TANF funds to supplant their own funds controlling for some 

changes to the program’s workload.
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