Currently authorized through federal fiscal year 2002, the TANF block grant represents an entitlement to states of $16.5 billion annually. Federal funding under the TANF grant is fixed, and states are required to maintain a significant portion of their own historic financial commitment to their welfare programs as a condition of receiving their full TANF grant—referred to as their maintenance of effort requirement (MOE).These two funding streams—federal TANF and state general funds for MOE—represent the bulk of the resources available to states as they design, finance, and implement their new low-income family assistance programs. (See figure 1.) Under TANF, states have the flexibility to design their own programs and strategies for promoting work over welfare and self-sufficiency over dependency. At the same time, states must meet federal requirements that emphasize the importance of work for those receiving assistance. To avoid federal financial penalties, in fiscal year 1997 states must ensure that 25 percent of their TANF families, rising to 50 percent in 2002, are engaged in work activities. In addition, the law prohibits the use of TANF funds to provide assistance for families with adults who have received assistance for more than 5 years. In addition to giving states more responsibility and flexibility in the design of welfare programs, TANF shifts the fiscal risk to states, thus highlighting the importance of fiscal planning, especially contingency budgeting. In the past, 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 also handle this responsibility in the context of any limitations—including legislative restrictions, constitutional balanced budget mandates, or conditions imposed by the bond market—on their ability to increase spending, especially in times of fiscal stress. States have various options and resources to help them handle this new fiscal responsibility. PRWORA provides states with the ability to save an unlimited amount of their TANF block grant funds for use in later years. These resources must be left in the U.S. Treasury until they are needed. States may also respond to the fiscal risks implicit in the new block grant environment by increasing the levels of their state “rainy day funds,” or by establishing dedicated reserves, consisting of state funds, for their welfare programs. PRWORA also creates 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 a $1.7 billion Federal Loan Fund for State Welfare Programs (Loan Fund). To address the objectives for this report, we collected fiscal information on all 50 states from the U.S. Department of Health and Human Services (HHS). In addition, we interviewed officials from state budget offices and reviewed state general fund budgets and low-income family assistance budgets. We selected the seven states examined in GAO’s parallel report, Welfare Reform: States are Restructuring Programs to Reduce Welfare Dependence (GAO/HEHS-98-109)—California, Connecticut, Louisiana, Maryland, Oregon, Texas, and Wisconsin. For this report, we added Colorado, Michigan, and New York to enrich the discussion of states’ efforts to budget for contingencies. These 10 states represent 53 percent of total program dollars and administer about half the nation’s caseload. We did not independently verify the reported levels of state spending nor whether reported federal or state spending met the qualifications set forth in the act. We conducted our fieldwork from April 1997 through February 1998 in accordance with generally accepted government auditing standards. (For more detail on our scope and methodology, see appendix I.) The act made sweeping changes to the nation’s cash assistance program for needy families with children and eliminated a family’s entitlement to federal assistance. These reforms gave states flexibility to design their own programs and strategies for acheiving program goals, including how welfare recipients would move into the workforce. The act changed the way in which federal funds flow to states for welfare programs. Under the old system of financing, matching grants provided states with resources to implement federal welfare programs. The federal match was largely open-ended so that if a state experienced caseload and related cost increases, federal funds would increase with state funds to cover expenditures for the entire caseload. This open-ended federal commitment provided that financing for every dollar spent on these programs was shared between the federal government and the states, thereby limiting the states’ exposure to escalating costs. In contrast, under the TANF block grant, the federal government provides a fixed amount of funds regardless of any changes in state spending or the number of people the programs serve. During periods when caseloads are decreasing, federal funds per recipient will be higher under TANF than under the old program. Conversely if caseloads and costs increase, federal funds per recipient would be lower. A state would then be presented with several options, including using resources previously saved for contingencies, reallocating budgetary resources to maintain program stability, reducing program benefits and/or services to ensure that previously allocated resources go further, or raising additional revenues through taxes or fees. PRWORA allows states more choices concerning the mix of services they can offer and the people they can serve, and these choices are likely to be affected by differences in the rules regarding the use of TANF and MOE funds. For example, state MOE funds may be used with more flexibility than TANF funds. TANF grant funds may be used for cash assistance, child care assistance, work placement programs, subsidized work programs and other efforts not specifically prohibited by PRWORA. MOE funds can be used not only for these purposes but also to provide benefits to some recipients excluded from TANF assistance. States make these budgetary decisions as part of their regular appropriations process. Since any unspent TANF funds remain available to states without fiscal year limitation, a decision to dedicate a portion of these funds for a future contingency represents one aspect of a state’s program budgeting under welfare reform. States have modified their policies to require and encourage welfare recipients and potential recipients to adopt behaviors that facilitate becoming more self-sufficient. For example, in our recently issued report on state program restructuring, we found that the proportion of recipients assigned to job placement activities—as opposed to education or training activities—was substantially higher in 1997 than in 1994. Furthermore, as states seek to expand the number of adults participating in work activities, they have generally expanded the roles of welfare workers to better support the work focus of their programs. These workers’ new responsibilities vary but include such tasks as motivating clients to seek work, exploring the potential for welfare diversions, and collecting more information about applicants and recipients to determine what they need to facilitate self-sufficiency. States are also expanding their programs to help families address barriers to employment. For example, these states are using a range of approaches to help recipients obtain reliable transportation, such as providing funding for rural transportation systems, enlisting volunteers to provide transportation for recipients, and providing funds for vehicle repairs. Substantial declines in welfare caseloads and increases in the number of welfare recipients finding jobs provide signs of early progress. For example, caseloads have dropped on average about 20 percent since 1996, when PRWORA was enacted, and by one-third since 1994. However, questions remain about what will happen over the long term to families that no longer rely on cash assistance but continue to need other kinds of assistance to maintain their employment and about how much these services will cost. Furthermore, as more families leave welfare programs, states may face increasing challenges in serving increasing proportions of long-term recipients with multiple barriers to employment. This adds to the uncertainty surrounding the resource needs of low-income family assistance programs in the future. Even if TANF caseloads continue to decrease over time, they may become more volatile. Such caseload volatility may put the states at greater risk for budgetary stress than did previous matching grant programs. We noted in our recent report on states’ efforts to restructure their welfare programs that although states have had a great deal of success implementing welfare reform programs in a strong economy, little is known about how a poor economy will affect their programs. It is possible that caseloads may prove more volatile under the new system than under the old. This is because the greater emphasis on work implies a tighter link to the state of the job market and hence to the economy. Although research on pre-reform caseloads found varying degrees of correlation between the economy (as measured by unemployment rates) and the AFDC single-parent family caseload, it generally found strong correlation between the economy and changes in the smaller AFDC-unemployed parent (AFDC-UP) family caseload. This difference has been attributed to the AFDC-UP caseload’s stronger connection to the labor market. Since the new TANF grant emphasizes work-related activities, TANF caseloads may act more like the AFDC-UP caseload rather than the single-parent AFDC caseload and hence be more closely aligned to the economy. Alternatively, some analysts suggest that future caseloads under TANF may not be as susceptible to economic downturns because states are beginning to place much greater emphasis on strengthening labor force ties. For example, many states have substantially increased the levels of resources allocated to job training, child care, and transitional medical care. These efforts may make the former welfare population less susceptible to being the first to be laid off in the event of an economic downturn than the AFDC-UP population was. Those who remain on the rolls may be a smaller as well as more stable population. These differing perspectives highlight the uncertainties that states will face as they implement and finance their new welfare programs and thus highlight the importance of budgeting for contingencies. Budgetary stress caused by caseload volatility may be compounded by the limitations placed on most states by constitutional or statutory requirements to balance their general fund budgets. For example, if revenues fall during an economic downturn, a state’s enacted budget can fall into deficit. State balanced budget requirements often motivate states both to reallocate resources within their budgets and cut program spending during recessions. The need to cut spending can be alleviated if a state has accumulated surplus balances in “rainy day” funds. These surpluses may be used to cover a given year’s deficit. However, unless there are reserves specifically earmarked for low-income family assistance programs, these programs will have to compete for “rainy day” fund resources with all other programs in a state’s general fund in times of budgetary stress. These factors together—the likelihood of increased volatility and the limited budgetary flexibility available during an economic downturn—point to the importance of state contingency budgeting. A combination of the decline in caseload levels, the higher federal grant levels, and the MOE requirement for states’ contributions to their programs means that most states have more budgetary resources available for their low-income family assistance programs since enactment of welfare reform than under prior law. In many states, caseloads began to decline even before the enactment of PRWORA. Since enactment, this trend has continued in all states except Hawaii and in many cases the trend has accelerated. (See appendix II for a more detailed discussion and caseload data.) The amount of each state’s block grant was based on amounts received by the state in 1994 and 1995, years when caseloads and spending were at historic highs. As a result, we calculated that 45 states were eligible to receive more in federal fiscal year 1997 for the TANF block grant than they received in 1996 under the previous welfare programs. (See appendix II for a more detailed discussion of the assumptions used in our estimates and our analytical techniques.) We estimated that if all states had drawn their entire 1997 TANF grant, the states would have received about $1.4 billion more under TANF than they received under previous welfare programs in 1996, when caseloads were much higher. It is important to note, however, that there is a great deal of disparity among the states in the levels of additional resources. These differences ranged from 70 percent more federal resources for Indiana to 7 percent less for Pennsylvania—with the median increase about 9 percent for all 50 states. Furthermore, states are required to maintain a significant portion of their own historic financial commitment to these programs. Like the TANF grant, this minimum MOE is fixed and does not depend on the number of people served or the types of services a state chooses to provide. The MOE requirement establishes a minimum, or floor, for state spending, but there is no federal ceiling on how much a state can spend. States face severe fiscal penalties if they do not meet their MOE requirement. The interaction between the MOE and the lower caseloads means that in 21 states, although total state spending went down, spending per recipient increased. For example, in Idaho the MOE requirement is about 28 percent lower than what the state spent in 1996; however, state spending per recipient will more than double from $870 to $1,849 per year. Aside from the nominal changes in funding, another way of viewing resources available for welfare is to compare total federal and state resources available under the block grant with what comparable federal-state spending would have been for 1997 caseloads under prior law. Overall, we calculated that under the block grant, 46 states wouldhave more total resources—state and federal—for their new welfare programs than they would have had under the old welfare programs—with a median increase of 22 percent—or about $4.7 billion more nationwide. This calculation represents the difference between states’ post-reform total budgetary resources—TANF plus MOE—and what they would have budgeted for their 1997 caseloads if they were still using the pre-reform cost structure. These differences are largely attributable to the change in financing mechanisms: total funding under the previous program was based on caseload, whereas under TANF, funding is based on federal and state spending levels in a prior period when caseloads were higher. (See appendix II for further discussion of the assumptions and analytical techniques used in our estimates.) Again, there was great variation among the 46 states with the estimated increase ranging from 1 percent in Alaska and Connecticut to 102 percent in Wyoming. Additional budgetary resources for state welfare programs present states with a unique opportunity to invest more in programs that can help people find and keep their jobs and prevent them from returning to welfare while still saving some resources for a “rainy day.” All 10 states we visited planned to use some of their additional resources to expand their programs. Most states recognize that achieving self-sufficiency and job placement calls for significant investment in social services and incentives. These states have generally not increased cash benefit levels; rather, they plan to spend additional resources for job placement services, child care, and other supportive services that can help welfare recipients make the transition to work. For example, Texas increased the budget for its job placement and training programs by about $100 million (or about 200 percent) in order to expand access to job placement services and enhance its “Invest in Long Term Success” initiative. This initiative (1) seeks to match employers with welfare recipients and provides recipients with targeted training opportunities to meet the needs of those employers, (2) enhances job retention services to help former welfare recipients keep their jobs, and (3) creates “local innovation grants” to support innovative welfare-to-work programs, such as micro-enterprise development funds. (See text box 1 for examples of how states are using federal and state funds to enhance their welfare programs.) Text Box 1: Examples of Expansion and Enhancements of State Welfare Programs Many states have used the additional resources available to expand and enhance their welfare programs by offering new services; to expand earned income disregards and transitional services to people who are working and are no longer eligible for cash assistance but still need help with child care, transportation, or continued case management; and to invest in new information technologies to prevent fraud, track cases, and improve services to clients. Texas increased spending on employment services to ensure sufficient funding to meet its federal work participation requirements and created new programs to train recipients for targeted jobs, provide innovation grants to local employment centers, and develop job retention and re-employment services. Louisiana approved a 24 percent increase in funding on services for vocational education, on-the-job-training, job search assistance and transportation subsidies used to enable clients to move from welfare to work. New York passed more than $230 million in new programs for employment training and job readiness skills, teen pregnancy prevention programs and new computer systems. In addition, New York enhanced funding for child care services by about $100 million. California increased funding for employment related services by $288 million--or 122 percent, and for Child Care services by $147 million--or 103 percent. Michigan increased funding for day care services by 9 percent and employment services by 24 percent. The additional funding for employment services is used primarily for transportation and other support services as a means of increasing the work participation rate among the two-parent family caseloads. Connecticut used its additional resources to increase child care funding, create a new early childhood development program, and establish a system of safety net services for families moving off welfare. Maryland increased spending on job training by 39 percent. Other program enhancements include one-time emergency assistance grants to welfare applicants and demonstration projects aimed at assisting welfare recipients to achieve economic independence. Wisconsin's total program budget will increase by 42 percent. The state plans to invest over $89 million more in child care services in state fiscal year 1998 and an additional $22 million in state fiscal year 1999. In addition, as part of an effort to “make work pay,” many states have changed their policies relating to the treatment of earned income from those previously in effect under AFDC to permit recipients to keep more of their monthly cash assistance payments or retain them for longer periods once they begin working. More than two-thirds of the states have increased the amount of assets and the value of a vehicle that recipients can own and still remain eligible for cash assistance. The asset and vehicle limits in the prior AFDC program were widely considered to be too low, creating barriers to families’ efforts to become more self-sufficient. As these changes allow more people to remain eligible for program benefits and to remain eligible for transitional benefits, total state program budgets have generally increased relative to caseload. In addition, the higher level of federal funds and lower caseloads enabled states to reduce their own funding for the program down to the required MOE level and still maintain higher total program budgets. TANF permits states to achieve some budgetary savings but the MOE requirement constitutes a higher level of spending per recipient in many states due to declining caseloads—limiting the level of savings the state can achieve during a period of declining caseloads. (See text box 2 for additional examples of how states have achieved budgetary savings in this manner.) In California, budget officials said that they were frustrated by the MOE requirement because it limited their budgetary flexibility. Given the fixed nature of the MOE levels, these officials noted that the state will no longer realize any budgetary savings from a declining caseload because they must spend the same amount of state funds on their welfare program as they did in the previous year even if their caseloads are lower. Text Box 2: Examples of States’ Use of Federal TANF Funds to Achieve Budgetary Savings The combination of additional budgetary resources and lower caseloads has permitted states to achieve state budgetary savings which were reallocated to other state fiscal priorities. These states were still able to meet their MOE requirement under TANF and many were also able to provide a higher level of state funds per case. A number of states show this substitution in their budget documents. Even though many state officials indicated that state funds withdrawn from their welfare programs were used in other health and human services programs, any state funds that were reallocated became part of the larger general fund and become available for any state funding priority. Oregon reduced the state's share of its total welfare program budget by nearly $55.2 million. These state funds, no longer needed to meet the MOE requirement, were reallocated to help finance other state priorities. However, our analysis shows that Oregon must spend about 27 percent more per recipient than it spent per recipient under prior law in order to meet its MOE . Michigan reduced its contribution to its welfare program by about $42 million but must increase the level of spending per recipient, as required under the MOE, by about 22 percent. Texas freed up $114.9 million in state funds in its welfare program to maximize the use of federal funds. Nevertheless, the MOE requirement serves to increase, by about 6 percent, the amount of state funds expended per recipient. New York took advantage of TANF's financing changes to provide over $344 million in fiscal relief to the state and localities by reducing the total state and local contributions to the program's financing by 16 percent. California reduced its own contribution to its welfare program by about $357 million, compared to past AFDC cost sharing ratios, but still met its minimum MOE requirement, which is about 7 percent lower than what it spent per recipient under AFDC. Colorado reduced general fund contributions to its welfare program by $8.3 million and the counties' contributions by $3.6 million for state fiscal year 1998. The state used the displaced general funds to increase funding for other state programs and required the counties to deposit their portion of the savings in local social services reserves. As allowed under PRWORA, 11 states reported that they transferred funds from TANF to either the CCDBG or the title XX Social Services Block Grant (SSBG). For example, both Connecticut and Wisconsin shifted TANF funds to their SSBG programs--$24 million and $32 million respectively. These states reduced, by an equal share, the level of state funding formerly dedicated to SSBG. Oregon provides an example of a state that used TANF funds to free up a portion of state funds for other state priorities. State officials told us that during budget deliberations for the 1998-1999 biennium, one of the Governor’s proposals was a major overhaul of the state’s school financing system. Although the state’s economy was sound and state revenues exceeded the forecast, the Governor informed state agencies responsible for program budgets that some state resources would have to be reallocated to the school financing initiative. According to agency officials responsible for Oregon’s welfare programs, many state programs were affected by this reallocation. Since their TANF grant was higher than what they had received in the previous biennium, their MOE requirement lower than what had been budgeted in the previous biennium, and their caseloads had declined by over 50 percent since 1994, they were able to reallocate nearly $55.2 million in state funds from their welfare program and still meet their MOE requirement. Those state general funds shifted out of their welfare program were reallocated to other programs within the Human Services department to cover budgetary needs for planned program expansions in, for example, the Oregon Health Plan and for other state general fund shortfalls resulting from the Governor’s overall budget priorities. As a result, the federal share of the state’s TANF program expenses now totals 68 percent, compared to the previous federal share of about 56 percent. In contrast, Maryland took a different approach by permitting the state’s Department of Human Resources to reinvest the state’s budgetary savings that result from caseload reductions. Ten percent of the total savings achieved in the state each year may be allocated to demonstration projects to test innovative approaches to reduce welfare dependency. Any remaining savings may be distributed by the state, with about half returning to the local social service departments that achieved the caseload reductions as a performance bonus. These “reallocated savings” may be used for, among other things, child care, welfare avoidance grants, drug treatment for targeted recipients, transportation emergency funds, or any other direct service to applicants or recipients that are considered appropriate to accomplish the program’s goals. There are several differing perspectives for assessing states’ fiscal commitment to these programs. Although states have been able to reduce their commitments of state funds below previous levels, they nevertheless must still maintain spending at higher levels than they would have spent under the matching grant programs. In fact, given the caseload decline, these lower levels of state spending are providing more per recipient in many states. Some states have correspondingly argued that the MOE requirement prevents them from achieving even greater savings and from reaping the budgetary rewards traditionally associated with a declining caseload. On the other hand, some have raised concerns that reductions in overall state spending could limit welfare reform’s potential to provide the resources necessary to move people from welfare to work. In most of the states we visited, decisions on how to allocate the additional budgetary resources available for low-income family assistance programs were made in a context of strong state economies, and most forecasts expected these trends to continue in the short term. Given the strength of their economies, most states we visited did not see an immediate need to prepare for a recession for their welfare programs. Based on past experience, some state officials said that if the economy worsened and states’ revenues fell, the budgetary impact would be felt in all state programs—including welfare. Nine of the 10 states we visited have established general fund “rainy day” funds to be used for downturns in state economies and budget shortfalls, but only four of the nine have significant balances. Some state officials believe that sound fiscal planning should include some type of dedicated reserve for contingencies and other future welfare program needs. These officials said that a future downturn could reduce funds available for benefits at a time when they are most needed. This could undermine welfare reform by reducing supportive services crucial to the success of a welfare to work strategy. Four of the states we visited had enacted budgets that established dedicated reserve funds although the amounts saved were small relative to total program budgets. Three of the four states budgeted some federal TANF funds to a special program-specific reserve account, and one state, Maryland, set aside state general funds for contingencies. (See table 1.) States that established reserves cited the possibility of future economic downturns and other factors in their decision-making. Officials in Maryland expected that at some point in the future—as has happened in the past—an economic downturn will bring higher caseloads and higher program costs. Using state general funds, Maryland established a $15.7 million reserve fund dedicated to low-income family assistance programs in part to address concerns about assuring programmatic stability during such a period of fiscal stress. In another example, Colorado allocated $5.9 million of its federal TANF grant to a long-term contingency reserve in the event it experiences recession-driven caseload increases in the future. In contrast, officials in other states felt that sound fiscal planning should focus on investing maximum resources now in a welfare-to-work strategy. For example, officials in Oregon said that caseload levels have not fluctuated with the health of Oregon’s economy (as measured by the unemployment rate), and they do not expect this to change. They believe caseloads will continue to decline if sufficient funds are invested now in appropriate services to achieve recipients’ long-term self-sufficiency. These officials attributed the state’s sizeable caseload declines, from a reported 117,656 recipients in 1993 to 56,299 in 1997, to full investment in the program and the new emphasis on work. Similarly, Michigan officials stated that past experience with caseload changes during recessions may not be relevant in a post-reform environment. These officials expect that while caseload levels have not become completely independent of the economy, they will eventually stabilize and then fluctuate with the economy around some new, lower core-caseload level which they believe will be so far below their historic high that they do not expect to have difficulties financing the costs of any future caseload fluctuations. The National Association of State Budget Officers (NASBO), the National Governors’ Association (NGA), and some state officials have suggested that proposed federal rules may actually discourage states from establishing dedicated state reserves composed of general funds. For example, in Michigan, state budget officials considered establishing a reserve with state general funds until the state learned that reserved funds would not count toward meeting the states’ TANF MOE requirement for the year in which they were reserved. Although Maryland did establish a state reserve, state officials there raised similar concerns and there are currently no plans to add more state funds to this fund. The 1996 reforms of national welfare policy focused considerable attention on the federal government’s role in welfare. While the resulting legislation devolves much programmatic and financial responsibility to the states, a significant federal role remains in providing a substantial share of the funding for these programs, setting national program objectives, establishing reporting and accountability criteria, and ensuring a safety net. Fiscal planning responsibilities were devolved to the states. The states were granted the ability to save federal funds without fiscal year limitation—in other words to plan for future contingencies. The act also provides two additional sources of federal funds—the Contingency Fund and Loan Fund—to be available if economic conditions affect caseloads and increase the fiscal burden on states. The Contingency Fund provides states with a limited amount of matching funds, much like under AFDC, and requires states to increase their own spending in order to receive federal matching funds. The Loan Fund allows states to borrow a limited amount as well, but they must repay this loan within 3 years at a rate equal to the yield on a similar Treasury security. However, states have registered concerns about the design of these federal contingency mechanisms. According to financial data reported by the states to HHS, many states had not spent all of their fiscal year 1997 TANF block grants by the end of the federal fiscal year, and some left considerable balances at the Treasury. Thirty-one states carried over a total of more than $1.2 billion. While these resources can certainly be used in the event of an economic downturn, the presence of this apparent fiscal cushion may reflect the transitional nature of the first year of the grant rather than explicit state savings decisions. While we found that some states left a portion of their TANF grants in reserve at the Treasury, we generally did not find a clear relationship between the unspent TANF balances and states’ contingency plans. During this transitional period, states generally have been unable to forecast caseload levels with any degree of accuracy. In all states but one, caseloads continued to decline, often at rates far faster than expected. (See appendix II.) State program budgets are prepared based on the projected caseload levels. Declines that are greater than expected have resulted in large unspent balances. Furthermore, the timing of the states’ draws on the TANF funds, and thus the levels of unspent resources, depend on when the states submitted their state plans, enacted their laws, and implemented their reforms. In addition, a Treasury policy statement issued in June 1997 affected the timing of states’ TANF draws. It requires that for each allocation of federal funds a state draws down, it must spend a proportional share of its own MOE funds. In this policy statement, Treasury applies principles set forth in the Cash Management Improvement Act of 1990 (CMIA) to the TANF block grant. CMIA settled a long-standing dispute between the federal government and the states over the disbursement of funds for federal programs administered by the states. CMIA helps to ensure that neither party incurs unnecessary interest costs in the course of federal grant disbursements.HHS recognized that this policy might, in some cases, limit a state’s financial flexibility. It noted that because PRWORA does not specifically exempt the TANF program, CMIA principles apply whenever state MOE and federal TANF funds can be used interchangeably. HHS indicated that if a state were able to demonstrate a bona fide need to draw its TANF funds under a different schedule than it spends its state MOE funds, the Office of Management and Budget (OMB) would consider granting an exemption to the proportionate draw down requirement. Given these various transitional issues, current levels of unused TANF may not be a reflection of state decisions to save for the future and therefore may not be a reliable indicator of future balances. Also, a great deal of uncertainty exists surrounding future welfare costs. PRWORA requires states to place a growing percentage of their caseload in work related activities over the next 5 years. As we noted in our related report on states’ efforts to restructure their welfare programs, data from states that have implemented early reforms and experienced large caseload reductions indicate that many of the remaining recipients have multiple barriers to participation in work activities, such as mental health and substance abuse problems, and domestic violence. Even if the economy remains favorable, per recipient costs may need to grow as states will have to place more of their caseloads in work-related activities and a greater percentage of their caseloads will need services that address the barriers to participation. The way federal policies are implemented may play a role in influencing states’ plans for future contingencies. Organizations representing states and officials in some states we visited suggested that cash management rules may reduce states’ incentives to save federal TANF funds for the future. Although states may carry forward any unspent federal TANF funds without fiscal year limitations, these unspent TANF reserves must be kept at Treasury—not drawn down and kept in a state reserve. NASBO, NGA, and the National Conference on State Legislatures (NCSL) have observed that balances left at the U.S. Treasury may suggest to the Congress that grant levels are too high and these funds remaining at Treasury are not needed by the states. Citing past experience with other federal grant programs, such as the State Legalization Impact Assistance Grants (SLIAG) program, where initial levels were reduced over time and federal requirements increased, officials at NCSL expressed a concern that unused TANF funds perceived as “excess” would become vulnerable to reallocation by the Congress to other areas of national need. These same concerns were also expressed in some of the states we visited. Consequently, some state officials suggested that these concerns might prompt states to spend rather than save a greater proportion of their TANF funds. In contrast, the Urban Institute argues that the federal application of CMIA to TANF is important in ensuring that states have some reserves for a future contingency. Since CMIA prohibits states from spending federal TANF funds until they are needed and requires that each draw of federal funds be matched by state funds, the Institute believes that the application of CMIA to TANF has helped to ensure that some federal funds were held in reserve. This is especially important, the Institute notes, because the draft HHS regulations prohibit state funds held in reserve to be counted as MOE, effectively creating a disincentive for states to create reserves with their own funds. Under HHS’ draft regulations, a state must report how much TANF and MOE funds it spent on a variety of activities, such as cash assistance, child care services, and work activities, but no mechanism currently exists for states to inform the Congress about their future plans for spending or saving TANF balances left at Treasury. Moreover, available data on TANF balances are generally midyear data from the perspective of states’ budgets and appropriations decisions—not data used in state decision-making. In commenting on HHS’ draft TANF regulations, the Center on Budget and Policy Priorities suggested that more information about state plans for saving TANF could aid congressional oversight of welfare reform. The Center suggested that as part of state financial reporting, HHS could give states the option to record the amount of TANF funds they plan to set aside for future contingencies, similar to accounts established in three of the states we visited. Allowing for more transparency and information regarding states’ contingency budgets and the nature of the balances left in reserve in the U.S. Treasury could provide states with an opportunity to clarify their longer term fiscal plans for the program. Consequently, this would help the Congress gain a better picture of the nature of the unspent TANF balances. Officials in most of the states we visited indicated that they would not use the Contingency Fund for State Welfare Programs (Contingency Fund) nor the Federal Loan Fund for State Welfare Programs (Loan Fund) even if they became eligible to do so. These state officials told us that neither the Contingency Fund nor the Loan Fund presented states with a viable option for future contingencies. Complex federal reconciliation provisions and a more stringent federal definition of qualified expenditures have led some state officials to conclude that the costs of gaining access to the Contingency Fund outweigh any benefits to the states. To be eligible to receive federal matching funds through the Contingency Fund, a state must meet certain conditions. First, a state must qualify as “needy” under one of two triggers: (1) in the most recent 3-month period, its average unemployment rate (seasonally adjusted) must have been at least 6.5 percent and must have increased at least 10 percent from the corresponding rate in at least one of the 2 preceding years or (2) its average monthly food stamp caseload for the most recent 3-month period must have increased at least 10 percent compared to what enrollment would have been in the corresponding 3-month period of fiscal year 1994 or 1995. Second, a state must meet a higher and more stringent level of MOE spending. None of the states included in our study had budgeted 100 percent for MOE. Most states we visited planned to meet only the minimum MOE required by PRWORA (between 75 and 80 percent of their 1994 expenditure levels), thereby requiring a substantial increase in spending to qualify for the Contingency Fund. In addition to the requirement that states raise their spending levels to 100 percent of historical expenditures to gain access to the Contingency Fund, a more limited range of a state’s spending can be counted toward the Contingency Fund MOE than for the general MOE. Although states may count expenditures on separate state programs that can serve TANF-ineligible clients as part of their general MOE requirement, these same expenditures cannot be counted toward the 100 percent Contingency Fund MOE. HHS agrees that the operation of the Contingency Fund would be simplified by allowing states to count the same expenditures toward both the TANF MOE and Contingency Fund MOE. However, both HHS and the Congressional Budget Office (CBO) note that changes that would ease access to the Contingency Fund would increase the costs of the Contingency Fund in budgetary scoring terms and could be subject to challenge under budget rules unless offsets were found. Once a state meets these conditions, it is eligible to draw from the Contingency Fund. The state’s annual draw is limited to 20 percent of its annual TANF grant. However, the state must match all draws from the Contingency Fund with additional state money as determined by its matching rate under the Medicaid program, or federal medical assistance percentage (FMAP). Moreover, there is a year-end reconciliation process which can reduce state allotments depending on the number of months during the year the state was eligible. (See text box 3 for more detailed discussion of this point.) Lags in data availability mean states qualifying on the basis of food stamp caseload increases would not even be aware of their eligibility until some time after the need arose. Text Box 3: The Contingency Fund’s Annual Reconciliation Process As currently structured, the reconciliation process favors states that are "needy" within a single federal fiscal year compared with those that are "needy" in months that overlap consecutive federal fiscal years. A state that is "needy" for all 12 months during a federal fiscal year would have to match all funds drawn at its applicable fiscal year FMAP rate with no adjustments for the number of months it was eligible because it was needy throughout the year. However, a state that is "needy" for 12 consecutive months that span 2 federal fiscal years (e.g., 6 months in each year) with an identical FMAP rate will see its federal match rate reduced by half because of the adjustment made for 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 for each year, reflecting its 6 months of eligibility in each year, but then the state would have to remit half of these federal funds after each year's reconciliation. This latter reduction is the result of pro- rating 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. Furthermore, the Adoption and Safe Families Act of 1997 (Public Law 105-89), §404 reduces the cap on Contingency Fund spending by $40 million over 4 years. If a state drew funds in a year affected by the reduction, the amount it could retain would be reduced by its share of the annual reduction. For example, the total reduction in fiscal year 1999 is $9 million. If two states drew funds in fiscal year 1999, at the end of the year, these two states’ allocation would be reduced by $4.5 million each. If the states had already received their allocation they would have to remit $4.5 million each. Although eight states qualified as needy and could have gained access to the Contingency Fund in fiscal year 1997, according to HHS, only New Mexico and North Carolina requested and were awarded funds. Although Hawaii would have been eligible for resources from the Fund for all of federal fiscal year 1997, the state determined that it did not have enough qualifying state expenditures to meet the Fund’s 100 percent MOE requirement. California was also eligible for Contingency Funds for the first 4 months of federal fiscal year 1997 (October 1, 1996, through January 31, 1997). Upon completing the reconciliation process, the state calculated that it would have to increase its own spending by almost $1.9 billion in order to receive $249 million from the Contingency Fund and declined to do so. According to HHS officials, North Carolina and New Mexico had been awarded funds on May 29, 1998. As of July 24, 1998, neither state had completed the reconciliation process and HHS officials expect that both states will be required to remit a large share of these funds. State officials also indicated that they are unlikely to borrow from the Loan Fund established in PRWORA. Officials in some states indicated that borrowing specifically for social welfare spending in times of fiscal stress would not receive popular support. We have previously reported on states’ reluctance to participate in a similar loan program in the Unemployment Insurance (UI) Trust Fund. The UI program originally operated as a forward-funded system with benefit levels and tax rates set so that the program could “save for a rainy day” by building reserves during periods of economic expansion and to be able to pay UI benefits during economic downturns. This federal-state partnership is financed through payroll taxes that are used to pay benefits, finance administrative costs, and maintain a loan account from which financially troubled states can borrow funds to pay UI benefits. By the early 1980s, as a result of severe back-to-back recessions, many states had depleted their reserves and began to rely on federal loans to sustain UI benefits. The Congress enacted several laws designed to move the system toward healthier reserve balances. These changes made it more expensive for states to borrow from the federal government. State loan repayments increased, and states took other actions including cutting program benefits, limiting the length of time recipients could receive benefits and, in some cases, increasing payroll taxes—jeopardizing the program’s objective of helping to stabilize the economy during recessions. Although the UI program is designed to allow states to build reserves during good economic times in order to pay benefits during downturns—and allows states to borrow from the federal government—these provisions have not always provided sufficient protection against a need for additional federal resources. For example, in 1993 the Congress passed a $4 billion supplemental appropriations bill to finance emergency unemployment benefits with federal funds due to shortfalls in state unemployment compensation trust funds and the unwillingness of states to borrow federal funds or expend state general funds on UI. With the passage of PRWORA, the nature of the partnership between states and the federal government for designing and financing welfare programs changed. Much of the downside fiscal risk has been shifted to the states by virtue of the fixed nature of the TANF block grant. States have gained important new flexibility in making decisions, and their provisions for financing their programs in the near and long term will have an important bearing on the future success of welfare reform. States currently have more resources available for these programs under TANF than would have been available under the old financing system, but future fiscal demands are uncertain. The fixed nature of the TANF block grant, the potential volatility of welfare caseloads and program spending along with the “pro-cyclical” budgetary pressures states face under their balanced budget requirements highlight the importance of both the states’ own funding for contingencies as well as PRWORA’s provisions for contingencies—allowing states to save unused TANF funds for future years’ use and the two safety net mechanisms, the Contingency Fund and the Loan Fund. As these provisions attest, the federal government retains a stake in states’ fiscal decisions affecting the sustainability of the program during downturns. As we noted, states see limited incentives to use the Contingency and Loan Funds, in part because the costs associated with gaining access outweigh many of the benefits that these mechanisms may offer. Although improving access might help states cope with the effects of economic slowdowns, easing these funds’ requirements could prove costly and may lessen the incentives for states to fulfill their own responsibilities for fiscal planning and program financing. While the Congress may very well revisit the design of these funds as the implementation of TANF unfolds, for now the TANF balances left at Treasury constitute the principal source of federal contingency funds for the states. While many states had TANF balances at Treasury at the end of fiscal year 1997, current reporting requirements do not clearly identify states’ plans for these balances. We identified a number of transitional issues that may have affected the levels of balances. A number of factors unrelated to states’ savings decisions have influenced the levels of these funds, including cash management practices, slow-starting programmatic spending, and caseload declines. States we visited took different approaches to contingency budgeting for TANF, and states’ practices may change as they gain experience in implementing their reformed programs under the grant. Better information on states’ plans for future contingencies, including on states’ unused TANF balances, could play a role in the continuing dialogue between states and the Congress as welfare reform continues to unfold. In the new block grant environment, the federal government has an interest in encouraging state savings, but what constitutes “adequate” saving will remain a state judgment made under conditions of considerable uncertainty. Finding the right balance between saving budgetary resources for future contingencies and investing them in programs that help people make the transition from welfare to work will be one of the main challenges for states as they develop strategies to address the needs of low-income families. We recommend that the Secretary of Health and Human Services consult with the states and explore various options to enhance information regarding states’ plans for their unused TANF balances. Such information might include explicit state plans for setting aside TANF-funded reserves for the future. Allowing for more transparency regarding states’ fiscal plans for TANF funds could enhance congressional oversight over the multi-year time frame of the grant and provide states with an opportunity to more explicitly consider their long-term fiscal plans for the program. We received comments from HHS, which are reprinted in full in appendix III. In addition, portions of the report were reviewed for technical accuracy by officials in the states we visited, and their comments were incorporated as appropriate. We also asked the National Governor’s Association (NGA), the National Conference of State Legislatures (NCSL), and the American Public Welfare Association (APWA) to review the report. We incorporated comments from these organizations as appropriate. HHS, NGA, NCSL, and APWA generally agreed that this report is an accurate and comprehensive portrayal of the current fiscal issues facing states as they make progress toward implementing welfare reform. HHS, however, expressed concern that our analysis of states’ additional budgetary resources did not take into account that states must now engage a significantly higher percentage of their caseload in work activities and that the costs of operating a welfare program before reforms could not be compared to the costs of operating a welfare program under TANF. Indeed, HHS, NGA, and NCSL all emphasized that under TANF, states are expected to do much more than under AFDC. Our analysis was not meant to compare the real costs of operating the AFDC program to the real costs of operating a welfare program under TANF, nor was it meant to minimize the additional responsibilities incumbent on states as they make progress implementing welfare reforms. Instead, we sought to illustrate the levels of resources that are available to finance the dramatic changes in states’ welfare programs. In our recent report on state program restructuring, we described how states are moving away from a welfare system that focused on entitlement to assistance to one that emphasizes finding employment as quickly as possible and becoming more self-sufficient. For example, we found that states were using some of their additional budgetary resources to enhance support services, such as transportation and child care, for recipients participating in work activities and poor families who have found jobs and left the welfare rolls. We concluded that the confluence of a strong national economy that fosters employment opportunities and the availability of additional budgetary resources has created an optimal time for states to reform their welfare programs. HHS concurred with our recommendation, but NGA and NCSL expressed concerns that it would lead to an increase in the reporting requirements already imposed on the states. It is because we agree that costs associated with collecting information should not outweigh its usefulness that we suggested HHS and the states work together on developing a reporting option. We recognize that estimates of future caseloads would affect estimates of future unspent TANF balances and that developing accurate caseload estimates at this early stage in TANF implementation poses problems for states. However, as NCSL and NGA agreed, information on states’ plans for unspent TANF balances could prove useful as the Congress executes its oversight responsibilities of the TANF program and the program’s funding levels. We continue to believe that the Congress would benefit from more complete information on states’ plans for future contingencies, including unspent TANF balances. As states, HHS, and other cognizant parties meet to discuss final reporting requirements under TANF, we urge them to work together to explore reporting options. This discussion can form part of the ongoing dialogue on how best to restructure governmental roles and responsibilities to achieve the goals of welfare reform. NGA, NCSL, and APWA also underscored states’ concerns about applying CMIA to TANF. In their view, CMIA limits state flexibility by restricting TANF funds from being held in state reserve accounts and by requiring that all draws of federal TANF funds be matched with state MOE funds. According to APWA, because caseloads have declined in many states and because states must still meet their MOE requirements, many states are not even drawing federal funds until the fourth quarter of the federal fiscal year. These comments reinforce the point made in our report that cash management practices may have had an impact on the level of TANF resources remaining at Treasury at the end of the federal fiscal year. On a related issue, APWA cited the Congress’ recent decision to reduce the proportion of TANF a state can transfer to its SSBG program as effectively limiting states’ flexibility in TANF draw downs, which in APWA’s view, penalized states for leaving TANF funds in the Treasury. NGA and NCSL urged that the federal Contingency Fund be redesigned to be a more attractive option for states. Specifically, NGA recommended changing the Contingency Fund’s MOE provision to conform to the TANF MOE requirement and to change the reconciliation requirement to eliminate the reduction in the state’s match rate that is based on the number of months the state was eligible to access the Contingency Fund. We noted in our report that very few state budget officials perceive that the Contingency Fund will serve to help states maintain stable program financing if caseloads rise during a recession. However, HHS noted that redesigning the Contingency Fund could result in significant increases in federal costs. The Contingency Fund was designed to balance competing objectives. On the one hand it could not be so generous as to encourage routine or casual use which would have led to significantly higher federal costs. On the other hand, if the Contingency Fund is overly restrictive many states would be disinclined to use it and it would not serve as the fiscal stabilizer it was intended to be. Balancing these competing objectives will likely challenge the Congress as well as the states as they continue to make progress in implementing their welfare programs under a variety of economic and demographic conditions. As agreed with your office, unless you release this report earlier, we will not distribute it until 30 days from the date of this letter. At that time, we will send copies to the Chairmen and Ranking Minority Members of the Senate Committee on Finance and the Senate Subcommittee on Social Security and Family Policy, Committee on Finance, and other interested parties. We will also make copies available to others upon request. If you have any questions, please call me at (202) 512-9573. This review was conducted in conjunction with a review conducted by GAO’s Health, Education and Human Services (HEHS) Division. The HEHS review studied welfare reform implementation in seven states: California, Connecticut, Louisiana, Maryland, Oregon, Texas, and Wisconsin. These states were selected because they represent a diverse range of socioeconomic characteristics, geographic locations, and experiences with state welfare initiatives. According to the U.S. Bureau of the Census and HHS estimates, the states ranged in population from about 3.2 million (Oregon) to about 31.0 million (California) in 1996; in median income for three-person families, from about $33,337 (Louisiana) to about $52,170 (Connecticut) in federal fiscal year 1997; and in overall poverty rates, from 8.5 percent (Wisconsin) to about 19.7 percent (Louisiana) in 1995. Some states like Wisconsin and Oregon have had reform initiatives in place for several years that include elements similar to those in PRWORA, such as time limits for welfare benefits (Wisconsin) and increased work participation requirements (Oregon and Wisconsin); others, such as Louisiana, have been operating more traditional cash assistance programs with welfare-to-work components and were only beginning more extensive reforms in fiscal year 1997. In addition, in order to capture a broader picture of the fiscal and budgetary implications of welfare reform, we added three additional states to our review: Michigan, New York, and Colorado. Historically, Michigan’s economy and budget have been highly sensitive to economic change, and in 1977 Michigan created a Budget Stabilization Fund to help stabilize the state’s fiscal policy. Like California, New York and Colorado have county administered welfare programs that share in the costs of the welfare programs. We added these states to obtain the views of local officials on the fiscal implications of welfare reform in their states. By including New York, Michigan, and Colorado, we also increased the geographic diversity of our study states and included states that when combined with the other seven states administer the welfare programs of about half the nation’s total caseload. To meet our objectives, we interviewed state and local officials in the local low-income family assistance programs and in program and state-wide budget offices. Specifically, we met with officials from the following organizations during our state visits: executive branch budget offices; legislative budget/finance committees; social service agencies; selected county program and budget offices; and advocacy groups. We also reviewed state program and budget documents, the PRWORA legislation, HHS regulations and policy guidance, prior GAO reports, and welfare experts’ studies. We also analyzed fiscal data related to all 50 states’ low-income family assistance programs obtained from HHS to determine the level of additional budgetary resources states’ received as a result of welfare reform. (See appendix II for a more detailed explanation of the methodology used in this calculation.) We did not verify the accuracy of these data. We requested written comments on a draft of this report from HHS, NGA, NCSL, and the American Public Welfare Association (APWA). These comments are discussed in the letter, and HHS’ comments are reprinted in appendix III. States currently have more budgetary resources available for their welfare programs than they would have had under prior law. This is primarily the result of a combination of three interrelated factors: (1) the unprecedented declines in caseloads, (2) the new federal financing mechanism, or block grant, that provides resources to the states without regard to the numbers of people states’ welfare programs serve, and (3) the maintenance of effort requirement on states that establishes a minimum, or floor, funding level for their state welfare programs. This appendix describes the influence each of these factors has on total resources available, and then presents our estimates of the combined effect they have on total available resources. Given the fixed nature of the federal funding stream and states’ minimum MOE contributions, caseload volatility will dramatically affect the resources available per recipient for state welfare programs. As caseloads drop, there will be more resources available to the states to finance their welfare programs since programs’ finance needs are largely driven by caseload assumptions. In contrast, if caseloads rise, there will be fewer federal dollars per recipient when compared to the previous budget period, and states will need to raise additional resources on their own or adjust their programs to make their resources go further. In many states, caseloads began to decline even before the enactment of PRWORA and continued to do so after passage of the law as shown in Table II.1. While there remains controversy over some of the reasons for the caseload declines, research indicates that important factors include the strong economy and changes in federal and state welfare policies. Total AFDC/TANF recipients by state (continued) Total AFDC/TANF recipients by state (continued) Overall, states’ caseloads have declined by about a third since 1994. However, this national average masks the differences among the states in the magnitude and timing of their caseload declines. For example, in North Carolina, the caseload dropped by about a third since 1994, with a decline of 20 percent before federal reforms had been enacted and an additional 13 percent decline in the last year. In contrast, in New Mexico, the overall decline is also near the national average; however, virtually all of the change occurred in the last year—after PRWORA passed. There is also a large disparity among the states in total caseload change since 1994, ranging from an decrease of 70 percent in Wyoming to an increase of 22 percent in Hawaii. Tables II.2 and II.3 present estimates of the change in federal resources available to implement welfare reform. Table II.2 presents our estimates of the differences between available nominal federal resources for family assistance programs under AFDC and under TANF. Our analysis shows that 45 states will receive more federal resources under TANF than they received in the last year before reform. TANF provides about $1.4 billion more federal dollars to the states than they received under the consolidated programs in 1996, when caseloads were on average much higher. These differences ranged from 70 percent more for Indiana to 7 percent less for Pennsylvania; the median increase was about 9 percent. Total federal TANF- related program spending in 1996 TANF block grant (continued) Table II.3 presents these additional federal resources on a per recipient basis to take into account the significant declines in caseload that have occurred since passage of PRWORA. These estimates of states’ additional federal resources considered on a per recipient basis present a different picture not only because the estimates take post-PRWORA declines in caseloads into account but also because of differences among the states in their expenditures for emergency assistance and administration, which TANF also replaced. Adjusting for smaller caseloads, on average, the new financing mechanisms in TANF provide states with about $614 more federal dollars per recipient than the consolidated programs provided in 1996. This table shows an increase in federal resources for all states but one, with a median increase of 47 percent more than before reform. The change in federal resources per recipient ranged from an increase of 334 percent (Wyoming) to a decrease of 10 percent (Hawaii). Our analysis shows that 38 states received an increase of 25 percent or more. Given a declining national caseload, the state MOE requirement further augments the budgetary resources available on a per recipient basis to finance states’ low-income family assistance programs. The state MOE is based on spending for a larger set of programs than the TANF block grant and was pegged to state spending in those programs during a period of high caseloads and high spending. In the absence of a MOE requirement, states could draw down all of their federal TANF grants, and then reduce their own financial commitment to the program to whatever level would maintain a current service budget baseline. In all states but one—Indiana—the 80 percent TANF-MOE requirement is less than what the state spent on those programs in 1996 (see table II.4) and would allow them to reduce their own financial commitment to the program. Differences in State Resources Under AFDC in 1996 and Under the TANF Block Grants MOE related state spending in 1996 (continued) However, the minimum MOE requirements, taken together with the further decrease in caseloads had the effect of increasing the level of state resources spent on a per recipient basis for a number of states. In table II.5, we estimated that 22 states must spend more per recipient than they spent per recipient under AFDC in 1996, assuming state spending at 80 percent MOE. (continued) Another way to estimate the total resources available for welfare programs is to compare total federal and state resources available under the block grant with what comparable federal-state spending would have been for 1997 caseloads under AFDC. To estimate changes in total available budgetary resources, we began by constructing a current-services baseline for pre-reform spending. We constructed our baseline by adding actual state and federal expenditures in federal fiscal year 1996 for the programs TANF replaced. We calculated total spending per recipient and then adjusted all baseline components for inflation except cash assistance.Finally, to take recent caseload declines into account, we applied these per recipient costs to 1997 caseloads. Using a states’ total annual TANF grant, we calculated the federal contribution to the total resources available. Since the federal contribution is now a block grant, these funds are available, irrespective of the needs in a state. Once again, we assumed that states would budget at 80 percent MOE. Since the MOE requirement establishes a minimum, or floor, on state spending, a state can spend more than minimally required if it chooses—raising the total levels of budgetary resources available. Table II.6 presents our estimates of the total additional budgetary resources available to states to design, finance, and implement their family assistance programs due to TANF. These estimates represent the difference between states’ post-reform total budgetary resources (TANF plus MOE) and what they would have budgeted for their 1997 caseloads if they were still using the pre-reform 1996 cost structure. That is, table II.6 shows “additional resources” as the difference between states’ new total budgetary resources and our construction of the current services baseline. The analysis, which takes caseload declines into account, suggests an even greater change in resources than merely looking at nominal changes in federal and state resources. Combining the effects of the increased federal resources and the act’s mandated floor on state spending, our analysis indicates that 46 states will have more total—federal TANF and state MOE—resources available than they would have had without reform. Our estimates of these additional budgetary resources totaled about $4.7 billion—or, on average, states will have 25 percent more in total budgetary resources available for their welfare reform programs. As with the other analyses, there is wide variation among states—ranging from 102 percent in additional resources for Wyoming to total fewer resources in Delaware, Hawaii, Nebraska, and Pennsylvania. Additional budgetary resources as a percent of constructed current services baseline (continued) Additional budgetary resources as a percent of constructed current services baseline 2. The “total” presented in this table represents the percent difference in the nationwide totals. The “average” is a simple average of the percentage differences across states, with each state having equal weight. The following are GAO’s comments on the Department of Health and Human Services’ letter dated July 23, 1998. 1. See “Agency Comments” section of the report. 2. Text (now on page 3) amended. 3. Text of Table 1 of page 18 changed to reflect that figures represent state reserves and are distinct from the Federal Contingency Fund for State Welfare Programs. 4. HHS refers to §409 (a)(7)(B)(i) to suggest that state MOE funds may only be used on 4 designated activities; (aa) cash assistance, (bb) child care assistance, (cc) educational activities designed to increase self-sufficiency, job training, and work . . . , (dd) and administrative costs in connection with the matters described in items (aa), (bb), (cc), and (ee) . . .” HHS omits (ee) from its list of qualified state expenditures. This part allows states to spend their own funds in any manner that is reasonably calculated to accomplish the purpose of TANF. In its proposed rule (see §273.2), HHS interprets §409(a)(7)(B)(i) to mean that a state may count as MOE its expenditures under all state programs, i.e., the state’s TANF program as well as any separate state program that assists “eligible families” and provides appropriate services or benefits. Thus, while MOE funds must be used on eligible families (as defined by the state) and on activities that can reasonably be calculated to accomplish the goals of TANF, they can be used to provide support to certain categories of clients that are prohibited from receiving federal TANF assistance. If states choose to operate separate state programs, they have more flexibility in the use of state funds than they have in the use of federal funds. We continue to believe that these differences will have an impact on the choices states make with regard to their programs, specifically the mix of services they can offer and the people they can serve. 5. Text (now on page 24) changed to reflect that HHS concurs with CBO that allowing states to count the same expenditures toward both the TANF MOE and the Contingency MOE would increase the costs of the Contingency Fund in budget scoring terms and could be subject to a challenge under the budget rules unless offsets were found. 6. Text (now on page 25) amended to reflect new information. Raymond G. Hendren, Senior Auditor The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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Summary: Pursuant to a congressional request, GAO reviewed the states' fiscal decisions for the Temporary Assistance for Needy Families (TANF) block grant and whether states are taking steps to prepare for the effects of future economic downturns on their welfare programs, focusing on: (1) how state budgetary resources, including federal aid, have been allocated since states have had access to TANF funds; (2) what plans states are making to ensure programmatic stability in times of fiscal and economic stress; and (3) the extent to which states have used, or plan to use, the program's federal Contingency Fund for State Welfare Programs and the Federal Loans for State Welfare Programs (Loan Fund) which are available for downturns or other emergencies affecting states. GAO noted that: (1) more federal and state resources are available for states' low-income family assistance programs since welfare reform passed in 1996 than would have been available under the previous system of financing welfare programs consolidated in the TANF block grant; (2) GAO's estimates showed that, taking caseload declines into account, 46 states would have more total resources--both state and federal--for their low-income family assistance programs than they would have had under the previous welfare programs; (3) states are transforming the nation's welfare system into a work-focused, temporary assistance program for needy families and generally chose to spend these resources to expand programs and benefits by shifting the emphasis from entitlement to self-sufficiency, enhancing support services, and increasing work participation rates; (4) states also have achieved budgetary savings by reducing state funds to the statutory maintenance-of-effort level of 75 or 80 percent of previous state spending levels; (5) while states have gained greater resources under the block grant, they also take greater responsibilities for fiscal risks should program costs increase in the future; (6) most states, including 7 of the 10 GAO visited, also have a general fund budget stabilization or rainy day funds that could be used to augment program spending during an economic downturn, but welfare programs would have to compete for these resources with other state funding priorities; (7) the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) includes features that could provide federal funding to cover future increases in program needs; (8) states can carry forward unused TANF funds without fiscal year limitation; (9) as of September 30, 1997, states had left about $1.2 billion in unspent balances in their accounts with the U.S Treasury, or about 9 percent of the total grant; (10) it is unclear whether these balances will remain, shrink, or increase as states gain experience with the problem; (11) PRWORA also creates two federal safety-net mechanisms--the Contingency Fund and the Loan Fund--that were designed to provide states with access to additional funds during times of economic downturn or fiscal stress; (12) as of February 1998, neither the Contingency nor the Loan Funds had been used by any state; (13) officials in states GAO visited said they did not view the Contingency Fund as a viable source of additional resources; and (14) officials in many states GAO visited indicated they did not believe their states would borrow from the Loan Fund during an economic downturn.