The TANF block grant was created by the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), and changed the federal role in financing welfare programs in states. PRWORA ended families’ entitlement to cash assistance by replacing the Aid to Families with Dependent Children (AFDC) program—essentially a federal-state matching grant—with the TANF block grant, a $16.5 billion per year fixed federal funding stream to states. PRWORA coupled the block grant with an MOE provision, which 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. This helped to ensure that states remained strong fiscal partners. PRWORA provided states greater flexibility and responsibility for administering and implementing their welfare programs. Importantly, with the fixed federal funding stream, states must assume the fiscal risks in the event of a recession or increased program costs. In addition to increased flexibility and the new fiscal structure, PRWORA charged HHS with oversight of states’ TANF programs and gave HHS new responsibilities for tracking state performance. PRWORA also set federal requirements that states must impose on many families receiving cash or other ongoing assistance, including time limits and work requirements for adults. At the same time, the law restricts HHS’s authority to regulate states’ programs and reduced the number of federal employees involved in the program. TANF and MOE spending is one component of federal, state, and local spending on a range of programs aimed at serving low-income and needy populations, which in this report we will refer to as welfare-related spending. In state fiscal year (SFY) 2004, among the nine states in our study, TANF and MOE spending represented from 12 to 28 percent of all federal, state, and local spending flowing through the state budgets for welfare-related services outside of the health spending captured in our survey. (See app. II.) Outside of TANF and MOE, welfare-related spending provides a wide range of services and comes from a variety of federal, state, and local sources. Transportation subsidies, rental assistance, child care subsidies, heating and energy assistance, and low-income tax preferences, among others, can all serve low-income and needy populations and are funded through multiple federal agencies, such as the Department of Housing and Urban Development, HHS, and the Department of Transportation, as well as by state and local governments. In 2001, we examined welfare-related spending in 10 selected states before and after the passage of welfare reform, from SFY 1995 to SFY 2000. We reported that after welfare reform, since both the amount of flexible federal TANF funds and required MOE remain fixed regardless of the number of people served with these funds, and since cash assistance caseloads declined dramatically since the mid-1990s, states had additional budgetary resources available for use toward a variety of welfare-related purposes and spending. From SFY 1995 to SFY 2000, while total spending levels for all welfare-related services generally increased, states began using these additional budgetary resources to enhance spending for noncash services, such as training, education, and a range of other welfare- related spending—an allowable practice under TANF. As state TANF programs and welfare-related spending evolved after welfare reform, the nation’s welfare system now looks quite different than it did under AFDC. Our previous findings focused on a period of sustained economic growth and increasing tax collections in states. From 1995 to 2000, state government tax collections grew in inflation-adjusted terms, and unemployment and poverty rates were generally falling, although there was some variation among the nine states we studied. Overall, these circumstances suggest that states were generally faced with declining spending demands from low-income populations and increasing fiscal resources to meet those demands. In 2001, however, the nation experienced a recession from March through November, and a contrasting set of economic and fiscal circumstances developed. A period of rising unemployment and declining state tax collections ensued. In seven of the nine states, poverty rates that fell from 1995 to 2000 increased from 2000 to 2004, as shown in figure 2. These shifts suggest that, in general, states were faced with an increased demand for services aimed at low-income populations at a time when fewer fiscal resources were available to meet these demands after the recession. According to data provided by the states, total welfare-related spending rose over the decade in each of the nine states. Health spending accelerated as the decade progressed, increasing faster over the decade than nonhealth spending, which varied somewhat by state and period. Health and nonhealth spending from both federal and state sources increased over the decade, a reflection of the strong fiscal partnership between the federal government and states in supporting low-income individuals. However, while the federal share of health care spending remained fairly consistent over the decade, the federal share of nonhealth spending varied over time. In the nine states, spending for low-income people for health and nonhealth services increased over the decade since welfare reform. These spending levels, shown in figure 3 for each of the three points in time we examined, include federal and state funds that flowed through state budgets for programs targeting low-income and at-risk individuals. The figure excludes spending for the elderly, for those in institutions, and for long-term care. In general, health spending accelerated over the decade. The median growth rate increased from 11 percent in the first period (from 1995 to 2000) to 40 percent in the second period (2000 to 2004), as shown in table 1. Colorado and Oregon were exceptions, with larger increases during the strong economy of the late 1990s. States often cited increases in eligible populations and rising pharmaceutical and service delivery costs as the primary reasons for the rapid spending growth in this area. The health spending we examined in this report included state spending from federal and state sources for any health care program for working age adults and children, excluding long-term and institutional care. While this spending included such services as public health initiatives—outreach, prevention, diagnosis, care, and children’s vaccines, most funds were spent on the State Children’s Health Insurance Program (SCHIP) and the Medicaid program. Medicaid is a complex program that serves many different low-income populations. Nationwide, children and their families constitute 75 percent of those served but only account for 30 percent of expenditures, while those with disabilities represent 16 percent of beneficiaries and 45 percent of expenditures. Between 1995 and 1997, the number of able-bodied adults and children on Medicaid fell, which may be due in part to changes in the relationship between TANF and Medicaid triggered by the 1996 welfare legislation. At the same time, states were starting to enroll low-income children in SCHIP, a new federal-state partnership created by Congress in 1997. It extends health insurance to low-income children whose families earn too much to be eligible for Medicaid but are unable to obtain insurance another way, either through an employer or outright purchase of private insurance. Nationwide, enrollments in Medicaid and SCHIP generally increased from 2000 to 2004. Even so, not all low-income individuals are eligible for Medicaid or SCHIP, and some of those who are eligible are not enrolled for a variety of reasons, including lack of information about the program or choosing not to enroll. Because health spending grew faster than nonhealth spending since 1995, it now consumes a greater share of welfare-related spending in the state budgets we examined, as shown in table 2. In eight of our nine states, health care accounted for at least 45 percent of welfare-related spending for low-income programs from federal and state sources by 2004. This mirrors a nationwide trend of rising health costs, raising concerns about growing government expenses for health programs. Nonhealth spending also generally increased after 1995, although at a slower rate and with more variation among the states and time periods, as shown in table 3. Nonhealth spending includes the following categories: cash assistance, employment services and training, work and other supports, and aid for the at-risk. Spending in these combined categories occurs through a wide variety of federal and state programs that can serve low-income and needy populations. While we found that spending increased overall when looking at all these programs combined, some differences emerged when compared with health spending. Since 1995, median nonhealth spending increased 17 percent, in contrast to the 61 percent median growth rate for health. Because nonhealth spending includes so many different federal and state programs and services, it is difficult to clearly identify factors that explain spending changes overall. However, our previous work and our discussions with state officials show that the spending outcomes reflect a multitude of factors, including changes in the numbers and needs of eligible populations and in federal and state policy and fiscal situations. We provide more information on the factors affecting spending changes in this area in the next section. Federal and state governments are important fiscal partners when it comes to providing many types of assistance to low-income and at-risk individuals. Our analysis of state expenditures showed that the spending increases evident since 1995 were substantially supported by both federal and state funds in the health and nonhealth areas in both time periods. (For more details on federal and state spending, see app. III.) The state contribution is noteworthy particularly during the second time period when states experienced declining revenues. States generally are required to balance their operating budgets, and may need to raise revenues or reduce spending to do so. At the same time, many of the key federal programs for low-income individuals are structured in a way to help ensure that states maintain their financial commitment to these programs in order to receive continued federal support. In the health area, federal and state funds spent on health services grew at roughly the same rate over the decade, resulting in a fairly stable split in federal and state shares of spending over time. As shown in table 4, in 2004, the median federal share of health spending totaled 58 percent, which would correspond to a state share of 42 percent. The higher federal shares in some states, such as Louisiana, may be explained in part by the greater role the federal government plays in funding Medicaid costs in states with lower per capita incomes. At the same time, because the health spending data include services other than Medicaid, the federal share will not correspond directly to the share under Medicaid. In the nonhealth spending area, we also found spending increases generally supported by both federal and state funds, although the federal share showed more variation over the two time periods for nonhealth than for health spending. As shown in table 5, the median federal share fell in 2000 (from 50 percent to 44 percent), possibly as states responded to higher state revenues during the late 1990s. In 2004, the median federal share rose to 49 percent, possibly as a reflection of the tighter fiscal conditions states faced in this time period. In addition, the federal share of nonhealth spending grew more consistent among the states over the decade. The federal share ranged from 33 to 73 percent in 1995, tightening to range from 43 to 61 percent by 2004. It is important to highlight the distinction between the health and nonhealth areas again when discussing the federal and state shares of spending. In contrast to the health area where much of federal and state financial participation is guided by federal Medicaid statute and regulations, nonhealth spending—comprising numerous federal and state programs—is guided by an array of different laws and rules about federal and state financial participation. Specifically, supports for low-income people vary in terms of whether they are funded with federal funds, state- local funds, or a combination. While several key funding sources, such as the TANF block grant, foster care, food stamp administrative costs, and others require state matching and MOE provisions, others do not. In these cases, funding decisions are left entirely up to states. The overall increases in spending for nonhealth services in the nine states mask some substantial shifts over the decade in how states spent federal and state funds for low-income people. Two trends emerged. First, spending shifted away from cash assistance programs toward other types of aid and services (excluding health). Second, this expansion in noncash spending was strongest from 1995 to 2000, and spending increased further—but more slowly—from 2000 to 2004. Spending for work and other supports, particularly child care and development, was a key growth area in several states, reflecting state efforts to support welfare reforms that focused on employment. Spending on the various nonhealth services varied among the states, reflecting to some extent different state spending priorities. In general, states reported that increases in these areas were driven by policy changes to welfare and other social programs, increased program costs and demand, and increases in federal grants. By 2004, the nonhealth portion of state spending (from federal and state sources) for low-income services looked substantially different than it did in 1995. In all of the nine states, the total portfolio of nonhealth services shifted away from cash assistance toward other programs, as demonstrated in figure 4. For example, in New York, 33 percent of total nonhealth spending was devoted to cash assistance in 1995, compared with 13 percent in 2004. Other shifts among the noncash assistance categories varied by state and period, reflecting differing spending priorities. For example, work and other supports increased from 39 percent to 58 percent of the welfare-related budget in Wisconsin over the decade, while in Louisiana, the same category declined from 37 percent to 31 percent. Figure 4 also shows the relative size of the nonhealth categories. Employment services and training remained the smallest category in most of these states over the decade. Although cash assistance began the decade as a larger category in many states, by 2004 it was generally the second smallest category. Over the decade, work and other supports grew to become the second largest category in most states, and aid for the at-risk generally remained or became the largest category. The aid to the at-risk category includes spending for child welfare, juvenile justice, mental health, and other related services. Cash assistance spending declined dramatically from 1995 to 2000 in all case study states and varied from 2000 to 2004, as shown in table 6. Although some states increased spending after 2000, all nine states experienced at least a 50 percent decline in cash assistance spending over the decade. In all of the states, a dramatic decrease in cash assistance caseloads led to the decline in spending in this area, particularly from 1995 to 2000. In our previous work, we found that several factors have been cited to explain the large reductions in cash assistance caseloads. These include changes in welfare programs; the strong economy of the late 1990s; and other policy changes, such as expansions of the federal EIC and increased federal spending for child care subsidies. One state attributed the more recent caseload increases to the economy. Many state officials also noted changes in the characteristics of those who remained on the welfare rolls. They told us that after the shift to a work-first approach, the caseloads stabilized as the most employable recipients transitioned into the workforce. They said that the remaining cash assistance recipients tend to have multiple barriers to employment and require a wider and costlier range of services to enable them to be self-sufficient. In general, spending for other noncash categories combined (employment services and training, work and other supports, and aid for the at-risk) increased significantly after welfare reform, but slowed from 2000 to 2004 in most of these states, as shown in table 7. While most states increased spending after 2000, some states cited challenges in maintaining their initial rate of growth as their fiscal situations tightened. In contrast to cash assistance spending, which declined sharply during the first period, noncash expenditures rose dramatically in the first period and generally continued to rise during the second period, but at a slower rate. State spending patterns for training and education varied, although one trend related to welfare reform was evident. As shown in table 8, six states expanded employment services and training spending after 1995, in part to meet the increased employment focus of their TANF programs. Then five of these states cut this spending back as state revenues declined after 2000. For example, as cash assistance caseloads declined in Wisconsin from 1995 to 2000, it more than doubled spending for employment services and training. However, as cash assistance caseloads increased after 2000, spending for employment services and training was reduced 44 percent. Even so, spending for employment services and training ended more than 30 percent higher at decade end than at its beginning. In addition, in California, a large amount of TANF funds were moved into the training and education area from 1995 to 2000, but some of these funds were removed after 2000. In contrast, two states reduced their training and education spending during the period immediately following welfare reform, but expanded this spending after 2000. Over the decade, state spending generally increased by a higher percentage for work and other supports than for any other nonhealth category. In most case study states, this was the second largest nonhealth category in 2004. In each period, most of these states increased spending in this area, although the median increase was much smaller after 2000, as shown in table 9. These expansions are consistent with our previous work, which found that many states expanded the availability of supports that promote employment and economic independence for low-income families. Louisiana was the only state to experience a substantial spending decline in this category from 1995 to 2000. Louisiana increased spending for two areas in this category, including child care and development, as discussed below. However, these increases were more than offset by other spending areas that decreased, including administrative costs for food stamps, associated with declining food stamp caseloads in the state. After 2000, spending for work and other supports increased as Louisiana invested TANF funds in additional programs, particularly prekindergarten. In contrast, Colorado increased spending on refundable tax credits for working families during the robust economic growth of the 1995-2000 period, but decreased spending slightly from 2000 to 2004. The child care and development area was the main driver of spending changes in this category in many of these states, with high rates of growth as shown in table 10. In five states, more than half of all growth in the category was due to increased spending for child care and development. Several states reported that child care continued to be in demand, even as TANF caseloads fell, because many working parents relied on subsidized child care to help them keep their jobs. While most spending in this area is focused on child care subsidy programs, some states also increased spending for prekindergarten and other child development programs. As part of the 1996 welfare reform, the federal government increased funding to states through the Child Care and Development Fund (CCDF) to subsidize child care assistance for low-income families who were working or preparing for work through education and training, with a special emphasis on families working their way off welfare. In addition to CCDF, funds allocated by the nine states for child care or development included TANF, MOE, and other funds. Table 10 shows that substantial investments of these funds for child care and development accompanied welfare reforms in the first period and continued, in almost all of these states at a slower rate of increase, in the second period. Other areas of expansion included some entitlement or federal grant programs, such as tax credits, housing, or food assistance. Four states (Colorado, Maryland, New York, and Wisconsin) began or expanded state EIC programs to complement the federal EIC program, which offers work incentives in the form of a tax credit based on income. Food assistance spending increased in most states due to increased administrative costs related to expanding food stamp benefit rolls, although the benefit costs are not reflected here. Two states told us they had engaged in publicity campaigns to encourage eligible recipients to sign up for federally funded programs such as food stamps or EIC. Spending on aid for the at-risk, generally the largest nonhealth category, increased over the decade, although growth slowed considerably in most states after 2000, as shown in table 11. This category includes spending for child welfare, mental health, developmental disabilities, juvenile justice, substance abuse prevention and treatment, and related spending. Among these, the largest areas of spending were child welfare, mental health, and developmental disabilities. Officials in several states told us that there were increases in the costs of providing services for these three areas, as well as increased demand for child welfare and other services. However, several states had growth rates under 10 percent after 2000, because of decreases in spending areas such as juvenile justice, substance abuse, and developmental disabilities. Child welfare spending increased considerably in most of the nine states over the decade, primarily from 1995 to 2000, as shown in table 12. This includes spending for key federal/state partnership programs such as foster care, adoption assistance, and other child welfare services. Nationwide, child welfare systems investigate abuse and neglect, provide placements to children outside their homes, and deliver services to help keep families together. TANF and MOE funds played an important role in four states, which increased TANF-related spending until it accounted for 19 to 32 percent of child welfare spending by 2004. The combination of a substantial decline in traditional cash assistance caseloads, new flexibilities under PRWORA, and states’ implementation of their welfare reforms resulted in a changing role for TANF and MOE dollars across state budgets. The change from the previous welfare program— with its open-ended federal funding that matched state expenditures for monthly cash assistance—to the federal TANF block grant—with fixed federal funding and a specified level of state spending—gave states broader discretion over the types of services and activities to fund toward welfare reform goals. This change also gave states broader discretion over the amount of federal TANF and state MOE funds to spend in a given year, subject to minimum levels required under the MOE provisions. Under this new fiscal framework, the landscape of spending for traditional welfare funds changed substantially since welfare reform. TANF and MOE dollars played an increasing role in state budgets outside of traditional cash assistance payments, for programs to encourage work, help former welfare recipients keep their jobs, and provide services to needy families that did not necessarily ever receive welfare payments. However, with this shift, gaps arose in the information gathered at the federal level to ensure state accountability. Existing oversight mechanisms focus on cash assistance, which no longer accounts for the majority of TANF and MOE spending. As a result, there is little information on the numbers of people served by TANF-funded programs, meaning there is no real measure of workload or of how services supported by TANF and MOE funds meet the goals of welfare reform. Since welfare reform, states have increasingly spent TANF and MOE funds for aid and services outside of traditional cash assistance payments. Before welfare reform each of our study states spent some federal and state AFDC-related funds in spending categories other than cash assistance. However, by 2004, most of the states had significantly increased their use of TANF and MOE funds in these noncash categories compared with the level of spending in 1995, as shown in figure 5. The TANF block grant played a critical role in this shift in spending priorities. Under the block grant structure, states’ fixed annual TANF allotments did not change as cash assistance caseloads fell. In addition, states still had to meet maintenance of effort requirements by spending at least 75 percent of the amount they had spent in the past when caseloads were much higher. States faced choices about how to use these funds, including whether to leave some amount of their annual grant in reserve at the U.S. Treasury to help them meet any future increases in welfare costs. TANF funds not spent by states accumulate as balances in the U.S. Treasury. Our previous work showed that several trends emerged in this new welfare environment. First, many states increased their efforts to engage more welfare families in work or work-related activities in keeping with key TANF program requirements. More specifically, to avoid financial penalties, states were to meet specified work participation rates by engaging parents receiving cash assistance in work-related activities. States generally met these rates, in part because of adjustments made in the target rates due to the drop in caseloads and other provisions that allowed states to serve some families without work requirements. In strengthening their welfare-to-work programs, states emphasized the importance of work to TANF recipients and paid more attention to case management services, child care and transportation assistance, and other services to help individuals, including those who faced some barriers to employment, become job ready. Second, many states took steps to help parents who had left the welfare rolls for employment, often by continuing to provide child care assistance, sometimes using TANF funds to supplement other federal funds used for child care subsidies for low-income parents. Our work has shown that many former welfare recipients work in low-wage jobs with limited benefits and that continued assistance, such as child care subsidies, can help them maintain their jobs. Third, states also used TANF and MOE funds to provide a range of services to families that had not previously received cash welfare payments. These services can include onetime payments to families in need, such as for rent payments that might help keep them off the welfare rolls. Some states increased efforts to promote healthy marriages and two-parent families. All of these uses of TANF and MOE funds are generally considered in keeping with the broad goals established in the legislation. As specified by law, the purpose of TANF is to provide assistance to needy families so that children may be cared for in their own homes or in the homes of relatives; end the dependence of needy families 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. This shift to aid and services other than cash assistance is mirrored in our analysis of states’ spending patterns for TANF and MOE funds. Figure 6 shows the percentage of TANF and MOE funds (combined) that each state spent in each spending category in 1995, 2000, and 2004. (This figure only includes TANF and MOE spending, in contrast to figure 4, which showed the percentage of total federal and state low-income spending that each state spent in each category.) For example, figure 6 shows that California spent more than 90 percent of its federal and state AFDC-related funds on cash assistance in 1995 compared with 68 percent of its federal and state TANF-related funds in 2004. As the share of funds devoted to cash assistance declined in that state, the portion devoted to employment services and training, in particular, increased. In seven of the nine states, by 2004, cash assistance spending accounted for 40 percent or less of total TANF and MOE. States varied in how their TANF and MOE funds were distributed among the noncash categories. This shift to noncash assistance was curtailed somewhat from 2000 to 2004, when cash assistance caseloads and related spending increased in several of the states, associated with a contraction of spending for other forms of aid and services, as shown in figure 6. During this period, state officials generally had to make different choices about what services and programs they could support with TANF and MOE funds to ensure they had enough funds to support the core cash assistance program. Some state officials told us that they drew down their TANF balances or reserves to help them maintain service levels. Regarding these TANF balances, most of the nine states followed a pattern of initially building up their TANF balances and then drawing them down in the 2000-2004 time period to help them maintain services, as shown in figure 7. Over the decade, we found that the states used their federal and state TANF-related funds throughout their budgets for low-income individuals, supporting a wide range of state priorities, such as refundable state EICs for the working poor, prekindergarten, child welfare services, mental health, and substance abuse services, among others. While some of this spending, such as that for child care assistance, relates directly to helping cash assistance recipients leave and stay off the welfare rolls, other spending is directed to a broader population and set of state needs. The flexibility afforded states under TANF allows them to use these funds toward their state priorities. Some examples include the following: Oregon—home to a large refugee resettlement population—spent TANF funds on cash benefits and other refugee services. Oregon also spent TANF and MOE funds on emergency assistance for survivors of domestic abuse. New York and Wisconsin use federal TANF or state MOE funds for refundable tax credits. New York has increased the extent to which it counts state spending for the refundable portion of its EIC and dependent care tax credit to help it meet its MOE requirement. Wisconsin has used federal TANF funds to finance the refundable portion of its state EIC that previously had been financed with state funds, as we reported in our earlier report on these states’ use of funds. Michigan uses TANF funds for emergency homeless shelters and programs for runaways. TANF funds are also used for individual development accounts, which provide funds to eligible families to match their own funds to encourage them to save for educational purposes. According to state officials, Texas used MOE funds for prekindergarten for low-income children with low English proficiency. Texas also used TANF funds for an employment retention and advancement program for working people. California counts state funds used for the California Food Assistance Program toward its MOE requirement and uses TANF funds for juvenile probation services and fraud prevention incentive grants to counties. Maryland spent TANF funds through the state Department of Education for the Children At Risk program. According to the Governor’s Budget, this program provides services for pregnant and parenting teenagers and provides funds to reduce the number of students who drop out of school each year, prevent youth suicides, reduce the incidence of child alcohol and drug abuse, and reduce AIDS among students. According to state officials, Louisiana, after initially building up a large TANF balance, took steps from 2002 to 2004 to spend down these funds, in some cases through short-term initiatives to be supported only until funding ran out. Some of these spending initiatives included prekindergarten, which state officials noted is a priority of the governor; funds to address teen pregnancy; and support for child welfare advocates. While current mechanisms in place at the federal level to hold states accountable for their use of federal TANF and state MOE funds provide useful information, these reporting mechanisms still leave significant gaps that hamper oversight. The new federal welfare program goals and fiscal structure established in 1996 entailed substantial changes in federal oversight and reporting mechanisms. At the federal level, HHS is responsible for oversight of the TANF block grant, and states provide several types of information for oversight purposes. Key oversight and reporting mechanisms are expenditure reports on the amount and type of federal and state MOE plans that each state must file with HHS to outline its TANF programs and goals, among other things, for reducing out-of-wedlock pregnancies; annual reports that each state must file with HHS to supplement its state aggregate caseload and individual reporting on demographic and economic circumstances and work activities of individuals receiving TANF cash assistance; single audit reports conducted as part of governmentwide audits of federal aid to nonfederal entities; performance bonuses related to measures of job entry, job retention, and wage growth for TANF recipients and also for reducing out-of- wedlock births; and financial penalties in 14 specified areas, including failure to meet the state MOE requirement and the minimum work participation rates. In addition, HHS funding supports a range of research activities that provide additional information on TANF recipients and other low-income populations. These reporting mechanisms and information sources generally provide useful information on states’ use of TANF and MOE funds, although key information gaps remain. One such gap exists because the key measure of the number of people served through the block grant remains focused on families receiving TANF assistance, defined in TANF regulations as benefits designed to meet a family’s ongoing basic needs, which most typically occurs through receipt of monthly cash assistance. This measure does not provide a complete picture of the number of people receiving other forms of aid or services funded with TANF and MOE funds. In 2002, we estimated that in the 25 states we studied, at least 46 percent more families than are counted in the TANF caseload are provided aid or services with TANF and MOE dollars. In addition, we reported in June 2005 that the lack of information on the numbers of children and families receiving child care subsidies funded by TANF and the types of care received leads to an incomplete picture of the federal role in providing child care subsidies to low-income parents. We already said in that report that Congress may wish to require HHS to find cost-effective ways to address this specific gap to provide additional information of value to policymakers and program managers in ensuring the efficiency, effectiveness, and accountability of federal supports for child care. Additional information on the full range of people served by TANF and MOE funds is essential for a better understanding of the true workload of the grant. Caseload or workload information is important for oversight and policy-making purposes, particularly those related to the amount of and needs associated with the block grant. For example, as the cash assistance caseload declined by more than half nationwide, it raised questions as to whether adjustments were needed to the block grant funding levels. At the same time, because the amount of the block grant has not been adjusted for inflation since its creation in 1996, concerns have been raised about its declining value and the possible impact on meeting needs. Better information could inform these discussions. While having more information on the numbers served is important, it is also critical to make a distinction between those receiving cash assistance and other types of assistance, because different program requirements apply to families in different situations. More specifically, under TANF, families receiving ongoing cash assistance are generally subject to work requirements, time limits, and other requirements, in part to emphasize the transitional nature of assistance and to help ensure that recipients take steps to prepare for work. Those receiving other forms of aid outside of a state’s TANF program through a separate state program, such as working parents receiving child care subsidies, are not subject to requirements such as time limits on aid. Another information gap relates to what services are funded and how those services fit into a strategy or approach for meeting TANF goals. This would include information about intended target populations and the strategy or approach for using the funds to further welfare reform goals. For example, additional information on the extent to which TANF and MOE funds were used to support work requirements for cash assistance recipients is important to understanding the costs of supporting a state’s core TANF program. It is also important to have additional information to better understand the costs involved in providing aid to those transitioning off of welfare and to a more general population, such as for prekindergarten services or to supplement a state’s refundable EIC program. Such information would be useful to congressional policymakers in considering changes to TANF work requirements and implications for the provisions of other services, a key issue in TANF reauthorization deliberations. In creating the TANF block grant, Congress emphasized the importance of state flexibility, and to that end, the legislation restricted HHS regulatory authority over the states except to the extent expressly provided in the law. Regarding collecting additional information about services beyond cash assistance, while HHS has acknowledged the value of having additional information, it has said that it will not collect this information without legislative changes directing it to do so. In any effort to get more information or to increase or revise program and fiscal reporting requirements, important considerations should be taken into account. In our report on the current undercounting of those served by TANF, some state officials raised concerns about the possibility of additional TANF reporting requirements being imposed on states to collect information on families not included in the TANF caseload. These concerns included that (1) states lack the information systems needed to fulfill additional requirements, (2) fulfilling additional requirements will increase administrative costs, (3) additional data collection requirements could deter states and service providers from offering services because they would not want the administrative burden associated with them, and (4) requiring all service recipients to provide personal identifying information for every service may deter some people from accessing services because of the stigma associated with welfare. While many of these concerns are legitimate, they do not necessarily outweigh the importance of getting needed information for oversight and policy making and can be considered in addressing any changes. In addition, there may be a variety of ways to get needed information, some more cost-effective than others, including relying on existing data sources or special studies. Moreover, opportunities may exist to streamline or eliminate some reporting requirements to make way for more relevant ones, as determined by Congress, HHS, and the states. In the past, Congress has included in legislation a requirement that HHS cooperate with states—key stakeholders in welfare reform—in considering aspects of monitoring state programs and performance. HHS has worked with state and human services professional organizations to discuss and receive input on information requirements and performance standards in the past. National-level data show that the trend away from cash assistance spending has occurred nationwide. States are using substantial portions of their block grants and MOE funds as large, flexible funding streams to meet their priorities in many areas of their budgets for low-income families, yet much remains unknown at the national level about how these federal TANF and state MOE funds are used to meet the overall goals of welfare reform. Ten years after Congress passed sweeping welfare reforms, much has changed in how federal and state dollars support programs for low-income and at-risk individuals. Some trends raise issues for the future. Overall, spending is up, but state budgets for low-income individuals are increasingly dominated by health care spending. To the extent that this trend continues or becomes more pronounced, it warrants attention as to its effect on state spending to meet other needs of low-income individuals. Another key trend was the shift in nonhealth spending priorities away from cash assistance to greater emphasis on supporting low-income individuals’ work efforts. However, the greatest increases came right after welfare reform during the strong economy, while some contraction in spending was apparent in the latter period. This raises questions about the sustainability of this shift. In addition, in the new welfare environment, too much remains unknown about how TANF block grant funds are spent to meet welfare goals. A natural tension exists with block grants that is not easily addressed. A key challenge is to strike an appropriate balance between flexibility for states and accountability for federal goals. This is particularly important given the large dollar amount of the TANF block grant—over $16 billion in federal funds annually. With the current accountability and reporting structure for TANF, the information gaps hamper decision makers in making informed choices about how best to spend federal funds to assist vulnerable populations cost effectively. At the same time, consideration needs to be given to collecting needed information in a way that minimizes reporting burden and acknowledges the importance of flexibility in addressing state and local needs. To better inform its oversight and decision-making process, Congress should consider ways to address two key information gaps for the TANF block grant: (1) insufficient information on the numbers served by TANF funds and (2) limited information on how funds are used—for example, on which target populations and as part of what strategies and approaches— to meet TANF goals. Efforts to obtain more information must take into account how to do so in the most cost-effective and least burdensome way. Some options include Congress directing the Secretary of HHS to require states to include more information in state TANF plans filed with HHS on their strategies and approaches for using funds; require states to include more information on all aspects of TANF spending in the annual reports they must file with HHS; and revise other reporting requirements regarding the uses and recipients of TANF-related funds. Congress may wish to require the Secretary to consult with key welfare reform stakeholders in assessing and revising reporting requirements or information-gathering strategies. We provided a draft of this report to HHS for review. In its written comments, which appear in appendix VI, HHS agreed that additional information on states’ use of TANF funds would be valuable and that expanded data collection requirements should be done in a cost-effective manner and in consultation with stakeholders. HHS also provided technical comments that we incorporated where appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send 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. In addition, the report is available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact David D. Bellis at (415) 904-2272 or Stanley J. Czerwinski at (202) 512-6520. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VII. In order to provide information on welfare-related spending over the decade since welfare reform, we designed our study to (1) examine changes in the overall level of welfare-related spending for nonhealth and health services in the periods before and after the recession in 2001 and over the decade since 1995, (2) examine changes in spending priorities for nonhealth welfare-related services during the same time periods, and (3) review the contribution of Temporary Assistance to Needy Families (TANF) funds to states’ spending for welfare-related services. To address these objectives, we used a survey instrument to collect state spending data from state budget and program officials in nine states examined in our prior reports; conducted site visits in these nine states; and reviewed information available from prior GAO work, relevant federal agencies, and other organizations. The nine states in our study—California, Colorado, Louisiana, Maryland, Michigan, New York, Oregon, Texas, and Wisconsin—represent a diverse set of socioeconomic characteristics, geographic regions, population sizes, and experiences with state welfare initiatives. For the purposes of this report, we focused on spending for working-age adults and children and excluded spending for the elderly, long-term care, and institutional care. The term welfare-related refers to spending for low-income and at-risk individuals, including TANF-eligible and non-TANF eligible individuals. Because our focus was on states’ budgetary decisions, we excluded federal program spending about which states do not make key budget decisions, such as food stamp benefits, the Earned Income Tax Credit, Supplemental Security Income, and other programs; as a result, our data do not capture all federal spending for low- income individuals. To obtain data on welfare-related spending over the decade since welfare reform, we asked state budget and program officials from each state’s central budget office and relevant state agencies to identify welfare-related spending data using the same survey instrument and criteria used in our prior report. (See app. V.) We worked closely with state officials to complete the survey during our site visits and through numerous telephone and e-mail contacts. Because parts of the survey were completed by different state officials, we also provided the states with the data we compiled for their review as well as data summaries of our analysis. We collected budget data and program information for three points in time based on state fiscal years: for 1995 before the passage of federal welfare reform legislation; for 2000; and for 2004, the most recent year for which data were available. Consistent with our prior methodology, we used the survey to take a comprehensive look at state social service program budgets by encouraging states to provide spending data on a broad array of programs, rather than just those programs that received federal TANF funding. Our study includes federal, state, and local spending associated with Medicaid, TANF, housing assistance, child care and welfare, and a myriad of other programs aimed at needy populations and for which states make key budgetary decisions. State budget structures differ across states. Some states in our analysis used biennial budgets, others used annual budgets. States can place employment and training programs primarily in their social services departments; other states can place these programs in their economic development departments. Some states place responsibility for welfare programs with county governments. These differences make comparisons of state budgets and spending difficult. In asking states to report spending on individual programs, regardless of which state agency oversaw these programs, and then aggregating the spending into the same categories for each state, we were able to compare state spending trends across all of the states. As figure 8 shows, we classified spending data in several key ways, including nonhealth spending—cash assistance (Category 1), employment services and training (Category 2), work and other supports (Category 3), and aid for the at-risk (Category 4)—and health spending (Category 5), which we generally separated from nonhealth spending in our analysis. Our first spending category includes state spending for ongoing cash assistance payments with federal or state moneys under the Aid for Families with Dependent Children (AFDC), TANF, or other state programs. This category corresponds most closely with traditional monthly cash assistance payments under the AFDC program. Our second spending category includes spending for job and training programs that seek to prepare people for employment. Our third spending category includes programs that seek to support low-income people with other forms of aid or services, including helping families move from welfare to work or avoid welfare altogether. For example, child care subsidies and rental assistance payments can help parents remain employed even if they are working in low-wage jobs. Our fourth spending category recognizes the range of programs that states can use to develop strategies to achieve TANF’s goals. These spending areas include child welfare programs, substance abuse programs, mental health programs, and programs that help the developmentally disabled attain a level of self-sufficiency, and exclude spending for any individuals in institutions. While many of these state spending areas may not have income standards to determine eligibility, a state can claim TANF funds for expenditures in these areas if the state is able to certify that participants in these programs meet the eligibility requirements set forth in the state’s TANF plan. Our fifth spending category includes spending for health services aimed at low-income people but excludes spending for the elderly, long-term care, and institutional care. Analyzing health care spending helps recognize a state’s true and substantial investment in spending to support these low-income and needy populations. In general, our spending categories were designed to cover all areas of a state’s budget associated with the TANF-eligible population and allowable expenses under TANF as well as for other low-income children and individuals of working age. We analyzed state spending of both federal and state funds on a wide array of programs aimed at providing services to the needy and that flowed through the state budget. In this analysis, federal spending is not defined by the level of a federal grant allocated to a state, but rather by how much of the grant the state chooses—or in some cases is required—to spend on a particular 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 stamp 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. Likewise, if a state budget action prompted local spending in these areas, through incentives like a state- local match, then local spending was included in our analysis. We converted state spending data to real 2004 dollars in order to make our spending more comparable over time. To obtain program description and recipient eligibility information on the spending data we collected, we also spoke with budget and program officials in these nine states knowledgeable about state TANF programs, Medicaid programs, and other state programs supporting the spending we captured in our survey. We also gathered information about the fiscal and economic environment in each state since state fiscal year (SFY) 2000, the last data year in our prior report, and a period that included a national recession in 2001. We worked closely with state officials to complete the survey. Once the state program and budget officials identified the program spending 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. To obtain information about policy and program developments for welfare and other related program spending data collected in our survey, we reviewed reports and information readily available from our prior work, relevant federal agencies, state governments, and local advocacy groups. We took several steps to determine the completeness and accuracy of data obtained from states. We reviewed related documentation and examined the data for obvious omissions and errors and to have reasonable assurance that the spending data were comparable over the three years in our analysis. We also collected information and audit reports on the systems state officials used to provide state spending data. We did not test the data systems ourselves. In some cases, state auditors found weaknesses with relevant agency data systems or internal controls. However, for the purposes of examining aggregate welfare-related spending across state budgets, and identifying the purposes of spending within these aggregates, we found the survey data we collected to be sufficiently reliable for use in this report. We determined the completeness and accuracy of data obtained from the Department of Health and Human Services (HHS) based on interviews and related documentation and determined that the data were sufficiently reliable for use in this report. 1. Provide expenditures for two state fiscal years (not the federal fiscal year): 1999-2000 and 2003-2004. For most states these would be the fiscal years that ended June 30, 2000 and June 30, 2004; for Texas they ended August 31, 2000 and August 31, 2004; for New York March 31, 2000 and March 31, 2004. Please note that there are four tabs at the bottom of the spreadsheet that identify four separate worksheets to be filled out. There are instructions for the childcare and healthcare surveys on their spreadsheets. Instructions for the social services survey are attached. Identify all state programs serving social service needs that are targeted towards reducing dependence on public assistance. Except where noted, include programs that serve both TANF-eligible and non-TANF-eligible clients. 3. 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. You may wish to refer them to the spending guide at http://www.acf.dhhs.gov/programs/ofa/funds2.htm. 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). Include all expenditures for each program serving social service needs, including but not limited to TANF and MOE expenditures. Include all TANF spending; if some TANF expenditures do not fit into one of the specific program categories, include them in one of the lines labeled “other.” If TANF funds are transferred to SSBG or the CCDF, please place them in those columns (if possible, label them separately from other SSBG or CCDF funds by inserting a row or a note). 6. Please be careful to count expenditures only once! 7. Do not include capital expenditures. 8. 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 it is impossible to break out these direct costs by program, include them in the other lines under the most relevant sub-category. If necessary, estimate the percentage of direct costs that apply to the programs eligible for our survey. Include the costs of fringe benefits for state personnel. (A rough estimate of fringe benefit costs is all that is necessary.) Identify funding streams included in the columns labeled “Other” on a separate worksheet. 9. 10. For columns labeled “SSBG” (Social Services Block Grant): If state officials cannot isolate spending on individual programs, obtain either (1) estimates for these amounts, or (2) totals with an explanation of the general areas in which SSBG funds are spent. For TANF funds transferred from TANF to SSBG, document them as SSBG expenditures with a note on the 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. 12. When possible, identify the caseload and eligibility criteria for each program and provide supporting documentation. Suggested format for data submission: For example, Line 2b, Work Preparation, 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. The various agencies’ contributions could be compiled and summarized. 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, 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. Do not include any 100% federally funded program such as free or reduced- school breakfast or lunch programs. Include, however, the state and federal expenditures on administrative expenses for those programs and any state supplemental programs. 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 Include expenditures in this category on lines 2a-2c below. Line 2a: education and training. In this instance, limit spending to TANF-eligible people. Line 2b: work preparation. Include expenditures on programs to prepare low-income people who are not yet working with skills to make them employable. Examples include skills development programs, community service placements, and Workforce Investment Act programs. 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 support that are not included above. Describe such programs on an attached sheet. Line 3: Employment Support Include expenditures in this category on lines 3a-3f 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 and 3c: 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. On line 3c, do not include foregone state revenues as an expenditure. 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 Include expenditures in this category on lines 4a-4c below. 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 Include expenditures in this category on lines 5a-5c below. 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 Include expenditures in this category on lines 6a-6d below. Line 6a: 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, short-term inpatient treatment facilities, and outpatient medical care. Line 6b: 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 6c: 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 6d: other Include expenditures on any other programs that are not included above. Describe such programs on an attached sheet. TANF: Temporary Assistance for Needy Families SSBG: Social Services Block Grant, Title XX of the Social Security Act TANF-MOE: TANF Maintenance of Effort. See your state TANF director or http://www.acf.dhhs.gov/programs/ofa/funds2.htm Instructions for Healthcare Coverage Spending Survey: Include expenditures on any healthcare program, in-home or out-of-home, aimed at low-income working or non-working people and their children, excluding long-term care. Include programs for both the TANF-eligible and non-TANF-eligible population, but exclude all programs for seniors. 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). 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 low-income 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. In addition to the contacts named above, Paul Posner, Gale Harris, Tom James, Sandra Beattie, Rebecca Hargreaves, Cheri Harrington, Dorian Herring, Brittni Milam, and Keith Slade made key contributions to this report. In addition, Gregory Dybalski and Jerry Fastrup provided key analytical and technical support; Wesley Dunn provided legal support; and Katherine Bittinger, Allen Chan, Reid Jones, Tahra Nichols, Rudy Payan, John Rose, and Suzanne Sterling-Olivieri assisted with fieldwork in states.

Summary: Under the Temporary Assistance for Needy Families (TANF) block grant created as part of the 1996 welfare reforms, states have the authority to make key decisions about how to allocate federal and state funds to assist low-income families. States also make key decisions, through their budget processes, about federal and state funds associated with other programs providing assistance for the low-income population. States' increased flexibility under TANF as well as the budgetary stresses they experienced after a recession draw attention to the fiscal partnership between the federal government and states. To update GAO's previous work, this report examines (1) changes in the overall level of welfare-related spending; (2) changes in spending priorities for welfare-related nonhealth services; and (3) the contribution of TANF funds to states' spending for welfare-related services. GAO reviewed spending in nine states for state fiscal years 1995, 2000, and 2004 and focused on spending for working-age adults and children, excluding the elderly, long-term and institutional care. GAO found that spending for low-income people for health and nonhealth services in nine states generally increased in real terms from 1995 to 2000 and from 2000 to 2004. Health spending, excluding spending for the elderly, outpaced nonhealth spending over the decade and now consumes an even greater share of total spending for low-income people, mirroring a nationwide expansion in health care costs. Spending increases were substantially supported by both federal and state funds in the health and nonhealth areas in each time period, reflecting the important federal-state partnership supporting these low-income programs. Overall, spending increases reflected changes in eligible populations and needs, increasing costs, as well as policy changes. While nonhealth spending increased in real terms, spending priorities shifted away from cash assistance to other forms of aid, particularly work supports, in keeping with welfare reform goals. The largest increases for noncash services occurred from 1995 to 2000, with smaller increases from 2000 to 2004, when some state officials cited challenges in maintaining services. By 2004, states used federal and state TANF funds to support a broad range of services, in contrast to 1995 when spending priorities focused more on cash assistance. However, reporting and oversight mechanisms have not kept pace with the evolving role of TANF funds in state budgets, leaving information gaps at the national level related to numbers served and how states use funds to meet welfare reform goals, hampering oversight. Any efforts to address these gaps should strike an appropriate balance between flexibility for state grantees and accountability for federal funds and goals.