The Personal Responsibility and Work Opportunity Reconciliation Act (P.L. 104-193), enacted in August 1996, overhauled the nation’s welfare system. Although some states were already implementing changes to their welfare programs before this legislation, the act abolished the federal Aid to Families With Dependent Children program and established TANF block grants, which imposed stronger work requirements for welfare recipients than its predecessor program. TANF provides benefits for a time-limited period and focuses on quickly putting individuals to work. The TANF block grants available to states totaled about $16.6 billion in fiscal year 1998—ranging from about $21.8 million in Wyoming to over $3.7 billion in California. To receive their TANF grants, states must maintain funding for needy families at specified levels tied to their historical expenditures on welfare programs. The Balanced Budget Act of 1997 authorized $3 billion for welfare-to-work grants to state (the 50 states, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands) and local communities to move welfare recipients into jobs—$1.5 billion is available to be awarded by Labor each year in fiscal years 1998 and 1999. A small amount of the total grant money was set aside for special purposes: 1 percent for Native American tribes ($15 million for each year), 0.8 percent for evaluation ($12 million for each year), and $100 million in fiscal year 1999 for performance bonuses to states that successfully move welfare recipients into employment. After these set-asides, Labor allocated 75 percent (about $1.1 billion for fiscal year 1998) of the welfare-to-work funds to states on the basis of a formula that equally considers the shares of individuals with incomes below the poverty level and adult recipients of TANF assistance residing in the state. States must pledge one dollar of nonfederal funding to match every two dollars of federal funding provided under the formula; up to half of the match may consist of third-party in-kind contributions. The state welfare-to-work matching funds are in addition to the state funds that must be expended as required under TANF block grants. Funds not allocated by formula, which are nearly 25 percent of the welfare-to-work funds (over $368 million for fiscal year 1998), were available for Labor to award competitively to local organizations. These organizations—local governments, Private Industry Councils, and private organizations that apply in conjunction with a Private Industry Council or local government—submit applications to Labor describing how they plan to use welfare-to-work funds. In addition to giving special consideration to cities with large concentrations of poverty and to rural areas, Labor reviews applications and awards competitive grants using the following criteria: the relative need for assistance in the area proposed to be served; the extent to which the project proposes innovative strategies for moving welfare recipients into lasting work; the quality of the proposed outcomes of the project; the degree to which the project is coordinated with other services; and the demonstrated ability of the grant applicant. To receive its allocation of welfare-to-work formula funds, a state was required to submit a plan for the use and administration of the grant funds to Labor. The Secretary of Labor then determined whether the plan met the statutory requirements, including assurances that the plan was developed with coordination from appropriate entities in substate areas and that welfare-to-work programs and funds would be coordinated with programs funded through the TANF block grants. Using an allocation formula developed by the state, 85 percent of the state’s federal formula funds were to be passed to local Private Industry Councils. The Private Industry Councils have policy-making responsibility in these service delivery areas and administer the welfare-to-work programs at the local level unless the Secretary of Labor approves a governor’s request to use an alternative administering agency. The remaining 15 percent of the state’s formula allotment may be spent on welfare-to-work projects of the state’s choice, which is described in this report as the governor’s discretionary fund. States establish their own formula for allocating formula funds to Private Industry Councils for local service delivery areas but must give a minimum weight of 50 percent to the number of people in the area in excess of 7.5 percent of the population whose income is below the poverty level. States may also consider the local area’s proportion of the state’s long-term welfare population or the state’s unemployed population. Additionally, if the amount to be allocated by formula to a local service delivery area is less than $100,000, that money may be held by the state and added to the 15 percent governor’s discretionary funds. Labor was required to obligate the fiscal year 1998 formula grant funds by September 30, 1998; however, funds for the competitive grants were multiyear, and Labor could obligate those funds into fiscal year 1999. Both formula and competitive grants must be spent within 3 years of the grant award. Under the Balanced Budget Act, the welfare-to-work grants were initially legislated as multiyear allocations that could be awarded any time in fiscal years 1998 and 1999, but this law was amended to require that Labor award formula funds available for fiscal year 1998 by September 30, 1998. If at the end of any fiscal year states have not applied for or have applied for less than the maximum amount available for formula funds, the funds are to be transferred to the General Fund of the U.S. Treasury. Competitive grant funds, however, remain multiyear funds, and there is no requirement to obligate funds for fiscal year 1998 within the fiscal year. Grantees have flexibility in designing welfare-to-work strategies geared to the needs of their own local populations and labor markets. Overall, welfare-to-work program services help individuals get and keep unsubsidized employment. Allowable activities include job readiness and placement services financed through vouchers or contracts; community service or work experience; job creation through public sector or private sector employment wage subsidies; and on-the-job training, postemployment services financed through vouchers or contracts, and job retention and support services. Both formula and competitive grant funds are to be used for certain TANF families—recipients on long-term welfare assistance, TANF recipients with characteristics of long-term welfare dependence, and/or their noncustodial counterparts. These people are considered hard to employ and may have low educational attainment or poor work histories. The law requires that at least 70 percent of the funds be spent on the hardest to serve long-term welfare recipients with two of three specified barriers to successful employment. Up to 30 percent of the grant funds may be spent on individuals with characteristics of long-term welfare recipients; these characteristics could include dropping out of school, teenage pregnancy, or poor work history. Under either the 70- or 30-percent category, noncustodial parents with dependents receiving TANF assistance may qualify for welfare-to-work activities. (See table 1 for a summary of eligibility requirements for welfare-to-work services.) Labor awarded about $1 billion in formula grants for fiscal year 1998 to all but six states. The six states that chose not to participate in the formula grant program would have received about $71 million. Labor also awarded a total of almost $500 million in competitive grants using all of the approximately $368 million in competitive grant funds available for fiscal year 1998 and about a third of the competitive grant funds available for fiscal year 1999. Most states applied for and received their full allocation of formula grant funds. (See app. II for the amount of formula funds awarded, by state, for fiscal year 1998.) Of the states that applied for formula grant funding, Arizona was the only state that did not pledge sufficient matching funds to receive its maximum federal allocation. Of the states that declined to participate in the welfare-to-work program, four states did not submit a welfare-to-work plan to Labor and the remaining states informed Labor that they would not participate in the formula grant program. These six states chose not to participate for various reasons, including concerns about their ability to provide state matching funds. Arizona needed about $9 million in matching funds to obtain its full allocation of about $17 million in federal welfare-to-work funds; however, the state legislature was not willing to provide this amount in matching funds. Instead, the state assured a match of $4.5 million and obtained a formula grant for $9 million in fiscal year 1998. Initially, Arizona asked the local service delivery areas to determine whether they could raise the required matching funds; however, the local areas, while they wanted the welfare-to-work funding, did not believe they could raise the matching funds locally. Of the six states that declined to participate in the welfare-to-work formula program, four states—Idaho, Mississippi, South Dakota, and Wyoming—neither informed Labor they would not be participating in welfare-to-work, nor submitted a welfare-to-work plan to Labor; the remaining states—Ohio and Utah—informed Labor that they would not participate. Ohio initially applied for its welfare-to-work allocation, but the governor later decided the grant was too complex and burdensome, especially the match requirement. Since Ohio had excess, unobligated TANF funds, state officials believed the TANF funds should be used to move welfare recipients to work—especially because there were no matching requirements and the eligibility requirements were less restrictive. Utah sent a letter declining its allocation, listing two reasons for its decision—that the state believed the formula funding was too restrictive regarding participant eligibility and that it believed the welfare-to-work grants were too prescriptive and did not allow the state enough flexibility.