The TANF block grant was created by the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) and was designed to give states the flexibility to provide both traditional welfare cash assistance benefits as well as a variety of other benefits and services to meet the needs of low-income families and children. TANF has four broad goals: (1) provide assistance to needy families so that children may be cared for in their own homes or homes of relatives; (2) end dependence of needy parents on government benefits by promoting job preparation, work, and marriage; (3) prevent and reduce out-of- wedlock pregnancies; and (4) encourage two-parent families. Within these goals, states have responsibility for designing, implementing, and administering their welfare programs to comply with federal guidelines, as defined by federal law and HHS. In creating TANF, the federal government significantly changed its role in financing welfare programs in states. PRWORA ended low-income families’ entitlement to cash assistance by replacing the Aid to Families with Dependent Children (AFDC) program— for which the federal grant amount was based on the amount of state spending—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 federal TANF allotments. Importantly, with the fixed federal funding stream, states assume greater fiscal risks in the event of a recession or increased program costs. However, in acknowledgment of these risks, PRWORA also created a TANF Contingency Fund that states could access in times of economic distress. Similarly, during the recent economic recession, the federal government created a $5 billion Emergency Contingency Fund for state TANF programs through the American Recovery and Reinvestment Act of 2009, available in fiscal years 2009 and 2010. The most recent data available, for fiscal year 2010, show that the federal government and states spent almost $36 billion on benefits and services meeting one or more of the TANF goals. In that year, states provided, on average, about 1.9 million families per month with ongoing cash assistance, including about 800,000 families in which the children alone received benefits. This represents a significant drop from the more than 3 million families receiving cash assistance when states implemented TANF in fiscal year 1997. In addition, states provide a broad range of services to other families in need not included in the welfare caseload data. The total number of families assisted is not known, as we have noted in our previous work. These allowable services under TANF can generally include any spending reasonably deemed to meet one or more of the four broad goals of TANF, and can include one-time cash payments, work and training activities, work supports such as child care and transportation, efforts to promote two-parent families or marriage, and child welfare services, among others. When TANF began, cash assistance represented the largest spending category (73 percent in fiscal year 1997). In contrast, cash assistance spending in fiscal year 2010 accounted for 30 percent of total TANF spending. Reducing dependence on government benefits through job preparation and employment is a key goal of TANF, and PRWORA identified the work participation rate as one of the federal measures of state TANF programs’ performance. This rate is generally calculated as the proportion of work- eligible TANF cash assistance recipients engaged in allowable work activities. for ensuring that generally at least 50 percent of all families receiving TANF cash assistance benefits participate in one or more of the allowable work activities for a specified number of hours each week. TANF provisions include other features to help emphasize the importance of work and the temporary nature of assistance, such as 60-month time limits on the receipt of aid for many families. 42 U.S.C. § 607. The 12 work activities are: unsubsidized employment, subsidized private sector employment, subsidized public sector employment, work experience (if sufficient private sector employment is not available), on-the-job training, job search and job readiness assistance, community service programs, vocational educational training, job skills training directly related to employment, education directly related to employment (for recipients who have not received a high school diploma or certificate of high school equivalency), satisfactory attendance at secondary school or in a course of study leading to a certificate of general equivalence (for recipients who have not completed secondary school or received such a certificate), and the provision of child care services to an individual who is participating in a community service program. 42 U.S.C. § 607(d). The preamble to the final rule issued by HHS in 1999 noted that the MOE cost-sharing arrangement reflected Congress’ recognition that state financial participation is essential for the success of welfare reform. The preamble to this final rule also noted that Congress wanted states to be active partners in the welfare reform process. These requirements are an important element of TANF—if a state fails to meet its MOE requirement for any fiscal year, HHS is required by law to reduce dollar- for-dollar the amount of a state’s basic TANF grant for the following fiscal year. Maintenance of effort requirements are sometimes found in federal grant programs to prevent states from substituting federal for state dollars. Such provisions can help ensure that federal block grant dollars are used for the broad program area intended by the Congress, in this case the four broad TANF purposes. Without such provisions, federal funds ostensibly provided for these broad areas could, in effect, be transformed into general fiscal relief for the states, as states could use some or all of their federal block grants to replace their own money invested in the program area. To the extent that this occurs, the ultimate impact of these federal dollars would be to increase state spending in other programs, reduce taxes, or some combination of both. A maintenance of effort requirement brings its own challenges—it can be complex to monitor and may lock states into meeting minimum spending levels that may no longer be warranted given changing conditions. Under TANF, while states have significant flexibility in how to spend their own money, several requirements guide the use of these state funds, including how much, for whom, and for what. Each state’s amount of MOE is generally based on fiscal year 1994 state spending for a specific set of programs. The 1996 welfare reform law consolidated and replaced programs under which the amount of federal spending was often based on state spending levels, and considerable state dollars contributed to these pre-TANF programs. Figure 1 shows the federal programs with related state spending that were included in establishing the fixed annual amount of the TANF block grant and state maintenance-of-effort level for each state. The required percentages of these previous state spending levels vary under different conditions: 80 percent—To receive its federal TANF funds, a state must generally spend state funds in an amount equal to at least 80 percent of the amount it spent on welfare and related programs in fiscal year 1994. 75 percent—If a state meets its minimum work participation rate requirements, then it generally need expend only 75 percent of the amount it spent in fiscal year 1994. 100 percent—To receive contingency funds, a state must expend 100 percent of that fiscal year 1994 amount. In addition to its own spending, a state may count toward its MOE certain in-kind or cash expenditures by third parties, such as nonprofit organizations, as long as the expenditures meet other MOE requirements, including those related to eligible families and allowable activities, discussed below. In addition, an agreement must exist between the state and the third party allowing the state to count the expenditures toward its MOE. Generally, to count toward a state’s MOE, expenditures must be for “eligible families,” that is, families who: include a child living with his or her custodial parent or other adult caretaker relative (or a pregnant woman); and meet the financial criteria, such as income and resources limits, established by a state for the particular service or assistance as described in its TANF plan. Each state is required to prepare and provide a biennial TANF plan describing its programs to HHS. Generally, expenditures for eligible families in these areas may count toward MOE: educational activities to increase self-sufficiency, job training and work (except for activities or services that a state makes generally available to its residents without cost and without regard to their income); cash assistance; child care assistance; other activities considered in keeping with a TANF purpose. certain administrative costs; and These expenditures may be made on behalf of families in a state’s cash welfare program or for other eligible families through other state programs or initiatives. However, state-funded benefits, services, and activities that were not a part of the pre-reform programs generally may count as MOE only to the extent that they exceed the fiscal year 1995 level of expenditures in the programs. This is referred to as the “new spending” test. For example, if a state has currently spent its own funds on eligible families on an allowable activity, such as a refundable earned income tax credit, it may count toward its MOE only the current amount that exceeds that program’s expenditures in fiscal year 1995. State MOE levels remained stable for many years and then increased more recently for several reasons. As shown in figure 2, until fiscal year 2006, MOE levels remained relatively stable, hovering around the 80 percent required minimum or the reduced rate of 75 percent for states that met their work participation rates. From fiscal years 2006 through 2009, they increased each year. In a 2001 report, we examined issues related to the new federal-state fiscal partnership under TANF, noting several issues related to TANF and MOE spending rules.