The TANF block grant was created through 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 the formation and maintenance of two-parent families. Within these goals, states are responsible for designing, implementing, and administering their welfare programs to comply with federal requirements, as defined by federal law and HHS. The creation of TANF significantly changed the federal government’s 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 with the TANF block grant. Each state’s TANF block grant amount is generally based on the amount of the state’s spending under AFDC. With the fixed federal funding stream, states assume greater fiscal risks in the event of an economic recession or increased program costs. In acknowledgment of these risks, PRWORA also created a TANF Contingency Fund that states could access in times of economic distress. In addition, during the most recent recession, the federal government created a $5 billion Emergency Contingency Fund for state TANF programs through the American Recovery and Reinvestment Act of 2009 (Recovery Act), available in federal fiscal years 2009 and 2010. PRWORA coupled the block grant with an MOE provision, which requires states to maintain a portion of their own historic financial commitment to their welfare programs as a condition of receiving their full federal TANF allotments. For example, these provisions generally require that each state spend at least 80 percent (75 percent if the state meets certain performance standards) of the amount it spent on welfare and related programs in fiscal year 1994, before TANF was created. In addition to its own spending, under HHS regulations, a state is permitted to count toward its TANF MOE requirement certain in-kind or cash expenditures by third parties—such as nongovernmental organizations (including nonprofit organizations or other private parties)—as long as the expenditures meet other TANF MOE requirements, including those related to eligible families and allowable activities. In addition, an agreement must exist between the state and the nongovernmental third- party organization allowing the state to count the expenditures toward its TANF MOE requirement. HHS noted in its preamble to the final rule for TANF issued in 1999 that the MOE cost-sharing requirement reflected Congress’ recognition that state financial participation is essential for the success of welfare reform. It also noted that Congress wanted states to be active partners in the welfare reform process. Allowing states to count nongovernmental third-party expenditures toward their MOE requirement was a policy choice HHS first articulated in December 2004. HHS later set forth the policy in a rule as part of the regulations implementing the Deficit Reduction Act of 2005. If a state fails to meet its TANF MOE requirement for any fiscal year, HHS is required by law to reduce dollar- for-dollar the state’s basic TANF grant amount for the following fiscal year. States’ levels of MOE spending can affect other TANF requirements, such as their required work participation rates. States are generally held accountable for ensuring that at least 50 percent of all families with a work-eligible individual receiving TANF assistance participate in work activities for a specified number of average hours per week over the month subject to a provision known as the caseload reduction credit, which allows states to reduce the work participation rate they are required to meet based on reductions in the size of their TANF caseload. In addition, under federal regulations, if states spend in excess of their required MOE spending level (excess MOE), they may be allowed to increase their caseload reduction credits and thereby lower the work participation rates they must meet. For example, our previous work found that in fiscal year 2009, 32 of the 45 states that met their required work participation rates for all TANF families claimed excess state MOE spending toward their caseload reduction credits. We have not updated this analysis, and information on how many states use excess MOE to reduce their required work participation rate is not readily available, according to HHS officials. However, HHS’s most recent TANF expenditure data reported by states show that for fiscal year 2014, about half of states reported total MOE expenditures at the 100-percent level or above. According to HHS data, until fiscal year 2006, state TANF expenditures counted toward TANF MOE requirements remained relatively stable. Specifically, according to HHS data, spending hovered around required minimum MOE levels (either 75 percent or 80 percent of the amount the state spent in 1994). Further, from fiscal years 2006 through 2009, the level of TANF spending states counted toward MOE requirements increased each year, according to HHS data. In aggregate, state MOE expenditures have remained above the 100-percent MOE level since 2009. Several reasons account for higher levels of reported MOE spending since 2006. First, many states (20) had to meet a higher MOE spending requirement because they accessed TANF Contingency Funds from fiscal years 2007 through 2010. According to HHS officials, many states have continued accessing these funds through the present day. Second, some states may have increased their level of MOE spending to access the Emergency Contingency Fund, which almost all states did in fiscal years 2009 and 2010. To access these funds, states were required to increase their basic assistance caseload and spending or spend more state funds for short-term, non-recurrent benefits or subsidized employment than they had in a corresponding quarter in an earlier base year. Third, many states claimed additional MOE spending to help them meet work participation rate requirements. Some stakeholders have raised questions about counting nongovernmental third-party expenditures toward a state’s TANF MOE requirement; these questions fall into two main categories. First, some stakeholders question whether allowing states to count spending by nongovernmental third-party organizations as TANF MOE spending is in keeping with the goal of maintaining or increasing the level of state provided services, considering these nongovernmental third-party services may have been provided whether or not the state counted them as MOE spending. If reported MOE spending does not actually reflect maintaining or increasing service levels, the overall level of services available to low-income families and children in the state may decrease. HHS officials note that nongovernmental third-party expenditures do not necessarily represent added state spending and that counting nongovernmental third-party expenditures as TANF MOE spending can reduce a state’s financial commitment in meeting its basic MOE requirement. HHS officials said that prohibiting this practice would help to ensure that states maintain their commitment to needy families as the law intended. Second, some stakeholders have noted that allowing states to count such spending toward MOE requirements makes it easier for states to lower the work participation rates they are required to meet, decreasing the share of adults on welfare expected to work or prepare for work. On the other hand, some stakeholders have noted that allowing states to count nongovernmental third-party expenditures as MOE spending helps states meet TANF requirements and facilitates public and private partnerships. In fiscal year 2015, around one-third of states (16 of 51) reported counting nongovernmental third-party expenditures as TANF MOE spending. After peaking at 24 states in 2010—the last year Recovery Act Emergency Contingency Funds were available—the number of states counting such expenditures as TANF MOE spending fell. However, since that time the number of states that have counted nongovernmental third-party expenditures toward TANF MOE requirements has remained higher than pre-Recovery Act levels (see fig. 1). Overall, 29 states reported counting nongovernmental third-party expenditures as state MOE spending at least once from fiscal years 2007 through 2015. Six states did so only during fiscal years 2009 or 2010 when Recovery Act Emergency Contingency Funds were available, leaving 23 states that counted nongovernmental third-party expenditures as TANF MOE spending at least once during a non-Recovery Act year. Appendix I provides more detailed information on the number of years states counted nongovernmental third-party expenditures as TANF MOE spending. Some states have made greater use of the option to count nongovernmental third-party expenditures toward TANF MOE requirements than others. In terms of number of years, 10 states we surveyed reported counting nongovernmental third-party expenditures as MOE spending for 5 or more of the 7 non-Recovery Act years from fiscal years 2007 through 2015. In contrast, 28 states reported they had never counted such expenditures as TANF MOE spending (see fig. 2). Eleven states reported that nongovernmental third-party expenditures accounted for over 10 percent of their TANF MOE spending (see fig. 3) for the most recent year in which the state counted such expenses toward TANF MOE requirements (fiscal years 2012 through 2015).