PRWORA made sweeping changes to national welfare policy, creating TANF and ending the federal entitlement to assistance for eligible needy families with children under Aid to Families with Dependent Children (AFDC). The Department of Health and Human Services (HHS) administers the TANF block grant program, which provides states with up to $16.5 billion each year through fiscal year 2002. TANF was designed to help needy families reduce their dependence on welfare and move toward economic independence. The law also greatly increased the discretion states have in the design and operation of their welfare programs, allowing states to determine forms of aid and the categories of families eligible for aid. TANF establishes time limits and work requirements for adults receiving aid and requires states to sustain 75 to 80 percent of their historic level of welfare spending through a MOE requirement. In addition, TANF gives states funding flexibility, which allows states to exclude some families from federal time limits and work requirements. TANF establishes a 60 month time limit for families receiving aid. States have the option of establishing shorter time limits for families in their state. A state that does not comply with the TANF time limit can be penalized by a 5 percent reduction in its block grant. While the intent of TANF is to provide temporary, time-limited aid, federal time limits do not apply to all forms of aid or to all families receiving aid. First, states are only to count toward the 60 month time limit any month in which an individual receives a service or benefit considered “assistance,” which is defined in the TANF regulations as cash or other forms of benefits designed to meet a family’s ongoing basic needs. Second, time limits do not apply to the following types of cases: 1. Child-only cases in which the adult in the household does not receive cash assistance.2. Families who received assistance while living in Indian country or an Native Alaskan village where 50 percent of the adults are not employed. Third, all states have the option to use federal funds to extend assistance beyond the federal 60 month limit for reasons of hardship, as defined by the state. States can extend assistance for up to 20 percent of the average monthly number of families receiving assistance (“20 percent extension”).Finally, assistance that is provided solely through state MOE is not subject to the federal time limit. TANF also establishes work requirements for adults receiving aid. After 2 years of assistance, or sooner if the state determines the recipient is ready, TANF adults are generally required to be engaged in work as defined by the state. In addition, TANF establishes required work participation rates—a steadily rising specified minimum percentage of adult recipients who must participate in federally specified work or work-related activitieseach year for at least a minimum number of hours. States were required in federal fiscal year 2002 to meet a work participation rate of 50 percent for all TANF families with adult members—referred to as the rate for all families. States were also required to meet a much higher rate—90 percent—for two-parent families. States must meet these work participation rates to avoid financial penalties. While states have generally met the work participation rate for all families, many states have faced financial penalties due to failure to meet the two- parent required rate in recent years. HHS issued penalty notices to 19 states in fiscal year 1997, 14 in fiscal year 1998, 9 in fiscal year 1999, and 7 states in fiscal year 2000. In addition to establishing federal participation rate requirements, PRWORA specified that the required rates are to be reduced if a state’s TANF caseload declines. States are allowed caseload reduction credits, which reduce each state’s work participation requirement by 1 percentage point for each percentage point by which its average monthly caseload falls short of its fiscal year 1995 level (for reasons other than eligibility changes). While states are to meet federal participation requirements, they also have the flexibility to encourage and require TANF recipients to participate in any activity a state chooses or at any level of activity, although that activity or the hours of activity may not count toward the federal participation rates. In addition, federal time limits and work requirements may not apply in some states that were granted federal waivers to AFDC program rules in order to conduct demonstration programs to test state reforms. The Personal Responsibility, Work, and Family Promotion Act of 2002 passed by the House of Representatives (H.R. 4737) on May 16, 2002, reauthorizes the TANF block grant keeping in place key elements of TANF, such as time limits and work requirements. It also changes some aspects of TANF, including the participation rate requirements. It increases the federally mandated rate by 5 percent a year to 70 percent by 2007, revises the number of hours of participation and types of activities required, and made some alterations to the caseload reduction credit, among other changes. In addition, the act specifies that two-parent families would no longer be subject to a separate and higher work participation rate. The Senate is in the process of reauthorizing TANF as of June 2002. Previously, under AFDC, state funds accounted for 46 percent of total federal and state expenditures. Under PRWORA, the law requires states to sustain 75 to 80 percent of their historic level of spending on welfare through a MOE requirement to receive their federal TANF block grant. The federal TANF funds and state MOE funds can be considered more like funding streams than a single program and states may use their MOE to assist needy families in state programs other than their TANF programs. In fact, states have flexibility to expend their MOE funds for cash assistance in up to three different ways, some of which allow states to exclude some families from time limits and work requirements. A state may use its state MOE funds in three different ways to provide cash assistance for needy families. Commingling: A state can provide TANF cash assistance by commingling its state MOE with federal funds within its TANF program. Segregating: A state can provide some TANF cash assistance with state MOE accounted for separately from its federal funds within its TANF program. Separating: A state can use its state MOE to provide cash assistance to needy families in any one or more non-TANF state programs, referred to as “separate state programs.” Each state may choose one or more of these options to provide cash assistance. In some cases, in this report, we refer to the second and third options as using “state-only” funds when the distinction between segregating and separating funds is not necessary. In addition, we focus only on cash assistance and not on other forms of aid or services, including, for example, child care and transportation, for which time limits and work requirements generally do not apply. (For more information on state funding choices, see app. I.) How a state structures its funds determines which TANF rules apply to the needy families being served. (See table 1.) When a state commingles funds, it must meet all TANF requirements. For example, states that commingle all their state MOE with federal funds are only able to exclude families from time limits through the 20 percent extension, cannot exclude families from counting toward the federal work participation rate, and cannot provide assistance to certain groups of legal immigrants. In addition, while not required by federal law, states may choose to apply work requirements or time limits on their state-funded assistance. States reported that in the fall of 2001, 2.1 million families received cash assistance funded with federal TANF or state MOE dollars. This includes about 110,000 families, or 5 percent, who were provided cash assistance through separate state programs funded by state MOE dollars. These families are not counted in the TANF caseload data reported by HHS. Twenty-six states used separate state programs to provide cash assistance, typically to legal immigrants and two-parent families. In most of these states, the separate state program caseload represented 5 percent or less of the total caseload. However, in four of these states, families served through separate state programs represented from 10 to 30 percent of the total cash assistance caseload. (For more information on the separate state program caseload by state and the populations served in the states’ programs, see app. II.) It is noteworthy that the separate state program caseload represents a more significant share in two of the nation’s most populous states— California and New York. More specifically, the number of families receiving cash assistance through separate state programs in California alone—nearly 50,000—is greater than the total cash assistance caseload in most states. HHS began requiring states in fiscal year 2000 to provide information on families provided assistance through separate state programs and reported on the separate state program caseload in their recently issued Fourth Annual Report to Congress. However, this caseload is not included in the TANF caseload data. Child-only cases, while not generally in separate state programs, account for an even more significant proportion of the cash assistance caseload. Of the 2.1 million families receiving aid, 736,045, or one-third, were composed of children only. Generally, child-only cases are not subject to work requirements or time limits. The percentage of child-only cash assistance cases varied greatly among the states, ranging from 13 percent in Hawaii to 73 percent in Wyoming.