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 maintenance-of-effort 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. Cases in which the adult in the household does not receive cash assistance, typically called “child-only” cases.2. Families that 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”).States can also extend assistance for victims of domestic violence through federally approved domestic violence waivers.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 that must participate in federally specified work or work-related activities each year. 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 to 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 one 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). 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. 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 maintenance-of-effort 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 testimony, 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. 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 towards the federal work participation rate, and cannot provide assistance to certain groups of legal immigrants. States may exclude families from time limits by funding their cash assistance with state MOE, either through “segregated funds” or in any non-TANF state programs. More specifically, any month of cash assistance funded solely by state MOE funds does not count toward the federal 60- month limit and may be provided to families who have reached their federal time limit. States may exclude families from federal time limits if they Stop the clock. States can “stop the clock” so that a family’s cash assistance does not count towards the federal time limit. This is accomplished by funding any month of cash assistance with state-only funds rather than with federal or commingled federal and state dollars. For example, if a state provides monthly cash assistance to working families with state-only funds, those months of assistance do not count toward the federal time limit. Extend the time limit. States can provide cash assistance beyond the 60-month time limit by using state-only funds. A state may extend a family’s time limit because it has determined that the adult needs more time to prepare for and find employment. Finally, while not required by federal law, states may choose to apply time limits on their state-funded assistance. In this case, states may also decide to stop the clock or extend time limits for certain families. In addition, families provided cash assistance funded by state MOE through non-TANF state programs are not subject to federal work requirements, though states may choose to impose their own work requirements on these families. States reported that in the fall of 2001, 2.1 million families received cash assistance funded with federal TANF or state MOE dollars, with about 700,000, or one-third, of these families composed of children only. Generally, child-only cases are not subject to work requirements or time limits. The most common types of child-only cases were families in which the caregiver is a nonparent, such as a relative, often a grandparent (40 percent); parent is receiving Social Security or Supplemental Security Income and not eligible for TANF (25 percent); parent is a noncitizen ineligible for federally funded TANF (23 parent is subject to sanctions (7 percent). (See figure 1.) The breakdown of child-only cases varied significantly across states, however. For example, child-only cases in which the parent is an ineligible noncitizen ranged from 0 percent in ten states to 39 percent in California and 77 percent in Texas; this variation is likely due to the variation in immigrant populations across the states. (For more information on each state’s child-only caseload, see Appendix I.) Reduced federal participation targets—due to declining caseloads and the caseload reduction credit—and states’ use of their MOE funds in non- TANF programs give states considerable flexibility in implementing work requirements. (For more information on how states use their MOE funds, see Appendix II). Since the implementation of welfare reform, states have experienced strong economic growth and welfare caseloads have declined dramatically, from 4.4 million in August 1996 to 2.1 million as of September 2001, marking a 52 percent decline in the number of families receiving cash welfare. The work participation target rate for every state in fiscal year 2002 is 50 percent for all families. However, once the caseload reduction credit is taken into account, the target rates can be greatly reduced.