Opinion ID: 2614152
Heading Depth: 1
Heading Rank: 4

Heading: The income-disregard exclusion

Text: As we explained in California Welfare Rights Organization v. Carleson, supra, 4 Cal.3d 445, 448-449, the Act (42 U.S.C. § 601) makes federal funds available to those states which have submitted and had approved by the Department of Health, Education and Welfare (HEW) a plan for aid and services to needy families with children. Although the AFDC program is elective, once a state chooses to join, its plan must comply with the mandatory requirements established by the Act, as interpreted and implemented by regulations promulgated by HEW. (See also King v. Smith, 392 U.S. 309, 316-317 [20 L.Ed.2d 1118, 1125-1126, 88 S.Ct. 2128].) California has elected to join the AFDC program, and under existing California law Carleson, as Director of the Department of Social Welfare, must establish regulations not in conflict with federal law (Welf. & Inst. Code, § 10604), and must administer the state program to secure full compliance with the applicable provisions of state and federal laws (Welf. & Inst. Code, § 10600). One of the requirements of the Act is that each state, in determining whether a particular family qualifies for aid, ... shall with respect to any month disregard ... the first $30 of the total of [the family's] earned income for such month plus one-third of the remainder of such income for such month ... except that, with respect to any month, the State agency shall not disregard any earned income ... [of the persons in the family] if with respect to such month the income of the persons so specified ... was in excess of their need as determined by the State agency ... [without considering the $30 plus one-third disregard of earned income], unless, for any one of the four months preceding such month, the needs of such persons were met by the furnishing of aid under the plan. ... (Italics added; 42 U.S.C. § 602, subd. (a)(8); see 45 C.F.R. § 233.20, subd. (a) (11) (ii) (b) (2).) With the exception of the italicized clause, the parties are in agreement regarding the correct interpretation of this provision. In essence, it requires the state to disregard the specified portion of a family's earned income in determining eligibility for, and amount of, an AFDC grant. The exclusion is available to all families except those whose earned income exceeds their standard of need (as determined by the state), and whose needs have not been met by an AFDC payment within the past four months. [8] The primary dispute between the parties herein involves the application of the statutory disregard to families whose earned income exceeds their standard of need. Carleson had been interpreting the statutory language to mean that any such family would be entitled to the disregard if it had received an AFDC grant within the past four months. [9] Counties, on the other hand, contended that those recipients of prior grants whose earned income exceeded their standard of need within the past four months should be denied the benefit of the disregard, since their needs during that period had been met entirely by their earned income and not by the aid they received. In other words, only those recipients of prior grants whose standard of need had exceeded their earned income within the past four months would be entitled to continue to disregard a portion of that income. [10] The trial court agreed with the counties' interpretation of the Act and ordered Carleson to amend SDSW-EAS 44-111.25 (or alter the interpretation of that regulation) so as to provide that an employed applicant for AFDC aid must first demonstrate eligibility without a deduction from his earned income of the `disregard,' but with a deduction of his `work-related expenses,' such eligibility being then determined by comparing the net income so derived to the appropriate standard of need established by defendants; and that if four successive months have passed when an employed recipient would not have been eligible for aid as an applicant, then commencing with the fifth month such recipient shall be required to re-establish eligibility as an applicant (as provided in this paragraph) and not as a recipient.... [11] The trial court's interpretation of section 602, subdivision (a) (8), was based, at least in part, upon its determination that a contrary interpretation would deny equal protection to other applicants for AFDC aid, and would constitute an illegal gift of public funds. Before we consider these issues, we first must determine whether the court correctly interpreted the Act. It seems reasonably clear that the court's interpretation was erroneous. As we shall point out, the income-disregard provisions were adopted by Congress to furnish AFDC recipients with an incentive to obtain and maintain an employment status. Under the trial court's analysis of section 602, a recipient family whose earned income (less work-related expenses) exceeded its standard of need for the past four months would be required to establish eligibility for further aid without the benefit of the income-disregard provisions. The family's entire net income would be considered in determining eligibility, thereby substantially reducing the incentive to continue employment. [12] (8) It is, of course, proper for the court to consider the legislative history underlying the adoption of the income-disregard provision. (See Mooney v. Pickett, 4 Cal.3d 669, 677, and fn. 9 [94 Cal. Rptr. 279, 483 P.2d 1231].) That history discloses that this provision was to be available as an incentive toward employment to all recent (i.e., within the past four months) recipient families, even though their current earned income exceeds their standard of need. The Senate committee report states that A key element in any program for work and training for assistance recipients is an incentive for people to take employment. If all the earnings of a needy person are deducted from his assistance payment, he has no gain for his effort.... The committee believes that this provision [the income-disregard provision] will furnish incentives for members of public assistance families to take employment and, in many cases, increase their earnings to the point where they become self-supporting. [Par.] ... The earnings exemption provisions will apply to the AFDC program only if for any one of the past 4 months the family was eligible for a payment. This provision gives people an opportunity to try employment without worrying about forfeiting their eligibility to receive assistance if their employment terminates quickly. (Italics added; 1967 U.S. Code Cong. & Admin. News, pp. 2994-2995; see pp. 2861, 3118.) The trial court's interpretation of section 602 would deprive certain recipients of the benefit of the income-disregard provisions even though they had been eligible for an AFDC payment in the past four months, contrary to the foregoing legislative intent. Moreover, that interpretation would impede, rather than promote, the employment incentives which lie at the heart of the disregard device since, as the committee noted, If all the earnings of a needy person are deducted from his assistance payment, he has no gain for his effort. Aside from the legislative history, at least one court has assumed, without expressly deciding the point, that the four months' limitation under section 602 limits eligibility for the income exclusion benefits of those whose income exceeds their needs to those who received aid in one of the preceding four months and denies the benefit of the income exclusion provision to those who have not received such aid within one of the past four months. (Italics added; Conner v. Finch (N.D.Ill. 1970) 314 F. Supp. 364, affd. sub nom. Conner v. Richardson (1971) 400 U.S. 1003 [27 L.Ed.2d 618, 91 S.Ct. 575].) [13] Thus, as to those families whose earned income exceeds their standard of need, it is the prior receipt of aid which determines the availability of the disregard. That such a family has continued to require assistance is, under federal law, indicative that it has not yet attained self-sufficiency and requires continued employment incentives. [14] Finally, it is apparent that the interpretation of the trial court would conflict with the mandate of our Legislature to permit the exclusion of earned income To the maximum extent permitted by federal law (Welf. & Inst. Code, § 11008). Section 11008 declares that In order that recipients of public assistance may become self-supporting and productive members of their communities, it is essential that they be permitted to earn money without a proportionate deduction in their aid grants. It is the intention of the Legislature to promote this objective to the extent possible within the limitations imposed by federal law, and the department, in implementing public assistance laws, is directed to do so in the light of this objective.... [Par.] To the maximum extent permitted by federal law, earned income of a recipient of aid under any public assistance program for which federal funds are available shall not be considered income or resources of the recipient, and shall not be deducted from the amount of aid to which the recipient would otherwise be entitled. (See also Welf. & Inst. Code, § 11205.) Therefore, even if we were to hold section 602, subdivision (a), ambiguous and subject to two reasonable interpretations, section 11008 would require us to adopt the interpretation chosen by Carleson prior to the Alameda judgment, unless that interpretation were constitutionally impermissible. The Alameda court found two constitutional impediments to interpreting section 602 as allowing all prior AFDC recipients the benefits of the income-disregard provision even though their employment income exceeded their standard of need. First, the court held that such favored treatment would unlawfully discriminate against initial applicants for aid. [15] There is conclusive evidence, however, that Congress was aware of the difference in treatment afforded prior recipients and initial applicants for aid, and that Congress purposely sanctioned the distinction in order to carry out the overriding legislative policy to limit the number of persons joining welfare rolls, and to foster employment incentives for existing welfare recipients. Thus, the Senate committee report states that: The bill contains provisions which will prevent increasing the number of persons receiving AFDC as a result of the earnings exemptions. The provisions discussed above are to become available for AFDC only with respect to persons whose income was not in excess of their needs as determined by the State agency without the application of this provision itself. That is, only if a family's total income falls below the standard of need will the earnings exemption be available. One possible result of this provision is that one family, who started out below assistance levels, will have some grant payable at certain earnings levels because of the exemption of earnings received after going on the rolls while another family which already had the same earnings will not be eligible for an assistance grant. The committee appreciates the objections to this type of situation which can be made; but the alternative would have increased the costs of the proposal by about $160 million a year by placing people on the AFDC rolls who now have earnings in excess of their need for public assistance as determined under their State plan. In short, the various provisions included in the committee's bill are designed to get people off AFDC rolls not put them on. (1967 U.S. Code Cong. & Admin. News, supra, pp. 2995-2996.) Thus, the benefits of the income-disregard provision were intended primarily as an employment incentive to persons already on welfare, to encourage them to obtain and maintain an employment status until their salary (excluding disregarded income and expenses) exceeds their standard of need. However, Congress did not intend to encourage persons not already receiving assistance, whose earned income exceeded their standard of need, to join welfare rolls. The foregoing legislative purposes are sufficient to defeat the contention that the Act, as interpreted and implemented by Carleson prior to the Alameda judgment, is invalid under equal protection principles. In Conner v. Finch, supra, 314 F. Supp. 364, the court rejected an identical attack upon the Act. The court candidly acknowledged that there may be considerable social merit in the position that all applicants should be entitled to disregard a portion of their income in determining their eligibility for aid, to the end that welfare benefits might be increased for all needy families. The court noted, however, that our analysis of the problem may not be in terms of what we believe to be the most desirable social policy for this state and our nation. [Par.] Rather, as pointed out by the Court in Dandridge v. Williams [397 U.S. 471 (25 L.Ed.2d 491, 90 S.Ct. 1153)] our review is limited to a determination of whether the provisions here under attack, and the distinctions found therein have some reasonable basis. (314 F. Supp. at p. 369.) The court concluded that The congressional enactment and the state regulation, though not free of inequities and inconsistencies, are supported by acceptable and what even plaintiffs agree to be laudable legislative objectives. As defendants have explained, the thrust of the AFDC changes in the Social Security Amendments of 1967, was to attempt to make more families self sufficient. The income exclusion provisions were considered as potentially an attractive incentive toward employment. By accepting employment, the federal and state governments save two-thirds of their former payments.... For these reasons, we conclude that the statutory provisions here sought to be declared unconstitutional and their enforcement enjoined, are constitutionally valid and enforceable. (P. 370.) The court's judgment was affirmed by the United States Supreme Court. (400 U.S. 1003 [27 L.Ed.2d 618, 91 S.Ct. 575].) Therefore, the trial court in the Alameda action incorrectly held that the Act, as implemented and interpreted by Carleson, was unconstitutional under equal protection principles. As an alternative holding, the trial court also held that payment of aid pursuant to the income-disregard provision as interpreted by Carleson would violate the provisions of our state Constitution prohibiting gifts of public funds. (Art. XIII, § 25, formerly art. IV, § 31.) The court reasoned that payment of benefits for an indefinite period after employment income meets or exceeds need can accomplish nothing to encourage self sufficiency or to relieve taxpayers of the burden of perpetual support. Encouragement of artificial dependency, and the inequitable distribution of public funds long after need has ceased, is so unreasonable as to require that it be declared ... as amounting to a gift of public funds. Initially, it is evident that the trial court misinterpreted the actual effect of the income-disregard provisions. That effect is not to require payment of AFDC benefits in perpetuity; the statutory exclusion becomes unavailable if the recipient has, during the past four months, failed to qualify for and receive a payment. [16] True, as an incentive to maintain his employment status, the recipient is given the benefit of the income-disregard provisions in determining whether he qualified during that period. However, given the legitimacy of the incentive device, that benefit does not result in any artificial dependency or inequitable distribution of public funds. Article XIII, section 25, of the state Constitution provides that The Legislature shall have no power ... to make any gift or authorize the making of any gift ... of any public money or thing of value to any individual ...; provided, that nothing in this section shall prevent the Legislature granting aid pursuant to Section 21 of this article.... Section 21 of article XIII (formerly art. IV, § 22), permits, among other things, grants of aid to institutions conducted for the support of minor orphans, abandoned children, children of a father incapacitated for gainful work by a permanent disability, or indigent aged persons, and authorizes direct grants to needy blind or physically handicapped persons. Since section 21 does not expressly exempt AFDC grants from the provisions of section 25, we must determine whether the making of such grants in the manner specified by the Act, as interpreted by Carleson, constitutes an unlawful gift of public funds. (9, 10) It is generally held that in determining whether an appropriation of public funds is to be considered a gift, the primary question is whether the funds are to be used for a public or private purpose; the benefit to the state from an expenditure for a public purpose is in the nature of consideration and the funds expended are therefore not a gift even though private persons are benefited therefrom. ( County of Los Angeles v. La Fuente, 20 Cal.2d 870, 876-877 [129 P.2d 378]; County of Alameda v. Janssen, 16 Cal.2d 276, 281 [106 P.2d 11, 130 A.L.R. 1141].) (11) The determination of what constitutes a public purpose is primarily a matter for the Legislature, and its discretion will not be disturbed by the courts so long as that determination has a reasonable basis. ( County of Alameda v. Janssen, supra, at p. 281; see Dittus v. Cranston, 53 Cal.2d 284, 286 [1 Cal. Rptr. 327, 347 P.2d 671].) Accordingly, a wide variety of welfare and other social programs have been upheld against constitutional challenge. (See County of Los Angeles v. La Fuente, supra (aid to needy aged); County of Alameda v. Janssen, supra (release of liens on property owned by indigent welfare recipients); San Francisco v. Collins, 216 Cal. 187 [13 P.2d 912] (aid to indigent sick and poor persons); Doctors General Hospital v. County of Santa Clara, 188 Cal. App.2d 280 [10 Cal. Rptr. 423] (tax refund to certain charitable institutions); Goodall v. Brite, 11 Cal. App.2d 540 [54 P.2d 510] (hospital care to paupers and others unable to afford private care).) In the Janssen case, supra, this court upheld legislation aimed at releasing certain liens against property owned by indigent recipients of aid for the reason that the Legislature could reasonably have determined that such legislation was in the best interests of the general public welfare; a release of liens could remove the necessity for additional direct aid to the property owner and thereby relieve the public treasury. Similarly, with respect to AFDC grants, the Legislature could reasonably conclude (as it did in Welf. & Inst. Code, §§ 11008 and 11205) that employment incentives are essential to accomplish the goal of self-sufficiency, and that the income-disregard provision was a necessary and proper device for encouraging employment, toward the ultimate goal of getting people off of welfare rolls. [17] And though there may occur isolated instances in which this provision fails to accomplish its purpose and relatively non-needy individuals are given public assistance, [18] the Legislature could have reasonably determined that the risk of such abuses was outweighed by the substantial financial and social benefits resulting from California's participation in the AFDC program. [19] (12, 13) We conclude that California's compliance with the income-disregard provisions of the Act, as we have interpreted them, would result in neither a denial of equal protection to other AFDC applicants nor an unlawful gift of public funds.