THE URBAN
INSTITUTE
The Impact of TANF
on State Budgets
ISSUES AND OPTIONS FOR STATES
NEW FEDERALISM
Gordon Mermin and C. Eugene Steuerle
A product of
“Assessing the
New Federalism,”
an Urban Institute
Program to Assess
Changing Social
Policies
T
he Personal Responsibility and Work
sufficient incentives for all three to occur, with
Opportunity Reconciliation Act of
states almost certainly varying in their
1996 consolidated three federal-state
response. We find that future caseload
match-grant programs, Aid to Families with
changes, either down or up, can force state
Dependent Children (AFDC), Emergency
spending to fall or rise by a greater percentage
Assistance (EA), and the Job Opportunities
than the percentage caseload change. Further,
and Basic Skills (JOBS) training program,
this fiscal impact will be aggravated by large
into one block grant program. The new promultiplier effects of the work requirements—
gram, Temporary Assistance to Needy
with an increase in the caseload, under
Families (TANF), gives states
a variety of circumstances, requirFederal
considerable spending flexiing states to increase the numlaw specifies that 50
bility, but also imposes new
ber of recipients in an
percent of TANF recipiwork requirements and
approved work activity by
ents must participate in an
time limits for welfare
approved work activity by 2002. If more than the caseload
recipients. Estimating a state’s caseload has declined since increase.
the fiscal impact on the base year (1995), this percentage
states of this switch to
is reduced through the Caseload
Initial
TANF is fraught with
Reduction Credit. But if, after an
Change in
uncertainty, in no
initial decline, the caseload begins
small part because it is
Federal
to increase again, the proportion
dependent upon the
Funding
of that increase which is
economy and on state
required to work can reach
responses to the new grant
Federal funding for
well over 100
structure.
TANF is about 7 percent highpercent.
This uncertainty does not
er in real terms in 1997 than fundmean, however, that TANF’s fiscal
ing in 1996 for the programs it replaced
impact is totally unpredictable. Since TANF is
(table 1). Indeed, state officials were given a
fairly precise about how much federal assisstrong incentive to accept the new TANF protance will be made available between now and
gram once Congress based grants on historical
2002, one can calculate how much fiscal burden
spending in years when the economy was less
would be placed on states under simplifying but
buoyant and the AFDC caseload (by far the
revealing assumptions. Such calculations do not
largest of the programs replaced by TANF)
provide a prediction of states’ policy response to
was significantly higher.1 The TANF impact
on federal spending varies significantly by
the new legislation, but they do reveal major
state, however, ranging from a 66 percent
fiscal incentives that will shape that response.
increase to more than a 9 percent decrease—
For the first few years, most states will
with 8 states getting at least a 20 percent
receive more federal funds for welfare than
increase and 9 getting decreases in 1997. Even
they received in 1996, which they can spend in
among the 9 states with less total funding,
one of three ways: reducing their own welfare
many will receive more funding per recipient
spending, increasing total welfare spending,
in 1997. The largest percentage increases in
and/or saving funds for future welfare needs.
1997 (relative to 1996) are going, by and
Our analysis demonstrates that there are
Series A, No. A-18, November 1997
No. A-18
NEW FEDERALISM: ISSUES AND OPTIONS FOR STATES
Table 1: Federal TANF Funding: 1997 Versus 1996
Millions of Real 1997 $
1996
1997
United States
Range
High Caseload Decline States*
Medium Caseload Decline States
Low Caseload Decline States
Alabamaa
Alaskac
Arizonab
Arkansasb
Californiac
Coloradob
Connecticutc
Delawareb
District of Columbiac
Floridab
Georgiac
Hawaiic
Idahoc
Illinoisc
Indianaa
Iowaa
Kansasa
Kentuckyb
Louisianaa
Maineb
Marylandc
Massachusettsa
Michigana
Minnesotac
Mississippia
Missourib
Montanac
Nebraskab
Nevadac
New Hampshirea
New Jerseyb
New Mexicoc
New Yorkc
North Carolinab
North Dakotaa
Ohioa
Oklahomaa
Oregona
Pennsylvaniab
Rhode Islandc
South Carolinab
South Dakotaa
Tennesseeb
Texasb
Utaha
Vermontc
Virginiab
Washingtonc
West Virginiab
Wisconsina
Wyominga
$15,310
$14 to $3,509
$2,854
3,940
8,516
81
62
205
55
3,509
143
227
31
79
540
309
101
32
610
125
127
89
175
126
75
211
382
598
245
71
214
40
58
42
36
363
134
2,385
322
25
566
126
151
790
84
101
20
188
447
70
43
138
401
94
247
14
Percent
Change in Real $
$16,389
$22 to $3,734
$3,562
4,010
8,816
93
64
222
57
3,734
136
267
32
93
561
331
99
32
585
207
130
102
181
164
78
229
459
775
266
87
215
46
58
44
39
404
126
2,360
302
26
728
148
168
719
95
100
22
190
486
75
47
158
400
110
318
22
7%
-9% to 66%
25%
2
4
15
2
8
3
6
-5
18
4
17
4
7
-2
-1
-4
66
2
14
3
30
4
9
20
30
9
22
0
14
1
4
7
11
-6
-1
-6
4
29
17
12
-9
13
-1
8
1
9
8
10
14
0
17
29
55
Source: Urban Institute 1997. The 1996 data are actual FY 1996 grant awards for AFDC, EA, and JOBS. The 1997
data are the published TANF grants (Administration for Children and Families, U.S. Department of Health and
Human Services).
Note: Percent change may not match difference between 1996 and 1997 because of rounding.
*We rank states by change in AFDC caseload measured from the higher of average caseload over 1992–1994,
caseload in 1994, or caseload in 1995 to caseload in 1996. High, medium, and low caseload decline correspond to
top third, middle third, and bottom third. There isn't a perfect a correlation between AFDC caseload decline and
windfalls in 1997 because TANF replaced other programs as well. a = high caseload decline state; b = medium
caseload decline state; c = low caseload decline state.
2
large, to states with the largest recent
caseload declines.2
The correlation between caseload
decline and change in federal funding
is not perfect, however, because TANF
replaced programs other than AFDC.
For example, the District of Columbia
gets one of the higher increases in
1997 (relative to 1996) despite relatively low caseload decline, because
its EA and its program administrative
costs were much lower in 1996 than in
the year used to determine its TANF
grant (i.e., the comparison between
1997 and the base year would not
show such a large increase). Colorado,
at the other end, gets one of the largest
reductions in funding in 1997 (relative
to 1996) despite medium caseload
decline. Many of the nine states that
receive less funding actually experienced declines in AFDC caseload
from their TANF grant base years to
1996 but still receive less total welfare
funding in 1997 (relative to 1996)
because they spent more on EA and/or
administrative costs in 1996 than in
their TANF grant base years.
Since the TANF grants are not
matching grants, increased federal
funding allows states to reduce their
own welfare spending in 1997 and still
provide the same level of support. To
provide a simple benchmark of the surpluses potentially available to states,
we estimate the total (state and federal)
welfare spending in 1997 that would be
necessary to maintain the same level of
support as in 1996 for each state—
under the assumptions that caseload
and nominal benefits per case are the
same as in 1996, while work and training costs,3 emergency support costs,
and administrative costs grow with
inflation at an annual rate of 2.7 percent. State spending necessary to maintain the same level of support in 1997 is
simply this total less the federal TANF
grant to the state (table 2). This benchmark is not a prediction of actual state
spending in 1997, because it ignores
other features, such as TANF’s maintenance-of-effort requirement. Under this
requirement, states must maintain at
least 75 percent of their own FY 1994
spending on EA, JOBS, and AFDC
(plus transitional and at-risk child care)
or risk the federal government reducing
their TANF grants by the amount of the
shortfall.4 (Possible uses of the surplus
Responses to
Temporary Increases
in Federal Funding
States are likely to spend their
excess TANF funds in 1997 on some
combination of the following:
(1) diverting previous state welfare
spending to nonwelfare uses;
(2) increasing total welfare-related
spending, especially for child care and
other noncash efforts; and (3) saving
TANF funds for future shortfalls. We
deal briefly with each possibility in
turn.
The temptation to spend some of
this money—as well as any further
saving due to caseload decline during
the continuing economic expansion—
for nonwelfare needs is strong. Recent
evidence indicates, for example, that
states will be under increasing fiscal
pressure due to declines in other federal grants as well as to commitments
to other spending, including prisons
and health care, whose costs continue
to grow faster than the economy and
state revenues.6 These pressures will
encourage states to shift any TANF
saving toward other functions. In
addition, of course, TANF itself provides incentives to reduce welfare
spending relative to former welfare
law because of the switch from matching to block grants. Previously, states
only paid a fraction of each additional
dollar of welfare spending; now they
must bear the full cost of additional
spending. As mentioned above, however, states with significant surpluses
will be constrained in their ability to
divert money to other uses by the
maintenance-of-effort requirement.
Increasing Total (Federal and State)
Welfare Spending
Alternatively, states could respond
to federal funding increases by maintaining their own budgetary outlays for
welfare closer to 1996 levels. Note that
this would increase total welfare
spending and, if the number of recipients falls, the amount of spending per
recipient would rise at an even faster
rate than the total. Some states may not
be able to avoid increasing the total
(federal plus state) spending, to the
NEW FEDERALISM: ISSUES AND OPTIONS FOR STATES
Diverting State Welfare Spending
extent that the maintenance-of-effort
provision is effectively enforced or
state legislators are simply hesitant to
reduce the state’s own spending by
much. For instance, even if Indiana
spends only a small amount of its own
money in 1997, total welfare spending
in the state will increase.
Where in the welfare system
would this money go? Given that cash
benefits per family have been falling in
real terms for many years now, it
seems unlikely that such money would
be used for more generous cash benefits. The only alternative is spending
on related services—including services intended to move welfare recipients toward jobs. Child care is an
obvious possibility. Despite increased
reliance on block grants for child care
funding, the federal government continued to provide some matching grant
money for child care as part of the
same reform legislation, thereby
adding to state incentives to spend
their resources here. Increased spending on welfare-to-work programs such
as workfare, job placement, training,
child care, and transportation is another likely outcome, since such spending
should make it easier for states to meet
increased work requirements in later
years, as long as the added benefits do
not themselves stimulate increased
welfare participation.
A small boost toward increasing
total welfare spending came in the
1997 Balanced Budget Act, which
granted an additional $1.5 billion for
FY 1998 and $1.5 billion for FY
1999—much of it directly to the
states—in work-to-welfare grants if
states match one-third of the newly
available funds on top of meeting their
normal maintenance-of-effort requirements. Governor Tommy Thompson
(R) of Wisconsin, an architect of stateled welfare reform initiatives, has
asserted that “I have told them (conservatives) that changing a system
from dependence to independence is
going to cost more, because you have
to put money into child care and into
job training and medical care and
transportation.”7
No. A-18
funds, such as spending more on
welfare because of the maintenance-ofeffort requirements or other reasons,
are discussed below.)
The 7 percent increase in real
federal spending means that states, as
a whole, could reduce their own real
spending by 12 percent from 1996 to
1997 and still provide the same level
of support to the same number of beneficiaries (table 2). In the absence of
any maintenance-of-effort requirement, eight states could reduce their
1997 spending by more than 40 percent (one by over 100 percent) and
still provide the same benefits to the
same-size caseload as in 1996.
Absent future caseload or benefit
changes, four states would have to
spend more in 1997 than in 1996.
As one would expect, the states
that could reduce their spending the
most in percentage terms under the
benchmark are those states that experienced high AFDC caseload
declines5 from the early 1990s to
1996 (table 2). Ignoring the maintenance-of-effort requirement, these
states could provide the same level of
support and still have a surplus of 39
percent of 1996 spending. In terms of
dollar impact on state taxpayers, the
story is a bit different. Here we use
real state welfare spending per resident—that is, state welfare spending
divided by resident population—as an
approximation of state taxpayer burden. States with the largest percentage
caseload declines should not be
expected to always have the largest
declines in cost per resident. A simple
reason is that each caseload decline in
a high-benefit state saves much more
money than it does in a low- or
medium-benefit state. Another reason
is that independent of average benefit
levels, a given percentage decline in
caseload reduces more cases per resident in a state with a larger baseline of
welfare recipients per resident. Thus,
it turns out, at least initially, that
medium caseload decline states save
less per resident under the benchmark
than do the low caseload decline
states (table 2). What drives this result
is that many of the low caseload
decline states provide higher levels of
average benefits and support a larger
number of welfare recipients per
resident.
Rainy Day Funds
One of the more intriguing possibilities is that states will take advantage of temporary surpluses by setting
3
No. A-18
Table 2: State Welfare Spending Necessary to Maintain 1996 Levels of Support in 1997
(Ignoring the Maintenance-of-Effort Requirement and Assuming Constant Caseload, Nominal Benefits,
Real Work Costs, and Real Emergency Support Costs)
NEW FEDERALISM: ISSUES AND OPTIONS FOR STATES
State Spending
(millions of real 1997 $)
United States
Range
High Caseload Decline States*
Medium Caseload Decline States
Low Caseload Decline States
High Per Capita Income States†
Medium Per Capita Income States
Low Per Capita Income States
Alabamaa, iii
Alaskac, i
Arizonab, iii
Arkansasb, iii
Californiac, i
Coloradob, i
Connecticutc, i
Delawareb, i
District of Columbiac, i
Floridab, ii
Georgiac, ii
Hawaiic, i
Idahoc, iii
Illinoisc, i
Indianaa, ii
Iowaa, ii
Kansasa, ii
Kentuckyb, iii
Louisianaa, iii
Maineb, ii
Marylandc, i
Massachusettsa, i
Michigana, ii
Minnesotac, ii
Mississippia, iii
Missourib, ii
Montanac, iii
Nebraskab, ii
Nevadac, i
New Hampshirea, i
New Jerseyb, i
New Mexicoc, iii
New Yorkc, i
North Carolinab, iii
North Dakotaa, iii
Ohioa, ii
Oklahomaa, iii
Oregona, ii
Pennsylvaniab, i
Rhode Islandc, ii
South Carolinab, iii
South Dakotaa, iii
Tennesseeb, iii
Texasb, ii
Utaha, iii
Vermontc, ii
Virginiab, i
Washingtonc, i
West Virginiab, iii
Wisconsina, ii
Wyominga, ii
1996
$13,345
$11 to $3,509
$2,092
3,063
8,190
9,348
2,949
1,049
46
62
118
28
3,509
132
223
30
77
448
211
99
20
595
84
86
68
91
60
49
208
373
473
213
27
157
21
47
42
36
353
56
2,361
225
16
397
74
111
728
73
55
13
120
310
36
29
130
390
41
180
11
1997
$11,696
$-3 to $3,119
$1,286
2,870
7,541
8,658
2,157
881
32
57
95
25
3,119
136
174
28
61
409
179
97
19
597
-3
79
53
80
18
44
182
280
274
183
10
149
14
45
39
32
298
60
2,304
237
14
213
49
89
776
59
54
11
113
258
29
24
104
374
22
101
3
% Change
1996 to 1997
-12%
-103% to +7%
-39
-6
-8
-7
-27
-16
-30
-7
-20
-11
-11
3
-22
-7
-22
-9
-15
-3
-3
0
-103
-8
-23
-12
-69
-11
-13
-25
-42
-14
-64
-5
-34
-4
-7
-11
-15
6
-2
5
-10
-46
-34
-20
7
-19
-3
-17
-6
-17
-20
-20
-20
-4
-47
-44
-73
State Spending per Resident
(real 1997 $)
$ Change
1996
1996 to 1997
$50
$-6
$10 to $142
$-31 to $4
$32
$-12
30
-2
84
-7
79
-6
31
-8
21
-3
11
-3
101
-7
27
-5
11
-1
110
-12
35
1
68
-15
41
-3
142
-31
31
-3
29
-4
84
-2
16
-0
50
0
14
-15
30
-2
27
-6
23
-3
14
-10
40
-5
41
-5
61
-15
49
-21
46
-6
10
-6
29
-1
24
-8
28
-1
26
-2
31
-3
44
-7
33
2
130
-3
31
2
25
-2
36
-16
22
-8
35
-7
60
4
74
-14
15
-0
18
-3
23
-1
16
-3
18
-4
50
-10
19
-4
70
-3
22
-10
35
-15
24
-17
Source: Urban Institute 1997, based on data from the Administration for Children and Families, U.S. Department of Health and Human Services.
Note: Percent change may not match difference between 1996 and 1997 because of rounding.
*We rank states by change in AFDC caseload measured from the higher of average caseload over 1992–1994, caseload in 1994, or caseload in 1995 to caseload in 1996. High,
medium, and low caseload decline correspond to top third, middle third, and bottom third. a = high caseload decline state; b = medium caseload decline state; c = low caseload
decline state.
†We
rank states by their FY 1996 AFDC match rate, which varied inversely with per capita income. High, medium, and low income correspond to top third, medium third, and
bottom third. i = high per capita income state; ii = medium per capita income state; iii = low per capita income state.
4
Although more speculative, a
benchmark estimate of state fiscal burden for years after 1997 also provides
some insight into what states should be
planning for. Over time, TANF grants
fall by the rate of inflation, but so will
cash benefits if states follow past
precedent.10 On the assumption of
constant nominal benefits, caseload,
real emergency support costs, and real
work and training costs, total state
spending necessary to maintain the
1996 levels of support in 2002 would
be 4 percent lower than in 1997 (table
3), with 28 states spending less under
the 2002 benchmark than the 1997
benchmark. Essentially, this calculation does little more than show the relative effect of inflation on real cash
benefits (excluding other costs and
emergency assistance) and real federal
grants. When the former is higher than
the latter, then the decline in real benefits due to inflation is larger in absolute
terms than the decline in federal support, and a state’s cash support fiscal
burden declines over time. Again,
these estimates are not meant to be
predictions of total state spending but
simply benchmarks before taking
account of items such as training costs,
which could rise or fall with changes
in work requirements and caseload.
Changes in caseload after 1997
will be a very important factor in
determining how much fiscal burden
states face in the out-years, particular-
(Ignoring the Maintenance-of-Effort Requirement and Assuming Constant Nominal Benefits,
Real Work Costs, and Real Emergency Support Costs)
No Change in Caseload
% change
from 1997
United States
High Caseload
Decline Statesa
Medium Caseload
Decline States
Low Caseload
Decline States
High Per Capita
Income Statesb
Medium Per Capita
Income States
Low Per Capita
Income States
18% Increase in Caseload
% change
from 1997
-16%
28%
12%
-28%
-37%
1
-38
53
-6
-38
-62
-2
-8
27
19
-23
-28
-6
-13
24
14
-28
-34
-5
-12
23
14
-27
-32
-2
-28
41
3
-33
-51
1
-15
43
20
-30
-41
-4%
% change
from 1996
13% Decrease in Caseload
% change
from 1996
% change
from 1997
% change
from 1996
Source: Urban Institute 1997, based on data from the Administration for Children and Families, U.S. Department
of Health and Human Services.
Note: State spending in 1996 estimated by applying matching rates to FY 1996 grant awards. State spending in
1997 and 2002 estimated by subtracting TANF grants from estimates of total (federal and state) TANF spending
in 1997 and 2002. Estimates of total welfare spending in 1997 assume caseload, nominal benefits, real work
costs, and real emergency support costs are the same as in 1996. Estimates of total welfare spending in 2002
assume nominal benefits, real work costs, and real emergency support costs are the same as in 1996.
a. We rank states by change in AFDC caseload measured from the higher of average caseload over 1992–1994,
caseload in 1994, or caseload in 1995 to caseload in 1996. High, medium, and low caseload decline correspond
to top third, middle third, and bottom third.
b. We rank states by their FY 1996 AFDC match rate, which varied inversely with per capita income. High,
medium, and low income correspond to top third, medium third, and bottom third.
ly because they often interact with
work requirements. We consider caseload increases and decreases in turn.
Increases in Caseload
Suppose, first, that an economic
downturn or demographic change
causes caseload to be 18 percent
higher in 2002 than in 1996 and the
1997 benchmark case. An 18 percent increase over five years is
equivalent to five years of 3.3 percent annual growth, the average
annual growth rate in national caseload since 1970. Under this scenario, in 2002 federal grants per
recipient would be 26 percent lower
in real terms than in 1997 and 20
percent lower than in 1996, with all
but three states also receiving less
per recipient in 2002 than in 1996.
In the years before 2002, states
experiencing caseload growth can
potentially qualify for contingency
matching funds if their unemployment rates or food stamp caseloads
grow enough. This will not be a
major mitigating circumstance, however, because only $2 billion was set
aside for the entire 1997–2001 period, less than 2.5 percent of total
TANF funding for those years, and no
grants are available in 2002.
We estimate state spending necessary to maintain 1996 support levels in 2002 with an 18 percent
increase in caseload, assuming (as
before) constant nominal benefits,
constant real work and training costs,
and constant real emergency support
costs and ignoring the maintenance of
effort. These estimates establish a
probable lower bound on state costs,
since they assume either that states
are able to meet the new work
requirements without spending more
in real terms or that the federal government chooses not to penalize states
for failing to meet them.
According to these estimates,
real state spending necessary to
maintain 1996 support in 2002 would
be 28 percent higher on average than
in 1997 (table 3), with 12 states having to increase spending by more
than 50 percent (not shown). The
increase is less in comparison to
1996. But as a political matter, if
states spend less of their own money
on welfare in 1997 than in 1996, state
legislators are likely to make their
subsequent comparisons with 1997.
NEW FEDERALISM: ISSUES AND OPTIONS FOR STATES
Fiscal Burden in the
Out-Years
Table 3
Percentage Change in Real State Welfare Spending Necessary to
Maintain 1996 Levels of Support in 2002
No. A-18
up “rainy day” funds. Each year’s federal TANF grant, but not its new small
Balanced Budget Act supplement,
appears to continue to be available
until expended.8 If so, it could be
“banked” by a state until needs
increase. A state could also save for
future years by reducing its own
spending, within the constraints of the
maintenance-of-effort requirement,9
and placing those savings in a rainy
day fund as well. Saving for the future
could be used to help pay for work
requirements that, in the absence of
significant caseload decline, become
more stringent over time. “Rainy day”
funds could be particularly important
if caseload increases are triggered by a
state, regional, or national recession.
5
Figure 1
The Multiplier Effect of Caseload Increases
Under TANF Work Requirements
Additional Work Participants per 100 Cases
Added to the Rolls
No. A-18
NEW FEDERALISM: ISSUES AND OPTIONS FOR STATES
6
An 18 percent caseload increase
in certain states would necessitate
large expenditure increases. This finding reinforces the importance of saving
excess TANF funds initially, especially for the states that saw large AFDC
caseload declines from the early 1990s
to 1996 and as a group will save the
most in 1997 (see above and table 2).
In these states, own-source spending
necessary to maintain 1996 levels of
support in 2002 would be more than 53
percent higher than in 1997.
Caseload growth interacts with the
work requirements to potentially
increase state fiscal burden in a way not
reflected in the estimates above. Take
the year 2002, when 50 percent of
recipients must participate in an
approved work activity. Under the
Caseload Reduction Credit provision
of TANF, this percentage is reduced
point for point by the percentage to
which caseload has declined between
1995 and the previous fiscal year,
which in this case is 2001. If the caseload declines 3 percent between 1995
and 2001, for example, the TANF work
requirement in 2002 among the
remaining recipients is 47 percent, not
50 percent.
The incremental impact of caseload changes on work requirements,
however, can be much higher than 50
percent. Figure 1 shows the number of
additional persons in the caseload that
must participate in an approved work
activity in 2002 for every additional
100 cases added to the rolls in the
previous year. As can be seen, the
result depends crucially on caseload
size in 2001 as a percent of caseload
size in 1995, the base year selected in
the legislation. When the caseload is
50 percent or more below its 1995
level, no work activity is required.
When the caseload is at its 1995 level
or above, 100 additional cases requires
50 additional cases in an approved
work activity. Between these two
extremes, a caseload increase has a
multiplier effect that increases as the
2001 caseload approaches its 1995
size, because the increase progressively erodes the Caseload Reduction
Credit at the same time as it adds
people to the rolls.
Let us take a specific example
(table 4). Suppose that caseload in both
states A and B was 100,000 in 1995 but
Source: Urban Institute 1997.
that in 2001 A has 90,000 cases while
B still has 100,000 cases. In 2002, on
the simplifying assumption that the
caseloads are the same in 2001 as in
2002, A would have to place 36,000
recipients [(50 percent requirement
minus 10 percent reduction in caseload) times 90,000] while B would
have to place 50,000 recipients [(50
percent minus 0 percent) times
100,000]. The 10,000 additional cases
in B lead to an additional 14,000 recipients who must be placed in work. The
same type of phenomenon, although
less severe, can occur in all years after
1996 when caseload is first below 1995
levels and then grows. Even if these
10,000 people move to welfare because
an economic downturn shrank the
number of jobs, the welfare offices
must find 14,000 additional jobs for
their welfare recipients in order to
avoid a cut in federal funding!
Caseworkers would need to expand
their work programs by 39 percent
(from 36,000 to 50,000) because of an
11 percent increase (from 90,000 to
100,000) in the number of cases. Thus,
the interaction between caseload
growth and TANF work requirements
when caseloads are increasing from
below 1995 levels magnifies the consequences of caseload changes and
economic cycles within states.
Declines in Caseload
The AFDC caseload fell 11 percent
from 1994 to 1996 and is likely to fall
further as long as the economic expansion continues, TANF’s focus on work
placement is successful, or states
respond to TANF incentives to reduce
caseload. According to recent data
from the U.S. Department of Health
and Human Services, the AFDC caseload fell 14 percent from May 1996 to
May 1997.11 If caseload in every state
falls between 1998 and 2002 at half the
annual rate the national caseload fell
between 1994 and 1996, the 2002 caseload would be 13 percent lower than
our 1997 benchmark and real federal
funding per recipient would be 1 percent higher than in 1997 (recall that
inflation still erodes the grant). Ignoring
the maintenance of effort, we estimate
state spending necessary to maintain
support in 2002 given a 13 percent
decrease in caseload and constant nominal benefits, real work and training
costs, and real emergency support costs.
Nationally, state spending necessary to
maintain support could fall 28 percent
from 1997 to 2002 (table 3). If not for
the potential maintenance-of-effort
problems, 2 of the 50 states would be
able to provide the same level of
support in 2002 as in 1997 without
spending any money of their own.
When caseload falls, the multiplier effect of the work requirement operates in the opposite direction. If a
state’s caseload declines by 50 percent
or more from 1995 to 2001, its overall
work target in 2002 shrinks from 50
percent to zero.
Caseload in
1995
Proportion of Recipients
That Must Work (50% Minus
% Reduction in
Recipients That
Caseload in
Caseload from
Must Work in
2001 and 2002
1995–2001)
2002
State A
100,000
90,000
40%
State B
100,000
100,000
50%
Increase of
B over A
Notes
10,000
(11%)
36,000
50,000
14,000
(39%)
Source: Urban Institute 1997.
None of the estimates presented
in this brief should be interpreted as
predictions of how new work requirements and five-year time limits will
play out, in good part because we cannot know (1) how much states will
spend to place a recipient in a work
activity, (2) what the effect of each
placement will be on caseload and
recipients’ countable earnings, or (3)
what impacts there will be on child
care and other job-related spending.
Even so, our simulations do provide
insight into some important fiscal
implications for states of the TANF
funding rules.
Most states have more than
enough funds to implement TANF’s
requirements in 1997, and on average
states will be able to maintain 1997
support levels for several years without spending additional funds. At the
same time, total federal plus state
spending per recipient is likely to
increase as noncash spending rises to
help meet work requirements and to
comply with maintenance-of-effort
goals.
Whether TANF later becomes a
fiscal burden on states depends heavily on changes in caseload. If caseload
remains stable, the states still might
have sufficient or excess federal
funds unless work requirements
become much more costly. But substantial changes in caseloads will
impact state budgets both because the
TANF grant is fixed and because of
the interaction between the work
requirements and caseload.
If caseloads continue to decline as
rapidly as over the last couple of
years, the probability of having excess
funds to implement TANF’s requirements is high. But an economic downturn or adverse demographic change
in any state could spell fiscal trouble
for it. States with large increases in
caseload will have difficulty meeting
the large year-to-year fluctuations
upward in demand, while the rising
caseload itself is likely to have a multiplier effect on the proportion of
recipients that must be placed in work.
This suggests strongly that states
should consider setting aside some of
their TANF monies in “rainy day”
funds as one mechanism to counter
the procyclical aspects of the TANF
legislation.
Finally, all our calculations
assume federal policy remains
unchanged until at least 2002. By that
time, states are unlikely to assess their
relative needs, or right to a “fair”
share of total grants, by the relative
size of their AFDC, EA, and JOBS
expenditures 7 to 10 years earlier (as
TANF specifies). If only a minority of
states incur an economic downturn,
they may not have sufficient voting
strength to generate a change in the
block grant formula. Even if a majority of states join the voting block for a
change in the formula, it is not clear
what that change should, or will, be.
Adjusting federal grants upward for
increases in caseload, for example,
would send a very strange message
because it would reward the very
states that failed to achieve Congress’s
goal of reducing caseload. What is
pretty clear is that the fiscal formula
for sharing TANF funds—like most
grant-sharing formulas—is unlikely to
remain stable for very many years.
2. We rank states by the change in
AFDC caseload in 1996 relative to the
same base years used to determine the
TANF grant. High, medium, and low caseload decline categories are of equal size.
3. The work requirement states that
25 percent of all TANF families must
“engage in work” in 1997. We assume
states will not have to spend more in real
terms to meet the work requirements in
1997 because (a) the participation rate is
reduced by one percentage point for every
percentage point caseload is below 1995
levels, and nationally caseload had already
declined 8 percent from FY 1995 to FY
1996; (b) over 10 percent of AFDC recipients participated in work activities such as
JOBS in recent years; (c) about 10 percent
of AFDC families had earnings in recent
years, and paid work in many instances
counts toward the participation requirements; (d) about 20 percent of AFDC cases
did not include an eligible adult and
therefore will not be subject to the work
requirements; and (e) states have the option
of excluding single adults with children
under age one from the work requirements.
4. If states do not meet all the work
requirements, the maintenance-of-effort
condition rises to 80 percent.
5. High, medium, and low categories are again of equal size.
6. See Andrew Reschovsky, “A
Balanced Federal Budget: The Effect on
States,” The LaFollette Policy Report,
Winter 1997, vol. 8, no. 1, pp. 8–21.
7. Jason Deparle, “Getting Opal
Caples to Work,” New York Times
Magazine, August 24, 1997.
8. See H.R. 3474, §404(e).
9. Saving for future welfare spending will not count toward the maintenance
of effort.
NEW FEDERALISM: ISSUES AND OPTIONS FOR STATES
Conclusion
1. A state’s grant is based on the
larger of (a) its average federal grants for
AFDC, Emergency Assistance, and JOBS
for FY 1992–1994, (b) its FY 1994 grants,
or (c) its FY 1995 grants.
No. A-18
Table 4
Work Requirements Magnify the Impact
of Caseload Changes
10. The erosion by inflation is offset
somewhat from 1998–2001 by the supplemental grants for states that provided the
least assistance per poor person in 1994
and/or experienced high population
growth from 1990–1994. Nationally, the
supplemental grants only increase real
funding modestly, by 2 percent, but,
according to Congressional Research
Service estimates, could be quite significant for many of the states that receive
them, increasing real funding by as much
as 10 percent. However, there are no supplemental grants after 2001 or in 1997.
11. Department of Health and Human
Services, Administration on Children and
Families. Report no. ACF3637. 1997.
7
No. A-18
This series is a product of Assessing the New Federalism, a multi-year project
to monitor and assess the devolution of social programs from the federal to the
state and local levels. Project co-directors are Anna Kondratas and Alan Weil.
C. Eugene Steuerle is a
senior fellow at the Urban
Institute. His books include
Retooling Social Security for
the 21st Century: Right and
Wrong Approaches to Reform,
1994; and The Tax Decade:
How Taxes Came to Dominate
the Public Agenda, 1992—
both published by the Urban
Institute Press. He has worked
under four U.S. presidents on
a wide variety of social security, health, tax, and other
reforms.
The project is funded by the Annie E. Casey Foundation, the Henry J. Kaiser
Family Foundation, the W.K. Kellogg Foundation, the John D. and Catherine
T. MacArthur Foundation, the Charles Stewart Mott Foundation, the
Commonwealth Fund, the Robert Wood Johnson Foundation, the Weingart
Foundation, the McKnight Foundation, and the Fund for New Jersey.
Additional support is provided by the Joyce Foundation and the Lynde and
Harry Bradley Foundation through grants to the University of Wisconsin at
Madison.
The series is dedicated to the memory of Steven D. Gold, who was co-director
of Assessing the New Federalism until his death in August 1996.
Publisher: The Urban Institute, 2100 M Street, N.W., Washington, D.C. 20037
Copyright © 1997
The views expressed are those of the authors and do not necessarily reflect those of
the Urban Institute, its board, its sponsors, or other authors in the series.
Gordon Mermin is a
research associate at the
Urban Institute. His area of
special interest is public
finance.
Permission is granted for reproduction of this document, with attribution to the
Urban Institute.
For extra copies call 202-857-8687, or visit the Urban Institute’s web site
(http://www.urban.org).
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NEW FEDERALISM: ISSUES AND OPTIONS FOR STATES
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