September 16, 2002
THE COST OF THE SENATE FINANCE COMMITTEE WELFARE BILL
Analysis Belies Claims that the Legislation Would be Costly
by Wendell Primus
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The Senate Finance Committee approved bipartisan welfare reauthorization legislation on June 26, 2002. The Congressional Budget Office estimates that this legislation would cost $11.5 billion over five years, relative to current law.(1)
Some Members of Congress and the Administration have criticized the bill as being too costly. For example, a White House press statement issued the day the Finance Committee passed the measure declared that the bill "abandons fiscal responsibility."(2) Similarly, Senate minority leader Trent Lott has said in reference to the legislation, "I thought we would take the next step [in welfare reform] without a huge increase in the costs."(3)
Analysis of the bill, however, yields a different conclusion. Over the next five years, the bill's $11.5 billion overall federal "cost," as estimated by CBO, is slightly below the level of federal funding needed for the low-income programs that the bill covers simply to keep pace with inflation. Moreover, the bill allows state funding for the programs to fall well behind inflation, so that combined federal and state funding for these programs is likely to decline in inflation-adjusted terms under the bill. As a result, under the legislation, there would be some overall reduction in the level of services these programs provide.
1. CBO's estimate that the bill would cost $11.5 billion over five years is very similar to, and in fact is slightly smaller than, the $11.7 billion needed for the programs that the bill covers simply to be reauthorized and keep pace with inflation.
- The $11.5 billion cost estimate represents the legislation's net cost as compared to CBO's "baseline"; the baseline is CBO's estimate of future federal funding if no changes in programs are enacted. In constructing its baseline, CBO generally follows standard rules. Because of statutory language in the 1996 welfare law, however, CBO is required to depart from these rules in setting the baseline for the programs that the welfare law covers, and to set the baseline for these programs in an anomalous fashion. This results in the baseline containing much lower levels of funding for these programs than would be the case if CBO used its standard baseline approach.
- Specifically, when constructing the part of the baseline that covers the TANF block grant, the "mandatory" portion of the child care block grant,(4) and the Social Services Block Grant, CBO must depart from its normal practice and assume that the funding levels for these programs will be frozen indefinitely at the 2002 level and that the level of services these programs provide consequently will decline each year. For nearly all other federal programs, the CBO baseline assumes that funding will rise each year to keep pace with inflation.
Thus, CBO normally considers a specified level of funding for a program to constitute a cost increase only if that funding level exceeds the program's current funding level, adjusted for inflation. Language in the 1996 welfare law, however, requires CBO to depart from this practice with respect to the three programs noted above. CBO must consider any funding for these programs above a "freeze level" including funding that simply keeps these programs even with inflation to be a "cost."
- In addition, CBO must assume in its baseline that certain basic elements of the 1996 law will expire at the end of 2002 and not be continued, even though this is a highly unrealistic assumption. As a result, when these components of the welfare law are extended, CBO must count the entire annual cost of these components as a new cost attributable to the welfare reauthorization legislation, rather than following the normal practice of counting as a new cost only those increases in cost that are due to changes Congress is making in these programs. For example, the baseline reflects the assumption that Transitional Medical Assistance a well-regarded program established under President Reagan that provides up to a year of Medicaid coverage to families that work their way off welfare will cease to exist after September 30. As a result, CBO must count the entire cost of extending this program as a cost of the Finance Committee bill.
- Due to these baseline anomalies, simply extending the current programs that the 1996 welfare law covers and keeping their funding levels even with inflation would "cost" $11.7 billion over five years, compared to the CBO baseline (see Table 1 on page 7). While the Finance Committee bill does not allocate funds so as to adjust each program the bill covers to stay even with inflation, comparing the $11.5 billion net "cost" of the bill to the cost of simply extending the welfare law and keeping funding for its programs at today's levels, adjusted for inflation, is an instructive way to assess the bill's fiscal impact. Under such a measure, the bill represents a net reduction of $200 million in cost. (The bill entails costs of $11.5 billion above the CBO baseline, compared to the $11.7 billion above the baseline that are needed for these programs simply to stay even with inflation).
2. The overall level of federal funding the Finance Committee bill provides for the programs it covers, exclusive of offsetting savings provisions contained in the bill, is $1.9 billion above what is needed to keep the programs even with inflation. Funding for some programs would rise by more than inflation; funding for others, such as the TANF block grant, would decline significantly in inflation-adjusted terms.
- The bill's $11.5 billion official "cost" consists of $13.7 billion in funding "increases" for the low-income programs that the legislation covers and $2.2 billion in offsetting savings from customs user fees and changes in the Supplemental Security Income program. If only the $13.7 billion in funding "increases" for the low-income programs are considered, the bill provides $1.9 billion over five years above the level needed to reauthorize these programs and maintain their purchasing power. This $1.9 billion represents an average increase of 1.4 percent in "real" (i.e., inflation-adjusted) terms over the five year period covered by the bill.
- While the bill thus contains sufficient funding over the five years as a whole to extend the programs it covers and adjust them for inflation, the bill does not distribute funds among its various programs in this manner. The bill provides funding increases above the level of inflation in some areas, such as child care, while holding funding well below the inflation-adjusted level in others areas, such as TANF. In addition, the overall $1.9 billion increase occurs entirely in the bill's early years and then erodes significantly. By fiscal years 2006 and 2007, the total funding the bill provides for the low-income programs it covers is insufficient to keep pace with inflation.
3. States would be able to reduce their own expenditures for low-income programs significantly in real terms and still obtain the full amount of available federal funds.
- The Finance Committee bill would allow significant reductions in state expenditures for the low-income programs it covers. State expenditures for these programs are driven largely by the expenditure levels that states are required to make to draw down their full allotments of federal funds.
- Under the Finance Committee bill, states would be able to reduce their expenditures for these programs in inflation-adjusted terms by $2.6 billion over five years and still obtain the full amount of available federal funds.
4. When the bill's increase for the low-income programs that it covers of $1.9 billion above the level needed to keep up with inflation (not counting the offsetting savings) is considered in conjunction with the decrease in state expenditures required to draw down the federal funds, the total level of federal and state funding for these low-income programs would fall in real terms and would be below what is needed to maintain the levels of service that these programs currently provide.
As these findings indicate, rhetorical charges that the legislation abdicates fiscal responsibility and contains huge increases in cost do not stand up under scrutiny. To the contrary, a more valid criticism of the legislation is that its funding levels are not sufficient in areas such as child care and TANF, given the large unmet need for child care and the desirability of avoiding service cuts in coming years in TANF-funded welfare-to-work programs.
Finally, even if the official (albeit misleading) $11.5 billion estimate of the bill's cost is taken at face value, that figure is dwarfed by the cost of other proposed or enacted legislation, including legislation promoted by policymakers who have criticized the Senate Finance Committee bill as being too costly. For example, the annual cost of permanently repealing the estate tax (rather than maintaining it at the generous parameters the estate tax will reach in 2009, the year before it is repealed) is seven times the annual cost of the Finance Committee bill when fully implemented.(5) Yet estate tax repeal would reduce taxes on the estates of fewer than 10,000 very wealthy individuals each year, while the welfare reauthorization bill would affect millions of the nation's lowest-income families and children. Similarly, the recently enacted farm bill will cost more than four times as much as the Finance Committee welfare bill. The prescription drug proposal offered on the Senate floor by Senator Graham on behalf of the Senate Democratic Leadership in July would cost 15 times as much as the welfare bill, while the prescription drug proposal the House of Representatives passed in June would cost 10 times as much.
Click here to view a more detailed analysis of the costs of the Finance Committee bill.
1. Estimates in this paper reflect budget authority rather than outlays. Public debates over the level of federal resources for the programs that the Senate Finance Committee bill covers generally focus on annual funding levels (or "budget authority") for these programs rather than annual expenditure levels (or "outlays"). Another reason to focus on funding levels rather than outlays is that as a result of TANF expenditure patterns over the past few years and the economic downturn, states spent nearly $2 billion more in fiscal year 2001 than the annual TANF block grant funding level. (States were able to do this by drawing down unused TANF funds from earlier years.) This analysis examines the level of resources needed to maintain current funding levels for the TANF block grant and other programs, after adjustment for inflation, not the amounts of resources needed to maintain current state expenditure levels for TANF, which are affected in part by the business cycle.
2. White House Statement by the Press Secretary, June 26, 2002, http://www.whitehouse.gov/news/releases/ 2002/06/20020626-6.html. In addition, on July 29, President Bush described the bill as "weak on the budget" and the Senate Finance Committee as spending "a bunch more money in order to make us feel better." President Bush's remarks in Charleston, South Carolina, July 29, 2002, http://www.whitehouse.gov/news/releases/2002/07/20020729-6.html.
3. "Panel OKs new spending in welfare-reform bill," Cheryl Wetzstein, The Washington Times, June 27, 2002.
4. Federal child care funds are distributed to states through a block grant that includes both a mandatory funding stream and a discretionary funding stream. The funding level for the discretionary portion of the block grant is determined through the annual appropriations process. The funding level for the mandatory portion of the block grant was set in the 1996 welfare legislation through fiscal year 2002 and must be set for coming years in the TANF reauthorization legislation. The Senate Finance Committee has jurisdiction over the mandatory funding stream but not the discretionary one, which falls under the jurisdiction of the Senate Health, Education, Labor and Pensions Committee. Thus, this paper focuses on the mandatory portion of the block grant.
5. The pieces of legislation to which the Senate Finance Committee bill is compared in this analysis phase in over different periods of time. For comparability, the annual cost of each piece of legislation, including the Finance Committee welfare bill, is calculated based on its cost when phased in fully. The fully phased-in cost is estimated as though that cost were being incurred in 2003.