March 30, 1998

Reinvesting Welfare Savings:
Aiding Needy Families and Strengthening State Welfare Reform



Sustained economic growth and changes in federal and state welfare policies over the past several years have contributed to substantial reductions in welfare caseloads in most states. During the same period, federal block grant funding for states under the Temporary Assistance to Needy Families (TANF) program remained based upon the historically high caseload levels reached in the mid-1990's. The combination of falling caseloads and fixed TANF block grant payments has created circumstances in some states in which available funds — including both federal TANF funds and required state maintenance-of-effort (MOE) funds — exceed the amounts needed to fulfill existing commitments under their TANF programs.

These TANF-related surpluses create important opportunities to move to the next stage of welfare reform. Proponents of the 1996 federal welfare law contended that the new TANF structure of fixed block grants to states would establish a "virtuous cycle." States that achieved initial caseload declines would be able to reinvest resulting savings in expanded help for low-income working families as well as more intensive assistance for harder-to-employ individuals who continue to receive welfare. Now that such caseload declines have materialized in many states, the challenge for state policy makers is to begin moving to the next phase of this cycle. Some states already have chosen to reinvest recent welfare savings, providing more of the financial resources necessary to meet the needs of low-income working families and harder-to-employ recipients. Progress in many other states, however, may be limited if state welfare savings are used for other purposes.

Looking Beyond TANF/MOE Financing to
Help Low-Income Individuals and Families

One problem closely linked to welfare reform that cannot be addressed through the use of TANF/MOE funds is lack of health insurance for low-income working parents. While children in low-income families typically can retain Medicaid coverage when their parents leave welfare for work, states until recently have not had the option to provide income-based (as opposed to welfare-linked) Medicaid eligibility to parents in such families. A provision of the 1996 federal welfare law — codified as Section 1931 of Title XIX of the Social Security Act — gives states the chance to overcome these eligibility restrictions. Section 1931 eliminates the traditional link between welfare and Medicaid eligibility for low-income families and, at the same time, creates a little-recognized opportunity for states to revise their Medicaid rules so that more low-income working parents can qualify. By making health insurance available to low-income working parents without regard to current or recent welfare receipt, this state option can help them avoid reliance upon cash assistance or move more quickly from welfare to work.

Other strategies for assisting low-income parents and other low-wage workers cannot be undertaken solely with TANF/MOE funds because they provide assistance to groups of individuals and families that include, but in most instances are much broader than, those eligible for aid under TANF. For example, state improvements in current eligibility rules for unemployment insurance would help childless workers as well as parents with children, and most likely would provide assistance to many jobless workers in households with incomes above TANF eligibility limits established by the state. Similarly, the creation of a state earned income tax credit for low-income workers with children typically would assist many families with incomes too high to qualify for TANF. A portion of the costs associated with these strategies potentially could be financed with TANF or MOE funds but the bulk of the funds to support such efforts would have to be drawn from other state revenues.

Finally, a range of anti-poverty efforts focus on groups other than needy families with children. These strategies include improvements in general assistance/general relief programs, expansion of or increases in state supplemental payments to SSI recipients, and aid to elderly or disabled individuals not covered by the 1997 restoration of legal immigrants' eligibility for certain federal benefits. Such initiatives also require state revenues or financing mechanisms different than TANF funds or those used to meet state MOE expenditures.

This paper describes 10 policy options for using "welfare savings" — federal TANF funds and state MOE funds that have become available as a result of declining welfare caseloads — to help needy families with children and to strengthen state

welfare reforms. Brief summaries of each proposal in this paper highlight the rationale for state action, relevant design issues, and current state models. The paper does not attempt to provide a detailed description or analysis of any single proposal. For a list of Center publications and resources from other organizations on these and related topics, see Appendix A.

The decision to use federal TANF funds rather than state MOE funds as a financing source has major implications for both states and poor families. Although both federal TANF and state MOE funds can be used to assist families that meet state-established eligibility criteria, the choice between federal and state funds — as well as whether state funds are combined with or spent separately from TANF funds — will determine whether the federal 60-month lifetime limit on receipt of assistance, work participation requirements, and child support assignment and reimbursement require-ments apply to recipients of such assistance. In addition, some individuals, including certain legal immigrants, are ineligible for assistance provided with federal TANF funds but can receive assistance if it is financed with state MOE funds. A more detailed explanation of the requirements that attach to each potential financing structure can be found in Appendix B.

While providing a partial framework for tackling the "unfinished business" of welfare reform, this paper explicitly does not constitute a complete state anti-poverty agenda. Many important policy initiatives to reduce or alleviate poverty are omitted from this paper because they cannot be wholly or primarily financed with TANF/MOE funds (see box). Other important policy initiatives that can be financed with federal TANF or state MOE funds are not discussed in this paper because they already have been adopted by many states. For example, many states have improved their earned income disregard policies in their TANF programs to allow welfare recipients to keep more of their earnings and that give them greater incentives to move into paid employ-ment. Illinois has taken a further step by using only state MOE funds to provide cash assistance to welfare families with substantial earnings, thereby ensuring that welfare time limits do not apply to these families. All of these strategies, regardless of whether they can be financed with TANF/MOE funds, deserve consideration as states develop plans for assisting low-income residents.

Not every proposal presented in this paper will be appropriate to explore in every state. Yet this collection of innovative strategies and practical ideas for helping needy families with children, along with a strategic analysis of current state policies and the broader climate for decision-making, may help to frame a compelling agenda for action in the next stage of state welfare reforms.




To create publicly-funded community jobs in private non-profit and public agencies that enhance the skills and employability of hard-to-employ individuals, enable states to meet their TANF work participation rates, and alleviate severe job shortages in depressed communities or during periods of high unemployment.


With unemployment rates relatively low in many parts of the country, many states have relied heavily upon private-sector job placement efforts to reduce their welfare caseloads. Over time, however, every state will be forced to address three labor market realities in order to sustain such caseload declines:

Community job creation — the creation of publicly-funded jobs in private non-profit and public agencies which enable welfare recipients to earn wages and gain valuable work experience while contributing to community improvement and human service projects — responds to each of these three challenges. Temporary community jobs lasting six to nine months can provide a "stepping stone" into unsubsidized employment for hard-to-employ individuals while also reinforcing the "work-first" philosophy which now guides many state welfare-to-work programs. Community jobs also can make work a realistic option in communities that lack a substantial employ-ment base or during periods of high unemployment and layoffs by private employers.

Design Options

A basic approach to community job creation for welfare recipients (and for non-custodial parents if a state chooses to include them in its TANF "assistance unit") uses funds now provided as cash assistance to cover some or all of the costs of participants' wages. In states with higher benefit levels, the amount currently devoted to cash grants often is sufficient to cover the entire cost of wages associated with half-time work at the minimum wage. Under such circumstances, the additional costs associated with a community jobs program may be quite modest, involving only the costs of payroll taxes, reimbursement of work-related expenses, supervision, and administration. More ambitious (and costly) program designs could include one or more of the following:

Many of these options would boost the overall incomes of community jobs participants substantially. Any wage-based community jobs program that provides earnings at least equal to prior cash benefits will enable participants to secure some income gain because they will qualify for the federal Earned Income Tax Credit (EITC).

Community job creation initiatives can be designed to fit very different labor market conditions and budgetary constraints. A statewide effort serving all hard-to-employ individuals throughout the state would require a large investment of resources. A more modest strategy would create a county or local option within the state's welfare-to-work program for community jobs and provide incentive funding or state matching funds for this purpose. Finally, a competitive grant process could be used to ensure that the cost of a community jobs programs did not exceed available resources, while at the same time ensuring some geographic targeting of distressed communities.

State Models

Vermont currently is operating a Community Service Employment program on a statewide basis for welfare recipients who have received cash assistance for 30 months and who are unable to secure unsubsidized employment. This effort is administered by the state Department of Social Welfare and implemented by local welfare offices as part of the state's broader welfare-to-work program. In contrast, Washington state is implementing its Community Jobs Initiative through a series of competitive awards by the state Department of Community, Trade, and Economic Development to non-profit contractors in five regions of the state, including both urban and rural communities.




To provide cash and food assistance to low-income legal immigrant families who are ineligible for federal food stamp benefits or federal TANF-funded cash assistance due to the eligibility restrictions imposed by the 1996 federal welfare law.


The 1996 federal welfare law made low-income legal immigrants ineligible for many forms of federal assistance. Although the Balanced Budget Act of 1997 restored SSI and Medicaid coverage for a limited number of immigrants, federal food stamps and TANF-funded assistance still are not available to large numbers of legal immigrants even if they have no other means of support.

USDA estimates that more than 900,000 low-income legal immigrants lost their federal food stamps in 1997 as a result of these changes in the law. The adequacy of food stamp benefits for roughly 600,000 poor children who are U.S. citizens but live with their legal immigrant parents also has been undermined. Although children who are citizens remain eligible for federal food stamps, their parents' loss of eligibility has led to sharp reductions in these families' overall food stamp benefits — as much as 50-70 percent in many cases. These reductions inevitably result in less food for all family members, including children.

The federal welfare law also denied most legal immigrants who enter the country on or after August 22, 1996 eligibility for federally-funded TANF assistance during their first five years in the country. In addition, immigrants granted "family unity" status under the Immigration Reform and Control Act of 1986 and others who are "Permanently Residing Under Color of Law" (commonly referred to as PRUCOL), were made ineligible for federal TANF-funded assistance.

States can use their own funds to reverse these dramatic cuts in federal eligibility for food and cash assistance, and many states already have chosen to do so. A broad range of concerns have prompted these state actions. Many legal immigrants have resided in the United States and paid taxes for many years. Most immigrants work and provide for their families, but they sometimes experience the same kinds of job losses or other temporary hardships that force citizens to seek food stamps or temporary cash assistance. Basic food and cash aid during such crises may help parents return to work quickly while also promoting the full and healthy development of their children.

Design Issues

Federal law allows states to "purchase" federal food stamps from the U.S. Department of Agriculture or to use USDA-funded electronic benefit transfer (EBT) systems to assist legal immigrants who are no longer eligible for federal benefits. States can provide this food assistance to all legal immigrants who lost food stamp eligibility under the 1996 federal welfare law or they can restore food assistance only for specific groups (e.g., families with children). States cannot use federal TANF or state MOE funds to finance food assistance for groups other than families with children.

States also have the option to use state funds to provide cash assistance to legal immigrant families with children that entered the country on or after August 22, 1996 (and therefore are ineligible for federal TANF assistance for five years) and to legal immigrant families classified as PRUCOL. States may not use federal TANF funds for this assistance, but may use state MOE funds.

State Models

Ten states — California, Florida, Illinois, Maryland, Massachusetts, Nebraska, New Jersey, New York, Rhode Island, and Washington — are providing food stamps to legal immigrants by purchasing them from the federal government or using the EBT systems set up for federal food stamps. Minnesota and Texas are providing cash assistance to legal immigrants to replace the value of lost food stamp benefits.

Fifteen states provide TANF-like cash assistance both to qualified legal immigrants who entered the United States on or after August 22, 1996 and to immigrants classified as PRUCOL. These states are California, Connecticut, Georgia, Hawaii, Kansas, Maine, Massachusetts, Minnesota, Nebraska, New York, Oregon, Pennsylvania, Utah, Vermont and Washington. Two states — Maryland and Michigan — provide this assistance to qualified legal immigrants who entered the United States on or after August 22, 1996, but not legal immigrants classified as PRUCOL. Two other states — Ohio and Rhode Island — provide this assistance to immigrants classified as PRUCOL, but not to qualified new entrants.




To ensure that all low-income families can afford quality child care, regardless of current or recent receipt of welfare benefits, by providing child care assistance through a mix of contracts with providers and vouchers given directly to parents.


Under the AFDC program, federal law required states to make child care assistance available to parents moving from welfare to work as well as to those still receiving welfare who needed child care services to participate in work-related activities. This requirement was repealed by the 1996 federal welfare law, but many states continue to guarantee child care assistance for current and recent welfare recipients. These child care guarantees are intended to protect the well-being of children and support the efforts of parents receiving welfare to find and retain employment. At the same time, many states fail to guarantee child care assistance for other low-income working families with similar needs that have not recently received welfare benefits. Such families have had access only to a spotty patchwork of state or local child care subsidy programs, many of which are inadequately funded and have long waiting lists.

There are many reasons why all low-income families, including those without recent connection to the welfare system, should be guaranteed access to child care assistance. Without child care subsidies based on adequate reimbursement rates for providers and affordable co-payments by parents, low-income families frequently will be unable to pay for quality child care and forced to choose between unsafe or poor quality care, leaving children unattended, or not working. Child care assistance for working parents also may increase the likelihood that they will retain lose their jobs and not return to the welfare rolls. Finally, basic principles of fairness suggest that low-income working families should not be denied access to child care help because they never have relied upon welfare for basic income support.

The newly-created Child Care Development Fund does provide increased federal funding to states as well as incentives for expanded state funding of child care programs. Despite this progress, however, the combination of all federally available child care funds, together with required state child care maintenance-of-effort and matching funds, generally will be inadequate to assure that all low-income families can gain access to child care assistance. Additional federal TANF, state MOE funds, or both typically will be necessary to meet this goal.

Design Issues

An effective child care assistance program should establish income eligibility limits that high enough to reach the full range of low-income families in need of child care subsidies. Other critical design elements that should be considered in developing an income-based program of child care subsidies include:

Adequate reimbursement rates: Provider reimbursement rates should be sufficient to ensure that parents have access to an adequate range of licensed and registered providers. Based on updated information about market rates, reimburse-ment rates should be adjusted on an annual or biannual basis.

Affordable co-payments: Sliding fee scales should be established to ensure that parents are not expected to contribute more than they can afford. Subsidies should be reduced gradually as income rises to avoid (when phase-outs for this aid as well as for other public benefits are considered) excessive marginal tax rates on parents' earnings.

A range of choices: In areas with an adequate supply of financially stable providers, vouchers will give parents the greatest range of choices. In neighborhoods or communities with limited child care supply and high concentrations of families who are relying on the subsidy program, contracts with providers may be necessary to expand the supply of stable child care providers and ensure parental choice.

Information and help for parents: A well-organized system of resource and referral services should provide up-to-date information about child care assistance, help in locating quality child care providers, and educational resources for parents.

TANF/MOE funds can be used to provide child care assistance to families with earnings low enough to meet TANF eligibility requirements. Families with higher but still inadequate earnings can be served using other federal and state child care funds, including federal TANF funds transferred into the Child Care and Development Block Grant. Time limits and other TANF requirements do not apply to these other funds.

State Models

A number of states — including Illinois, Minnesota, Rhode Island, Washington, and Wisconsin — have taken important steps to establish child care systems in which all eligible low-income families can obtain assistance without regard to prior welfare receipt. Only Rhode Island has created a legal entitlement to child care help, making subsidies available to all families below 185 percent of poverty who use licensed or "certified" providers. Despite difficult choices and trade-offs in establishing income limits, provider reimbursement rates, and parental co-payments, initiatives in all five states have succeeded in greatly expanding low-income families' access to child care.




To increase the amount of monthly cash benefits provided through TANF so that families receiving time-limited assistance can meet their basic subsistence needs without financial crisis and focus their energies on finding and retaining work.


Welfare benefit levels vary by state but are all very low and have fallen sharply since 1970, adjusting for inflation. The maximum welfare benefit for a family of three in the median state is $378 a month. This amount is less than 35 percent of the federal poverty level; in 10 states, the maximum welfare grant is less than 25 percent of the federal poverty level. Even when maximum welfare and food stamp benefits in the median state are combined, total benefits are still fall far short — reaching only 62 per-cent — of the federal poverty level.

Current levels of cash assistance do not provide enough for a family to meet very basic needs, such as shelter or food, without severe hardship. Several studies have found that in the course of a year one-third of welfare families run out of food or experience hunger. Studies of the hardships faced by welfare families have found significant numbers of families who had recently experienced utility shut-offs, evictions or homelessness. In every state except Alaska, HUD's fair market rent (an annual measure of typical rental costs for non-luxury housing) for a two-bedroom apartment exceeds that state's TANF benefit amount for a family of three. In 10 states, HUD's fair market rent is more than twice the TANF benefit amount. Nationally, only one in four families receiving cash assistance also receive any form of housing assistance.

Providing adequate benefit levels furthers the goals of the TANF program by helping to stabilize families so that they can participate in work activities. Many welfare recipients are so desperately poor that surviving — including meeting their children's most basic needs — can require a great deal time and energy. Any unanticipated expense can precipitate a crisis that disrupts the family. Increases in welfare benefits could relieve somewhat these pressures and allow parents to place more energy and consistent attention on work activities.

Policymakers in the past often expressed the view that the public would not support increases in cash assistance because the welfare system placed too little emphasis on work. The 1996 federal welfare law has changed circumstances dramatically:

Cash assistance under TANF can be provided only on a temporary basis for all but a small fraction of welfare families. The federal entitlement to cash aid has been eliminated.

Parents receiving cash benefits under TANF typically are required to participate in work activities and face sanctions if they fail to do so, in many instances losing all cash aid. Individuals who refuse to prepare for or accept employment will not continue to receive benefits even if the family has not yet reached a time limit.

It is unlikely that increases in cash benefit levels will undermine incen-tives to work, particularly in light of time limits now imposed on cash assistance. Most states also have strengthened the work incentives in their TANF programs by raising the amount of earnings a family on welfare can keep when they find employment. These changes ensure that families end up better off financially when a parent makes the transition from welfare to work, even if the amount of cash assistance provided to families on welfare increases.

Large numbers of welfare recipients are now participating in unpaid work activities to prepare for employment, including job search, work experience or community service programs, and pre-employment activities such as basic education and vocational training. These families cannot yet benefit from the increased income generated through employment, and yet they often need more adequate incomes to meet their most basic needs and to cover expenses related to their participation in work activities while preparing for or attempting to find paid employment. Increases in cash assistance to eligible families are the most direct and cost-effective to achieve this goal.

Design Options and State Models

In increasing monthly benefits to families that are eligible for cash assistance under TANF, a main challenge is to determine the appropriate size of an adjustment in benefit levels. The size of an increase in monthly benefits should not necessarily be limited to a cost-of-living adjustment for a single year. Changes in the cost of living over the entire period since the last benefit adjustment could provide a more appro-priate benchmark. An alternate approach that states could use to increase cash assistance to TANF families would be to provide a monthly shelter allowance (in addition to the basic TANF grant) to families that do not live in subsidized housing.

States that have raised their cash benefit levels during the past year include Maryland, Montana, Ohio, Vermont, and Wisconsin. In Montana, state law requires that cash benefits be adjusted each year so that they equal 40.5 percent of the federal poverty level and keep pace with annual changes in the cost of living.




To provide rental subsidies to low-income parents who are in the process of moving from welfare to work, or who have recently left the welfare rolls, in order to help these parents find and retain employment.


Lack of affordable housing and related housing instability makes it difficult for low-income families to both find and retain employment. Yet only about one-quarter of all welfare families nationally receive any form of housing assistance. Most families receiving welfare face major housing problems that often interfere with employment:

Rental assistance can help families overcome these barriers to employment. Families will be able to rent adequate housing in safer neighborhoods with better access to jobs and transportation services. With reduced housing cost burdens, families will have more resources to spend on employment-related expenses and their children's basic needs.

Design Options

Under a rental assistance program, families typically are given a voucher which they can use to rent housing of their choice in the private market. Families would pay a specified amount or proportion of their income in rent; the voucher would pay the difference between the family's rental contribution and a reasonable rent standard.

Eligible population: Housing assistance would be provided to those families who are currently eligible for or receiving TANF or have received TANF within the last year, and who are working, have been offered employment, or are about to complete a job-training or community work program. If state funds beyond those needed to meet state MOE requirements are available for this purpose, states also may wish to set slightly higher income eligibility limits for this housing assistance program than for cash assistance in order to serve low-income workers with very high housing costs.

Amount of the rental subsidy: Subsidies should be sufficient to accomplish the goals of expanding access to housing near jobs and increasing housing stability. States may wish to provide a subsidy equivalent to the difference between reasonable housing costs and 30 percent of family income, which is the general guideline for affordable housing in most federal housing programs. Alternatively, states could provide all recipients a flat subsidy amount and the family would pay the remaining rental cost.

Links to supply-side programs: In some states, there may not be an adequate supply of housing to rent with tenant-based assistance in areas in close proximity to jobs. If so, a state may wish to design a housing assistance program that would promote the construction or rehabilitation of such housing. For example, a certain number of vouchers could be reserved for units funded in part through the federal Low Income Housing Tax Credit or HOME funds. Developers who build these low-income housing units thereby would be assured a constant flow of rental income to supplement the direct rental payments that families in low-wage jobs typically can afford.

State Models

Connecticut and New Jersey have developed housing assistance programs for limited numbers of former TANF recipients who are now employed. In both states, the welfare agency pre-screens families for referral to the new housing program. Connecticut's program is specifically intended to help working families with low earnings when they reach the state's TANF time limit and lose their TANF benefits. Families generally are required to contribute at least 40 percent of their income toward rent, and assistance is limited to one year. New Jersey's program is targeted to those with particularly severe housing needs and incomes under 150 percent of the federal poverty line. Family rental contributions are based on income and increase each year for three years.




To establish an alternate unemployment insurance (UI) program that retains many of the features of the existing UI program, including job search requirements and short-term duration of benefits, but assists low-wage workers with children who now fail to qualify for unemployment insurance benefits when they lose a job.


Periods of unemployment are a major cause of poverty among working families. In 1995, for example, one-third of the working parents in poor families experienced a spell of unemployment. Unfortunately, the unemployment insurance system now assists only one in three unemployed workers — and only one in six unemployed single parents at the lowest earnings levels. These large gaps in coverage, which disproportionately affect working women, occur in part because low-wage workers (especially those working less than full time) often do not have sufficient earnings during the preceding five quarters to meet UI eligibility rules. These problems are exacerbated by state UI administrative practices which in many instances result in a failure to count wages earned during the most recent three to six months of employ-ment. Low-income single parents also are more likely to leave a job due to child care or transportation problems — causes of job loss not covered by most state UI programs.

In the past, AFDC served as a safety net for many unemployed workers with children who did not qualify for UI benefits. Federal and state time limits on the receipt of cash assistance now make it likely that substantial numbers of unemployed low-income parents will be ineligible for both UI and welfare benefits.

Changes in state UI programs could ameliorate these problems and provide significant relief to low-wage workers who find it difficult to qualify for UI benefits. At the same time, proposals to expand UI eligibility may generate considerable opposition within states if they are perceived by employers and state policymakers as leading to higher UI taxes on employers. If expansions in UI eligibility appear unlikely for this reason, one alternative that responds to these concerns would be to provide assistance to unemployed parents who lose low-wage jobs through a separate — but similar — unemployment program using state welfare funds.

Design Issues

Three key elements should be included in the development of an alternate unemployment insurance program:

Eligibility criteria focused primarily on recent work experience: A state-funded UI program could continue to require significant work history and a minimum amount of earnings as a condition of eligibility. This alternate program, however, would focus on a more recent period when considering work history and earnings, such as the past three or six months. This approach would ensure that benefits are paid only to those parents with a clear attachment to the labor force while still providing aid when parents work in and subsequently lose low-wage jobs. The new program could retain other UI rules, including those that deny benefits to workers who voluntarily quit their jobs or are terminated by the employer due to poor work performance.

Administration in conjunction with the regular UI program: Administering the program through the state agency responsible for the regular UI program, rather than through the state or county welfare department, has several advantages. Eligi-bility for the new program could be determined immediately after a worker applies for regular UI benefits but is found to be ineligible. The new program also could require recipients to look for work actively and to accept reasonable job offers, just as current UI recipients are required to do. Finally, participants in the new unemployment program could benefit from the job information and networks that unemployment insurance offices share with recipients of regular UI benefits. If alternate UI benefits are administered outside the state or county welfare agency, however, steps to ensure that workers still apply for Medicaid and food stamps when eligible are essential.

Financing from federal TANF or state MOE funds: An alternate UI program could be financed with a state's welfare funds to the extent that the program's recipients are caring for children in the home and meet the state's TANF income and resource eligibility rules. Benefits paid to other eligible unemployed workers would have to be supported by other state funds, such as state general funds. A state could fund the program entirely with welfare funds — either TANF funds or state MOE funds — if it chose to limit eligibility solely to TANF-eligible families. Under these circumstances, reliance upon state MOE funds would be particularly advantageous because families receiving assistance would not be subject to the federal 60-month time limit on cash assistance or other requirements associated with the use of federal TANF funds. If an alternate UI program were limited primarily to low-income parents with children, the net costs may be quite modest since many of these parents otherwise would apply for and receive cash assistance under the state's TANF program.

State Models

Legislation to create an unemployment compensation program using only state MOE funds was passed by the Illinois House of Representatives in 1997, but it was not considered by the state Senate. House supporters of the proposal viewed it as an important way of addressing the very limited access to unemployment insurance among single women raising children who lose a job.




To create a welfare "rainy day" reserve fund to meet the increased need for assistance during an economic downturn or to address potentially large increases in the demand for work-related services such as job training or child care.


A number of states now find themselves with overall welfare budgets (including both federal TANF and state MOE funds) that exceed their current spending commit-ments. Sharp declines in welfare caseloads have caused state expenditures to fall and made it far easier for states to meet TANF work participation rates. Yet this period of seemingly ample welfare funding could end quickly for any of the following reasons:

Design Options

While the mechanics of establishing a welfare reserve fund may involve little more than a designation of funds by the state legislature for this purpose, at least three major issues related to the design and structure of a reserve fund should be considered:

Size of the welfare reserve fund: Substantial reserve funds may be needed to meet potential future demands. For example, an economic downturn can push welfare spending up sharply. Federal AFDC expenditures in 1994, following the recession of the early 1990's, were 33 percent higher than in 1989. This single-year figure, however, understates the cumulative impact of recessions on welfare spending. When addi-tional federal AFDC expenditures associated with rising caseloads over a five-year period (from 1990 through 1994) are combined, this cumulative total exceeds 100 per-cent of federal AFDC spending in 1989.

Financing sources for the reserve fund: Federal TANF funds can be used relatively easily to create a welfare reserve fund. Each year's TANF allocation is available until expended, which means that any unobligated federal funds from one year can be accessed in future years. The only potential disadvantage of this approach is that federal TANF funds are not transferred to states until they are spent on benefits or services. This inability to deposit unspent TANF funds — including rainy day reserves — in state coffers has caused some state-level officials to worry that these funds are not guaranteed and could be rescinded at some future date.

States also may choose to use state funds to establish a welfare reserve fund. State funds deposited in such a reserve would not count toward a state's MOE require-ment in the year the reserve is created, requiring the state to spend more than its minimum MOE level that year. However, these funds would count as MOE expendi- tures when released and spent, thereby making it easier to meet the MOE requirement during a recession when state budgets typically are under intense pressures.

Conditions for release of funds from the welfare reserve: Creation of a welfare reserve fund with explicit conditions for expenditure of these funds is important for several reasons. Reserve funds that can be tapped only in specific circumstances — when there is a rise in applications for cash assistance, other evidence of an economic downturn, or an increased need for job training or child care — are more likely to be protected from competing claims and eventually used as intended. The establishment of a reserve fund with clear conditions for use also may help state officials protect their TANF funds, should there be a future attempt by federal policy makers to reduce TANF allocations or take back unspent TANF funds already made available to states.

State Models

A number of states have established welfare reserve funds, although some have no conditions for release of funds and require only an act of the legislature to be expended. Ohio's TANF reserve fund is noteworthy for its size, which by the end of 1999 will equal 21 percent of its annual TANF block grant allocation. Other states have tied uses of their reserve funds closely to anticipated welfare needs. For example, Texas has a modest reserve that can be drawn upon when needed to cover costs associated with caseload growth and expenditures on behalf of families facing time limits. North Carolina's state-funded reserve can be tapped only to meet unexpected increases in spending on cash assistance.




To create a worker stipend program that provides income-based wage supple-ments as well as services to working families in a framework specifically designed to meet the needs of parents who have substantial earnings but still need modest amounts of assistance to meet their families' basic needs and retain employment.


Federal and state cash assistance programs for low-income families with children generally are not well-suited to the needs of those parents who are working but have low earnings. Cash assistance under AFDC was reduced by nearly a dollar for every dollar earned, and welfare benefits in most states were eliminated at earnings levels far below the federal poverty threshold. Welfare rules have improved in recent years — more than 35 states have expanded their earned income disregards to allow working parents to keep more of their earnings. Despite these improvements, however, a family of three in a majority of states still becomes ineligible for cash assistance well before its earnings reach the poverty line.

A worker stipend program that is independent from the state's basic TANF-funded program can give states greater flexibility to provide assistance to low-income working families in a manner that is tailored to their unique circumstances and needs. With stipends that phase out as earnings increase, such a program could:

Some of these goals also could be achieved through changes in the state's basic TANF-funded program. For example, a state could provide assistance to more poor working families by disregarding a greater amount of their earnings (or in some states by raising their income eligibility ceilings). Moreover, if a state provides wholly MOE-funded assistance within its TANF-funded program to families in which parents have substan-tial but still inadequate earnings, as Illinois has done, it can assure that the TANF time limits do not apply without creating a separate state program. A separate worker stipend program, however, may offer greater flexibility and a potentially more effective tool for achieving a broader range of goals in this area.

By virtue of creating a worker stipend program, assistance to low-income families with inadequate earnings may be viewed more favorably than welfare benefits. Because these stipends will only supplement parents' substantial earnings rather than providing their primary source of income, there are strong arguments for ensuring that the time-limit "clock" does not run for these families and allowing them to retain any child support payments made by non-custodial parents.

Design Issues

A worker stipend program potentially could serve several distinct groups of families with substantial earnings, including: those who remain eligible for assistance in the state's TANF program but choose to participate in this new program; those with earnings that place them above the TANF program's income-eligibility threshold; and those who are no longer eligible for assistance under the state's TANF-funded program because they have reached the state's time limit. To the extent that the families served in the worker stipend program meet the state's definition of a family eligible for assistance in a TANF-funded program, some or all of state expenditures on the program could count toward the state's MOE requirement.

The amount of cash assistance to be provided to working parents at various earnings levels is a key decision in the design of a worker stipend program. One of the central goals of a worker stipend program, particularly in states with low TANF benefit levels, should be to provide a substantial earnings supplement for families with significant earnings but that still need assistance to meet their basic needs. In addition to this cash assistance, a worker stipend program could include some or all of the following services tailored to the needs of working parents:

These services could be delivered by different staff or administered by a different agency to keep the program focused on the special needs of working parents. A worker stipend program also could be structured to ease burdens on administrators and parents by dropping requirements to report minor fluctuations in earnings and allowing families to receive their benefits on a quarterly rather than monthly basis.




To restore or expand a child support pass-through that allows a portion of child support collected by the state to go directly to the child(ren) receiving TANF-funded assistance without affecting that family's TANF eligibility and grant level.


The 1996 federal welfare law repealed a federal requirement under AFDC that states pass through to the family and disregard as income the first $50 of current child support it collects. States now are free under TANF to continue the pass-through, expand it beyond $50, or repeal it, but the new federal law also requires states to give the federal government its full share of any child support collected. As a result, the costs of any child support pass-through under TANF must be borne entirely by the state. Under these new rules, 30 states have chosen to stop the child support pass-through, 15 states have retained it, and five states have continued it in a modified form.

States that have retained the child support pass-through typically have done so to ensure that there is a direct connection between child support paid and benefits received by the child. (In most states that have repealed the pass-through, the custodial parent is not even aware whether the non-custodial parent has paid child support in a given month.) Restoring or expanding the pass-through helps re-establish or strengthen that connection, resulting in:

Increased incentives for child support payment. Non-custodial parents are more likely to pay child support when their payments directly benefit their children. This incentive to pay child support may be particularly important for low-income fathers, who may see little reason to meet their child support obligations if faced with a perceived 100-percent tax rate on their payments.

More frequent contact between non-custodial parents and their children. Experts suggest there is a connection between child support payment and non-custodial parents' involvement in the lives of their children. The pass-through ensures that tangible benefits to the custodial parent and child accompany the payment of child support and may lead to other forms of involvement by the absent parent in the life of his child.

Greater economic security for custodial parents and their children. In many instances single parents with children will remain in poverty despite work unless they receive substantial child support from a non-custodial parent. The child support pass-through allows the custodial parent to keep a portion of a non-custodial parent's earnings in the same way that an earned income disregard allows the custodial parent to keep a portion of her own earnings. When the custodial parent knows that child support payments are being made, she also may be more confident of her ability to combine earnings from employ-ment with child support to secure an adequate income and leave welfare.

Many of the states which abolished the pass-through did so immediately following enactment of the federal welfare law amidst concerns about the adequacy of TANF block grants to states. Since then, welfare caseloads have declined sharply in most states and related budget pressures have eased. Continuation or expansion of the pass-through is thus likely to be more affordable than states had anticipated.

Design Options

Restoration or expansion of a child support pass-through is relatively simple. The basic administrative mechanisms necessary to re-establish or increase the size of the pass-through currently exist or recently existed. New state policies in this area either could establish a fixed ceiling on the amount to be passed through to the family (e.g., $50 or $100 per month) or could provide for a pass-through equal to a specified percentage (e.g., 50 percent) of the monthly child support collections. Federal law has clarified that any state expenditures on a child support pass-through can count toward the state's maintenance-of-effort requirement.

With the new flexibility afforded states under TANF, states also may want to simplify administration of the pass-through. For example, states could provide the pass-through to custodial parents on a quarterly rather than monthly basis. Another way to simplify the program would be to pass through a portion of any child support collections received in a month whether a current payment or a payment of arrears. States that made this choice would no longer have to undertake the cumbersome process of distinguishing between current support or arrears in administering the child support pass-through.

State Models

In addition to the 15 states that have retained the $50 child support pass-through, several states have established higher pass-through amounts. Nevada has set its pass-through at $75 per month; Connecticut's is $100 per month. West Virginia is also taking an innovative approach; it is moving to a system where $50 is automatically added to a family's TANF grant when child support is received on the family's behalf, rather than the current practice of issuing a separate $50 check from the child support enforcement agency which is then disregarded by the welfare agency in its TANF eligibility and benefit calculations.




To expand the range of training opportunities available to newly-employed welfare recipients so that they can advance from unstable, low-wage positions into better-paying jobs with fringe benefits and a greater measure of job security.


Many states have shifted the focus of their welfare-to-work programs away from investments in pre-employment education or training, expecting parents receiving welfare to find entry-level jobs as quickly as possible. Those parents who find jobs in such "quick-employment programs" typically are paid low wages, receive few if any benefits, and often are forced to work part-time schedules. This pattern is particularly troubling because the majority of welfare recipients lack the basic education and job-specific skills needed to move up to better jobs, and most employer-provided training is focused on mid- and upper-level staff rather than entry-level workers. .

There are three reasons why states should seek to improve access to post-employment education and training for newly-employed welfare recipients and other low-wage workers:

Design Options

Public-private partnerships that engage employers in the design and imple-mentation of on-site basic skills and job training programs are the key to effective job advancement strategies. In some instances it may be possible to establish publicly-funded "bridge training" that strengthens the basic educational skills and "soft skills" (teamwork, problem-solving, communication, etc.) of entry-level workers and then moves them into employer-provided vocational training. More often, however, employers will not have formal, in-house training programs that are appropriate for entry-level workers. Grants in support of public-private partnerships will be essential in such cases to craft programs that address the skills deficits of newly-employed welfare recipients and other entry-level workers while also meeting employers' needs.

Job advancement training should focus primarily on vocational skills and basic skills that are broadly transferable within a given industry sector. Employers should be asked to provide participating workers with at least 10 hours of release time per week as part of their contribution to the program, and may receive on-the-job training subsidies to offset a portion of these costs. Employers also should be asked to sponsor training for supervisors and/or job coaches to ensure that further learning takes place on the job.

State Models

California is funding a $20 million job advancement initiative through its Employment and Training Panel (ETP), the nation's largest state agency for incumbent worker training. Through contracts with individual employers, groups of employers in key industrial sectors, non-profit training agencies, and local private industry councils, ETP's new Welfare-to-Work program will train newly-hired welfare recipients in the skills they need to succeed in their jobs and remain employed. Training for other entry-level workers also will be funded by ETP if employers agree to hire welfare recipients to fill job vacancies created through the promotion of entry-level workers. Under an initial $1 million ETP grant to Los Angeles County, 500 former TANF recipients employed in the hotel, general merchandising, and food service industries will receive 150 hours of combined vocational and basic skills training.

Pennsylvania has taken a different approach, launching two pilot projects to test the effectiveness of "individual learning accounts" (ILAs) in promoting ongoing educa-tion and training for workers. The state contributes up to $1,000 for each account, and these contributions are matched equally by both employers and employees (although the state pays a portion of this required match for low-income workers). The ILAs can be transferred to a new employer if the worker changes jobs, and they are invested in a manner chosen by the employee. Workers also decide when to draw upon their ILAs and which education or training programs will be best suited to their individual needs.





Community job creation

Clifford M. Johnson, Shattering the Myth of Failure: Promising Findings from Ten Public Job Creation Initiatives, Center on Budget and Policy Priorities, December 1997.

Clifford M. Johnson, Toward a New Generation of Community Jobs Programs, Center on Budget and Policy Priorities, July 1997 (reprinted in the 1997 Enterpreneurial Economy Review published by the Corporation for Enterprise Development, Washington, D.C.).

Steve Savner and Mark Greenberg, Community Service Employment: A New Opportunity Under TANF, Center for Law and Social Policy, November 1997.

Steve Savner and Maurice Emsellem, The Fiscal and Legal Framework for Creating a Community Service Employment Program, Center for Law and Social Policy and National Employment Law Project, November 1997.


Aid to legal immigrants

Kelly Carmody, State Options to Assist Legal Immigrants Ineligible for Federal Benefits, Center on Budget and Policy Priorities, February 25, 1998.

Stacy Dean and Kelly Carmody, States Now Have the Option to Purchase Food Stamps to Provide Food Assistance to Legal Immigrants, Center on Budget and Policy Priorities, December 4, 1997 (revised).

Jennifer Daskal and Kelly Carmody, A Guide to Estimate the Cost of a State-funded Food Stamp Program for Legal Immigrants, Center on Budget and Policy Priorities, December 4, 1997.


Child care

Mark Greenberg, Spend or Transfer, Federal or State: Considerations in Using TANF and TANF-Related Dollars for Child Care, Center for Law and Social Policy, January 1998. (Publication #98-09)

Mark Greenberg, A Summary of Key Child Care Provisions of H.R. 3734, Center for Law and Social Policy, August 1996. (Publication #96-4)

Gina Adams, Karen Schulman, and Nancy Ebb, Locked Doors: States Struggling to Meet the Child Care Needs of Low-Income Working Families, Children's Defense Fund, March 1998.


Housing assistance

Barbara Sard and Jennifer Daskal, Housing and Welfare Reform: Some Background Information, Center on Budget and Policy Priorities, February 12, 1998.

For further information on housing and welfare reform, please send your name, address, phone number, and email address to the Center on Budget and Policy Priorities by mail, fax (202-408-1056), or e-mail ([email protected]).


Alternate unemployment insurance (UI) program

Women, Low-Wage Workers, and the Unemployment Compensation System: State Legislative Models for Change, National Employment Law Project, October 1997.


Child support pass-through

Paula Roberts, Guidance from the Federal Government on Implementation of the Child Support Related Provisions of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 as amended by the Balanced Budget Act of 1997, Center for Law and Social Policy, January 1998. (Publication #98-13)

State Action Regarding the $50 Pass-Through and Disregard, Center for Law and Social Policy, January 1998. (Publication #98-4)

Paula Roberts, Family Law Issues in the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, Center for Law and Social Policy, November 1996. (Publication # 96-24)

Other Publications on Related Topics

Jocelyn Guyer and Cindy Mann, Taking the Next Step: States Can Now Take Advantage of Federal Matching Funds to Expand Medicaid for Low-Income Working Parents, Center on Budget and Policy Priorities, April 1998.

Iris Lav, Low-Income Tax Relief in the Absence of an Income Tax, Center on Budget and Policy Priorities, September 3, 1997.

Ed Lazere, Poverty Despite Work Handbook, Center on Budget and Policy Priorities, April 30, 1997.

Ed Lazere, State Earned Income Tax Credits Build on the Strengths of the Federal EITC, Center on Budget and Policy Priorities, February 19, 1998.

Karin Martinson, Study Shows that Welfare Program Has Success in Both Increasing Employment and Reducing Poverty, Center on Budget and Policy Priorities, December 17, 1997.

Sharon Parrott, Providing Income Support to Working Poor Families, Center on Budget and Policy Priorities, May 12, 1997.

Mark Greenberg, Paula Roberts, Steve Savner and Vicki Turetsky, Child Support Assurance: A New Opportunity in the Block Grant Structure, Center for Law and Social Policy, May 1997. (Publication #97-4)

Tina Marie Perry and Leslie Anne Argenta, Child Support Assurance: Overcoming Political Barriers, Center for Law and Social Policy, May 1997. (Publication #97-11)




In the TANF framework, each state receives a block grant of federal funds that may be used for specified allowable purposes and that is subject to a set of federal TANF requirements. In order to receive its full block grant, a state must meet a "maintenance of effort" (or MOE) requirement which mandates that states spend at least 80 percent (or 75 percent if the state meets applicable TANF work participation rates) of state spending on AFDC-related programs in 1994.

Within the universe of state policy innovations for needy families with children, the choice of whether to use federal TANF funds or state MOE funds as a financing source has important implications for both states and families. Although both TANF and state MOE funds can be used to accomplish any of the purposes of the TANF block grant, there are significant differences between the two regarding who can receive the funds and the requirements that attach to receipt of the funds.

Who Can Receive Assistance Funded with TANF or MOE Resources?

Federal TANF funds must be spent on benefits or services for needy families. States have the authority to define "needy." Federal TANF funds, however, generally may not be spent to assist families that include an adult that has received TANF-funded assistance for 60 months. A state may exempt up to 20 percent of the state's caseload from this lifetime limit on TANF assistance in instances of hardship or domestic violence. Federal TANF funds also cannot be used to provide assistance at any time to certain legal immigrants.

State MOE funds must be spent on "eligible families" — that is, families eligible for assistance under a state's TANF-funded program and families that would be eligible for TANF but for the 60-month time limit or the restrictions on legal immigrants. Eligible families assisted with state MOE funds must have income and resources below the state's TANF eligibility standards.(1)

What Restrictions and Requirements Attach to Assistance from TANF or MOE Funds?

Some of the TANF requirements and restrictions apply to assistance provided with TANF funds; other requirements apply to assistance provided in a program that receives TANF funds. Thus, the requirements and restrictions that attach to receipt of assistance depend both upon which funds are used and whether the funds are used in a program that receives TANF funds or in a separate state-funded program. There are three basic configurations or models for providing assistance to families from which a state may choose:

Providing assistance to a family through a TANF-funded program that uses federal TANF funds or commingled federal TANF and state MOE funds;

Providing assistance to a family through a TANF-funded program, but using only state MOE dollars that have been segregated from federal TANF funds within the program; and

Providing assistance to a family through a program that receives no TANF funds (i.e., a separate state program outside of TANF), using state MOE dollars. (2)

The federal requirements and restrictions with which a state must comply depends upon a state's choice among these three models for providing assistance to a family. The primary requirements and restrictions at issue are the federal 60-month lifetime limit on receipt of assistance, the work participation requirements, and the child support assignment and reimbursement requirements.

If a state provides assistance to a family with TANF funds or states MOE funds that are commingled with TANF funds, all of these federal restrictions on the use of TANF funds apply: the 60-month time limit, the work participation requirements, and the child support requirements.

When considering whether TANF or MOE funds can or should be used to finance all or part of a policy option set forth in this paper, states should consider which, if any, of the TANF requirements the state wishes to impose on recipients of the program. Examples of design configurations that a state might use for some of the specific policy options discussed in this paper are:

TANF or Commingled Funds: A welfare grant increase would most likely use TANF or commingled TANF/MOE funds in a TANF-funded program since the time limit, child support, and work participation requirements already apply to these families.

State MOE Funds Segregated in a TANF Program: A state could decide that it does not want the TANF time-limit "clock" to run for persons who are working substantial hours in a community jobs program. However, the state may want to count such working families toward meeting its required work participation rates. In this instance, the state could finance the benefits or wage subsidies with segregated state MOE funds (which are not subject to TANF time limits) but serve the families within the state's TANF program.

State MOE Funds in a Separate Program: If a state decides that it wants working families to keep the child support collected on their behalf, it should finance a Worker Stipend Program or a Housing Assistance program with state MOE funds in a separate state program so that the federal child support requirements do not apply.(4)

End Notes

1. A state may set its TANF income standard at any level it determines appropriate to aid needy families and may provide different types of assistance to families with incomes below that standard. In addition, a state might have multiple TANF programs with multiple eligibility standards.

2. For more detail on these alternative funding arrangements, see Savner and Greenberg, The New Framework: Alternative Funding Strategies under TANF (Center for Law and Social Policy, March 1997) and Center on Budget and Policy Priorities paper State Funding Requirements Under the New Welfare Law (April 1997).

3. The TANF regulations proposed by HHS appear to discourage in several ways the use of state MOE funds in separate state programs. A broad array of states, national and state organizations, and advocates have criticized this attempt to discourage the use of MOE in separate state programs which, as HHS recognizes, is clearly allowed under the federal welfare law. The final regulations are likely to be published in August of 1998. As states consider implementing some of the proposals set forth in this paper through a separate state program, they should be cognizant of the status of this issue and of relevant design choices a state might make to minimize any risk.

4. In some cases a state may only be able to count a portion of state expenditures in a separate state program as MOE. If the program serves both "eligible families" and individuals that do not meet the definition of "eligible families," that portion of the state expenditures spent on behalf of "eligible families" would count toward the state's MOE requirement.