April 15, 1997

State Funding Requirements Under the New Welfare Law
by Jocelyn Guyer

I. Introduction

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 radically altered the way in which welfare programs for families with children are financed. In the past, the federal government and the states shared responsibility for funding AFDC, JOBS, and Emergency Assistance (EA). Under the prior system, the federal government "matched" a state's expenditures at a rate established roughly in accordance with the state's fiscal capacity — for every additional dollar a state spent, it could receive anywhere from $1 to $4.88 in federal funds. On the other hand, if a state allowed its own spending to fall, then the federal government's contribution to that state's welfare programs also fell, creating an implicit financial incentive for states to maintain their own spending on programs for low-income families.

When the welfare law replaced the AFDC, JOBS, and EA programs with the new Temporary Assistance to Needy Families (TANF) block grant, it also replaced the matching rate financing system with a fixed federal block grant payment to states. Under the new system, states receive a federal block grant allocation based on a formula that does not take into account their own spending on programs for low-income families. Because the incentive for states to maintain spending is not implicit in the financing structure of TANF, the new law explicitly requires states to maintain a certain level of funding for their low-income programs. In light of the lack of implicit financial incentives to maintain spending, the adequacy of the resources available to fund work and welfare programs will depend in part on whether states fully comply with these "maintenance-of-effort" (MOE) requirements.

Although the underlying concept of state spending requirements is straightforward — states face a financial penalty if they fail to maintain spending on needy families at required levels — the details often are extremely complex. This paper begins with a brief overview of the key elements of the state spending requirements included in the welfare law. Using a question and answer format, it then explores the details of the basic MOE requirement and of a separate MOE requirement states face in order to secure access to a contingency fund that provides some supplemental federal assistance to states during difficult economic times. Finally, it concludes with a discussion of why declining caseloads may create a strong incentive for states to find ways to reduce their own spending and reasons why states nevertheless should maintain spending at or above required levels. In describing the details of the MOE requirements, the paper relies on the statutory language of the welfare law and on a guidance that HHS issued on January 31, 1997 offering states the Department's initial interpretation of the basic MOE requirement and other related issues. The Department has suggested that it may expand, and perhaps revise, its interpretation when it issues further guidance on the welfare law.(1)


II. Overview of the MOE Requirements and their Implications

The new welfare law contains two distinct MOE requirements — a basic MOE requirement with which states must comply in order to avoid reductions in their federal TANF block grant allocations and a more rigorous MOE requirement with which they must comply in order to secure access to a contingency fund.

Under the basic MOE requirement, states are expected to maintain their spending at 80 percent of their fiscal year 1994 levels on AFDC, JOBS, EA, and welfare-related child care programs. For states that comply with the federal work participation rates contained in the welfare law, the required minimum contribution is 75 percent of 1994 levels, rather than 80 percent. Beginning with federal fiscal year 1997 (October 1, 1996 — September 30, 1997), states that fail to comply with the basic MOE requirement will have their federal block grant allocations reduced during the succeeding fiscal year. They also will face an obligation to increase state spending in a future year to compensate for the resulting loss in federal funds.

There are many rules governing what kind of spending states can count toward compliance with the basic MOE requirement. Among other things, the rules provide that an expenditure only counts if it meets the following conditions:

As discussed in detail in Part IV of the paper, caseload declines in recent years have resulted in many states already reducing their own spending on programs for low-income families below fiscal year 1994 levels. Despite the decline in the number of people receiving cash assistance, there are several reasons beyond the law's MOE requirements for states to maintain or expand spending on low-income programs. States may need to consider providing state-funded support to low-income children and families who will be losing federal aid due to cuts in food stamps, SSI and assistance for legal immigrants.

First, states will have to meet the new law's work participation rates grow, which grow more stringent over time. The Congressional Budget Office (CBO) has projected that meeting these rates will require significant state resources, above the federal block grant allocation. Second, state spending is important because it can be a source of added flexibility for states seeking to design programs in accord with the diverse needs of people in their state. The restrictions and prohibitions that apply to federal TANF funds do not apply to state MOE funds, depending on how the state structures the funding for its low-income programs. States that do not withdraw state resources from their low-income programs will have a greater ability to design and implement policies that reflect state priorities. Box 1 provides an overview of the additional flexibility that states have over the use of their own funds.(2) . Third, under the new block grant financing, states will bear the full cost of increases in need that are likely to result if the economy goes into a downturn. Some states are planning for future funding shortfalls by establishing new rainy day funds.

States Have Greater Flexibility Over the Use of Their MOE Funds

In general, states have far more flexibility over how they use their own funds than they have over the use of federal TANF dollars. If a state combines its state and TANF funds in one program and aids each family with a combination of state and federal funds as was done under the AFDC program, then the federal restrictions and prohibitions in the welfare law apply to all funds. The restrictions and prohibitions may not apply, however, to aid financed exclusively with state funds, depending on how the state-funded aid is structured. In delivering aid financed exclusively with state funds, states can rely on one of two financing options:

A separate state program: A state can use its MOE funds in a state program that does not receive any federal TANF funds to provide aid to "eligible families."

A program where TANF and state funds are segregated: A state can operate a program financed with a combination of federal TANF dollars and state MOE funds that provides aid to some families exclusively with state MOE funds and to other families with federal funds.

A state's financing structure will determine whether a restriction or prohibition that applies to federal TANF funds also applies to state MOE funds. Certain restrictions apply to all assistance provided under a program that is financed at least in part with federal TANF funds, including assistance funded wholly with state dollars. However, none of the federal restrictions apply to aid from separate state programs financed exclusively with state funds. Certain other restrictions and prohibitions, including the 60-month time limit, only apply to federal TANF funds. Families aided with state funds — within the same program that receives TANF funds or through a separate state program — are not subject to the federal time limit.

The different rules for state and federal funds provide states much greater flexibility in designing their new programs. Consider a state that decides to offer a wage supplement to working parents with low wages. If the state uses federal TANF funds to provide the wage supplement, then it must count any month in which a parent receives it — no matter how small it is — against the lifetime 60-month time limit. Such a policy would create an untenable choice for a parent — should she accept a small wage supplement during a month in which she has a job and use up part of her life-time limit on assistance or turn it down out of fear that there may come a time when she is unemployed and in need of more substantial help? If the state uses its own funds, either under a separate state program or a segregated TANF program, to provide the wage supplement, then this conflict can be avoided because the 60-month time limit applies only to the use of federal funds. The state also has an interest in using state dollars to finance the supplemental aid so that if the parent loses her job the family could qualify for federally-financed aid and would not necessarily have to rely only on state-funded aid.

A second example is that a state may decide that is inappropriate to require families consisting of an elderly grandparent caring for her grandchildren to comply with the prescriptive federal work requirements laid out in the welfare law. Since the federal work participation rates are based on the work activities of families that are receiving assistance under a program funded with TANF dollars, a state the exempted grandparents from the work rules could find it harder to meet the work participation rates. However, if the state served grandparent cases in a separate state program, it could count expenditures on such cases toward the MOE requirement without decreasing its chances of meeting the federal work participation rates and risking a federal penalty.


III. Questions and Answers About the MOE Requirements

1. How much do states have to spend in order to comply with the basic MOE requirement?

Beginning in fiscal year 1997, states must maintain their spending at a level equal to or greater than 80 percent of historic state expenditures in order to comply with the basic MOE requirement. For states that meet the new work participation rates, the required minimum level of spending drops from 80 percent to 75 percent of historic state expenditures. In general, historic state expenditures refer to gross state expenditures on the following programs during fiscal year 1994: AFDC benefits and administration, JOBS, EA, and welfare-related child care programs (i.e., JOBS-related child care, transitional child care, and at-risk child care).(3), (4) In contrast, states' TANF allocations are based on historical gross federal spending only on AFDC, JOBS, and EA, not on welfare-related child care programs. Instead of including federal spending on welfare-related child care programs in states' TANF allocations, the law folds it into a separate child care funding stream. For this reason, a state's federal TANF block grant and its obligation to spend its own funds are not based on the same set of programs.

Table 1 shows state MOE levels according to HHS's calculations. In total, states would have to spend $13.9 billion annually to maintain spending at 100 percent of fiscal year 1994 levels, $11.1 billion to maintain it at 80 percent, and $10.4 billion to maintain it at 75 percent.

2. In general, what are the key restrictions imposed on spending states can count toward compliance with the basic MOE requirement?

A state can count an expenditure toward the MOE requirement only if it meets the following criteria:

3. For what purposes can basic MOE funds be used?

States can count an expenditure toward compliance with the basic MOE requirement only if it is used for the following:

The purposes of the new TANF block grant as stated in the new law are quite broad and so the provision allowing states to use MOE dollars for anything "reasonably calculated to accomplish the purpose" of the new block grant means that states have significant discretion to determine the kinds of activities in which they can invest their MOE dollars. The law states that the purpose of the block grant is to increase state flexibility to accomplish the following:

4. What does it mean to limit basic MOE spending to "eligible families"?

In general, an expenditure may count toward the basic MOE requirement only if it is made with respect to "eligible families." HHS's January 31, 1997 guidance provides that MOE funds must be used for families that meet the following criteria:

The law offers states broad authority to establish the income standards used to determine eligibility for their TANF programs.

It is important to highlight that under HHS's interpretation an "eligible family" for MOE purposes can be a family that cannot or does not receive federally-funded TANF aid. As a result, states can count expenditures made on behalf of families who are ineligible for assistance financed with TANF funds toward the basic MOE requirement. For example, states can use MOE funds to provide aid to the following groups(7):

5. Can states use basic MOE funds to provide aid to immigrants?

HHS originally had suggested that a drafting error in the new law would prevent states from using MOE funds to help those legal immigrants who cannot be aided with federal TANF funds. However, in its January 31, 1997 guidance the Department revised its initial interpretation. States can use MOE funds to provide aid, including work slots and cash assistance to immigrants who are ineligible for federally-funded TANF aid, including the following groups:

Although states clearly can extend aid to immigrants who are ineligible for federally-funded TANF aid, states still must ensure that their spending meets all of the criteria imposed on MOE funds. For example, states only can provide aid to immigrants who are part of an "eligible family." Since an "eligible family" generally must include a child living with a parent or another adult relative, in many cases states will not be able to use MOE funds to help disabled and elderly legal immigrants who lose their eligibility for SSI and food stamps under the new welfare law.

6. What is the "new spending" test?

The "new spending" test applies to spending on aid provided through new or existing state programs that would not have qualified for federal matching payments under the old welfare system. It does not apply to state spending programs that would have qualified for federal matching funds under the AFDC, JOBS, EA, or welfare-related child care programs (such spending clearly can be counted toward the basic MOE requirement). Under the "new spending" test, states may count spending on new or existing programs that would not have been matched under the old system but only to the extent that spending on these programs is greater than fiscal year 1995 levels. For example, if a state spent $10 million of state funds on an employment and training program for low-income workers (separate from its JOBS program) during fiscal year 1995 and $12 million on the same program during fiscal year 1997, it could count a maximum of $2 million out of the $12 million toward compliance with the basic MOE requirement, assuming other MOE criteria were met.

The purpose of the new spending test is to prevent states from circumventing the MOE requirement by claiming existing spending on programs other than AFDC, JOBS, EA, and welfare-related child care programs as an MOE expenditure. The test is evidence that Congress sought to make the MOE requirement a meaningful tool for maintaining states' investments in programs for low-income families. Nevertheless, considerable monitoring may be necessary to ensure the new spending test fulfills its purpose. As a first step, it will be important to gather accurate data on state spending during fiscal year 1995 on programs that states may rely on to meet the MOE requirement. It may be important to identify when a state changes the name of a program that existed in fiscal year 1995 and if it seeks to count the program's expenditures toward the MOE. A name-change should not prevent the new spending test from applying.

7. What are the limits on the amount of basic MOE funds states can devote to administrative expenditures?

The welfare law requires that states spend no more than 15 percent of their MOE expenditures on administrative costs. The law contains a similar restriction on the use of federal TANF funds — states cannot spend more than 15 percent of their federal TANF funds for "administrative purposes." The law does not define administrative expenditures under either the state or the federal restriction, although the provision that restricts the use of federal TANF funds for administrative purposes states that expenditures on information technology and computerization needed to comply with tracking or monitoring required by the new law are not considered to be "administrative." In a letter to states dated October 25, 1996, HHS noted that it anticipated issuing regulations that will define administrative costs for TANF. The letter also states that the Department "anticipates that the definition for administrative costs for TANF will be more flexible than what has traditionally been considered administrative costs under the AFDC program."(10) It is not clear whether the definition of administrative costs that is applied to TANF funds also will apply to MOE funds.

8. What types of expenditures are states explicitly prohibited from counting toward compliance with the basic MOE requirement?

The law lists several specific kinds of expenditures that cannot be counted toward the basic MOE requirement, including:

These limitations underscore Congress's intent to prevent states from circumventing the MOE requirement by using federal funds or double counting state funds for purposes of claiming federal funds.

9. Can states count child care expenditures toward compliance with the basic MOE requirement?

In order to secure access to a new fund established by the welfare law that provides states with federal matching dollars for child care expenditures, states must meet a child care MOE requirement. Specifically, states must maintain their spending on welfare-related child care programs at fiscal year 1994 or fiscal year 1995 levels (whichever is higher).

As noted above, in general, the law prohibits states from counting toward the basic MOE requirement any state funds expended as a condition of receiving federal funds from another program. Without an exception to this rule, states would not be allowed to count toward the basic MOE requirement any expenditures that also were used to satisfy the child care MOE requirement. The law, however, specifically allows states to count child care expenditures up to the amount the state spent on welfare-related child care programs during fiscal year 1994 or fiscal year 1995 (whichever is greater) toward the basic MOE requirement even though they may also have been spent as a condition of receiving child care matching funds. Thus, states may count a limited amount of child care expenditures toward both the child care MOE requirement and the basic MOE requirement.(11)

It is likely that child care expenditures are accorded special treatment because states' required spending levels under the basic MOE requirement are based in part on their historical expenditures on welfare-related child care programs. In the absence of special treatment, states would face a higher required spending level under the basic MOE requirement because of their historical child care expenditures, but could count child care spending toward compliance with it only to the extent they forfeited the right to count such spending toward the child care MOE.

10. What is the penalty if a state does not meet its basic MOE requirement?

If a state allows its spending to fall below required levels, then the Secretary of HHS must reduce its TANF allocation for the following fiscal year by the amount of the shortfall.(12) In addition, the state is required to replace the lost federal funds in the following fiscal year by increasing its own spending above the regular MOE level. If, for example, a state with a TANF allocation of $60 million and a basic MOE requirement of $50 million spent only $48 million in state funds during fiscal year 1997, then its TANF allocation for fiscal year 1998 would be reduced from $60 million to $58 million and its required level of spending for fiscal year 1999 would be increased from $50 million to $52 million.

11. What is the contingency fund?

The welfare law established a contingency fund that provides a limited amount of additional federal assistance to states during difficult economic times. To qualify for the contingency fund, a state must have an increased and high unemployment rate or a significant increase in its food stamp caseload. The fund may provide eligible states with additional federal payments totaling up to 20 percent of their TANF allocations in any single year (in any single month, a state can receive no more than 1/12 of this amount or 1.66 percent of its annual TANF allocation). A total of $2 billion is authorized for the contingency fund for fiscal years 1997 through 2001, and states are not guaranteed help if this funding level should prove inadequate. States must providing matching dollars for any federal money they receive from the fund. See the box on page 15 for additional details.

12. How much of their own money do states have to spend in order to receive aid from the contingency fund?

In addition to the basic MOE requirement, the welfare law imposes a different and more stringent MOE requirement on states that use the continency fund.(13) It effectively requires states to maintain their own spending at 100 percent of historic state expenditures during any year in which they receive aid from the fund. If a state fails to meet the contingency fund MOE requirement, then it must eventually return all of the aid that it received from the fund. For purposes of this state spending requirement, the definition of historic state expenditures is the same as the one used for the basic MOE requirement (see question 1) unless a state meets the child care MOE requirement. As explained in question 14, if this occurs then required spending levels are based on an alternative definition of historic state expenditures.

Moreover, states must provide matching payments in accordance with their fiscal year 1995 Medicaid matching rate for any contingency fund aid that they receive.(14) States are not allowed to treat any state spending as a matching payment unless they already have met the requirement to maintain spending at 100 percent of historical levels. For example, if a state spent $100 million in fiscal year 1994 and $110 million in fiscal year 1997, it can count only $10 million in state spending as matching payments for contingency fund aid. States have until the end of a fiscal year during which they receive aid from the contingency fund to provide matching payments. If they fail to do so, they must return unmatched federal aid to the contingency fund.

13. In general, what kinds of state spending count toward compliance with the contingency fund MOE requirement?

Unlike under the basic MOE requirement, the law only allows states to count their own spending in their TANF programs toward the contingency fund MOE requirement. They cannot count spending in separate state programs. The same rules also apply to state spending used to match federal contingency fund payments.

14. What happens to the contingency fund MOE requirement if a state meets the child care spending requirement?

If a state meets the child care MOE requirement (see question 9), it faces a level of required spending under the contingency fund MOE that is based on its historic state expenditures during fiscal year 1994 only on AFDC, JOBS, and EA (instead of on these programs and welfare-related child care programs). At the same time, it is not allowed to count child care expenditures toward the contingency fund MOE. Conversely, for a state that fails to meet the child care MOE, historic state expenditures will be calculated based on spending in fiscal year 1994 on AFDC, JOBS, EA, and welfare-related child care programs. It, however, is allowed to count child care expenditures toward compliance with the contingency fund MOE. The purpose of imposing different rules on states that have met the child care MOE appears to be to ease the burden on these states of complying with the contingency fund MOE. It was not necessary to make similar adjustments under the basic MOE requirement because it allows states to count spending on separate state programs, including child care programs, toward compliance.

15. What are the implications of the different rules for the contingency fund MOE requirement and the basic MOE requirement?

The implications of the relatively more stringent contingency fund MOE requirement are two-fold. First, states that want to secure access to the contingency fund will have to spend more on programs for low-income families than is required by the basic MOE requirement, at least by the end of a year during which they use the fund. Thus, the contingency fund MOE requirement may create an incentive for states to invest more state resources in programs for low-income families. The law, however, only requires states to maintain spending at 100 percent of historical levels by the end of a fiscal year in which they relied on the fund. States may decide it is not necessary to maintain spending in anticipation of needing the fund; instead they may wait until they use it before increasing their expenditures to the required level. Note, however, that if they choose this route, states will have to increase spending at the same time that economic conditions are likely to make it most difficult for them to do so. Second, while states can count expenditures on separate state programs toward compliance with the basic MOE requirement, such spending does not help them meet the contingency fund MOE requirement (see box above for a description of "separate state programs"). The contingency fund MOE requirement, therefore, may discourage states from relying on separate state programs to increase their flexibility to implement the welfare law as they see fit.

It is unclear whether the contingency fund MOE requirement will encourage states to invest additional spending in programs for low-income families and/or to forego the opportunity to use separate state programs. The extent to which the requirement affects states' decision-making in these areas will depend on how much they value the opportunity to secure access to the contingency fund. As discussed in the box, the structure of the contingency fund makes it less valuable to states.


IV. State Spending Requirements in the Context of Declining Caseloads

Welfare caseloads have declined significantly in most states over the past few years. While these relatively dramatic declines may lead states to reduce their own spending on programs for low-income families, the welfare law increases the need for state spending by imposing deep cuts in many federal safety net programs and by expanding states' obligations to help families prepare for, find and retain employment. Thus, it will be important for states to consider more than recent caseload declines when determining how much to invest in programs for low-income families.

The Value of the Contingency Fund to States

For several reasons, the right to access the contingency fund may hold uncertain value for states.

  • Inadequacy of funding available from the contingency fund

    The contingency fund contains $2 billion for fiscal year 1997 through fiscal year 2001. Historical experience suggests that this funding level is likely to prove inadequate relatively quickly. During the last recession, which occurred between 1990 and 1992, federal AFDC spending increased $6 billion over the 1989 level. In other words, the additional amount expended during these three years was triple the amount available in the contingency fund for the next five years. Moreover, states have no guarantee that they will receive any assistance from the fund. The welfare law directs the Secretary of Health and Human Services to distribute funds to states in the order in which they apply for assistance.
  • Difficulty of qualifying for assistance

    In order to qualify for assistance from the fund, a state's food stamp caseload must increase at least 10 percent over the lower of its 1994 or 1995 level, or its unemployment rate must rise to at least 6.5 percent and be at least one-tenth higher than the state's unemployment rate in the same months of either of the two prior years.
    * Either of these triggers may be difficult for states to meet even when they are facing difficult economic times.
  • Problem with the federal match rate

    or states that qualify for assistance from the contingency fund for a period of less than a year, the welfare law effectively offers them federal assistance at a significantly reduced matching rate. The federal matching rate is reduced by a factor reflecting the portion of the year that the state was eligible for the contingency fund. If, for example, a state with a regular matching rate of 50 percent qualifies for contingency fund assistance for only half a year, then the federal government will offer it assistance at a matching rate of only 25 percent (e.g., in addition to meeting the 100 percent MOE requirement, the state would have to spend $3 for every $1 of federal aid it receives).

* When evaluating whether a state qualifies for the contingency fund under the food stamp trigger, the federal government will adjust reported caseload data for 1994 and 1995 to reflect what caseloads would have been like if the food stamp cuts included in the welfare law had been in place during those years.

Recent Caseload Declines May Lead States to Withdraw State Funds

In the short-term, relatively dramatic welfare caseload declines in most states may lead states to reduce their spending on programs for low-income families. As Table 2 shows, the average monthly AFDC caseload in recent months was 14 percent below fiscal year 1994 levels. Although recent expenditure data for all states are not yet available, it appears that in many states expenditures on AFDC, JOBS, EA, and Title IV-A child care (or their TANF replacements) also have fallen along with caseloads.

Since AFDC caseloads have declined in almost all states since the base year(s) used to determine their TANF allocations, many states will receive more from their block grant allocations in the short-term than they would have received in federal assistance if the old AFDC, JOBS, and EA financing systems had been retained.(15) Some states have labeled this difference a "windfall," although, as described below, the so-called "windfall" disappears once states take into account their expensive, new responsibilities for complying with rigorous work requirements and cuts in federal funding for other safety net programs.

The welfare law requires states to use their TANF funds — including any "windfall" funds created by declining caseloads — for TANF purposes. Thus, states cannot directly use their "windfalls" to build prisons or pay for a tax cut; they must use them for activities such as providing cash assistance, child care, and education and training to low-income families. The substitution of new state spending requirements for the old obligation that states match federal spending, however, creates an opportunity for most states to convert at least part of their "windfalls" into funds that can be spent as they wish. Within constraints, states can use federal TANF funds to supplant existing state spending on programs for low-income families and then use the state dollars that are freed up for other purposes.

The extent to which states can supplant state spending with federal TANF funds is a function of the basic MOE requirement and of how much caseload declines already have led state spending to fall below 1994 levels. The basic MOE requirement allows states to reduce spending by up to 20 to 25 percent below 1994 levels, depending on whether they plan to meet an 80 percent or a 75 percent basic MOE requirement. In many states, however, caseload declines already may have led states to reduce their spending below fiscal year 1994 levels. In these states, spending cannot be reduced below current levels by the full 20 to 25 percent, making it more difficult for them to fully absorb their windfalls by supplanting state spending with federal funds.

For example, a state that spent $100 million on welfare and related child care programs in fiscal year 1994 faces an MOE requirement of $75 million for fiscal year 1997 (assuming it expects to be in compliance with work requirements). If caseload declines since fiscal year 1994 already have caused the state's spending to fall by $20 million from $100 million to $80 million, then the state can reduce its own spending only by an additional $5 million. If the state receives a federal "windfall" of more than $5 million, then it cannot absorb it fully by further reducing state spending. When a state receives a federal "windfall" that exceeds the amount by which it is allowed to reduce state spending, it may look to other options for absorbing it or seek ways to circumvent the MOE requirement.(16)

In sum, the "windfalls" create strong incentives for states to replace their own spending on low-income programs with federal funds, while the decline in state spending in recent years means states already have used up part of their allowed reduction in spending. In combination, the two phenomena may create strong incentives for many states to pull out as much money from TANF-funded programs as allowed by the basic MOE requirement and even to seek ways to circumvent the MOE requirement by effectively reducing state spending below 75 percent of historical levels.

Reasons Why States Should Maintain Their Own Spending

Despite recent declines in caseloads, there are many reasons why states should consider maintaining spending on behalf of needy families at required levels or even above required levels. Although most states have submitted TANF plans that continue their old AFDC systems for the present, states now are operating in a completely different environment. Most significantly, they are facing costly work requirements and the responsibility for responding to downturns in the economy without any significant additional assistance from the federal government. In this context, the short-term "windfalls" states may receive as a result of declining caseloads likely will prove to be an inadequate contribution toward helping states finance their new responsibilities.

With mandatory time limits on federal aid and new work requirements, states must assume greater responsibility for helping parents prepare for, find, and retain employment. According to Congressional Budget Office estimates, if states are to comply with the rigorous new work requirements, they will have to invest an estimated $12.3 billion into work and training programs above the level of federal JOBS funding included in the block grant and the state matching dollars that would have been spent to draw down these funds. Most states will have to invest significant new resources into work programs, job training, education, and child care in order to comply with the federal work requirements.

States that maintain their own spending will also be in a better position to respond to other changes in federal law that will leave hundreds of thousands of people without access to essential safety net programs and millions more receiving less assistance from these programs. The new welfare law includes more than $50 billion in federal cuts based on changes in programs other than the old AFDC, JOBS, and EA programs, with especially large reductions in the food stamp program, the Supplemental Security Income (SSI) program for the elderly and disabled poor, and assistance to legal immigrants. For example, the law contains a new definition of childhood disability that will cause over a hundred thousand poor children to lose or never to receive federally-funded SSI benefits. The vast majority of these children, all of whom live in families with very low incomes, will have to turn to state low-income programs if they are to receive aid.

Finally, in a block grant environment, states must bear the financial responsibility for responding to difficult economic times. They may be at risk, therefore, if they reduce state spending to the maximum extent feasible given currently declining caseloads. Unlike in the past, states may find that it makes sense to establish a spending cushion. Moreover, the only additional federal assistance states may be eligible for during difficult economic times is from the contingency fund. But, as already described, in order to avoid repaying federal assistance from the contingency fund, states must meet an MOE requirement based on 100 percent of historic state expenditures and provide state matching payments.

In sum, states now have far more responsibility for providing aid to low-income families and individuals, promoting employment, and responding to economic downturns than prior to enactment of the welfare law. In light of this increased responsibility, states have many reasons to comply with the state spending requirements included in the welfare law, and even to increase spending above required levels.

Table 1: Maintenance-of-Effort Requirements for States Under the Welfare Law
(in thousands)

State spending on welfare programs during FY 1994*

Basic requirement (80% of FY94)

Requirement if in compliance with
work rules
(75% of FY94)
Contingency fund requirement
(100% FY94)
ALABAMA 52,285 41,828 39,214 52,285
ALASKA 65,257 52,205 48,942 65,257
ARIZONA 126,704 101,363 95,028 126,704
ARKANSAS 27,785 22,228 20,839 27,785
CALIFORNIA 3,643,208 2,914,566 2,732,406 3,643,208
COLORADO 110,495 88,396 82,871 110,495
CONNECTICUT 244,561 195,649 183,421 244,561
DELAWARE 29,028 23,222 21,771 29,028
DISTRICT OF COL 93,932 75,146 70,449 93,932
FLORIDA 494,559 395,647 370,919 494,559
GEORGIA 231,158 184,926 173,369 231,158
HAWAII 97,309 77,847 72,981 97,309
IDAHO 18,238 14,591 13,679 18,238
ILLINOIS 572,027 457,622 429,021 572,027
INDIANA 151,367 121,093 113,525 151,367
IOWA 82,618 66,094 61,963 82,618
KANSAS 82,333 65,866 61,750 82,333
KENTUCKY 89,891 71,913 67,418 89,891
LOUISIANA 73,887 59,109 55,415 73,887
MAINE 50,370 40,296 37,778 50,370
MARYLAND 235,954 188,763 176,965 235,954
MASSACHUSETTS 478,597 382,877 358,948 478,597
MICHIGAN 624,691 499,753 468,518 624,691
MINNESOTA 239,660 191,728 179,745 239,660
MISSISSIPPI 28,966 23,173 21,724 28,966
MISSOURI 160,161 128,129 120,121 160,161
MONTANA 20,919 16,735 15,689 20,919
NEBRASKA 38,629 30,903 28,971 38,629
NEVADA 33,985 27,188 25,489 33,985
NEW HAMPSHIRE 42,820 34,256 32,115 42,820
NEW JERSEY 405,274 324,219 303,956 405,274
NEW MEXICO 49,934 39,947 37,450 49,934
NEW YORK 2,281,060 1,824,848 1,710,795 2,281,060
NORTH CAROLINA 205,568 164,454 154,176 205,568
NORTH DAKOTA 12,092 9,674 9,069 12,092
OHIO 520,734 416,588 390,551 520,734
OKLAHOMA 81,667 65,334 61,250 81,667
OREGON 123,006 98,405 92,255 123,006
PENNSYLVANIA 542,834 434,267 407,126 542,834
RHODE ISLAND 80,489 64,392 60,367 80,489
SOUTH CAROLINA 47,786 38,229 35,839 47,786
SOUTH DAKOTA 11,699 9,359 8,774 11,699
TENNESSEE 110,413 88,331 82,810 110,413
TEXAS 314,300 251,440 235,725 314,300
UTAH 33,721 26,977 25,291 33,721
VERMONT 34,205 27,364 25,653 34,205
VIRGINIA 170,898 136,718 128,173 170,898
WASHINGTON 362,748 290,198 272,061 362,748
WEST VIRGINIA 43,601 34,881 32,701 43,601
WISCONSIN 225,638 180,511 169,229 225,638
WYOMING 14,220 11,376 10,665 14,220
UNITED STATES 13,913,282 11,130,625 10,434,961 13,913,282

Table 2: Decline in AFDC Caseloads Since FY 1994
  Average monthly caseload,
Current* average monthly caseload % Change
Alabama 50,340 40,707 -19.1%
Alaska 12,759 12,153 -4.8%
Arizona 71,984 61,598 -14.4%
Arkansas 26,014 22,039 -15.3%
California 908,999 870,679 -4.2%
Colorado 41,614 33,698 -19.0%
Connecticut 59,201 57,082 -3.6%
Delaware 11,460 10,437 -8.9%
Dist. of Col. 27,117 25,214 -7.0%
Florida 247,087 199,404 -19.3%
Georgia 141,451 121,347 -14.2%
Hawaii 20,420 21,856 7.0%
Idaho 8,676 8,450 -2.6%
Illinois 240,319 216,841 -9.8%
Indiana 73,803 50,148 -32.1%
Iowa 39,555 30,988 -21.7%
Kansas 30,102 23,328 -22.5%
Kentucky 79,840 70,318 -11.9%
Louisiana 86,915 66,574 -23.4%
Maine 22,934 19,768 -13.8%
Maryland 80,123 68,993 -13.9%
Massachusetts 111,783 83,164 -25.6%
Michigan 223,950 167,770 -25.1%
Minnesota 62,979 57,075 -9.4%
Mississippi 56,785 45,101 -20.6%
Missouri 92,110 79,088 -14.1%
Montana 11,908 9,740 -18.2%
Nebraska 15,934 13,939 -12.5%
Nevada 14,166 13,257 -6.4%
New Hampshire 11,475 8,905 -22.4%
New Jersey 122,427 106,905 -12.7%
New Mexico 33,633 33,013 -1.8%
New York 454,952 414,063 -9.0%
North Carolina 131,220 108,441 -17.4%
North Dakota 5,877 4,676 -20.4%
Ohio 250,208 202,544 -19.0%
Oklahoma 46,971 35,371 -24.7%
Oregon 42,135 28,647 -32.0%
Pennsylvania 210,155 181,434 -13.7%
Rhode Island 22,654 20,485 -9.6%
South Carolina 51,925 43,456 -16.3%
South Dakota 6,926 5,665 -18.2%
Tennessee 110,766 93,505 -15.6%
Texas 283,744 239,775 -15.5%
Utah 17,801 13,973 -21.5%
Vermont 9,883 8,668 -12.3%
Virginia 74,818 60,593 -19.0%
Washington 102,952 96,742 -6.0%
West Virginia 40,729 37,388 -8.2%
Wisconsin 77,207 50,102 -35.1%
Wyoming 5,740 4,254 -25.9%
United States 4,984,521 4,299,359 -13.7%
Source: Data are from the Department of Health and Human Services. *"Current" caseload is based on the average caseload during August, September, and October of 1996.

End Notes:

1. For a complete analysis of HHS's January 31 guidance, see HHS Policy Guidance on Maintenance of Effort, Assistance, and Penalties: Summary and Discussion, Center for Law and Social Policy, February 4, 1997.

2. For a more detailed discussion of this issue, see Savner and Greenberg, The New Framework: Alternative State Funding Choices Under TANF, Center for Law and Social Policy, March 1997.

3. Among other things, the significance of "gross" rather than "net" expenditures is that child support collections that offset the state's gross AFDC expenditures during fiscal year 1994 are not factored into the MOE requirement. If MOE requirements were based on net rather than gross expenditures, then the MOE spending levels would be lower.

4. The welfare law includes a provision allowing a state to adjust its historic state expenditures downward by a conversion factor if its federal TANF allocation for a given fiscal year falls below the amount of federal assistance it received during fiscal year 1994 for AFDC, JOBS, and EA. In its January 31, 1997 guidance, HHS stated that it considered the language creating the conversion factor a remnant of earlier bills that no longer is viable in the context of the final welfare law. Accordingly, it appears that HHS does not intend to rely on the conversion factor.

5. In its January 31, 1997 guidance, HHS indicated that it believes the intent of the restrictions on the use of MOE funds for educational expenditures is to prevent states from counting "general educational expenditures by State or local governments for education purposes." Instead, educational spending should count only if it is for "services targeted on 'eligible families,' but not available to the general public".

6. Section 401(a) of the Social Security Act.

7. As described in more detail in the box on page 4, states can use MOE funds to help these groups if they establish a segregated TANF program or a separate state program to provide them with aid.

8. States also can use MOE funds to prevent people from using up their time-limited federal aid. For example, a state could provide state-funded aid to people with significant employment barriers who otherwise would have a high probability of hitting the federal time limit (see box on page 4).

9. "Qualified aliens" is a classification created by the welfare law for selected groups of legal immigrants. For details on the meaning of this phrase and all of the immigration provisions in the welfare law, see Wheeler and Bernstein, New Laws Fundamentally Revise Immigrant Access to Government Programs: A Review of the Changes, National Immigration Law Center, October 26, 1996.

10. Letter from Lavinia Limon, Director, Office of Family Assistance, Department of Health and Human Services to state officials, October 25, 1996.

11. HHS's January 31, 1997 guidance clarifies that states can count child care spending toward both the basic and the child care MOE requirements only if the spending meets the separate restrictions imposed on spending under each of the requirements. For example, a child care expenditure that would have been allowed under the at-risk child care program can be counted toward the child care MOE, but it cannot be counted toward the state's basic MOE requirement unless it is used to help an "eligible family."

12. In general, the law prohibits the Secretary from imposing a penalty on a state if it has "reasonable cause" for failing to comply with a federal requirement. The reasonable cause exception, however, does not apply to the MOE requirement or to the requirement that states pass audits of their state child support enforcement programs, suggesting that Congress intended the Secretary to be particularly rigorous about enforcing these two provisions.

13. The law includes two separate provisions that effectively create a contingency fund MOE requirement. Only one of the provisions is described in this paper (See 403(b)(4) of the Social Security Act). This provision imposes a contingency fund MOE requirement via an annual reconciliation process designed to ensure that states provide matching dollars for any aid that they receive from the contingency fund. The second version of the contingency fund MOE requirement is largely redundant of the first version, but conflicts with it in a number of small ways (See 409(a)(10) of the Social Security Act). It is not discussed in this paper because a set of technical amendments to the welfare law now under consideration by Congress may eliminate it.

14. States will have to provide matching payments at even higher rates if they qualify for the fund for only a portion of a year. See box on page 15 for details.

15. For several reasons, AFDC caseload declines only can suggest whether or not a state will receive more under its block grant allocation than it would have received under prior law. First, AFDC caseloads do not serve as a perfect predictor of AFDC expenditures. Second, states' block grant allocations are based on AFDC, JOBS and EA expenditures. In many states, EA and JOBS expenditures were expected to increase even as AFDC caseloads and expenditures fell.

16. States are allowed to transfer up to 30 percent of their TANF allocations to the Child Care Development Block Grant (CCDBG) and the Social Services Block Grant (SSBG). The amount states can transfer to the SSBG is further limited by two additional restrictions: 1) it cannot exceed 10 percent of a state's TANF allocation, and 2) it cannot exceed a third of the amount the state transfers to the CCDBG. Transferring funds outside of TANF allows states to provide child care and other services to people without regard to all of the restrictions and prohibitions that accompany the use of federal TANF funds. For example, by transferring money to SSBG, a state could provide services it used to provide under its EA program to families without subjecting them to the 60-month time limit or work participation requirements. If states use transferred funds to reduce their own spending on child care or other programs financed through the SSBG, then transfers effectively also serve to provide states with another opportunity to absorb their federal TANF "windfalls."