American Public Human Services Association, Elaine M. Ryan

Holzer, Harry L., Urban Institute, and Georgetown University

Ohio Department of Job and Family Services, Joel Potts

"RAINY DAY" AND OTHER SPECIAL TANF ISSUES

House of Representatives,
Committee on Ways and Means,
Subcommittee on Human Resources,
Washington, DC.

The Subcommittee met, pursuant to notice, at 10:02 a.m., in room B-318 Rayburn House Office Building, Hon. Wally Herger (Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]

Chairman HERGER. Good morning. Welcome to today's hearing on "rainy day" and other special welfare funding issues.

Today we will hear about several related matters requiring our attention this year and next, as we consider the future of the 1996 welfare reforms. Two provisions in the 1996 law will expire at the end of the current fiscal year: the Federal contingency grant fund and the supplemental grants to fast growing or relatively poor States.

These programs are part of today's agenda, but they really point us towards larger issues and questions: how should our nation's cash welfare program be funded as we go forward, and what signals and incentives should Washington give on spending or saving TANF funds?

The latter question is one I want to explore in depth today, so I have encouraged witnesses to do some deep thinking on ways to encourage States to save more for rainy days. Fortunately, as we will hear, many are doing just that, aided by the more than 50 percent national caseload decline and fixed block grant funding.

What a change this is. Under the former AFDC system, spending rose in good times and bad. In fact, the very idea of saving cash welfare funds for rainy day was almost unimaginable.

Still, there are complications. This Committee fought back attempts to cut the TANF block grant when others saw welfare "surpluses" as inviting targets for budget cuts. We won that fight, so now both sides have upheld their end of the 1996 deal, when we traded fixed Federal funding for more responsibility to produce results.

What remains is to find ways to help States save more of their block grants, while insulating such savings from Washington budget cutters. That would leave States better able to assist needy families in the event of tough times, and it should help protect taxpayers' interests in the long run as well. So I am eager to hear the testimony of all of our witnesses on these important issues.

Without objection, each Member will have the opportunity to submit a written statement and have it included in the record at this point.

[The opening statement of Chairman Herger follows:]

Chairman HERGER. Mr. Cardin, would you like to make an opening statement?

Mr. CARDIN. Thank you, Mr. Chairman.

I would request that my entire statement, along with a letter from Governor Perry, the Governor of Texas, be put into the record.

Chairman HERGER. Without objection.

[The information follows:]

Office of the Governor
Austin, Texas
March 16, 2001

The Honorable Tommy G. Thompson
U.S. Secretary of Health and Human Services
Department of Health and Human Services
Washington, D.C. 20201

Dear Secretary Thompson:

I am writing to urge you to extend the Temporary Assistance for Needy Families (TANF) supplemental grants through fiscal year 2002. These grants play an important role in helping hard-working men and women achieve self-sufficiency. They were designed to address the needs of States with especially high population growth or historically low welfare benefits, and are critical to enable us to help even more Texans move from welfare to work.

It is imperative that these grants be extended while we work towards overall welfare reform reauthorization. I know you have heard from several Governors on this issue already, and I appreciate your consideration of this matter.

Please let me know if I can be of any assistance to you.

Sincerely,

Rick Perry
Governor

I, too, share your joy that the commitment we made to the States has been upheld by Congress, that we have lived up to what we said we were going to do. We did fight off efforts by others to violate that commitment. The results, I think, have been very, very positive.

I am not certain why, when we passed the legislation on the contingency fund and the supplemental grants, we had an expiration date in this year when TANF expires next year. It seems to me that it would be better suited for us to take up the longer term commitments on supplemental grants and contingency funds when we take up TANF. They are very much related.

On the other hand, I do not want to see either of those programs expire, because if they do, then I think we are violating the basic understanding we have with the States.

The supplemental grants, for example, would reduce TANF funds basically for 17 States by about ten percent. It doesn't affect my State of Maryland, but it does affect many States in this country. I asked permission to put Governor Perry's letter in the record, where he strongly urges us to continue the supplemental grants because it is very important for the State of Texas.

In regards to the contingency fund, we all know that the contingency fund was a major part of the TANF compromises that were reached, to take into consideration that we may go through a tough economic time. We haven't since we passed TANF. We haven't tested the contingency funds, as to how they might be called upon to be needed.

Several States, most States, have put some money away just in case. That's exactly what we wanted them to do. They put some of their TANF money away and some of their own funds away. I have the figures here for Maryland, my own State, and we have reserved about $50 million of TANF funds and have dedicated about $80 million of our own resources in the event the economy moves into a difficult position. So the States are doing what we asked them to do.

If you take a look at the total dollars that have been unencumbered, I think it's about $3 billion, that is available to the States collectively, and about $9 billion has not been spent. That's not a large sum of money when you consider that, since the inception of the program, about $80 billion has been made available to the States.

So I think the programs have been working, and they have been working well. I would hope that we would either extend the supplemental grant and contingency fund for one more year, until we can get the TANF reauthorization, or we should really take a look at both of these programs, update for the current situation, look at some of the trigger mechanisms and determine whether those trigger mechanisms are appropriate, look at the appropriate funding levels--which might be difficult for us to do this year. But if we can't agree on an extension for one year, then I think we will need to do that.

I very much look forward to the witnesses.

[The opening statement of Mr. Cardin follows:]

Chairman HERGER. Thank you, Mr. Cardin, for your comments.

Before we go on to the testimony this morning, I want to remind the witnesses to limit their oral statements to five minutes. However, without objection, all the written testimony will be made a part of the permanent record.

Will the witnesses please have a seat at the table.

On today's panel, we will hear from Paul Posner, Director of Federal Budget Issues at the U.S. General Accounting Office; Elaine Ryan, Acting Executive Director, American Public Human Services Association; Joel Potts, TANF Policy Administrator at the Ohio Department of Job and Family Services; and Harry Holzer, Professor of Public Policy, Georgetown University, and Visiting Fellow, The Urban Institute. Mr. Posner, we will now hear your testimony.

STATEMENT OF PAUL L. POSNER, MANAGING DIRECTOR, STRATEGIC ISSUES, U.S. GENERAL ACCOUNTING OFFICE

Mr. POSNER. Thank you very much, Mr. Chairman. It is a pleasure to be here today.

I am reporting to you about the study that we have done for the Subcommittee, revisiting ten States that we had looked at several years ago, as part of our effort to monitor the unfolding of the TANF block grant.

This particular testimony, as you indicated, focuses on the potential challenges posed for this new partnership when we do have a downturn, the potential cushions available for both Federal and State governments to deal with the specific contingency mechanisms that were alluded to, and options to promote savings for a rainy day.

Fundamentally, the challenge is framed by the shift in Federal funding from an open-ended to a closed-ended program, which means that additional costs that might visit us in a time of recession are no longer available on an open-ended match from the Federal Government to the States. Once States exhaust their TANF balances, they are more or less on their own to fund those additional costs, which is why the Federal Government provided a contingency fund as part of the bargain, if you will.

Although the extent of the new program's response to a potential downturn still remains highly uncertain--conjectural, if you will--most observers and researchers and State officials agree that a downturn will put pressure on the program.

Against this backdrop, we know that State budgets tend to be pro-cyclical. What do we mean by that? Unlike the Federal budget, States have balanced budget requirements, bond markets, other fiscal limitations, that prompt them to make painful choices during times of downturn. As people become needier, States have less money. Simply put, absent a deficit, they can lower spending, raise taxes, or seek Federal help. Sometimes these shocks come abruptly in the middle of a State's fiscal year on biennium.

For States, fiscal planning is the key to smoothing out the impacts of business cycles, both for their overall budget and for programs like this that are sensitive to economic shocks. Rainy day funds dedicated to general budget stabilization funds are a normal part of State budgeting. Five percent of State money is generally in those funds, as well as rainy day funds dedicated to specific programs, with the general idea that you "fix the roof while the sun is shining."

The Federal Government, too, has an interest, even in an era of devolution in promoting savings for the future, as you indicated. That is why we provided the contingency fund, in fact, to buffer the impact of a cyclical change.

Recognizing that the Federal Government is often viewed as a funder of last, and sometimes first resort, in the event of a downturn, encouraging savings now helps smooth out the Federal obligation as well.

Notwithstanding the contingency and loan fund, ironically it is not that fund that has been the main source of potential savings but, rather, the surprising unspent TANF balances that have come to play the role of an "accidental" rainy day fund for this program. They now total about $9 billion, or almost 15 percent of the grant since its inception.

Let me caution two things about those unspent balances. There is less here than meets the eye. First of all, these balances are highly uneven among the States. Ten States have zero or almost zero balances left. They have drawn down almost all their funds.

Secondly, we know there are inconsistent definitions reporting across States as to what these balances consist of. HHS has offered a few categories for States to report. Some are calling them unobligated, some are calling them unliquidated. The idea is to try to capture how many of those balances are really pre-committed.

The problem we have, when we go behind that data and look at the States, there is much uncertainty and confusion about the nature of these balances. States reporting money as unobligated, in fact, are reporting things that are, in fact, committed, like pre-contracts to child care. On the other hand, States reporting items as unliquidated obligations, in fact, are reporting spending to counties that are still largely uncommitted.

So what I have to say here is just like we said two years ago: nobody really knows how much of that $9 billion is really available as a cushion.

Why does this matter? The lack of clarity of balances puts them potentially at risk in the budget process, particularly when spending is constrained and numerous other demands press for attention. The notion that it is "the State's money" might not be enough to protect it for the future in this competitive environment.

Unspent funds in any budget process create the presumption--and I would argue a legitimate presumption--that funds aren't needed. Every program has a burden of showing why these balances, in fact, are not only part of a bargain struck by the States, but part of a national reserve to address contingencies and cyclical pressures.

So we argue that the unique cyclical nature of this program argues, first of all, for better reporting of the nature of these balances, particularly how much would States be planning to set aside for future contingencies. We recommended this in 1998 and we have not seen any progress really along this score.

Secondly, we think that improved planning by the States themselves is important as well. We noted that States largely have not dedicated any reserves from their own money, partly because they can't count those reserves for their maintenance of effort requirements. Only Maryland really has found a way to do this. The Federal Contingency and Loan Fund is largely not available because of the overly stringent requirements.

So what we say in conclusion here is we provide some options for you to think about, changing the contingency fund, providing a little more flexibility for States to dedicate rainy day funds as part of their MOE, and ultimately provide some better information so that we know going forward what we really have to buffer the future in a downturn.

Thank you.

[The prepared statement of Mr. Posner follows:]

Chairman HERGER. Thank you very much, Mr. Posner.

We will now hear from Miss Ryan.

STATEMENT OF ELAINE M. RYAN, ACTING EXECUTIVE DIRECTOR, AMERICAN PUBLIC HUMAN SERVICES ASSOCIATION

Ms. RYAN. Good morning, Mr. Chairman, and members of the Subcommittee.

First, let me begin by expressing the American Public Human Services Association's (APHSA) sincere thanks for all of your efforts to keep the deal, to make sure the Federal TANF funds remained in place, and for your efforts today to try to restore Social Service Block Grant funding that is very important to States.

I am Elaine Ryan, the Acting Executive Director of APHSA, a nonprofit, bipartisan organization representing State and local human service professionals for more than 70 years. Thank you for the opportunity to testify.

Given the cycles of the economy, it is appropriate that today's hearing focuses on TANF financial issues and the hope that progress can be sustained in the future or in a recession. Because there is an unfinished agenda of welfare reform--to provide ongoing supports to working families, to aid those with multiple barriers to overcome, to strengthen families, and to reduce future welfare dependency. In periods of economic downturn, these challenges may intensify. Rising caseloads and fixed Federal funding may pressure States to reduce critical investments. That is why APHSA supports measures to increase State flexibility to create State TANF "rainy day" funds and supports the continuation of the TANF contingency fund.

Shortly after the enactment of welfare reform, many States felt the need to create reserve funds during periods of economic downturn. In 1998, APHSA conducted its first survey and found that 26 States had established some kind of TANF rainy day fund. Seventeen States set aside Federal funds, 7 States reserved State funds, and 2 used a combination of State and Federal funds. But by 1999, States had changed their strategies, and our most recent survey finds that while many States still have some reserve funds, many also plan to fully obligate those Federal funds by the end of next fiscal year.

This change in strategy I think may be attributable to several factors. First, the Federal regulations create disincentives to reserve funds. Second, reports of the unobligated fund balances made TANF the target of congressional cuts in '98 and '99. And although the welfare reform law says specifically that States may carry over funds fiscal year to fiscal year, without limitation, the message from Washington has been "spend your TANF funds or risk losing them."

Let me just briefly describe some of the regulatory barriers that were imposed on States. States are not permitted to use TANF Federal dollars for rainy day funds. They may carry over funds from year to year, but the Federal regulations attach a narrow definition of assistance, which means those unobligated funds that you referred to can only be used for cash-like assistance. They can't be used for teenage pregnancy prevention, they cannot be used for work supports, they cannot be used for child care.

States may not allow counties to reserve funds for rainy days. A proposed Federal rule even goes so far as to require States to spend new State dollars to draw down prior year funds. These are all disincentives to rainy day funds.

I would also say that rainy day funds, like Maryland's, where they're funded with 100 percent State dollars that do not count toward Maryland's State maintenance of effort unless they're expended. Therefore, APHSA requests that you consider the following actions: to afford States the flexibility to draw down TANF dollars to fund these rainy day funds; to afford States the flexibility to establish county rainy day funds; to allow States to use unobligated TANF funds for any purpose under the Act; to maintain Federal funding for child care and the social services block grant, and do not add any set aside requirements that will force States to spend rather than reserve those dollars.

When thinking about a contingency fund, I think it's important to try to deduce how much of those unobligated dollars are truly unobligated. The real story of State spending, is illustrated in the CBO baseline, that shows that TANF funds are leaving the Treasury at a rate such that outlays will exceed the authorized level in fiscal year 2002 and beyond.

TANF caseload data that you may look at, showing a 50 percent decline, only measures families receiving cash assistance, and not the families served by every other kind of TANF program.

Some States may need to access a TANF contingency fund during periods of economic downturn, and we support its continuation. However, it needs to be a viable source for States. The level of funding should be sufficient. The MOE requirements should be modified to be the same as TANF. And the unemployment triggers and food stamp triggers ought to be modified as well.

Finally, I would say that APHSA urges Congress to extend the TANF supplemental grants to the 17 high-growth, high-poverty States. Allowing these supplements to expire would not only result in a significant reduction in block grants, but it also would impede their ability to transfer funds to other block grants and it would reduce their high performance bonus award.

I would like to close by just saying that the example of one State, Tennessee, typifies an experience that many States have had--the choice to spend in order to prove the need for the funds, versus to draw down, to save for a rainy day.

In 1996, prior to the enactment of law, Tennessee engaged a noted economist to try to forecast caseloads, to try to figure out how much money they should reserve in the event of an economic downturn. They established a State fund, and then they used Federal funds to establish Federal reserves, and then threatened Federal cuts inspired them to start to spend down their reserves.

Since last June, Tennessee has experienced a seven percent increase in their welfare caseloads, and today they face the prospect of losing their TANF supplemental grant to States. It's a double-bind, that States spend or risk losing funds. Perhaps there could be a better way.

We have outlined a number of recommendations in our Association report, "Crossroads: New Directions in Social Policy," and a full range of all the reauthorizations pending before this Committee, food stamps and others. We look forward to working with you in the future.

Thank you.

[The prepared statement of Ms. Ryan follows:]

Chairman HERGER. Thank you very much, Miss Ryan.

Mr. Potts.

STATEMENT OF JOEL POTTS, TANF POLICY ADMINISTRATOR, OHIO DEPARTMENT OF JOB AND FAMILY SERVICES

Mr. POTTS. Good morning, Mr. Chairman, and members of the Committee. My name is Joel Potts and I am the TANF Policy Administrator for the State of Ohio, and I, too, would like to thank you for keeping the commitments.

I think that the Personal Responsibility and Work Opportunity Reconciliation Act is the best piece of social policy that has come out of Washington, and I think that it has made a huge difference, not for States, not for caseworkers, not for us in government, but for the people that we serve. I hope that we can continue to work together to continue this approach.

In Ohio, we have successfully implemented the Personal Responsibility Act. It has allowed us to move forward with a fundamental reform to the welfare system. And while that safety net still remains in place for families and children who cannot work, the primary focus of welfare reform in Ohio has moved from a system that was focused previously in providing cash assistance and cash payments to a system that now is bringing stability and self-sufficiency to people's lives through the promotion of work, and we obviously want to continue that.

Today, there are fewer Ohioans receiving public assistance than at any time since 1967. When our caseloads peaked in the early 1990s, there were 748,000 individuals dependent on the old AFDC system, at an average cost to the State and Federal coffers of $82 million a month in Ohio. Today, that number is 210,000 individuals, with an average cost of $27 million per month. Obviously, this reduction in caseloads provided us with significant funding that we have been able to shift, along with the flexibility provided by Congress, and it has resulted in a model for welfare reform which is highlighted with more families being served, fewer welfare-dependent families, increased earnings, decreased poverty for those formerly on the system, and broad community and business support.

I think we have taken a very responsible approach in Ohio to implement our welfare reform program and the block grants. Our strategy has been to provide this tremendous flexibility and funding for programs and services never before possible, while still maintaining a responsible cash reserve to protect against a major downturn in the economy. We didn't really look to the Federal Government and say, "Boy, we're just going to spend it, and in the event our caseloads keep going up or something changes, we'll just turn back to our congressional delegation and say Ohio is in trouble." We accepted the challenge of the Act and we think what we're doing in TANF is the right approach. We wanted to be able to manage that within our own program.

Our approach has been responsive to meet the needs of the clients, and I think it has been responsible to the integrity of the TANF program, and it has been fiscally prudent. For the first time in Ohio's history, we are spending more welfare dollars to support work than to support dependency. Our caseloads continue to decrease and we are able to shift more and more revenues to families to help them stabilize their lives and prevent long-term dependency.

At the beginning of the TANF program, we did decide that we should have some type of contingency reserve in place. We set aside about ten percent, or $75 million, a year for the first four years in the contingency reserve. That reserve amount is now around $300 million.

In the event of an economic downturn, we have gone back for the past 30 years and looked at our worst economic situations. We looked at the recessions of the late 1970s and the early 1990s and determined we have enough cash reserve that we can continue to provide public assistance in Ohio for 27 to 45 months, while still continuing to maintain the existing programs to support work, without having to take away from those types of approaches.

We have had a tremendous change in the way we're doing things, and I think one of the frustrations for States is that we still continue to be measured on arbitrary data, and in some cases I think the wrong things. In former public assistance programs, we did not measure success. Frankly, we measured failure. We looked at what was needed for public assistance programs by looking at caseloads. The larger your caseloads, the more money we got.

We measured clients in the same way. When they came to us and said, "We need help", our response was something to the effect of, "You know, what you need really isn't important to us. What's important to us is that you fill out this 35-page application. We will take that information, we will put it into our computer system, the system is going to tell us what you're eligible for, and if what you're eligible for addresses what you need, then we can provide you service."

We don't do that any more. In fact, we do a lot more in prevention and retention programs, to prevent people from ever becoming dependent on the system than we ever could have possibly imagined under the old AFDC program. We would like to continue to do that.

We have been able to make that fundamental shift in administering our programs. We didn't make the mistake in Ohio of rushing out and spending the block grant on short-sighted programs without significantly altering the former programs in place under AFDC. We have been able to increase services to support families, help families move out of poverty, train and prepare individuals for work, and provide support services. In addition, we have been able to accomplish the successes of welfare reform in Ohio with an adequate reserve in place to ensure that funding is available in a manner which can successfully address unforeseen problems or crises.

I would like to finish by saying that I think what the Committee is doing is obviously very vital to all the States. It is where all the conversations are going right now--follow the money. It's going to dictate what we do for the next several years. It affects our communities, it affects our legislatures, and it affects us as administrators.

But I would contend that it's not about the money only. Welfare reform under the TANF program, I don't think it's about time limits, I don't think it's about sanctions, I don't think it's about flexibility. I think it's about all of those things. The thing that is the common denominator in all of those is personal responsibility. States need to be held personally responsible, as do the clients. Part of that personal responsibility is in being responsible for the funding and in the flexibility you have provided.

Thank you.

[The prepared statement of Mr. Potts follows:]

Chairman HERGER. Thank you very much for your testimony, Mr. Potts.

Mr. Holzer.

STATEMENT OF HARRY J. HOLZER, PROFESSOR OF PUBLIC POLICY, GEORGETOWN UNIVERSITY, AND VISITING FELLOW, URBAN INSTITUTE

Mr. HOLZER. Thank you, Mr. Chairman, and members of the Committee.

I would like to argue broadly that there is a need for a continued Federal role in terms of providing contingency funds in the event of a downturn, and also that some changes should be made in what triggers State participation in that fund, and also in the level of funding.

Very briefly, if a recession occurs, we know that employment rates could drop very substantially for welfare recipients. Job availability will certainly decline and the welfare caseload will rise. Now, of course, the big question is by how much, and unfortunately, that's very hard to predict. It depends on the severity of the recession, the duration of the recession, but also how States respond to it.

I have seen estimates that say, in a mild recession, the caseload could rise anywhere from 10 to 30 percent, and in a more serious recession, like the one in the early eighties, it could be 30 to 40 percent or even higher.

The important thing to remember is that these caseload increases will not just be for one year but could last for several years. It takes several years to recover from a major recession. The caseloads actually lag behind recovery in the economy. So the problem of higher caseloads could be around for a while.

Several of the other speakers have addressed the adequacy of the TANF surpluses that have accumulated and the ways in which those moneys have already been committed. The point I would like to make is that, in a recession, States will be under pressure to make a very difficult choice--either between cutting some of those spending programs they have taken on with their extra surplus money, for things like child care and other things with broad political support, or making it more difficult for women to get back on the TANF rolls.

We know that at least part of the reason that TANF rolls have declined over the last five years is that States have made it more difficult administratively to get on the rolls. That may make perfect sense in an economy where there is a lot of jobs. I think it makes a lot less sense in an economy where a lot of those jobs have dried up. So I think there is not only a good argument for States to do more to help welfare recipients get money, but for the Federal Government to help the States out in this regard, because it is so hard to plan for the size of a recession.

We recognize that in other cases we don't want the States to do it on their own. In fact, we have an unemployment insurance program that recognizes this. Unemployment insurance is our primary program to protect workers and States in times of recession, and part of the unemployment insurance program is an extended benefits program that is automatically triggered by State insured unemployment rates. I think that provides a strong parallel to the contingency fund and the need to maintain something in the event of recessions.

Now, in terms of the specifics of that contingency fund, I would like to argue that the triggers that were enacted in 1996, which basically were either that the State had to have an unemployment rate of 6.5 percent, or that they have to have food stamp caseloads 10 percent higher than their peak levels in 1994 and '95, I think those triggers really did make a lot of sense in 1996. Looking back from 1996, most States, in the recession of the early nineties, would have qualified with that set of triggers. About 35 States would have qualified just on the basis of their unemployment rates, and several more would have qualified on the basis of their food stamp caseloads.

Looking forward, however, now, that is much less likely to be the case, because food stamp caseloads have declined so dramatically, and because unemployment rates have also declined so dramatically. Twenty-five States have had unemployment rates below four percent over the last few years, and ten States have had them below three percent. So in a moderate recession, like the last one we had, it would be very difficult for most States to reach those triggers and most States would not be covered.

Similarly, the level of the funding under the contingency fund, $2 billion, really may be inadequate, even when added to the amounts of the TANF surpluses, in the event of a serious recession, in the event of a recession where caseloads really do rise by very substantial amounts, and stay high over a period of several years.

At least one possibility to consider is uncapping the contingency fund and relying on the matching mechanism, to create incentives for States to economize. I think all of us agree that there needs to be incentives for the States to economize and be responsible, but we don't want those incentives to be too severe to the extent that they would force States to turn away women who can't find jobs and who really might be in need.

I would like to close by saying I think there's a strong argument for incentives for States to do the right thing, but also for Federal support. We should not only reauthorize the contingency fund, but we should also make some changes, which I think would update it and recognize some new realities.

Thank you.

[The prepared statement of Mr. Holzer follows:]

Chairman HERGER. Thank you very much, Mr. Holzer.

We will now turn to our panel for questioning. I would like to remind the members that they each have five minutes for witness questioning.

The gentleman from Oklahoma, Mr. Watkins.

Mr. WATKINS. Thank you, Mr. Chairman.

I have a couple of questions, and one for Mr. Potts of Ohio. Under title XX, I think you can switch up to ten percent of TANF funds. Do you shift that amount?

Mr. POTTS. Mr. Chairman, members of the Committee, absolutely. The title XX monies are even more flexible than TANF dollars, and the way that our county agencies are set up, we have a county-administered system and most of our counties will have a child welfare system and a public assistance system that will be tied together, so we do try to maximize the flexibility.

Mr. WATKINS. Is that title XX by county, or by the State?

Mr. POTTS. Actually, Mr. Chairman and members of the Committee, we do both. Some of it will be allocated to the counties, and at the State level we have what we refer to as consolidated funding. We try to get away from that kind of "one size fits all" approach to providing these services. The counties--

Mr. WATKINS. That's the point I was trying to make. I think some counties in the poor and economically depressed areas, in small town and rural depressed areas, are probably not getting the transfer of that money down to them in the delivery system.

I would like to ask the staff, if it's all right, Mr. Chairman, to take a look at the transfer of TANF and what title XX is doing in some areas.

I have a question for Mr. Holzer. You said the trigger for some of these various funds depends on the economic conditions, et cetera. You said those triggers are based on State unemployment. What about the county level of unemployment?

Mr. HOLZER. My impression is it's the State level that determines it, and it is the State insured unemployment rate which, of course, differs from the State's overall unemployment rate. Some States have different levels triggering their amounts, but it is my impression that it's mostly at the State level.

Mr. WATKINS. That's another concern I have, that it has to be the State figures which triggers it, where out in the small towns and rural areas it may have been triggered a lot earlier. I think that's something else we should look into and it may be something we can correct.

I apologize for the hoarseness in my voice. Thank you, Mr. Chairman.

Chairman HERGER. Thank you, Mr. Watkins.

Mr. Cardin would you like to inquire?

Mr. CARDIN. Thank you, Mr. Chairman. I thank all the witnesses for their testimony.

Mr. Holzer, I was struck by your comparison between what we should do on TANF and unemployment insurance and the role the Federal Government plays as somewhat of an equalizer nationwide.

You know, if we go through a recession, it is going to be different in different parts of the country. You pointed that out, that there will be some parts where there's a much higher impact on their cash assistance needs than other parts of the country. The unemployment rates will be different around the Nation.

Mr. Potts, I really applaud what Ohio has done. As you pointed out, if there's a mild recession, you can still maintain your basic commitment not only to the cash assistance caseload increase, but also to the noncash assistance programs. That's wonderful. That's what you want to do.

But it wouldn't take much of a change in the economy to increase dramatically the cash assistance rolls, if I understand the correlation about a one percent increase in unemployment relates to somewhere around a five to ten percent increase in the cash assistance welfare rolls. Again, that's a rough calculation. So if we see a two percent or three percent increase in unemployment, you will have a dramatic impact on cash assistance.

It is true that there should be State accountability. When you get flexibility, there should be State accountability. I think you're absolutely correct on that, Mr. Potts, and States should prepare for changes in economic conditions. But we do need to have the Federal Government as a partner in trying to make sure that those areas that are hit the hardest have a partner in the Federal Government, so that they can continue to provide not just the cash assistance, but also the other services.

It would be tragic if we lost the other related services because we had to put so much into the cash assistance rolls. So I really do appreciate very much your comments and the challenge to us.

Mr. Holzer, I agree with you. The triggers need to be revisited. We need to bring it up to where we are currently and take a look at the dollars, the circumstances. I would be wondering whether you have any specific recommendations you would like to make on trigger mechanism changes, either now, if you would like, or submit it to our Committee. I would appreciate that.

Mr. HOLZER. Briefly, I do have them in my written testimony.

On the unemployment side, if you want to maintain the logic of the original triggers, but update them to the new circumstances, a five percent trigger level for unemployment would be very comparable, because it would be roughly a one percentage point increase above the average national unemployment rate right now. But you might also want to have an additional mechanism for the States that are starting it at 2.5 or three percent, that will never reach even five percent. You might want to have any State that has a 50 percent increase, or a 75 percent increase in their unemployment rate, they might trigger as well.

Finally, on the food stamp side, I would argue that I might live with even more stringent increases than the ones in the current law, maybe 20 to 30 percent rather than 10 percent, but starting at the current base rather than the base of 1994-95. I think those would be sensible, would maintain the logic of the earlier triggers, but update them to new circumstances.

Mr. CARDIN. Miss Ryan, let me ask you a question.

I understand that nine of the 17 States that receive supplemental grants are already spending at least at their base amount and most more than that. So if we were to eliminate the supplemental funds, I'm curious as to what impact it would have on the services being provided, at least in those nine States, if not in all 17 States.

Ms. RYAN. That's exactly right. For example, in Louisiana, given the way they are planning to transfer funds they estimate they would have to reduce their child care spending by $5 million if they lost their TANF supplemental grant.

Other States are looking are looking to reduce or to consider reducing other programs, such as a mentoring program or ongoing work supports.

I would say that, given the fact that 44 States transfer funds to child care and SSBG, I think there would be a significant pressure on those States to actually reduce their child care investments, or reduce their amount of transfer. Though those children are not reflected in total caseload data, they are certainly children who won't be cared for when their moms go to work or training.

Mr. CARDIN. Thank you.

Mr. Posner, very quickly, because my time is evaporating, you mentioned Maryland as one of the ten States, and you mentioned they had a combined model. I'm curious as to what States you felt had good models that we could use as examples.

Mr. POSNER. Well, Maryland was the only State that provided a rainy day fund from their own money. Now, they did it by shifting funds so that they freed up their own money by replacing it with TANF money, but as you indicated, Maryland has a $70 million rainy day fund, with a requirement that it be reviewed by the legislature and the Governor before it's being used.

Mr. CARDIN. I just wanted to get a plug in for Maryland. That's fine.

[Laughter.]

Mr. POSNER. Glad to do it.

Chairman HERGER. Well taken. Thank you very much, Mr. Cardin.

Mr. Potts, do you have any specific suggestions for us to encourage more State savings?

Mr. POTTS. I have several, I guess. I think the main thing that would really benefit those of us who are trying to administer public assistance programs would be some type of direction from Congress. The only thing our State legislatures and our governors are hearing is "spend the money or lose it".

We have tried to put together a very responsible program. Our governor is very supportive. We have term limits that have taken effect in Ohio. Forty-seven of our 99 House members are brand new this year. They don't remember double-digit inflation in Medicaid. They don't remember caseloads that actually went up instead of going down. They don't remember the promises of five years ago.

When the constant, consistent message from Washington is, "You're sitting on substantial reserves and you ought to be spending those", I think it's a real challenge for us. So some type of indication of what your wishes are for those. And it doesn't even have to be "we think you ought to keep a reserve", as much as if we would just get word from Washington that, if a State chooses to do a reserve, we think that that's allowable, or that that's something that we recognize as being important. It has put States in a rather awkward situation as we go through our budget debates, and especially in Ohio with term limits, it has had a huge impact on us.

The other thing that really has States sitting out there nervous is the entire definition of what you refer to as "supplantation", something that didn't exist when we first started developing our programs. I think the sooner we can all decide what exactly we mean by that, the better we can respond to your wishes and the better we can administer these programs.

So I think the two major pieces--and I think both of those don't require a law change as much as they do that partnering you referred to and just a working back and forth.

Chairman HERGER. Good. Thank you very much, Mr. Potts. Hopefully we're beginning to do that.

Mr. Lewis of Kentucky will inquire.

Mr. LEWIS. Thank you, Mr. Chairman.

Mr. Potts, you mentioned a program in some of your counties in Ohio that were designed to cure head lice. How did that come to your attention and what has been the results of those programs?

Mr. POTTS. Mr. Chairman and members of the Committee, this is actually probably one of the biggest surprises, but I think one of the stories that I like to talk about quite often, of how different welfare reform is now from before.

We require each of our 88 counties to have a public forum before we hand over some of the flexibility in the TANF program to them. They go to the communities and say what's available, what can we do. We've got these types of funds that will now be available to provide service to poor families.

At one of those meetings, a juvenile justice judge stood up and said, "Well, if you want to start dealing with problems in the juvenile justice system, don't look to me. You really ought to be looking to the schools, because I'm telling you right now, the kids who are consistently absent from schools will be the ones in my system within the next few years."

So they started looking at the schools and asked if that was an accurate statement, and the superintendents in the room agreed. They sat down and worked on how they could address some attendance problems.

They found the number one problem of attendance in Appalachian schools in the State of Ohio was head lice. A child that contracts head lice in their school districts at the beginning of the school year can expect to miss 35 to 40 days in the year. Once a child is identified by the school system as having contracted head lice, they are sent home automatically. They are given a note that says you have to go out and buy these expensive shampoos, and you need to take care of that problem before the child is allowed to come back in.

Even if they do the shampoos, it is very similar to--If you have ever had a dog with fleas, you give it a bath, you see the dead fleas, you feel pretty good about it, and two days later the dog is scratching again. Head lice are no different. Not only does the child have it, but generally so do the parents, so do the siblings, so do the pets. So it's a constant recurring problem.

The counties were able to take some of their TANF dollars for poor families, and when they contracted head lice, they actually send a nurse to the home. They will actually show and, in some cases, bathe the children, show them how to rid the head lice. They will give them vouchers for dry cleaners to get the bed clothes cleaned. They will bring in carpet cleaners or a carpet cleaning company, to clean the carpets and do those types of things. As I said in the written testimony, in some cases we've had school districts who reduced absenteeism by about 50 percent in the first year of that program.

You know, I've been asked what exactly does that have to do with welfare reform. We know that children who are consistently absent from school are mostly likely to be held back. We know those who are held back are the most likely to be dropouts. We know dropouts are the most likely to be teen parents. We know that over half of the teen parents wind up on welfare at some point in their life, and we also know that 80 percent of the people in the child welfare system, the children, their parents either recently were or are on public assistance.

We thought head lice had everything to do with welfare reform in Ohio. I thought the real advantage of that program was that it was created not because we figured it out in Columbus or here in Washington. This program came about because we told the community what are the problems you're facing. I thought it was a very unique and, frankly, very inexpensive way to address a very serious problem in those areas.

Mr. LEWIS. I agree. It is a very innovative way of dealing with the problem. Other States could do similar things.

Can you project savings like with this particular program, or other programs that you've been able to put in motion?

Mr. POTTS. Mr. Chairman and members of the Committee, probably the biggest challenge, and from all the States I'm talking to, is how do you measure whether or not a prevention program really prevented somebody from coming on.

There are some programs that are probably the right thing to do--and we have a difficult time trying to figure out how would that fit within the TANF parameters--but how do you really know, and do you know in a short term or a long term.

One of the greatest challenges when we talk about preventing the incidence of out-of-wedlock births, it is something we take very seriously, it's something we want to do a lot of work with, but it is going to be a long time before we can successfully determine the effectiveness of our programs. People aren't going to stop doing things just because we say so. We have tried to manipulate caseloads historically by changing the parameters and that hasn't been real successful. I think we really need to change our approach, and it has been a real challenge.

I think one measurement in the long run will be the number of community partners that are involved. We do a lot with faith-based organizations in the State. In fact, about $90 million this biennium is going through faith-based contracts. The more we can get the local communities, the churches and the families involved, the better we will be long term. But we don't have a real good way of measuring that.

Mr. LEWIS. One last question.

Prior to welfare reform, would this have been possible to do?

Mr. POTTS. Mr. Chairman, members of the Committee, no. No, there wasn't any flexible funding. Our money was all going into caseloads, so we were looking at ways to reduce the immediate caseload. And when you talk about prevention programs, especially a long-term prevention program, there weren't any funds that would allow us to do that.

Mr. LEWIS. Thank you.

Chairman HERGER. Thank you very much, Mr. Lewis.

The gentleman from Texas, Mr. Doggett.

Mr. DOGGETT. Thank you, Mr. Chairman.

It was troubling that President Bush did not include in his budget the continuation of the supplemental TANF funds. I am pleased that Senator Bob Graham of Florida, joined by Senator Hutchinson from Texas, have amended, as all of you probably know, the budget resolution over in the Senate, to add it back in for this next year, and hopefully the conferees on the budget resolution will follow the Senate version of the bill.

Mr. Cardin has already entered into the record the statement of the current Governor of Texas, Rick Perry. I think there is a feeling among the people that I talk to in my home State that we would really jeopardize funding particularly for child care or child protective services, with reference to abused children, if we don't have the TANF supplemental grants restored for next year.

I believe, in response to Mr. Cardin's question, Miss Ryan that you have already spoken to this. Mr. Holzer, could you elaborate as to what will happen in other States if the Congress does not act promptly this year to continue the supplemental funding?

Mr. HOLZER. As was indicated earlier, the supplemental funds constitute about ten percent of the overall funds going to those 17 States on average. Now, a ten percent cut, even at the current caseload level, would again put States in this bind, either having to make it more difficult for people to enter the welfare caseloads and with cash assistance, or to cut from other areas, other kinds of expenditures, child care and the like, which are both politically popular and have bipartisan support, and also are probably reasonably cost-effective in what they do, so the States would face those difficult trade-offs, even in the absence of any kind of economic downturn.

Mr. DOGGETT. I guess, if there is continued trouble with the economy and the former welfare agencies, acting now more as employment agencies, experience a greater number of people returning to the rolls who are unemployed, that there will be further pressure to cut into child care and other work supports, correct?

Mr. HOLZER. That's correct, absent these other contingency funds and other funds that might be available to cushion those increases.

Mr. DOGGETT. It seems to me that perhaps the best short-term solution is to have Congress continue the supplemental TANF funds for another year, and then, as a part of the overall revision of TANF, make adjustments in the formula to take care of this problem over the longer term, rather than having these two separate programs.

Do you have thoughts about how, Mr. Posner, we should address this on the long term, in contrast with the short-term need?

Mr. POSNER. I think that's a very good distinction, because the formula really, essentially, grandfathered in the old distribution, which promoted quite large disparities among States, as you know. In terms of per-grant, per-child, it goes from about $700 on average in those 17 to about $1,700 in some of the other States that have traditionally been more willing and able to spend higher amounts of money. So, by freezing in the old distribution, we kind of perpetuated the disparities in the program and the supplemental grants were a small down payment on trying to kind of edge our way towards a little more uniform allocation.

I think putting that formula on the radar screen for reauthorization is something I know is not easy to do for the Congress, but it is something that probably is the right way to approach that issue.

Mr. DOGGETT. Has any study begun of how that formula might be altered in order to resolve this matter?

Mr. POSNER. We have not done anything on that yet. We have been doing some work on the Medicaid formula, which has similar issues, where you really want to focus more on per person and need indicators and total taxable resources among States and figure out a way to kind of figure in needs, fiscal capacity, and relative costs among States.

We need to develop a formula that--you know, here we have inherited this formula over 60 or 70 years, and it served us well possibly in the early stages of the program, but it is time to reexamine it.

Mr. DOGGETT. Thank you.

Miss Ryan?

Ms. RYAN. May I just add to that by saying one thing that I think does need to be looked at in reauthorization, is that, a year after welfare reform was passed, the TANF supplemental grant formula was applied and determined only 17 States would ever get this supplement, notwithstanding any other changes in poverty or population or anything else. So one thing to look at is whether or not there should be a periodic review of the initial eligibility of States, rather than just freezing that in for six years.

In our Association, and in our bipartisan recommendations, we are concerned about potential formula fights. We don't want to see that occur. We think there is a reason to make adjustments, but future supplements should be funded above the current TANF baseline amount.

Thank you.

Chairman HERGER. Thank you very much, Mr. Doggett.

Mr. DOGGETT. Thank you, Mr. Chairman.

Chairman HERGER. Mr. Holzer, is it true that several of the States receiving supplemental grants, including Mississippi, Montana, Louisiana and Idaho, have some of the largest unobligated TANF balances, and in all, 14 of the 17 States receiving supplemental grants have unspent TANF balances?

Mr. HOLZER. To be honest, I haven't looked carefully at those numbers. It sounds like that might be true.

But on the other hand, remember that California and Florida are two of the States receiving supplemental funds--and not all States are equal in terms of caseload. We know that the eight largest States account for over 60 percent of the overall TANF caseload, and some of the largest States like California have no unobligated balances and relatively small unliquidated balances. So I think the experience there is a real mix across different States. But some of the largest ones have more serious fiscal situations than the States you indicated.

Chairman HERGER. Thank you very much.

The gentleman from Pennsylvania, Mr. English, may inquire.

Mr. ENGLISH. Thank you, Mr. Chairman.

Mr. Posner, in looking over your testimony, I notice you also explore some options that might increase the States' incentives to save. Specifically, you throw out the idea that Congress could either allow States to count rainy day funds towards their maintenance of effort, or that they could allow States to draw down their entire TANF grant and save these funds in their own treasuries.

I wonder if you could explore those two options and give us a sense of the potential fiscal impact and the pros and cons.

Mr. POSNER. Right. Those are important issues.

On the rainy day funds, we saw that some States felt they did not have the incentives to save from their own funds because they couldn't count it as part of the maintenance of effort. The idea that could be explored is permitting States to do that with some safeguards, because there are some potential downsides. You don't want States to draw down their entire TANF funds, replace their State funds, and put it aside for a future purpose, for example.

Mr. ENGLISH. On that point, may I ask, what safeguards do you think would be most appropriate?

Mr. POSNER. Well, you could limit the share of the MOE that's dedicated to a rainy day. You could require States to provide for a "bona fide" rainy day fund. In other words, something like they do with their own rainy day funds, have trigger mechanisms specifying the point when funds would be released, have the legislature pass a statute, have some kind of review process that ensures that the money will truly act as a rainy day fund and be thought about in a more systematic way.

On the other proposal, we heard from State officials--and it has been echoed here, and rightly so--that money that is permanently appropriated to this program, which is available in perpetuity to the States, for all intents and purposes, is potentially at risk, because Congress sees these unspent balances and doesn't really know potentially how much is really needed, how much is not needed.

The idea has been advanced by States that they should draw down that money entirely at the beginning of the year, put it in the State treasuries rather than having it rest in the Federal Treasury. Under the Cash Management Improvement Act, that applies to all the Federal grant programs, States are not allowed to draw down money until they absolutely need it to spend, which means that the outlay is not recorded on the Federal budget books until the States actually pay the money for actual services. By requiring States to outlay that money at the beginning of the year, it would take it off our books and put it on their books.

There's a couple of very important issues. One is our surplus would be lower, at least temporarily, by doing that, and we would lose some interest. You could develop procedures, as currently is done in some States with other grants, to have States reimburse us for those interest costs, because they're going to be gaining in interest earnings when they have those balances in their own bank accounts. So we could have a fiscally neutral exchange, essentially, that moves up the timing of the money, so that States feel like this is in their own bank accounts and can plan with more certainty that that money will actually be there. That's the advantage of it.

We would want to make sure that we maintain transparency if that happens. One of the advantages of the current situation is we see very clearly how much States are spending and how much they're not spending. We would want to make sure that that continued with the other kind of process, should we think about that.

Mr. ENGLISH. Mr. Holzer, looking at these two suggestions, allowing States to count their rainy day funds, perhaps with some important qualifiers, toward their maintenance of effort, and secondly, considering allowing States to draw down their TANF grant and put it in their own treasury, do you feel comfortable with these two proposals? What sorts of policy restrictions should Congress consider if we get to the discussion stage on these two ideas?

Mr. HOLZER. Both proposals sound quite sensible to me. I guess I would caution us from thinking that that might solve the entire issue. I think one of the hardest things about this business is trying to come up with even broad estimates of how much might be needed in a recession, given how much uncertainty exists about the magnitude of the recession and how States would respond. So I think those are sensible suggestions. I don't think it fully eliminates the need for contingency funds and some additional Federal role.

Mr. ENGLISH. Mr. Potts, looking at this from a State perspective, on either of these two suggestions, are they ideas that would make this even more attractive for Ohio?

Mr. POTTS. Mr. Chairman, members of the Committee, certainly, the more control we have over the program, I think the better we'll be in a position to make the more immediate decisions.

We talk about recession numbers and inflation and those types of things. Those will all show up eventually, but when we have--for instance, in the City of Cleveland, when they just recently announced a layoff of 2,000 steelworkers, and we know that for every laid off steelworker, it generally results in the loss of five like jobs, we know that that community has an immediate need.

So if we have some way of control where we can move those contingency dollars, if we had control of those within our own situation, as opposed to having to go and meet a formula and go through all the hoops it would take to be able to pull those dollars down, we can probably have a better effect at helping those families that are being impacted by major economic changes.

Obviously, from the State perspective, anything that gives the State more control will ultimately result in better outcomes.

Chairman HERGER. If the witness could sum up. Thank you very much.

Mr. ENGLISH. Thank you, Mr. Chairman.

Chairman HERGER. I thank the gentleman from Pennsylvania.

Now the gentleman from Michigan, Mr. Levin, may inquire.

Mr. LEVIN. This has been an interesting hearing, and I think a very good idea. I wasn't quite sure what the issues were, though, and I think the last few minutes have helped to illuminate what the issues might be.

We are talking about the contingency fund and about rainy day funds in addition to the supplemental. It seems to me that the options are becoming a little more clear. We could leave the contingency fund essentially inoperative, which it is today because of the triggers, and essentially let Federal dollars go into the States to create their own contingency funds, which is what a reserve fund is, in which I think Mr. English's questions elicited some response--and I don't mean these are absolutely black and white situations or alternatives--or we could make the Federal contingency fund operative and use the Federal TANF funds to meet the challenges ahead in welfare reform. I think there is a good argument for the latter, that we not get lost in kind of accounting devices and go back to what are the issues in front of us.

We have been talking about the contingency fund for a number of years, and a number of us have urged that the contingency fund be made real. We can make the triggers more sensitive to the realities; we could also take the cap off the contingency fund--we could have done that years ago--at a small cost. True, if there were a recession, it would have shifted more of the burden to the Federal Government.

Also, the use of TANF funds, there is a reason for the maintenance of effort provisions, to try to keep the focus on the purpose of welfare reform, which is to help move people from welfare into work and into work that will lift them out of poverty. I think that's the trouble with the suggestion of simply taking the TANF funds that are unused and putting them into a rainy day fund, because if you take almost any State, and maybe every State, there is a lot of work that is left to be done, both with those who have not moved from welfare to work, who are going to be in many instances harder to place or harder to make that transition--we all know that, right, Mr. Potts--I think you would acknowledge that, by and large, those who remain in TANF have, by and large, whatever term we should use, have needs that make it more difficult for them to make that transition.

Also, for those who have made the transition, the data are quite clear that the majority, or a substantial number of them--it depends on the States--remain below the poverty level and have needs, whether it's transportation needs to be able to move into a higher paying job, or have training or retraining needs.

So, Mr. Chairman, I think that the hearing has helped to elucidate what these issues are, and I think there is a good case to be made for our taking a look at the contingency fund this year and see why it isn't working, to reauthorize it but perhaps, I would hope, to improve it, and also to look at what we want to be done with the unutilized Federal TANF funds.

I think the vast majority of States, and really all of them, have a lot of unmet challenges to meet, to really make the promise of welfare reform, as we carved it, a reality increasingly, as well as taking a look at the supplemental fund, which we must do.

Mr. Chairman, I would hope the hearing today might accelerate our attention to these issues. I really think any notion of essentially taking unused TANF funds and having them replace what was supposed to be the purpose of a Federal contingency fund is probably not good policy, in terms of making welfare reform the full success that those of us who worked on it, who helped to shape it and eventually voted for it, to make that promise a reality.

Chairman HERGER. I thank the gentleman from Michigan for your comments.

Just in closing, I would like to ask you, Miss Ryan, in general, wouldn't encouraging States to maintain their own State contingency funds, using either their TANF block grants or State funds, relieve some of the pressure on the Federal contingency fund in times of need, and wouldn't that be a smarter way to allocate resources for the Federal fund than to back up State rainy day funds?

Ms. RYAN. Mr. Chairman, we strongly believe that additional flexibility should be afforded to States to send a strong signal from Washington that it is prudent to save in the instances of an economic downturn--that decision Maryland made to create a reserve with their own State dollars, even though it doesn't count toward maintenance of effort to do so, was a prudent course. So we strongly urge attention to giving States more flexibility to be able to reserve State and federal funds.

Just one other point, if I may. The regulations that apply to the TANF block grant with respect to the drawdown of TANF funds from the Treasury, are unlike any other Federal regulation that applies to any other block grant. You have other block grants in the Federal Government that have maintenance of effort requirements, such as substance abuse and mental health block grants, that are treated in a totally different way under Federal regulation than TANF. There have been regulatory disincentives to save that don't exist with respect to other block grants exist.

I urge you to take a consider regulatory changes outlined in my testimony. But it seems to me that we should do both, TANF supplemental grants should be extended. A contingency fund in instances of severe economic downturn, yes, some States may need that extra help. But in the interim, allowing States to create reserve funds, a way to balance prudent investments and saving for economic downturns, is the best formula for success in the future.

Chairman HERGER. Thank you, Miss Ryan.

Mr. Posner, would you like to comment on the same question?

Mr. POSNER. Yes. I don't think that these options are mutually exclusive. They need to be considered. You have a role probably for a contingency fund, you have a role for saving some of TANF's balances for a rainy day, and frankly, you have a role for the States in providing their own money. In fact, that is provided in the contingency fund formula, that States have got to match it up to a certain level. So I think that is the way to go forward.

I would add that the contingency fund has "not worked" not because so much of the triggers. It is because the fiscal limits are so strict. California, for example, would have had to spend $1.9 billion of its own State money increase to get a $247 million State contingency fund grant. That's the challenge. We have set the price. We should have the States participate equally as partners, but that price--the question is, is it self-defeating.

Chairman HERGER. Thank you.

Mr. Potts, in light of Mr. Posner's suggestion, would States be agreeable to paying interest to the Federal Government in order to keep unspent TANF balances in the State treasury?

Mr. POTTS. Mr. Chairman, members of the Committee--obviously, not speaking for the other States, but for Ohio, that would be fine. I think having control of the money and having the ability to do those things is very important to us. Right now, we don't have either. So is something better than nothing? Absolutely. I do think it's a responsible way for us all to approach this.

I also think for you to hold the States accountable is critical. Make sure we understand that we are expected to manage our own caseload. You know, we make decisions that will determine how large our caseload will be. In Ohio we have a three-year time limit instead of a five-year time limit. Obviously, that makes a difference.

As long as the control and responsibility are combined, I think that's fine.

Mr. CARDIN. Would the chairman yield on that point?

Chairman HERGER. Yes.

Mr. CARDIN. Wouldn't it be more tempting for you to spend the money that you actually have? Wouldn't the legislature give you a little bit more of a difficult time?

Mr. POTTS. Yes, Mr. Chairman, members of the Committee. I worry about that. I mean, I think both things. I think that if it's sitting in the State coffer somewhere, you're going to have the State legislature probably dealing with some of the things that you all had to deal with over the years. If that money is sitting there unspent, especially when you get into tough economic times, they start looking at those.

Yes, in many cases, it's six of one and a half-dozen of the other.

Chairman HERGER. I want to thank each of our witnesses for your testimony this morning. It has been a very informative hearing. I appreciate the work that you have done and the time you have given us today.

With that, this Committee stands adjourned.

[Whereupon, at 11:15 a.m., the hearing was adjourned.]
[Questions submitted from Chairman Herger to the panel, and their responses follow:]

U.S. General Accounting Office
Washington, DC  20548

1. How has the pattern of State saving for rainy days changed over time?

1. For example, are States saving more or less now than before?
2. What factors contribute to this--implementing a new program, signals from Washington about cutting the block grant, uncertainty as TANF heads towards reauthorization?

In our written statement we make a distinction between two types of saving, (1) reserves of unspent TANF balances at the U.S. Treasury and (2) rainy day funds established by the state for welfare programs with state or federal funds. The latter--an established rainy day fund--implies explicit action taken by the state to recognize the need to prepare for future unexpected costs. The former--reserves of unspent TANF funds--provides no information on states' savings plans because it is difficult to ascertain how much of these balances are truly uncommitted and available for future contingencies. While states' reserves of unspent TANF balances probably represent a de facto rainy day fund, there is much "less there than meets the eye" because the data reported by the states are misleading.

As such, if a state is saving federal funds the distinction between the two types of saving is blurred because all federal funds a state saves for a rainy day must remain in the Treasury until spent. In our 1998 report we recommended that HHS and the states work together to improve reporting requirements on states' plans for these unspent balances. Without improvements in the data we cannot assess any trends or patterns in the levels of state saving for a rainy day from the data states report on their unspent TANF funds because the data are not reliable enough to make such a determination. Likewise, there is no aggregate information on how much state funds states are saving for a rainy day. States cannot count the funds reserved toward their MOE requirement until they are spent. States are not required to report on these state-only balances to the federal government.

In our on going work for the Subcommittee we have collected data on state savings in ten states. We have seen few changes in the pattern of state saving for a rainy day. We surveyed ten states in 1997 after they enacted their first budgets using TANF funds and found only three states--Colorado, Texas, and Wisconsin--had established rainy day funds of unspent federal funds left at the U.S. Treasury. One state--Maryland--used state funds to establish a reserve. In 2000 we surveyed the same ten states and found that only one other state--New York--had established a rainy day fund for its welfare program in the interim. New York uses federal funds for its rainy day fund. However, the balances earmarked for these funds by the states were not determined through a fiscal planning process that reflects budgetary assumptions about projected future needs. State officials said that because their new welfare programs had not been tested during a recession, developing a model that might predict how caseloads and costs would respond to a downturn proved difficult. Instead, these states designate any funds not already appropriated by the state legislature for other purposes as constituting the state's welfare rainy day fund.

Maryland has continued to make deposits into its state-funded rainy day fund. In 1997 it made an initial deposit of $15.7 million and then did not make another deposit until 2000, when it deposited $53 million of state funds in its welfare reserve. However, as we noted in our written statement, Maryland was able to shift the costs of saving state funds to the federal government by using TANF funds to replace state funds in some programs and depositing the freed-up funds in its reserve account. Again, Maryland has not projected future needs based on alternative economic scenarios, instead a senior state budget official said that they were motivated chiefly by the perceived need to draw down their federal funds quickly or risk their rescission. They were also concerned that if they left these funds unspent it might affect future funding levels.

In 1998 we reported that the levels of unspent TANF funds were transitional in nature and that a number of factors unrelated to states' savings decisions have influenced the levels of these funds, including cash management practices, timing of the enactment of new state welfare laws, slow-starting programmatic spending, and caseload declines. Concerns similar to those expressed by Maryland budget officials about the future of TANF funding levels have driven other states to spend their TANF funds more quickly. As a result, the levels of reserves are expected to go down.

2. In your written testimony you note several approaches to encourage States to save more State Funds.

1. Would these changes result in added federal costs?
2. In fact, depending on what we do with the Federal contingency fund, wouldn't encouraging more State saving tend to reduce Federal costs, as States would need less immediate Federal assistance in a downturn?

In the new block grant environment, the federal government has an interest in encouraging states to save for future contingencies, but within a framework that recognizes that the size of the reserve will remain largely a state determination made under conditions of inherent uncertainty. While the new fiscal partnership implies a much stronger state role in the safety net, both federal and state governments have a shared responsibility to ensure that sufficient resources are available for rising TANF costs in a recession.

In our written statement we noted that states could be encouraged to save their own funds by counting a portion of state funds set aside towards their MOE requirement. If a state chose this option it would have to either cut program spending to make up the difference of what it saves, or it could draw down any unspent TANF funds--if available--and use the federal dollars to make up the difference. If the state chose to draw down TANF funds instead of leaving them in the U.S. Treasury, the rate of outlays recorded in the TANF program would shift forward. Accordingly, the federal budget surplus would be proportionately lower in the near term.

We also stated that states might be able to save more TANF funds directly for the future if they were able to draw down federal funds earlier than needed for program spending. Some state officials argued that their incentives to save for the future could be bolstered by allowing states to keep unspent TANF funds in their own accounts rather than the U.S. Treasury. They believe that this might reduce incentives for Congress to rescind unspent balances since the outlays would be recognized earlier at the time of the grant and not when the money is actually spent.

We also suggested that certain changes to the Contingency Fund for State Welfare Programs could make it more effective and thus more likely states would incorporate the Fund in its contingency plans which could encourage states to save some of their own funds. The Fund requires states to bring their own spending up to pre-welfare reform levels before they can gain access to additional federal funds. Simplifying the Fund's design and removing some of the restrictive barriers to access could provide incentives to states to save some of their own funds, since they would be more likely to use it in the event of a downturn. Currently, future outlays from the Contingency Fund are recorded at zero. Any change that eases access to the Fund could record a faster outlay rate.

It is unclear the degree to which a recession might impact TANF caseloads and state welfare costs. If states have saved enough of their own funds, they may not need to call on the federal government for emergency funding. But states have not engaged in any rigorous analyses of their future needs. Without better information on the adequacy of their reserves, we cannot assess the impact of these savings on future federal draws.

Urban Institute
Washington, DC 20037
May 9, 2001

Mr. Wally Herger
Subcommittee on Human Resources
Committee on Ways and Means
U.S. House of Representatives
Washington DC 20515

Dear Rep. Herger:

Thank you for giving me the opportunity to respond to your questions about my testimony on April 26, which raise several important issues.

1. I note your suggestions for changes in the Federal contingency fund, including providing "uncapped" funding for this purpose.

   A. Do you have any idea what this would cost?
   B. If we enacted your proposals for relaxing eligibility criteria and providing unlimited funds for this purpose, would any States qualify right away? Which ones.
   C. How is your proposal any different from the pre-welfare reform approach of providing unlimited Federal funds to States that fail to save or help families leave the rolls and go to work?

1. A. I would prefer to have CBO or OMB cost out this proposal, and I would certainly defer to their estimates. However, my best guess is that the total cost of my proposal to the federal government would be approximately $2B in a moderate recession and about $6B in a severe one. (My worst-case estimates are about $4B in a moderate downturn and $10B in a severe one respectively.) Details of how I arrive at these estimates are available upon request.

This would be a one-time expenditure, spread over several years. To put it in context, please note that this would be a very small fraction of the total federal expenditure on TANF block grants over its current 6-year authorization. It is also very small relative to the extra federal government expenditures in a recession on Emergency Unemployment Insurance benefits ($28B in the previous recession, or about $36B in current dollars) or on Food Stamps.

B. I don't believe any states would qualify right away (at least not on the basis of the most recent caseload and unemployment rate data), as the triggers I propose would require increases of unemployment (or food stamp caseloads) of at least 20% over their current levels.

C. The proposal differs from the pre-welfare reform approach in a number of ways. For one thing, there would be triggers and state-level MOE requirements that would now limit state access to federal funds, which was not true in the pre-welfare reform era.

Furthermore, this proposal would be implemented in the context of a welfare reform effort that has already successfully reduced caseloads and dramatically increased work incentives. The time limits and state-level discretion that TANF allows will continue to reduce rolls beyond what was true in the past.

If we pressure the states too much to "save" during good times and finance their own caseloads during bad times, they may forego expenditures on important supports (such as child care) to working families who really need it, or they might decrease other expenditures designed to improve employability among the hardest-to-serve. Alternatively, they may turn away people from the rolls during difficult times who have access to no other safety net.

2. You cite several studies suggesting rising unemployment will send welfare caseloads up by certain percentages.

1. How high would the unemployment rate have to rise for the caseload to return to where it was before the new law was signed in August 1996?
2. How would that rate compare with the unemployment rate in 1996?
3. Do your calculations assume any change in behavior by would-be recipients due to work requirements, time limits, and related factors?

2. A. According to the standard estimates, unemployment rates would have to rise by as much as 10 percentage points or more to return to us to the caseload levels that were in effect in August 1996. It is very unlikely that this will happen, even in a serious recession. (Of course, the "standard estimates" have their limitations, as I note in part C below.)

B. The national unemployment rate averaged 5.4% during 1996, when the welfare reform bill was signed.

C. These estimates are based on statistical models of previous business cycles, but the models do include some measures of state-level policies and behaviors (including enforcement of time limits) in the 1990's that have affected the caseloads. They also capture trends over time that reflect federal work requirements and other recent changes. It is possible that these models do not fully capture the behavioral changes, since we don't really know how states will use their discretion in responding to the increased need for assistance by families during recessions. On the other hand, since the huge decrease in the welfare rolls in recent years is completely unprecedented, it is also possible that our estimates based on the past will understate the response of the caseload to a serious downturn.

3. Sheldon Danziger of the University of Michigan, summarizing a study by George Wallace and Rebecca Blank, the former Chair of President Clinton's Council of Economic Advisors, writes: "A severe recession that raises the unemployment rate by 3-4 percentage points, to 7.5-8 percent, would leave welfare caseloads well below the levels reached in the early 1990s. They conclude that the 1996 welfare reform seems to have achieved a large reduction in caseloads independent of the state of the economy." Do you agree with this assessment?

3. As my previous answers indicate, I agree with the notion that welfare reform has had an effect on caseloads that is, to some extent, independent of the strength of the economy. The decline in caseloads reflects another factor as well: the growth of the Earned Income Tax Credit and other developments that help "make work pay". But the strong economy has played a very important role as well. Without it, caseload declines would have likely been much smaller, and much more painful to achieve.

Furthermore, while we will not likely see any return to the caseload levels of the mid-1990's during the next downturn, the need for federal assistance to the states will remain. Given that states have used their TANF block grants to fund a wide range of laudable activities and work supports, they will not be able to finance significantly higher TANF caseloads out of their current block grants without serious cutbacks in these other supports, which in turn would have unfortunate consequences for working families.

4. What is the "full employment" rate of unemployment? Has this changed over time? You suggest (page 6) that contingency funds be available to States with unemployment rates as low as 5 percent. Should a rainy day fund be available to States that are technically at or near "full employment"?

4. I currently regard the rate of unemployment that we can achieve through fiscal and monetary policy without rising inflation as being about 4%, and most economists would put it somewhere in the range of 4-5%. This is significantly below the rate of 6% or so that most economists believed was the lowest rate achievable in the 1970's, and below the 5-5.5% rate of the 1980's. The decline in this rate can be attributed to a wide range of factors - such as changes in workforce demographics, industrial structure, coverage by unemployment insurance, etc.

Two important caveats to the above statement must be mentioned here. First, this rate should not necessarily be interpreted as "full employment." It is simply the lowest rate that we can achieve without setting off inflation. (Most economists refer to this as the "non-accelerating inflation rate of unemployment", or NAIRU, rather than "full employment".) Accordingly, there are probably a fair number of poorly-skilled individuals who have difficulty finding work, even in such an environment; and many more people will have such difficulty when unemployment rises above that rate.

Second, the NAIRU no doubt varies very significantly across states. Since states differ from one another greatly in terms of the factors that determine these rates (e.g., demographics, industrial structure, coverage by Unemployment Insurance, etc.), they also differ greatly in the rates to which unemployment can fall at any time. Thus, roughly 10 states have recently achieved unemployment rates below 3% (while a few others, such as West Virginia and New Mexico, have had difficulty achieving rates below 6-7%). These 10 states would presumably suffer major cyclical job losses, a lack of job availability for unskilled workers, and seriously rising welfare caseloads, even at 4-5% unemployment; and it would be reasonable for the federal government to provide assistance in paying for its higher caseloads under those circumstances.

I hope you find these responses useful. Please let me know if I can be of any further assistance.

Sincerely,

Harry J. Holzer