Committee on Ways and Means, Subcommittee on Human Resources, 4-26-01 Testimony

Statement of Elaine M. Ryan, Acting Executive Director,
American Public Human Services Association

Testimony Before the Subcommittee on Human Resources
of the House Committee on Ways and Means

Hearing on "Rainy Day" and Other Special TANF Funds

April 26, 2001

Good Morning, Mr. Chairman and members of the Subcommittee. I am Elaine Ryan, Acting Executive Director of the American Public Human Services Association, a non-profit bipartisan organization representing state and local human service professionals for more than 70 years. Thank you for the opportunity to testify on the subject of "rainy day" funds and other special funding issues under the Temporary Assistance for Needy Families (TANF) program.

Background

Under the Aid to Families with Dependent Children (AFDC) program, families were trapped in a pattern of dependency that few believed could be reversed; states could give families little more than a check to help them provide for their children and the federal rules discouraged work. Since the enactment of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, states have achieved noteworthy success in implementing welfare reform. According to the Administration for Children and Families, the percentage of working welfare clients reached an all-time high in 1999 and their average monthly earnings and hours of work continued to rise. The percentage of Americans living in poverty continued to decline and child poverty recorded its biggest five-year drop in 30 years. The percentage of the population on welfare fell to its lowest point since 1965, child support collections increased dramatically, and states continued to provide critical TANF-funded supports to millions of families who exited welfare for the workplace. Teenage pregnancy rates have steadily declined during this period and some states have begun to achieve progress in an effort to reduce the number of out-of- wedlock births. While much has been achieved, states recognize that there are challenges ahead.

Some have credited welfare reform for the progress that has been achieved in recent years, while others point to a robust economy as the reason so much has been achieved in such a short period of time. I expect the debate will continue without any clear resolution for some time to come. However, an unknown of perhaps a more pressing nature is whether progress will continue, and if there is a prolonged economic downturn, will there be sufficient resources available to states to meet the needs of the children and families served under TANF?

Creation of State "Rainy Day" or "Contingency" Funds

Understanding the cycles of the economy, in the years following the enactment of welfare reform, more than half of the states planned to establish TANF "rainy day" funds to protect against economic downturn or caseload increases. Based on an APHSA survey conducted in 1998, 26 states had established reserve funds. Fifteen states created the state contingency funds in statute and eleven did so in budget language. Seventeen states planned to set aside federal unobligated funds, seven planned to set aside state funds for contingency purposes, and two planned a combination of federal and state contingency funds. For example, Georgia initially established a reserve fund with an up-front set aside of 2.5 percent of its FY 1997 federal TANF block grant allotment to be available in periods of future economic downturn. Maryland created a "Dedicated Purpose Account" to reserve unexpended state TANF MOE funds. And prior to 1996, Tennessee established a reserve fund using state and later a combination of federal and state funds to ensure that adequate funding would be available if caseloads increased. By 1999, states were altering their plans; some created funds and others eliminated their funds altogether. But the preliminary findings of our most recent state survey indicate that while some states still have reserve funds, the majority of respondents plan to obligate or expend all of their federal TANF funds by the end of FY 2002.

This shift in state plans to fund "rainy day" funds may be attributable to several factors. First, the federal TANF regulations and other federal regulations created disincentives to reserve funds. Second, in recent years, concerns have been expressed about the level of state spending, and misleading reports of "unobligated" TANF funds made the block grant the target of congressional attempts in 1998 and 1999 to cut or rescind unspent TANF funds. Although the welfare reform law allows states to reserve TANF funds "without fiscal year limitation," the message sent from Washington to the states has been spend the TANF funds or risk losing them.

State Spending Under TANF and Regulatory Disincentives to Reserve Funds

Over the past several years, federal agencies have restricted state flexibility to reserve federal and state funds in order to plan for periods of economic downturn or caseload increase. The final TANF regulations, the application of the Cash Management Improvement Act to the TANF block grant and ACF program instructions have limited states' ability to draw down, obligate, and expend federal TANF funds. Examples of restrictions include:

1. In welfare reform, states agreed each year to maintain their historic level of spending, known as maintenance of effort or MOE, and in exchange they would receive a fixed level of TANF block grant funding from the federal government. Since the enactment of the law, every year, every state has met the maintenance-of-effort requirement. However, even after a state has satisfied its MOE in a given fiscal year, any unobligated block grant dollars remain in the federal treasury, conveying the false impression that these funds are unmatched or unnecessary. And in past years, these unobligated federal TANF funds have been targeted for cuts or rescissions.

2. States are not permitted to draw down these funds into their state treasuries in order to fund "rainy day" or contingency funds because these funds are not considered to be obligations under the federal rules.

3. Exacerbating this situation, the final TANF regulations prohibit states from spending unobligated federal funds from a prior year on any purpose other than cash-like "assistance" payments. None of the several billion of TANF carryover funds can be used to fund work supports, such as child care, education and training or mentoring, substance abuse treatment and prevention, two parent family preservation, parenting education, or any other noncash service. Under this restriction, even if states reserve TANF funds in a contingency fund, the use of those funds would be severely limited, largely to ongoing cash assistance. However, in an economic downturn, it is likely that states would need to increase spending not only on cash but also on such one-time emergency payments to prevent evictions and homelessness and to create work experience and training programs.

4. Under welfare reform, the federal government devolved authority to the states and, in turn, a number of states devolved authority to counties and local governments. In January 2001, the Administration for Children and Families issued a Program Instruction to states, (TANF-ACF-PI-01-02) that would prevent states from permitting counties to fund "rainy day" funds at the county level.

5. And last October, a proposed federal rule relating to the draw down of TANF funds promised to make it even more difficult for states to draw down TANF funds and by imposing yet another obstacle to the funding of a TANF rainy day fund with federal funds. The proposed rule would require states to spend additional state funds to draw down unobligated TANF funds from the previous year even though the MOE requirement has already been met for these dollars. And as previously stated, those dollars could only be used to fund "assistance" benefits.

6. Finally, under federal rules, states may not count the state expenditures placed in "rainy day" funds toward their annual MOE until these funds are expended. Similarly, local funds reserved for these purposes cannot be counted toward the state MOE.

Therefore, APHSA asks Congress to consider the following actions:

· Afford states the flexibility to draw down TANF dollars to fund "rainy day" or contingency funds after the annual state MOE requirement has been satisfied and consider these funds as obligated;

· Similarly, afford states the flexibility to establish county "rainy day" funds;

· Remove the federal "assistance" restriction on the use of unobligated federal funds so that states may use these funds for any purpose under the TANF act; and

· Allow state and local expenditures for state or local "rainy day" funds to count toward the states' MOE requirement.

Finally, let me underscore the importance of maintaining federal funding for related human service block grants such as the Child Care and Development Fund (CCDF) and the Social Services Block Grant (SSBG). If these block grants are reduced, states will be unable to reserve funds for rainy days because funding will be needed to offset federal cuts. As a related issue, we urge Congress to reject adding "set-aside" language to the TANF block grant that requires states to spend federal or state dollars for a particular benefit, service, or purpose. These requirements will limit funds that could be reserved to protect against periods of caseload increase or recession.

The Real Story of State Spending

After federal welfare reform was enacted, states needed time to transition from a system of check-writing that existed under AFDC into a program where time-limited assistance and work were the primary focus. Time was needed to adopt state legislative changes, redesign programs, train caseworkers, inform clients, and implement new program rules. After this initial period of transition, welfare reform was well underway in the states. As TANF caseloads declined dramatically, some states may have been slow to obligate their federal block grant funds, but again, it is important to note that all states met their state maintenance-of-effort requirements. As TANF funds collected interest in the federal treasury, state funds financed the early success of welfare reform.

The "True" TANF Caseload

In recent fiscal years, however, the pace of spending under TANF has changed. While some in Washington have focused on the "unobligated" TANF funds, the real story of state spending is illustrated by the CBO baseline that shows TANF funds are leaving the treasury at a rate such that outlays will exceed the authorized level of funding in FY 2002 and beyond. After an initial period of transition and program planning, many states are investing funds in a wide range of programs to support self-sufficiency and prevent dependency and transferring a significant amount of funds to the Child Care and Development Fund and Social Services Block Grant. For example, from FY 1997 through the first two quarters of FY 2000, 44 states transferred more than $4.3 billion of TANF funds to CCDF and an additional $3 billion to SSBG.

Perception and Reality

Contrary to what federal caseload data might suggest, the work of the TANF agency does not end when families exit the cash assistance caseload. Federal data on the size of the TANF caseload are limited to the number of families receiving TANF cash assistance. The data do not report the "true" TANF caseload that includes families that receive TANF-funded child care, employment and training, counseling, programs for noncustodial parents, teen pregnancy prevention, family support and other critical services to children and families. Moreover, the TANF "assistance" and "non assistance" caseloads do not reflect the thousands of families who receive child care assistance funded with TANF transfer funds. The amount of unobligated funds and TANF caseload decline should not give policymakers false hope that all states could manage their TANF programs in periods of severe economic downturn. The reported amount of unobligated funds does not accurately reflect the planned and current state investment of TANF funds. The federal caseload data do not include the millions of children and families supported with services such as employment and training, counseling, substance abuse counseling, family formation, parenting education, teenage pregnancy prevention, transportation, and child welfare services. Nor does the caseload include the thousands of children who receive child care services funded with TANF transfer funds. Some have suggested that the demand for services, such as child care, will lessen in an economic downturn. This may not be the case. As long as there is a requirement that parents are engaged in a meaningful work activity while on welfare, there will be a need to provide child care for their children. In periods of severe economic downturn, there may not be sufficient TANF funds available in some states to meet the need of rising caseloads and to maintain current investments.

Extend and Restructure the Contingency Fund

The TANF Contingency Fund was created in 1996 to ease the risk states faced in accepting a fixed amount of block grant funding over a period of six years. The risks may be as great today as they were then for some states. While a strong economy has obviated the need for states to seek contingency funding, in a period of economic decline the current TANF Contingency Fund would be of little use to states. While APHSA supports the continuation of a federal Contingency Fund, significant changes are needed to ensure that it would be a viable and sufficient source of funds for states during periods of economic downturn or recession. First, the level of funding for the fund should be sufficient to provide support to a number of states that may need to draw from the fund at the same time. Second, the eligibility requirements should be revised. Specifically, the MOE requirements for access to the fund should be the same as the TANF MOE requirement and the definitions of qualified state expenditures should be aligned as well. Third, the unemployment and food stamp triggers should be modified. Considering the current U.S. unemployment rate, states would be long into an economic recession before meeting the current trigger of 6.5 percent. And in that instance, given the MOE requirement, few, if any, states would be eligible.

Extend TANF Supplemental Grants to States

Under the welfare reform law, Congress provided a modest annual supplement to seventeen rapidly growing states and high poverty to help them achieve TANF goals. The supplemental grants included in the 1996 law were authorized only through fiscal year 2001, while the law generally was authorized through fiscal year 2002. Allowing the TANF supplements to expire this year would not only result in a significant reduction in block grant funds, but states' ability to transfer funds would be reduced and their TANF High Performance Bonus would be reduced as well. APHSA urges Congress to extend these grants.

Closing Comments

In February, APHSA released Crossroads: New Directions in Social Policy containing recommendations for the reauthorization of the welfare reform law and other human service programs pending reauthorization by this Congress. With respect to the TANF block grant, our members have endorsed maintaining the current TANF baseline plus inflation for the next six years. We support the extension of the TANF supplemental grants to states and believe that this funding should be in addition to the current block grant allocation. We support the renewal of a TANF contingency fund and are working with our members to develop new criteria for accessing these funds.

While much has been achieved, there is an unfinished agenda of welfare reform--one that involves on-going supports to low-income working families, one that seeks to remove the barriers for clients with multiple barriers to overcome, and one that seeks to strengthen families and eliminate welfare dependency for generations to come. In order for early success in the workplace for TANF families to evolve into extended periods of job retention and earnings progression, continued federal and state investments are needed. In future years, a sustained commitment of on-going TANF work supports, such as transportation and education and training, may be required. And for those families who have not made the transition from welfare to work--those with multiple barriers to overcome--intensive services and supports will be costly.

In periods of economic downturn, these challenges may intensify and rising caseloads may pressure states to reduce current investments in child care or other critical support services. Increased state flexibility in the drawdown and expenditure of TANF program funds could afford state and local administrators with the necessary tools to manage during periods of increasing caseloads. A viable contingency fund could enable states to continue program investments during period of severe economic downturn. Above all, the federal commitment to maintain TANF block grant funding levels and related human service programs will enable states to their work to improve the future for millions of low-income children and families in this country.

Thank you for the opportunity to testify. I would be pleased to respond to any questions you may have.