Welfare Reform:

Information on Changing Labor Market and State Fiscal Conditions

GAO-03-977: Published: Jul 15, 2003. Publicly Released: Jul 15, 2003.

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With the enactment of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), the Congress made sweeping changes to federal policy for needy families. PRWORA ended the Aid to Families with Dependent Children (AFDC) program and created the Temporary Assistance for Needy Families (TANF) block grant to states. The Department of Health and Human Services (HHS) oversees the TANF block grant program, which provides grants to states totaling up to $16.5 billion each year and requires states to maintain a historical level of state spending on welfare reform programs. Under TANF, states have greater flexibility and face greater uncertainty than they did under AFDC. States have greater flexibility to design, finance, and implement programs for low-income families, including determining who is to be served and what services to provide. TANF also emphasizes the transitional nature of assistance and the importance of employment for welfare recipients. Because the amount of the TANF block grant is fixed, as caseloads decline--as they did in all states through the late 1990s--states have had additional resources that they have used to expand their programs, achieve some budgetary savings, and create reserves; however, states bear most of their TANF program's fiscal risks if their programs' costs rise as a result of higher caseloads or other factors. Welfare reform was initially implemented in a time of economic growth, when there was a strong demand for labor and the fiscal situation of the states was favorable. More recently, the economy has slowed and welfare reform is being implemented in less favorable economic conditions. To obtain information on welfare reform under changing labor market and fiscal conditions, Congress asked us to determine (1) how labor market conditions have changed in recent years; (2) how cash public assistance caseloads and the employment activities of current and former welfare recipients have changed in recent years; (3) how the fiscal situation of states has changed in recent years; and (4) to what extent states have made changes to their welfare programs as a result of fiscal changes.

The recent economic downturn is reflected in key national and state labor market statistics and in the reports of state officials. The national unemployment rate, for example, increased from 4.0 percent in January 2000 to 5.8 percent in March 2003. Although changes in unemployment rates have varied across industrial sectors and for workers of different levels of educational attainment, unemployment rates have generally increased across sectors and education levels in recent years. Unemployment rates varied across the five selected states, ranging from 4.0 percent in Iowa and Montana to 6.2 percent in Pennsylvania in February 2003. Despite these differences, officials in each state felt that their state has experienced an economic downturn. While the loss of jobs in manufacturing and the continued importance of service sector employment for TANF recipients were common features of the downturn across the five states, other important characteristics of the downturn differed. Changes in cash public assistance caseloads and the employment activities of welfare recipients also varied across the five states. Although the national welfare caseload declined from December 2000 to December 2002, only one of the five states (Pennsylvania) experienced caseload declines in both years of this time period. Caseload patterns differed across the five states in terms of any geographic concentration of caseload changes or the length of time recipients stayed on cash assistance. Information on how the downturn has affected the employment prospects of TANF recipients also differed across the states and by the type of organization interviewed. Some reported that TANF recipients had greater difficulty finding jobs as a result of changing economic conditions, while others said that entry-level jobs--those most likely to employ TANF recipients--were still generally available. State officials in the five states reported that changes had not been made to state welfare-to-work programs in response to recent economic changes, but some states have had to curtail, or expect to curtail, services and/or cut cash benefits because of fiscal difficulties. States are facing one of their most challenging fiscal situations in years, in part, due to the economic downturn and state fiscal responses to this downturn. Most states are required to balance their budgets and since their revenues have been much lower than forecast, state officials have struggled to bring expenditures in line with available resources. A state's need to cut spending or increase revenues during a downturn can be mitigated if it has accumulated surplus balances in reserve and states accumulated unprecedented reserves during the late 1990s. However, these reserves have dropped appreciably as states address their fiscal crises. For the TANF program specifically, we found that each of the five states in our review planned to use their reserves of unspent federal TANF funds to maintain their TANF programs and they also planned to use the program's flexibility to reallocate some resources to higher priority TANF needs. Nationwide, states reported that over $5.8 billion in federal TANF funds remained unspent at the end of federal fiscal year 2002. However, the levels of TANF reserves vary considerably among the 50 states. For example, 3 states' reserves of unspent funds are equal to or greater than their annual grant amount whereas 3 other states have no reported reserves. Many states began to draw down some of their reserves in federal fiscal years 2001 and 2002, in part due to concerns that accumulating unspent balances might signal that these funds were not needed.

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