Conversely if caseloads and costs increase, federal funds per recipient would be lower. For example, if revenues fall during an economic downturn, a state’s enacted budget can fall into deficit. However, unless there are reserves specifically earmarked for low-income family assistance programs, these programs will have to compete for “rainy day” fund resources with all other programs in a state’s general fund in times of budgetary stress. States Have Additional Budgetary Resources to Finance Their Low-Income Family Assistance Programs

A combination of the decline in caseload levels, the higher federal grant levels, and the MOE requirement for states’ contributions to their programs means that most states have more budgetary resources available for their low-income family assistance programs since enactment of welfare reform than under prior law. Aside from the nominal changes in funding, another way of viewing resources available for welfare is to compare total federal and state resources available under the block grant with what comparable federal-state spending would have been for 1997 caseloads under prior law. Overall, we calculated that under the block grant, 46 states wouldhave more total resources—state and federal—for their new welfare programs than they would have had under the old welfare programs—with a median increase of 22 percent—or about $4.7 billion more nationwide. Text Box 2: Examples of States’ Use of Federal TANF Funds to Achieve Budgetary Savings The combination of additional budgetary resources and lower caseloads has permitted states to achieve state budgetary savings which were reallocated to other state fiscal priorities. These officials said that a future downturn could reduce funds available for benefits at a time when they are most needed. Allowing for more transparency and information regarding states’ contingency budgets and the nature of the balances left in reserve in the U.S. Treasury could provide states with an opportunity to clarify their longer term fiscal plans for the program. States Are Unlikely to Make Extensive Use of PRWORA’s Contingency Fund or Loan Fund

Officials in most of the states we visited indicated that they would not use the Contingency Fund for State Welfare Programs (Contingency Fund) nor the Federal Loan Fund for State Welfare Programs (Loan Fund) even if they became eligible to do so. Officials in some states indicated that borrowing specifically for social welfare spending in times of fiscal stress would not receive popular support. States currently have more resources available for these programs under TANF than would have been available under the old financing system, but future fiscal demands are uncertain. The fixed nature of the TANF block grant, the potential volatility of welfare caseloads and program spending along with the “pro-cyclical” budgetary pressures states face under their balanced budget requirements highlight the importance of both the states’ own funding for contingencies as well as PRWORA’s provisions for contingencies—allowing states to save unused TANF funds for future years’ use and the two safety net mechanisms, the Contingency Fund and the Loan Fund. In our recent report on state program restructuring, we described how states are moving away from a welfare system that focused on entitlement to assistance to one that emphasizes finding employment as quickly as possible and becoming more self-sufficient. This is primarily the result of a combination of three interrelated factors: (1) the unprecedented declines in caseloads, (2) the new federal financing mechanism, or block grant, that provides resources to the states without regard to the numbers of people states’ welfare programs serve, and (3) the maintenance of effort requirement on states that establishes a minimum, or floor, funding level for their state welfare programs. GAO Comments

1. 2. 3. 5. 6.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the states' fiscal decisions for the Temporary Assistance for Needy Families (TANF) block grant and whether states are taking steps to prepare for the effects of future economic downturns on their welfare programs, focusing on: (1) how state budgetary resources, including federal aid, have been allocated since states have had access to TANF funds; (2) what plans states are making to ensure programmatic stability in times of fiscal and economic stress; and (3) the extent to which states have used, or plan to use, the program's federal Contingency Fund for State Welfare Programs and the Federal Loans for State Welfare Programs (Loan Fund) which are available for downturns or other emergencies affecting states.

What GAO Found

GAO noted that: (1) more federal and state resources are available for states' low-income family assistance programs since welfare reform passed in 1996 than would have been available under the previous system of financing welfare programs consolidated in the TANF block grant; (2) GAO's estimates showed that, taking caseload declines into account, 46 states would have more total resources--both state and federal--for their low-income family assistance programs than they would have had under the previous welfare programs; (3) states are transforming the nation's welfare system into a work-focused, temporary assistance program for needy families and generally chose to spend these resources to expand programs and benefits by shifting the emphasis from entitlement to self-sufficiency, enhancing support services, and increasing work participation rates; (4) states also have achieved budgetary savings by reducing state funds to the statutory maintenance-of-effort level of 75 or 80 percent of previous state spending levels; (5) while states have gained greater resources under the block grant, they also take greater responsibilities for fiscal risks should program costs increase in the future; (6) most states, including 7 of the 10 GAO visited, also have a general fund budget stabilization or rainy day funds that could be used to augment program spending during an economic downturn, but welfare programs would have to compete for these resources with other state funding priorities; (7) the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) includes features that could provide federal funding to cover future increases in program needs; (8) states can carry forward unused TANF funds without fiscal year limitation; (9) as of September 30, 1997, states had left about $1.2 billion in unspent balances in their accounts with the U.S Treasury, or about 9 percent of the total grant; (10) it is unclear whether these balances will remain, shrink, or increase as states gain experience with the problem; (11) PRWORA also creates two federal safety-net mechanisms--the Contingency Fund and the Loan Fund--that were designed to provide states with access to additional funds during times of economic downturn or fiscal stress; (12) as of February 1998, neither the Contingency nor the Loan Funds had been used by any state; (13) officials in states GAO visited said they did not view the Contingency Fund as a viable source of additional resources; and (14) officials in many states GAO visited indicated they did not believe their states would borrow from the Loan Fund during an economic downturn.