Overcoming Barriers: Solutions for Addressing Challenges Created by Federal TANF Changes

by Stacey Rolland

Key Findings

• The new federal TANF law passed in early 2006 could require the District to increase the number of welfare recipients in work activities by nearly 150 percent, but it provides no additional funding.

• The District faces possible federal penalties of up to $4.6 million for 2007 and $19 million in future years if it does not meet new work participation rates.

• The new law eliminates two bonuses totaling up to $25 million which DC has received in each of the past five years.

• There are steps the District can take to maintain its welfare-to-work services and avoid penalties.  Solutions are discussed in this paper.

Report

The federal Deficit Reduction Act passed by Congress in February 2006 included substantial changes to Temporary Assistance for Needy Families (TANF), the welfare-to-work program established in 1996.  Most notably, the new TANF law greatly increases the number of TANF parents that DC and each state must engage in federally-defined work preparation activities.  While the intent may appear reasonable ‘ to increase welfare-to-work efforts ‘ the new law and implementing federal rules could create serious new fiscal burdens and make it harder for DC and states to provide appropriate welfare-to-work services.

• The new TANF law places new burdens on DC and the states without additional funding.  The new law could require the District to increase the number of welfare recipients in allowable work activities, from the 2005 level of 1,953 to as many as 4,772, an increase of nearly 150 percent.  The District would need to spend an estimated $17 million per year to meet the new work participation rates, but the new federal law provided no additional federal TANF funding.

• The District could face substantial financial penalties.  The District already attempts to engage a large share of welfare recipients in work activities.  Even if these efforts are stepped up, the city is unlikely to meet the new work requirements.  (Many other states also are expected to be unable to meet the work rates.)  If that occurs, the District faces a federal penalty of up to $4.6 million for 2007 and the possibility of penalties up to $19 million in the future.  DC and the states will be required to spend additional state funds to compensate for the lost federal funds.

• The District will lose TANF bonuses it has been receiving.  The new TANF law eliminates two substantial bonuses that rewarded states that reduced out-of-wedlock births and helped families achieve job stability.  The District has received $20 million to $25 million per year from the out-of-wedlock birth reduction bonus since it was first established in 1999, a large addition to its $92 million basic TANF grant.  DC has also received $9 million in job performance bonuses since 2000.  These bonuses have been used for a number of activities, including child care.

It is worth noting that drastically changing DC’s TANF program in order to attempt meeting the expectations of the new TANF rules would not necessarily  help move more families out of poverty.  The federally allowable TANF work activities focus largely on getting parents into jobs quickly, even though this means many parents end up in low-wage jobs that keep their families in poverty.  The District currently works successfully with a broad group of TANF recipients, including those with disabilities who are able to work or engage in productive employment preparation activities, while recognizing that a small share of recipients may be unavailable for participation due to severe impairments or the need to care for family members with disabilities.

Responding to the challenges created by the new federal law while also maintaining a strong welfare-to-work program will be difficult for the District and most states.  In particular, the District should consider allocating more local funds to welfare-to-work services, both to support enhanced engagement in work participation activities and to cover services that can no longer be funded with TANF bonuses.  In addition, the District will need to explore ways to modify welfare-to-work services to increase work participation.

Even if it makes every effort to do so, the District may not be able to meet the strict federal work requirements.  One option to avoid substantial federal penalties is to create a separate and solely state-funded (SSF) program outside TANF using local funds that are not claimed toward the local TANF match requirement, known as “maintenance of effort” (MOE).  A number of states and the District are considering the establishment of SSFs to help them maintain individualized services that meet the needs of TANF recipients even if they do not meet the narrow range of federally approved work activities, without the risk of steep federal penalties.  As discussed in more detail below, this redesign approach in creating solely-stated funded programs does not necessarily require an increase in local funding.

How the New TANF Law Changes Work Participation Requirements

The TANF law adopted in 1996 required all states and the District of Columbia to have 50 percent of all TANF families engaged in specified work preparation activities (or in actual employment) for at least 30 hours per week (20 hours for a single parent with a child under age six).[1]  The rate for two-parent families was set at 90 percent.  The law specified 12 allowable work activities, such as job search and job readiness, that stressed a “work first” approach to get parents into the job market quickly.

At the same time, the law included provisions that gave states flexibility to provide services tailored to meet a family’s needs even if it did not meet the federally defined work participation criteria

• States received a “caseload reduction credit” that adjusted downward a state’s work participation rate requirements based on the decline in the number of families receiving TANF assistance since 1995 (for reasons other than changes in eligibility rules).  In 2004, for example, the District’s required work participation rate was 13 percent ‘ because TANF caseloads had fallen 37 percent since 1995 ‘ and it achieved a rate of 18 percent.

• In addition, the 1996 law allowed DC and the states establish so-called “separate state programs” that were part of their welfare-to-work efforts but funded entirely with state funds; these funds could count toward a state’s MOE requirement.  Families receiving assistance through a separate state program were not considered when measuring the percent of TANF recipients engaged in work activities.  Many states and DC created separate state programs to serve populations with serious barriers to employment, such as low literacy and disabilities.

The new TANF law, which will go into effect in October 2006, maintains the prior law’s 50 percent participation rate for all families and a 90 percent participation rate for two-parent families, but it makes two major changes.

• States will no longer receive credit for caseload reductions since 1995.  Instead, the required work participation rate will be reduced based only on caseload declines since 2005.  Since TANF caseloads dropped sharply in the 1990s and then stabilized, it is unlikely that states will benefit much from this.

• In addition, the measurement of each state’s work participation will include families served by separate state programs whose funding is counted towards the MOE requirement.

This means that starting October 1, 2006, DC and the states will face work participation rates of close to 50 percent for all families and 90 percent for two-parent families.  As discussed below, these rates are far higher than the existing work participation rates achieved in DC and in most states.

New Work Participation Requirements Will Place Significant Challenges on DC and Many States

While DC and all states attempt to engage a substantial share of TANF parents in work activities, the vast majority of states now have TANF work participation rates that are below the 50 percent level required in FY 2007.  (See the box on the background on DC’s welfare reform below.) 

In 2004, the average work participation rate among all states was 32 percent. Meeting a 50 percent work participation rate nationally under the new rules would have required an increase of more than half in the number of families engaged in countable work participation activities.

DC’s work participation rate in 2004 was 18 percent, reflecting an average monthly participation of 1,700 TANF recipients.  In 2005, the District engaged 1,950 TANF recipients in work activities per month.  To meet the new law’s requirements, the District would have to engage nearly 4,800 TANF recipients in such activities to reach a 50 percent rate.

No state met the 90 percent work participation rate for two-parent families in 2004, which generally is considered to be unrealistically high.  Nationally, the two-parent participation rate equaled 47 percent.  In the District, it was 20 percent.  Meeting the 90 percent rate thus would require enormous increases in the number of two-parent families engaged in allowable work activities.  It is widely expected that few states, if any, will be able to meet this requirement.

While these rates were below the required 50 and 90 percent rates, the District and all states fulfilled their work rate requirements in 2004 because they earned the caseload reduction credit, which decreased the work participation rate requirement.

Meeting the new TANF requirements through increased participation in work activities will carry substantial costs to operate work programs and to provide child care and related supports.  The Congressional Budget Office (CBO) has issued a preliminary estimate that the national cost of meeting the new requirements through increased participation would be $8.4 billion over five years, primarily for employment services and child care.[2]   The new TANF requirements were not accompanied, however, with any new TANF funding.  New child care funding totals $1 billion over five years — about 12 percent of the estimated funding needed to meet the new requirements through increased participation.

Based on the CBO national figures and Congressional Research Service (CRS) estimates of increased work participation needed to meet the new rules, the cost to DC for meeting the work rates through increased participation could be $17 million in FY 2007 and $84 million over five years. [3]  By contrast, the amount of funding DC will receive in new child care funding is $318,319 in FY 2007 and $1.6 million over five years.[4]

District Faces Large Potential Penalties

Even if states make significant efforts to meet the new work rates, it is likely that many will fail to do so.  If the District or any state fails to meet the new requirements, they could face substantial penalties.  These federal penalties are prorated based on by how many percentage points a state misses its requirement.

• In the first year under the new law, the penalty for failing to meet the all-families participation rate can involve a loss of up to five percent of a state’s TANF block grant.  This means the District’s could face a penalty of $4.6 million against its $92.6 million TANF block grant.  (The federal law does not mandate a penalty of this size.  It allows penalties to be set below 5 percent if corrective actions are taken or if there is good cause for failing to meet the work rate.)

• In addition, when a penalty is imposed, the state is required to contribute state funds equal to the lost federal funds in the following fiscal year.  This means that if the District were to face a $4.6 million federal penalty, it would need to replace the lost federal funds with $4.6 million in local funds.[5]  In some years, this could create a stair-stepping effect, where the actual cost to the city is double the federal penalty after the first year.  In the year after the first penalty is imposed, DC would be required to replace the withheld federal money with local dollars in addition to receiving the second penalty.  This double penalty in actual cost to the District would continue for every year it fails to meet its work participation requirement.

• The maximum penalty for failing to meet work participation rates grows up to two percent per year for each year a state fails to meet the requirement, with a maximum of 21 percent.  Under this structure, the District’s penalty could grow from the $4.6 million level by $1.8 million per year, ultimately reaching as much as $19 million.

Solution: Solely State Funded Programs

The District may not be able to move enough families into countable work activities to meet federal work requirements, which could subject the city to significant federal financial penalties.  One option that many states are considering to avoid these penalties while continuing to provide services for current TANF recipients unable to meet work requirements is the creation of solely state funded programs (SSFs) for some current TANF recipients.  These are programs that use local funds that are not used as part of the local TANF match, known as “maintenance of effort” (MOE) funds.  Families assisted with local funds that are not used to meet the maintenance of effort requirement would not be considered when determining the District’s work participation rate, which would allow DC to provide services that meet the needs of recipients even if they do not meet the narrow range of federally approved work activities.

There are two ways the District can create SSFs that would not require new local funding.  The District can identify current locally funded services that can be counted MOE but currently are not.  This would DC to take some of its local funds that are being used to serve welfare recipients and no longer count them towards the MOE requirement.  Alternatively, the District could identify locally funded services that could be funded with federal TANF funds.  Either of these swapping strategies would free up the local funds to be used to support welfare-to-work services within SSF programs outside TANF.

Creating a solely state funded program would allow the District to maintain its diverse TANF program, which focuses on immediate employment for most recipients but also has some specialized programs for those with significant employment barriers.  One example is the Program on Work, Employment, and Responsibility (POWER).  POWER provides cash assistance to families in which the head of household is unlikely to meet TANF work requirements due to a short-term incapacity related to physical or mental health problems, substance abuse problems or learning disabilities.  Recipients attend rehabilitation services and work with vocational counselors to create a specialized treatment plan to help them move toward employment.

The District has operated POWER as a “separate state program” funded with local resources that count toward MOE dollars.  Under the new TANF law, POWER would be counted toward DC’s work participation rate.  Because many POWER recipients do not meet federal work activity requirements, this would reduce the District’s work participation rate.  Converting POWER to a “solely state funded” program ‘  that is, maintaining local funding but not counting it toward meeting the MOE requirement ‘  would allow DC to continue to serve recipients without them being considered in the federal work participation rates.

Elimination of TANF Bonus Funds Will Affect the District Greatly

In addition to altering the work participation requirements, the TANF law adopted earlier this year also eliminated two TANF bonuses from which the District had benefited significantly.

• Out-of-wedlock birth reduction bonus:  Every year, the federal government awarded $100 million in TANF funds to four or five states with the greatest reduction in the number of out-of-wedlock births.  The District has won this award every year since 1999, receiving annual TANF bonuses of $20 million to $25 million on top its $92 million basic TANF grant.

• Job-performance bonus:  The federal government has awarded $200 million to states nationally showing strong performance in helping families move to work and for wage growth and job stability for these workers.  The District has been awarded job performance bonuses every year since 2000, amounting to $9 million cumulatively.

DC has used the TANF bonus funds both to support welfare-to-work programs and for related services outside the welfare program.  Of $21 million appropriated in 2006, for example:

• $5.4 million will support a 7.5 percent increase in basic TANF monthly benefits, the first TANF increase in the District in 15 years.

• $3.2 million will support TANF welfare-to-work services.

• $5 million will go to support summer programs through the Children Youth Investment Trust Corporation, which provides grants and technical support to non-profits providing out-of-school-time services.

• 3 million was used to supplement the DC Energy Assistance program in response to rising energy costs.

• In previous years, TANF bonus funds also have been used to enhance child care services.

Without these bonus funds, the District will be forced to scale back support for these programs or to find other sources of support, particularly local funds.

Conclusion

The goal of the District’s TANF program is to help families transition successfully into good-paying and stable jobs.  The TANF changes adopted earlier this year ‘ which increase the focus on the federal work participation requirements ‘ are likely to make it harder for DC and many states to maintain successful elements of their welfare-to-work programs that do not fit the narrow federal activities.  Moreover, federal penalties will be levied against states, including DC, that fail to meet these work requirements.

As discussed above, the District should consider a number of steps to address the federal changes, including providing additional local funding for TANF and related services.

• Enhance Funding and Efforts to Engage Recipients in Existing Work Programs:  As noted, the District already takes several steps to encourage TANF recipients to participate in work preparation activities.  Some states have boosted participation rates by improving screening and assessment of TANF recipients and by providing more intensive case management.  Such steps may increase work participation, although it is not clear by how much.

• Make Better Use of Allowable Federal Activities:  The District could explore ways to place more TANF recipients in certain allowable work activities.  This could include leveraging federal dollars for workforce development, combining education with other work participation activities, making greater use of subsidized jobs and work experience programs and reviewing existing services to determine whether, with modification, any can be considered an allowable work activity.

• Use Local Funds to Replace Lost Federal Bonus Funds:  TANF bonuses, which have totaled more than $20 million annually, support a number of critical services, including child care.  Without new local funding, those services may have to be cut.

• Create a Solely State Funded Program for some recipients:  To avoid federal penalties while maintaining services to its hardest to serve recipients, DC should follow other states’ lead by creating solely state funded programs (SSFs) outside TANF.  This strategy will allow DC to provide TANF and MOE services to those recipients able to engage in countable work activities or those without special needs while providing services in SSFs outside TANF to those recipients facing multiple barriers to employment.

These solutions are not simple or easy, but they may be critical to maintaining the most effective welfare-to-work services while meeting the new work participation rates and minimizing the risk of federal penalties.

End Notes:

[1] The participation rate is the number of families participating in countable activities for a required number of hours each month (the numerator) as a share of families with a “work eligible individual” (the denominator) as further modified by adjusting the denominator downward for families with a child under age one and (for up to three months) families in sanction.

[2] Preliminary CBO Estimate. Potential Additional Costs to States of Meeting Proposed Work Requirements in the Reconciliation Conference Proposal. December 18, 2005. In a note, CBO explains: “The estimate illustrates the costs to states if states choose to meet the new requirements by funding more activities for recipients such as work experience programs. Actually, CBO expects that states are more likely to meet the requirements by applying a combination of approaches including funding more activities, imposing tighter up-front requirements and adopting stricter sanctioning policies. States may also be able to make changes in their programs to partially avoid the new requirements. However, the bill applies the requirements to families in separate state programs and requires the Secretary of Health and Human Services to issue new standards about who counts as a participant; those provisions would limit states’ ability to avoid the requirements.” CBO further notes “The estimate assumes a constant caseload at the level in the first half of FY 2004. It assumes that states will have to begin to ramp up their programs in 2006 in order to meet the requirements in 2007. Finally, the estimate does not reflect costs related to the requirements on two-parent families.”

[3] This calculation is based on using the Congressional Research Service data to calculate that 1 percent of the increased number of needed participants would be attributable to the District of Columbia, and then calculating that 1 percent of the Congressional Budget Office $8.4 billion projected cost would be $84 million.

[4] Melinda Gish, “Estimated Mandatory Child Care Allocations Under the Deficit Reduction Act of 2005″ Congressional Research Service (Dec. 20, 2005).

[5] The two-parent penalty is considerably smaller’the maximum penalty is limited to 5 percent of the state’s block grant times the percentage of a state’s cases that are two-parent family cases. However, even if the state only fails to meet the two-parent rate, it will still be required to meet the 80 percent maintenance of effort requirement.