Welfare Reform: A Record of Pluses and Minuses


What many reformers have long sought -- the transformation of the welfare system from a program of monthly cash assistance to a web of work incentives for poor families -- moved closer to reality last year.

Following examples set by Illinois, Maine and others, dozens of states announced plans to tap the pool of federal dollars left over from declining welfare rolls to make new investments in child care, affordable housing, tax cuts and personal counseling for the needy.

California, Minnesota, Mississippi, New Jersey and New York were among those announcing the largest new spending increases.Last July, Ohio, whose welfare caseload of 238,000 is the 5th largest in the nation, announced that its expenses for services for low-income, working families this fiscal year would surpass cash assistance by at least $100 million.

"In the past, we supported people who were out of work. Now we're spending more money helping people get jobs and stay working," Joel Potts of the Department of Job and Family Services told the Cleveland Plain Dealer.

Despite these investments, however, most of the states were spending less on the poor than they did before Congress overhauled the nation's welfare system in 1996. As caseloads have dropped by half, the states have accumulated an enormous surplus of federal welfare money -- about $8.3 billion, or 15 percent of the total awarded over the past four years.

In fact, evidence emerged in 2000 that, in addition to stockpiling billions in federal dollars, the states have also trimmed their own spending on needy families -- a trend Congress is likely to view with alarm when it revisits the welfare law in 2002.

"When Congress made this deal, they thought they were getting the better half," said Barry van Lare of the Welfare Information Network. "It turns out they [the states] got the better half."

In an analysis of the social services budgets of four states -- California, Wisconsin, Missouri and Georgia from 1995 to 1999, Rockefeller Institute of Government researchers found that all four had cut both state and federal spending on programs for low-income families. Total cuts ranged from 25.4 percent in Georgia to 4.6 percent in Missouri. The Rockefeller study also found that three of the four states -- California, Georgia and Wisconsin -- used federal funds to replace state outlays.

"The federal government expected... welfare reform to provide federal budget savings over the longer term, and higher state costs," the report's authors Deborah Ellwood and Donald Boyd wrote.

A national advocacy group formed to monitor welfare reform, the National Campaign for Jobs and Income, reported in 2000 that six states -- Connecticut, Kansas, Minnesota, New York, Texas and Wisconsin -- had tapped their federal funds to "supplant" state spending in 1999. In 2000, Michigan subsequently joined the pack and announced that it would use federal welfare money to replace $27 million in state spending.

Four of those states, Minnesota, New York, Texas and Wisconsin, used state budget savings in 1999 to fund tax cuts for individuals and corporations.

The spending cuts worry advocates who point out that most of the families who have left the welfare rolls since 1996 are still poor. Although the national poverty rate fell to a 20-year low in 1999, to 11.8 percent, the large number of poor in the United States -- 32.3 million people -- still eclipses the number that relied on welfare at its height -- 14 million.

Under the 1996 welfare law, states are allowed to use their welfare money to serve all needy parents and children, regardless of their previous ties to the welfare system. U.S. Rep. Nancy Johnson, a Republican of Connecticut, has ordered the General Accounting Office to investigate the extent of supplantation by the states. "If the savings from supplanted federal funds are used for purposes other than those specified in the [welfare] legislation, Congress will react by assuming that we have provided states with too much money," Johnson wrote the governors in the spring.

For two years, Johnson, chairperson of the House subcommittee that oversees welfare, has told the states to use their federal welfare surplus or risk losing it. In 2000, the significant increases in spending indicated the states were finally paying attention.

Between March 1999 and March 2000, the latest date for which figures are available, the federal welfare surplus grew by less than $1 billion, just 1/16th of the money awarded over the same 12 months -- a much smaller rate of growth than in previous years.

Tax Cuts

Perhaps the greatest gains for low-income, working families in 2000 came in the form of state tax cuts and credits. A number of states decided to build on the federal Earned Income Tax Credit by enacting credits of their own. The federal EITC, as it is called, is now one of the largest anti-poverty programs in the country, amounting to $30 billion in 1999.

Under the program, low-income, working families can claim a credit against their federal income taxes. The lowest-paid can qualify for a refund from the government even if they owe no federal income tax. Many analysts believe the incentive of the EITC is as much responsible for the increase in parents leaving welfare for work as the new welfare rules.

According to the Center on Budget and Policy Priorities, a research group in Washington, D.C., New Jersey and the District of Columbia adopted refundable tax credits in 2000 that will boost the incomes of low-wage workers with children. Illinois and Maine created non-refundable credits that will help low-income families offset their state tax burden.

Four states with refundable credits -- Colorado, Maryland, New York and Minnesota -- made them larger during the year. Virginia adopted a credit that will eliminate income taxes on most families living at or below the poverty level.

Child Care

In 2000, at least seven states announced additional spending on child care, with many of them focusing on improving the quality of care as well as the quantity. Mississippi, which had accumulated a $94 million federal welfare surplus, unveiled a plan to spend $70 million of that money. Much of it will go to expanding after-school programs and child care for low-income families.

In Kentucky, Gov. Paul Patton pushed hard to win a $55.7 million program for children which will include an expansion in subsidized child care. Kentucky plans to fund the program with its share of the tobacco settlement.

Five other states -- Alabama, Minnesota, Florida, Pennsylvania and Washington -- also announced new child care spending. Although spending has increased dramatically since 1996, the network of child care services the states are building remains far from comprehensive. While most states can assist the parents now trying to move off the welfare rolls, most do not yet have enough spaces to accommodate all eligible children. The U.S. Department of Health and Human Services reported in November than only 12 percent of eligible children received federal child care assistance in 1999.

Housing -- California and Minnesota Stand Out

California in 2000 responded generously to a statewide housing crunch that has caused rents in some areas to more than double. Lawmakers agreed to make a $500 million investment in affordable housing programs, including $100 million for mortgages for first-time homebuyers and $188 million to increase the supply of rental housing. Housing advocates say they have not seen such an expansion in funds in decades.

At the urging of Gov. Jesse Ventura, Minnesota lawmakers agreed to invest a good portion of their state's leftover welfare money -- about $50 million -- in similar programs.

Investments in Work Incentives

According to the U.S. Department of Health and Human Services, states continue to make it easier for families to go to work, without having to leave welfare altogether. Most have adopted policies known as "earnings disregards" that allow parents to keep more of their welfare checks while they go to work, HHS reported last August.

In Texas, an earnings disregard established in 1999 kicked in 2000. Parents there can now keep up to 90 percent of their welfare checks for the first four months that they are working. Indiana's new earned income disregard began July 1, 2000. The state will now allow families to supplement their earnings with welfare until their incomes reach the federal poverty level, $14,150 for a family of three.

An evaluation of Minnesota's welfare program -- which allows parents to collect welfare and work -- found that these policies can benefit families tremendously. Researchers from the Manpower Demonstration Research Corporation found that Minnesota's policies had led to one of the largest drops in poverty among single-parent families ever recorded.

"We've actually rarely seen this kind of improvement in poverty," MDRC analyst Virginia Knox said. "These financial incentives are giving states a new tool to make even further progress than they have in the past."

Helping Long Term Welfare Recipients

Most states have begun to screen long-term welfare recipients for problems such as domestic violence, learning disabilities, physical disabilities, drug and alcohol addiction -- problems that may make it difficult for them to work, HHS reported to Congress this summer.

In 2000, a number of states expanded efforts to address these problems. In addition to its new investments in housing, Minnesota earmarked $75 million for a range of services, from car repairs to mental health counseling, to help long-term welfare recipients find and keep jobs.

New York doubled its investment in similar services, including a tripling of its budget for drug and alcohol counseling.

Last summer, Michigan ran a $20-million summer school for almost 3,000 welfare families. While children were treated to museum and swimming outings, parents went to computer and parenting classes. Georgia announced a program to reach out to about 2,000 long-term recipients facing the state's January deadline on cash assistance.

New Jersey is contacting 11,500 recipients nearing their deadline and will spend up to $15 million on services to help them move into jobs. In addition to new child care spending, Florida this year agreed to pump millions more into training programs to place unskilled workers in specific jobs.

Helping The Working Poor

In 2000, a number of states unveiled programs to help low-income families that never relied on government aid as well as those who recently left the welfare rolls.

Indiana dedicated a small amount of money, just $5 million, to a new program called STEP, or Short-Term Empowerment Process. The program will target assistance to families who earn incomes above the poverty line, up to $42,625 for a family of four.

On January 1, New Jersey will begin offering former welfare recipients up to $3000 to pay for additional training. The state plans to spend $5.5 million next year for classes for up to 1,800 women. West Virginia this year committed $15 million of its $160 million welfare surplus to help low-income families stay off the dole.

Also last year:

  • Connecticut, Rhode Island and California raised their minimum wage. Beginning Jan. 1, 2001, most employers in Connecticut must pay at least $6.75 an hour.
  • Rhode Island's wage floor rises to $6.25 in July and to $6.75 in 2002. For workers in Connecticut in 2002 and in Rhode Island in 2003, the minimum wage will begin to rise with inflation.
  • In California, the minimum wage will increase by $1.00 over two years, to $6.75.
  • In July, New Hampshire Gov. Jeanne Shaheen announced a dental program for low-income children.

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