State Strategies to Manage Budget Shortfalls

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Case Study: Welfare Reform in Michigan in 1991-92

Michigan made substantial revisions to its welfare programs in 1991 and 1992. The state's experience with reforms to general assistance and AFDC suggests that reforms can have positive effects on state budgets and recipients' behavior but that the effects develop slowly. The experience also suggests that policymakers have to be wary about displacement effects--that people removed from one program may overload another one.

General assistance. On Oct. 1, 1991, Michigan terminated its general assistance program, which was a cash assistance program that provided aid to adults without dependent children who were not eligible for any other form of state or federal public assistance. In March 1991, Michigan's general assistance population was 106,000, and in the last full year the program was in effect (FY 1990), Michigan budgeted $235 million for it. The program provided beneficiaries with $160 per month. Goals of the termination were to reduce public spending, increase employment levels and make a dependent population self-sufficient.

According to the Senate Fiscal Agency, termination of general assistance reduced state expenditures by the amount of direct costs for the program--$235 million in FY 1990, the last full year of operation. An evaluation by the University of Michigan School of Social Work found the following:

Thirty-eight percent of former beneficiaries found at least part-time work in the two years after the program ended, usually in jobs that paid about $5.50 per hour. {Percentage and other figures are based on a survey population. See Sandra K. Danzier and Sherrie A. Kossoudji, "When Welfare Ends: Subsistence Strategies of Former General Assistance Recipients," Final Report of the General Assistance Project (Ann Arbor: University of Michigan School of Social Work, February 1995).
Twenty-six percent of former beneficiaries were enrolled in either federal or state disability benefit programs by the summer of 1993, as opposed to 2 percent before general assistance was terminated.
Twenty percent moved into AFDC (a program for parents of minor children).
Sixteen percent depended upon a spouse's benefits from AFDC, a disability program or other public assistance.
Demand for space in homeless shelters in Detroit more than doubled after general assistance was terminated.

The evaluation results also suggested that the fairly impressive level of employment reported by former beneficiaries could be misleading. Poor health and a lack of skills tended to make beneficiaries take jobs like baby-sitting, running errands and raking leaves. Poor health and lack of productive personal contacts, the report suggests, will mean that former beneficiaries will have difficulty keeping jobs.

The findings by the University of Michigan School of Social Work, although they have not been subjected to critical evaluation by advocates of repeal of the general assistance program in Michigan, suggest that much of the public expenditure the program represented has been diverted to other forms of public assistance. The Michigan Senate Fiscal Agency, after analyzing a variety of public assistance caseload data, could not find definitive empirical support for the University of Michigan survey findings. {The Michigan Senate Fiscal Agency, after analyzing a variety of public assistance caseload data, could not find definitive empirical support for the University of Michigan survey findings.

Family Assistance. On Oct. 1, 1992, the state put into effect a program called "To Strengthen Michigan Families (TSMF)." This program contained 21 welfare reform policies, many of which revised traditional provisions of AFDC. Revisions included:

A requirement that all adult welfare recipients must enter a "social contract," that is, must engage in employment, education, training, self-improvement activities or community service for at least 20 hours a week;
A provision allowing welfare recipients to keep a larger proportion of earnings while on welfare;
Fewer restrictions on the eligibility of two-parent families to receive welfare; and
A provision allowing children to earn and save without affecting welfare benefits.

These revisions were central to the program's goals of stabilizing family structures, encouraging the habit of gainful employment, creating greater self-reliance and, through those means, reducing welfare dependency.

TSMF focused on program revisions rather than cost savings; and it is a long-term program. An evaluation of the first year of the program yields encouraging findings even in the short term, nearly all of them, according to the Michigan Department of Social Services, "in directions positive for both clients and taxpayers." {Alan Werner and Robert Kornfeld, The Evaluation of To Strengthen Michigan Families: Second Annual Report-First-Year Impacts (Ann Arbor, Mich.: State of Michigan, Department of Social Services, December 1994).

The changes are marginal, as might be expected in a program intended to alter behavioral patterns. Not all the intended changes in client behavior showed up in the first year of the program, nor were the findings all consistent with each other. These were the major findings of the evaluation:

TSMF had no significant impact on the level of employment or earnings among welfare recipients in its first year, either for adults or for children.
Participation declined. Under TSMF, people who entered a welfare program--AFDC, State Family Assistance (a state-funded program for families not eligible for AFDC), food stamps or Medicaid--were one percentage point less likely to continue for 12 months than people in the traditional program. (Because measurement was simultaneous in control groups, it is thought that changing economic conditions did not affect this finding.)
People entering the new program were 1.5 percent more likely to combine work and welfare than beneficiaries in the previous program.
Medicaid participation increased for adults but fell for children. This occurred because TSMF allowed two-parent families to transfer from State Family Assistance, where they were not Medicaid-eligible, to AFDC, which confers Medicaid eligibility. But children's participation in Medicaid fell because overall AFDC eligibility declined.
By the end of the evaluation period, welfare payments were beginning to fall. The amount is statistically insignificant but is consistent with the expectation that as work participation increases, payments should fall.

The findings by the Michigan Department of Social Services suggest that changing the conditions of welfare grants and providing financial incentives can alter the behavior of welfare beneficiaries in the direction of greater self-reliance. But they also suggest that changes in income-support programs can have adverse effects on other programs because of beneficiaries' movement from one program to another. The Michigan Senate Fiscal Agency has been unable to substantiate the findings. {The Michigan Senate Fiscal Agency notes that "early evaluations did appear somewhat ambiguous. However, using a longer time reference indicates that TSMF has had a significant impact on the AFDC program. In addition, the Senate Fiscal Agency also found no empirical data that would lend credence to the hypothesis that these changes have resulted in the 'movement from one program to another' of these recipients.

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Written December 1996, posted January 2003, reviewed December 2003
Email statebudget-info@ncsl.org for more information.
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