Challenges, Resources, and Flexibility: Using TANF Block Grant and State MOE Dollars

September, 1999

Jack Tweedie, Dana Reichert and Sheri Steisel

States have an historic opportunity to transform welfare programs-to focus on work and to provide a broader set of services to help working poor families. New federal TANF regulations issued in April clarify the broad flexibility states have to design their own programs. And the stunning drop in welfare caseloads means that almost every state has resources available for new or expanded programs. State policymakers can continue their work-based reforms-expanding services to recipients who have not been able to leave welfare, offering child care and transportation assistance to working poor families, even if they have never been on welfare, and providing job training so low-income workers can improve their jobs. States can also think about new programs to help poor families and children. Even as they complete their work-based reforms, state policymakers can use TANF resources to help low-income families and children:

extending child care, transportation assistance and other work supports to low income families not on welfare,
providing home visits to help parents with babies and young children and other programs to prevent child maltreatment and support troubled families,
expanding Head Start programs to include more children and provide day-long programs,
providing employment training and parenting skills to non-custodial parents to strengthen the financial and emotional links with their children.

States have a remarkable opportunity to continue this progress and to take on broader challenges facing poor families. They have an unprecedented set of choices about what services to provide and which families to serve. They have billions of dollars for new and expanded programs. The economy is strong and the public supports continued progress. The opportunity to transform their family assistance programs may be short-lived however. Congress has already raised the possibility of taking back some TANF money and they must revisit questions of flexibility and funding when they reauthorize TANF in 2002. No one knows what the outcome of this debate will be, but states will have stronger arguments to continue flexibility and maintain the federal investment if they continue to expand services now.

Using Flexibility --Two Sets of Choices

Under TANF, states have two basic sets of choices to make: First, what services and assistance do they want to provide? The range of available services is much broader than existed under AFDC-cash assistance, job training, child care, transportation (including vehicle leasing or purchase), job search, education (basic, vocational, and post-secondary), home visits, family counseling, refundable earned income tax credits, wage subsidies to employers that hire former recipients, job coaching for recipients who get jobs and whatever else states consider important to assist needy families. States can also establish programs such as teen pregnancy prevention and supporting visitation arrangements for non-custodial parents under the third and fourth purposes of the federal TANF law.

Second, which families do they want to serve? The key concept here for most services is the idea of "needy family." The federal law allows states to spend federal and state money in the TANF program on needy families-either to provide assistance to "needy families" or to help "needy parents" become economically independent. States define who qualifies as a needy family and they can use different income standards to determine eligibility for different services. States can have one standard for cash assistance, a different one for job training and transportation assistance, a third for home visit programs, and yet another for child welfare services to children at risk of abuse and neglect. They can also define non-custodial parents as "needy parents" if they want to provide employment training and parenting skills. Federal guidance has made clear that they will accept definitions of "needy families" that include incomes up to 200 percent of the poverty level--$27,760 for a family of three in 1999. What is more, federal officials say they will not require extensive verification procedures for families to qualify-simple verbal or written statements of income will be considered sufficient for virtually all non-cash programs.

State and Federal Welfare Money

States are in a strong position to develop and implement new programs responding to these challenges and opportunities. Under the TANF program, they have broad flexibility. And they have money. Because of caseload declines, states have resources-several billion dollars -- that would have been spent on cash assistance but now can be invested in other ways to serve poor families.

States' welfare resources come from federal and state funds. The federal block grant gives states more than $16 billion a year. Each state's share of the federal money is based on its welfare spending in FY 1994, when caseloads and spending were high. States can only draw the money down by spending it. Money that the state does not spend in a given year still belongs to the state, but it remains in the federal treasury. States can spend it in later years, but after October 1, 1999, they can use these carryover funds it only for cash assistance. (This may not be difficult to deal with as states can use the previous years' funds to pay cash assistance and the current year's block grant for other purposes.) States are entitled to the full block grant amount as long as they meet the maintenance of effort (MOE) requirement. They must spend at least 80% of what they spent in FY 1994 (or 75% if they meet the federal work participation requirements). States have broad flexibility, but different regulations apply to the state and federal money, so it is often useful to think separately about state MOE and federal TANF funds.

TANF Dollars

States can use TANF block grant dollars in a wide range of programs as long as the services and assistance address the four purposes of TANF:

to provide assistance to needy families so that children may be cared for in their own homes or in the homes of relatives

to end the dependence of needy parents on government benefits by promoting job preparation, work and marriage

to prevent and reduce the incidence of out-of-wedlock pregnancies and establish annual numerical goals for preventing and reducing the incidence of these pregnancies;

to encourage the formation and maintenance of two-parent families.

These purposes are the foundation of TANF and the flexibility of the program. Both federal and state spending must address these purposes. But these purposes, particularly the first one, allow for a wide variety of services and programs to help low-income parents and their children. And federal officials are encouraging states to interpret these purposes broadly. States may use TANF (and state MOE) money for services "reasonably calculated to accomplish [a] purpose." There are a few restrictions that limit the services the programs that states can develop, but the basic principle is that states can use these resources to fund services that strengthen low-income families and help their children.

Spending on the first two purposes must be targeted on "needy" families or parents, but states define eligibility. They determine the income level that qualifies as "needy" and they can define different income levels for particular services if they choose. Nothing in the welfare statue prohibits a state from setting different eligibility for different services funded by TANF.

The Administration for Children and Families (ACF) in the federal Department of Health and Human Services has issued guidance on allowable services under TANF, Helping Families Achieve Self-Sufficiency: A Guide on Funding Services for Children and Families through the TANF Program. The purpose of the Guide is "to promote creative thinking about the potential services, supports, and activities that States might adopt to further the purposes of the TANF program." It truly is a new era: federal officials are urging states to use federal welfare money creatively. The Guide points to several appropriate uses of TANF and state welfare money-five pages worth, focusing attention on innovative ways states can use this money. It demonstrates the range of services that states can develop under the TANF purposes.

Spending for the third and fourth purposes is not restricted by the "needy families" provision, so state programs serving those purposes do not have to be targeted to families based on income eligibility. States can use federal TANF money to offer teen pregnancy prevention programs in their schools or in community organizations without having to worry about which teens are eligible. And TANF spending for this purpose does not have to be limited to abstinence-only programs.

One of the most advantageous parts of the new regulations makes it clear that states can provide a wide range of services to families that have left welfare for work without affecting these families' TANF time clocks. States can also provide similar services to working poor families. The regulations define "assistance" fairly narrowly-essentially provision of basic needs such as cash assistance and housing subsidies that go on for more than four months. Only this kind of assistance triggers the time clock and inclusion in the work participation rate calculation and detailed data reporting requirements. Services such as child care and transportation assistance to an eligible family where a parent is working do not count as assistance.

In addition, states can transfer up to 30% of their TANF funds to the Child Care and Development Block Grant, Social Services Block Grant (SSBG) and as state match for the new Job Access and Reverse Commute Grant program. States can transfer up to 30% of the fund directly into the Child Care and Development Block Grant. Another option for states is to transfer 10% of the TANF funds to the SSBG, provided that the funds must be used for services to children and families below 200% of poverty. (Beginning in 2001, transfers to SSBG are limited to 4.25%) Similarly, states can use TANF transfer funds (within the 30% limit) to fund transportation initiatives for current, former, or at-risk welfare recipients under the Job Access and Reverse Commute program. Programs and services funded by dollars transferred from TANF are not subject to federal TANF restrictions such as time limits and work requirements and are not included in work participation rates.

There are some restrictions on TANF dollars. Only 15 percent can be spent on administrative costs. (Spending on information technology and computers needed for tracking and monitoring is excluded from that limit.) States are prohibited from using TANF to fund the Medicaid program and to fund "medical" services. However, TANF can be used for "non-medical" services that support medical treatment for welfare recipients such as screening for substance abuse or counseling for domestic violence victims by non-medical personnel.

Remaining Challenges in Welfare

Welfare programs have gone through unprecedented change-reduced caseloads with most recipients leaving welfare for work. Several key challenges remain:

States have expanded support services such as job training, child care and transportation, but gaps still remain. In many areas, welfare recipients and other poor parents do not have access to these services when and where they need it. Many states need to expand night-time and weekend child care as well as sick child and infant services. And public transit is not available in many areas, so practical solutions to transportation often involve vehicle purchase and leasing programs.
Most of those recipients who are most work-ready have already left the welfare rolls. Recipients who are still on welfare have greater barriers to finding jobs-substance abuse, learning disabilities, domestic violence, limited work experience and mental and physical disabilities. October 1999 marks the beginning of the fourth year of the TANF program, so the five-year federal time limit raises the stakes of getting effective programs in place for these recipients.
Many recipients have left cash assistance for jobs. But these former recipients often need help keeping their jobs or finding new ones. Job coaches and hotline backup services for child care and transportation show promise for helping new employees keep jobs. And most former recipients have jobs that pay only slightly above minimum wage. They need education and training programs to help them get better jobs that will enable them to support their families without cash assistance.

Although jobs are available in most places, recipients looking for work in many rural areas and city centers struggle to find job openings. States need to develop economic and community development programs to create more entry-level jobs in these areas. And transportation options need to be developed to increase the accessibility of existing jobs.

Many recipients are leaving welfare without a job or other apparent means of supporting their families. Safety net programs can identify families at risk and provide services to protect the wellbeing of children in those families.

States need to prepare for an economic downturn. The strong economy that exists in most states will not continue indefinitely. States should designate a reserve fund to pay for the additional benefits and services that will come when the economy declines and caseloads increase. They should also determine how to best invest remaining funds in programs that will reduce the effects of that downturn by increasing training and targeting jobs which are less susceptible to a poor economy.

State Maintenance of Effort

To receive their full federal block grant each year, states must spend their own money to meet a mandated maintenance of effort (MOE) requirement--80 percent of state dollars spent in FY 1994, or 75 percent for states that meet both the all family and the higher two-parent family work participation rates. (In FY 1998, all states met the all family rate, but 14 states fell short of the two-parent family rate.)

MOE spending is not limited to spending by the state TANF program. Spending in other programs, such as community colleges, departments of labor, and health agencies, can also count toward the state MOE. (However, states cannot use Medicaid spending as MOE.) States must ensure that funds are spent on eligible families. Eligible families include at least one child living with a parent or other adult caretaker relative (or a pregnant woman) who are financially eligible according to the state-determined standard for the service or benefit involved. Services and benefits must be reasonably calculated to accomplish at least one of the purposes of TANF. In addition, spending qualifies as MOE if it would have been counted as a matching payment under AFDC or a related program.

There are two key restrictions on whether state spending can count as MOE. First, spending outside the TANF program must meet the "new spending test." The new federal regulations specify that if the program existed in 1995, the state can count only additional spending as MOE. If a home visit program was budgeted for $2 million in 1995, then the state could count any spending above $2 million dollars on TANF eligible families for its MOE. Note that the 1995 spending base is not limited to those families who would have been eligible for TANF. It includes all spending for the program. If the home visit program was new (did not exist in 1995) or a different home visit program is established, all spending in that program can count toward the MOE. The new spending test does not apply to TANF dollars.

Second, states cannot count as MOE spending on public education programs that are available generally. Federal officials will look particularly hard at any MOE spending in K-12 education to determine if the programs are limited to TANF families and are not generally available to students, even if services for non-TANF eligible students come from funds not counted as MOE.

State MOE funds can be used in three different ways:

State dollars commingled with federal TANF dollars essentially count like federal dollars and take on the restrictions of federal dollars-time limits, work participation rates and the restriction on medical spending.

Segregated state money within the TANF program does not count as federal dollars. Segregating state money gives states flexibility with time limits, teen parent restrictions and spending for medical services such as medical substance abuse treatment. If a state wanted to pay benefits to more than 20% of their families for more than five years, they could do so if they used only state money. Even before the five-year limit, states can pay benefits out of state money and avoid running the federal time clock for those families. Illinois does so for families who are working at least the federally required number of hours. All families in the TANF program, regardless of whether federal money is being used to pay their benefits, come under the work participation rate requirement.

States can also set up separate state programs. These programs are not subject to the general TANF requirements-time limits, child support cooperation, work participation rates and data reporting. Guidance issued in 1997 cast considerable doubt on separate programs. Federal officials were suspicious they would be used to avoid work participation rates and sharing child support recoupment. The new regulations reflect increased federal trust of state programs, so states can set up separate programs without excluding themselves from penalty relief. Several states have established separate programs for recipients going to college programs. Some states have set up separate state programs for two parent families because of the difficulty of meeting two-parent work participation rates in the TANF program.

States need to pay some attention to the restrictions on how they can spend federal TANF funds and how they can spend state MOE. For instance, they cannot use TANF for medical services, such as substance abuse treatment by a doctor, but they can use state MOE for that. And they can use state MOE only on eligible families, so they could not use it to provide a school-wide teen pregnancy prevention course, but they could offer this course with TANF money. Someone in the state needs to know these rules and be able to help structure programs so they comply with the rules. But the flexibility is there. These spending rules do not limit what can be done-the services states can offer and the families who states can make eligible.

AVAILABLE MONEY--FOR NOW

In FY 1998, states spent $9.9 billion of the $14.8 billion in federal money (67%) they had available for TANF after their transfers to child care and the social security block grant. (An additional $2.25 billion was obligated for future spending, but in many states much of this money was still available for new programs.) Reports for FY 1999 are following a similar pattern. Most states have significant amounts of federal TANF money that they are not currently spending. While state policymakers consider these funds as a reserve for an economic downturn, few states have developed plans about how to structure that reserve. Instead the "reserve fund" is simply the money that is not spent.

States may be at risk of losing this money. Congress looks at the growing balance of unspent funds in welfare and thinks that states do not need all of the TANF funds for welfare. A proposal to cut TANF passed the House of Representatives as part of the FY99 budget bill, but was defeated in the Senate by strong state objections. House budgeters have again proposed cuts in the FY2000 budget and state officials are again protesting strongly.. As the amount of unspent TANF funds grows, the threat to the federal investment builds. And Congress will have to revisit questions about funding levels when they debate TANF reauthorization in 2002. The more states do now, the better their arguments when reauthorization is considered.

The average state is spending about 75% of the money they have for welfare each year. These states have now built up substantial reserves. Current money for welfare (each year's block grant and state MOE) can fund a 25 to 30% increase in caseload without any program changes. With that protection against increased costs, states can use their existing reserves for investments to move more recipients into jobs and to provide broader supports for low-income families. These investments should also lessen the effects of an economic downturn and reduce the draw on the reserve fund when one comes.

Legislators also need to ensure that their agencies are actually spending appropriated funds. In many states, legislatures appropriated nearly the full block grant and state MOE. Yet some welfare agencies have been slow to implement new programs or spend money on designated services. Agency officials in many states have focused almost exclusively on work-getting recipients off welfare and getting current recipients into work activities. They did not take advantage of alternative placements, such as vocational training or post-secondary education. This strategy made sense in the early days of TANF when we did not know how hard it would be to meet work participation rates. But now almost every state has flexibility because of the caseload declines. Counting the caseload reduction credit has made it easier for states to meet their all family work participation rates. They can put recipients into training and educational tracks or intensive services to treat substance abuse or learning disabilities without risking penalties for not meeting the work participation rates. The federal regulations and two years of experience make it easier to determine the caseload credit a state will receive. Arkansas has set up a program to allow several hundred recipients go to vocational training and college while working only 15 hours a week. The statute allows the agency to increase the hours to the federal minimum if the state risks falling short of the all family rate. It will be critical for legislatures to maintain an active oversight role to examine agency programs and spending to ensure their intentions are carried through.

USING FLEXIBILITY

TANF starts with the assumption of flexibility-states deciding what their programs should look like and what services they want to offer low-income families. Unlike the old AFDC program, the TANF law and regulations do not define what is considered allowable uses of TANF and MOE funds. Instead they set out broad purposes and allow states to spend welfare money on services and programs reasonably calculated to accomplish those purposes. While states sought this flexibility in the 1996 law, this has been a stumbling block for some states. States do not need permission to develop new ideas, benefits and services. TANF encourages states to rethink the kinds of services they can provide to low-income families, including families that are not receiving cash assistance and families that have left cash assistance. The starting point is simple: If a state wants to provide a new or expanded service or benefit to a low-income family, they can use federal TANF money and/or state MOE funds to do it. Policymakers can focus on developing good programs that use the flexibility that the federal rules allow under the broad TANF purposes.

States now have flexibility beyond anything they have ever experienced in welfare.

Some states have invested their resources aggressively in new services supporting work and children's wellbeing in low-income families and in programs designed to reduce teen pregnancy and support two-parent families. All states are looking for new ideas on how to use their TANF resources. There is no single checklist to which states can refer--now more than ever they must tap into ideas from surrounding states and from federal officials encouraging state innovation. Every year, NCSL collects illustrations of creative state programs. The following are selected examples:

Post Employment Services-Arkansas and Tennessee provided intensive case management services to former recipients to make sure they can keep jobs once the get them. They have developed mentoring programs to provide both emotional support and positive reinforcement for welfare recipients who have recently entered the work force. Mentors provide guidance with such issues as time management, balancing commitments at work and home, financial budgeting, professional relationships and work ethics. Tennessee and Maryland have developed hot lines to help handle crisis for newly employed recipients. Hot line operators can make service referrals or act as mediators between recipient and employers.

Teenage pregnancy prevention-Develops a strategy focused on reducing teenage pregnancy. Georgia, Iowa, Louisiana, Minnesota, North Carolina, and Oklahoma are using welfare dollars to fund programs. Minnesota and Oklahoma are also funding abstinence education initiatives.

Tax credit for low-income families-Wisconsin provides a refundable state earned income tax credit for working families who qualify.

Substance abuse treatment-Allows non-medical substance abuse treatment for welfare recipients using MOE dollars. Oregon developed a substance abuse treatment program through local community colleges. North Carolina placed substance abuse professionals in county offices to help identify clients with substance abuse problems. Extends the state employee assistance program to working recipients enabling access to treatment services. Michigan has instituted a pilot project in five counties where all applicants and recipients are subject to drug tests. Persons who test positive will be assigned to treatment programs.

Domestic Violence Training for Caseworkers-California provides funding to a university to develop a domestic violence training curriculum to train staff serving welfare recipients.

Educational Accounts-Funds special accounts to help give former recipients or their children access to post-secondary education. In Florida, accounts are for children of recipients. Parents can "earn" money for their child's education by becoming and staying employed. Oregon requires employers and the department to invest $1 for every hour a participant works in a subsidized job. Families can access accounts after they have left welfare and been employed for 6 months. Wisconsin appropriated $1 million to provide $500 for additional training to former recipients who have been employed for 9 month who can provide a match

Services for Low-Income Fathers-Programs to help low-income fathers pay child support and reconnect with their children through job training, employment counseling, life skills management and peer support. Arizona, California, Florida, Iowa, North Carolina, Ohio, Wisconsin and West Virginia have targeted welfare dollars on services for low-income fathers.

Micro-Enterprise-Helps certain recipients become entrepreneurs by developing a business. Arizona helps those in rural communities develop businesses and assists in conducting market analyses for selected communities, establishing projects in communities that match skills to needs and developing financial resources. West Virginia uses funds to promote micro-enterprises.

Women's Programs through Department of Corrections-California offers programs for women with children who are in prison, released from prison and as an alternative to prison. Services include residential treatment for women offenders and their children after being released from prison and a 12-month aftercare program as an alternative to serving prison time.

Literacy and Reading Program for Children-Ohio developed a specialized program for children to enhance reading skills and literacy using welfare dollars.

Safety Net Services-Connecticut and New York provide services and vouchers to families who have lost eligibility for welfare either through time limits or sanctions.

Now is the time for states to develop new programs and services to respond to the remaining challenges of welfare reform. Most states have substantial TANF reserves and the new federal regulations broaden and clarify states' flexibility. States can replace the limited cash assistance programs of AFDC with a variety of services to help low-income families with children. This opportunity may end with TANF reauthorization in 2002. And the best way to maintain flexibility after 2002 is to use it assertively now.

For further information contact Sheri Steisel or Lee Posey in the D.C. Office (202) 624-5400 and Jack Tweedie in the Denver Office (303) 830-2200.

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