Because Medicaid spending was not cut substantially in these states and, in fact, continued to grow in most states and because spending on cash assistance programs remained essentially flat, offering few opportunities for savings, fiscal pressures during state budget crises fell mostly on non-health social services programs. This outcome was especially true because other budget pressures to maintain or increase spending in non-social welfare were strong in these states. The greatest external pressures came from education programs, which were the top priorities of elected officials in South Carolina and Louisiana and were high priorities elsewhere. However, states had some flexibility in dealing with these pressures due to two factors: the large "surpluses" in TANF spending that states had accumulated since 1997 and the wide array of programs that might be funded under TANF non-assistance.
One way in which states responded to fiscal pressures was to spend down their TANF surpluses. Most poor states were fiscally conservative in 1997 and 1998 in using their federal TANF dollars and typically spent less than three-fourths of their grants on current program needs. Their total spending grew rapidly, but the surpluses they built gave them a cushion they drew on to support their basic assistance programs in later years.
Exhibit IV-8 tracks these changes by displaying the percentage of federal TANF grants spent by states from 1998 through 2002, averaged for each quartile of state fiscal capacity. State spending of federal dollars in the poorest quartile as a percentage of states' annual grants was low in 1998, only 57 percent. All but the wealthiest quartile of states increased their spending of federal TANF funds in 1999, at least partly in response to the flexibility offered by the federal government's "non-assistance rule" (see below; also see Plein (2001)). Spending continued to grow after 1999 among states in the poorest quartile until average spending of federal TANF funds exceeded 111 percent of states' annual TANF grants in 2002. Between 2001 and 2002, when the recession began to hit most states, TANF spending increased in all quartiles, probably reflecting growing fiscal pressures due to revenue shortfalls and growing needs.
Average of TANF Spending as a Percentage of the State's Annual Grant, by State Fiscal Capacity, 1998-2002 (federal dollars only)
Carry-over funds accumulated for most states, though they were especially large among the poor states, despite the small size of their grants relative to their needy populations (Gais & Weaver, 2002). The federal TANF law required states to use their carry-over funds only for "basic assistance," or benefits to meet a family's "ongoing basic needs," such as food, clothing, and shelter or supportive services such as transportation or child care for families whose heads were unemployed (U.S. House of Representatives 2000, p. 355). Because most low fiscal capacity states had small cash assistance programs-and states tended to refrain from expanding such benefits-such states were more constrained in using their surpluses than were others. Nonetheless, the TANF surpluses relieved fiscal pressures on the states in our sample; they typically used their surpluses to fund their current basic assistance needs, thereby freeing current TANF grant funds for other, non-assistance programs.
A second source of flexibility was the wide range of services and programs that could be funded with federal TANF and required state MOE funds. Especially important was the broad definition of TANF non-assistance, which was clarified by the federal government in its rulemaking in 1999. Non-assistance could include any non-recurrent, short-term benefits, work subsidies, and supportive services to employed families. Exhibit IV-9 shows that per capita spending on non-assistance was generally lower and grew less rapidly among the six poor states when compared to the average for all states in the U.S. These differences in per capita spending on TANF non-assistance between the poorest states and other states seemed to continue the trends we noted in the Census data on state spending on non-health social services during the late 1990s. Nonetheless, TANF non-assistance spending rose in most of these states after 1999, most notably in West Virginia. Thus, even the poor states, with their relatively small TANF grants, had a new source of funding for non-health social services.
Per Capita Spending on TANF Non-assistance, Six Poor States and U.S. State Average, 1997-2002
How did the states use their flexibility under TANF to deal with their fiscal crises? And what happened to their spending on non-health social services? Considerable variation occurred among these six states, but a few generalizations applied to most.
First, we found a growing variety of programs funded with TANF dollars, as administrators and elected officials sought funding for high-priority services. Administrators viewed as critical many of these programs that otherwise faced cuts. South Carolina and West Virginia were using a growing share of their TANF grants to support child welfare programs, including protective services, foster care, emergency shelters, and others that administrators regarded as involving high stakes. TANF thus allowed these states to mitigate cuts in funding for their child welfare programs, despite large reductions in state matching funds under Title IV-E. Still, cuts occurred in South Carolina in staffing and payments for protective services, foster care, and adoption in the late 1990s and early 2000s. These cuts suggest an intriguing puzzle for fiscal federalism theory because major parts of IV-E used the same attractive open-ended match rate as Medicaid. To make room in TANF for these child welfare funding needs, which administrators viewed as involving "life and death" issues, they eliminated a number of employment services that had been funded under TANF.
The greater importance of TANF dollars in funding a wider array of programs also seemed to be pushed by drops in federal aid. For example, the nominal and constant-dollar decline in federal support for the Social Services Block Grant has left some of these states scrambling for dollars for child welfare, child care, and a number of other basic services-a deficiency that TANF non-assistance dollars seemed to address.
Other changes in the composition of TANF non-assistance spending resulted less from stress than surplus. Louisiana's large TANF surplus led the state to set up a nearly universal pre-Kindergarten (pre-K) program with TANF dollars. But even though the TANF surplus declined substantially in recent years-and although the state's transportation, child care, and employment services programs were poorly funded-the popularity of the pre-K program prevented legislators from cutting it or even requiring the program to be supported with general revenue funds. Another state noted how it drew on TANF dollars to launch a school readiness program. Several states also began to use a wider range of programs to meet their MOE requirements. Because of cuts in state programs previously included under MOE, state TANF agencies searched for current public expenditures in other agencies and public institutions that might fit within the fairly broad definition of MOE spending, even if the programs had had little or no connection with TANF in the past. Such processes led, for example, to counting several university scholarship programs as MOE dollars.34
We found, thus, an expanding range of programs supported under TANF and its MOE requirements, sometimes because money could be found nowhere else and sometimes because the programs, often educational in nature and serving a larger population, were more politically popular than programs that exclusively served the poor. We are not suggesting that this expanded range of programs represents "supplantation," or improper shifting of program funds from state to federal sources. Yet it does suggest that states have learned to exercise greater flexibility in using the block grant, just as they did after the promulgation of the non-assistance rule in 1999. Gauging the aggregate effects of these program shifts was difficult. To the extent, however, that TANF and MOE funds were redirected to support child welfare, education, and other programs, fewer funds were perhaps available for income and work supports.
Second, we found that state flexibility under TANF allowed policymakers and especially administrators to weigh and adjust programs already funded under the block grant. In general, programs were cut that served goals considered less critical or that were thought to have less immediate impacts. In most states, for example, few child care programs were cut. Child care programs were perceived in most of these states as already under-funded, yet valuable, because the child care subsidies constituted one of the few significant services with immediate and widespread importance for low-income families. These programs were also regarded as serving multiple goals. Transitional child care encouraged people to move off of cash assistance, and child care subsidies for foster parents, many of whom worked, were considered essential to the foster care program. Some discretionary cuts in child care were imposed, though since most of these states did not put large amounts of state money into their child care programs, only the two states that had put larger sums of TANF or state money into their subsidy programs in the 1990s (Arizona and Louisiana) made major reductions in their child care spending. For all these reasons, child care programs outside Arizona and Louisiana did not bear the brunt of cuts even through FY 2004.
Some programs, however, were considered less essential, though states varied in what they thought essential. Pregnancy prevention programs, fatherhood programs, parenting classes (e.g., in Mississippi, involving a charitable choice initiative), and job services contracts were often seen as inconsequential in the short-run to meet basic performance criteria and fared less well in these states. In South Carolina, for example, many job development positions and their functions were eliminated in FY 2004. There were exceptions. A TANF advisory board in West Virginia recommended the elimination of the state's "marriage bonus," a cash grant to people who wed while on assistance, but the state eventually decided to keep the provision. Also, Louisiana saw its TANF priorities as including pregnancy prevention programs. For the most part, however, TANF services were often weighed in terms of their immediate importance. In several states, agency administrators also said they used performance measures to decide which programs to cut and which to sustain-or which contracts to eliminate.
Third, we found that administrative expenses, especially staff, were often severely cut in social service agencies. South Carolina's Department of Social Services saw a 26 percent reduction in staff between FYs 2001 and 2003. Arizona has made major reductions in its human service workforce since the beginning of the decade, despite the state's large increase in Medicaid workloads after the passage of Proposition 204. Louisiana has refrained from cutting staff much in the last year, but it reduced positions in its state administered welfare system substantially in FY 2002. Plans to improve information systems were widely postponed or cancelled altogether in most of the six states. These administrative cutbacks seemed greater among poor states than among others: TANF administrative costs per capita declined 22 percent among these six states between FYs 2000 and 2002, while the average decline in all states was only 5 percent over the same period.
Administrative expenses have been reduced in other funding streams, too, or at least they have failed to keep up with caseloads. Food Stamp administrative expenses were generally split equally between the federal and state governments. But despite substantial increases in the number of households on Food Stamps in recent years, states were sometimes unwilling to pull down additional federal dollars to support Food Stamp Program (FSP) administration. As Exhibit IV-10 indicates, federal dollars for administrative expenses per FSP household recently declined. For example, although South Carolina, Mississippi, and especially Arizona have seen large increases in their Food Stamp caseloads in recent years, they have either refrained from increasing or have cut their state matches and, thus, the amounts they get from the federal government to support the program's administration.
Federal Share of State Administrative Expenses in the Food Stamp Program in the Six Poor States (dollars per FSP household)