Social welfare programs strive to improve the well-being of needy and vulnerable populations. Government spending on social welfare programs, although not a guarantee that programs will meet this goal, nonetheless constitutes important tangible evidence of state policies and commitment to social welfare programs. Certainly, a low level of state social welfare spending in poor states relative to a high level of need would constitute cause for concern among policymakers.
States vary enormously in their need for social welfare services and their capacity to finance the services. Presumably, states that have higher proportions of individuals living in poverty have a greater need for programs that provide cash benefits, health care, employment supports, and other services. Often, however, these states bring in fewer tax revenues.
In addition, worsening economic conditions increase the need for these types of services but reduce tax revenue to fund them. Entitlement programs, which provide pre-established benefit levels to all individuals meeting the eligibility criteria, provide some protection to ensure increased funding when the economy worsens. States determine the benefit levels and eligibility criteria based, in part, on the long-term fiscal capacity of the state. Nevertheless, programs that include a state match, such as Medicaid, can place great stress on state budgets as they expand to satisfy needs while state revenues are declining.
This study, produced for the U.S. Department of Health and Human Services (HHS) Office of the Assistance Secretary for Planning and Evaluation (ASPE) by The Lewin Group and the Rockefeller Institute of Government, examines the extent to which fiscal capacity affects state social welfare spending. First, we reviewed the relevant literature regarding this topic. Then, we analyzed spending patterns across the 50 states and over time using Census of Governments (Census) data. Finally, we conducted site visits to six low fiscal capacity states and used qualitative and quantitative information to describe the differences among these states in their spending on social programs.
This report is organized into four major sections plus two appendixes. Section I, Introduction, presents information on the project, policy context, research questions, and a brief literature review. Section II, Approach, describes our methodology for analyzing the spending data as well as our methodology for selecting the six states for field visits and the data collection and analysis. Section III, Findings and Results, lays out the detailed findings from primarily the cross-state spending analysis. Section IV, A Closer Look at Poor States, describes the integrated analysis using the results from the Census data spending analysis and the quantitative and qualitative data collected in the field visits. Lastly, Section V, Final Observations and Conclusions, summarizes and comments on the projects major findings. The two appendixes provide additional information on the econometric modeling (Appendix A) and the six states visited (Appendix B).
A. Policy Context
The fact that states spend differing amounts per capita on social welfare is well known; the extent to which these differences relate to differences in state fiscal capacity is less understood. The federal government has long played an important role in offsetting state fiscal disparities. However, significant changes have occurred in federal grant programs and eligibility requirements that impact differentially poor and rich states. Other factors in the state environment in addition to fiscal capacity and federal grants influence state spending, including various determinants of state need for social welfare spending such as poverty and unemployment. Finally, political and institutional factors, including the state budget process, affect state spending.
The federal government can offset state fiscal disparities through federal reimbursement for Medicaid and foster care under a formula more generous to low-income states than to high-income states. In addition, the federally funded Supplemental Security Income (SSI), Food Stamps, and Earned Income Tax Credit (EITC) programs provide assistance to all eligible individuals and require no state funds.2 Thus, a state with a relatively high share of low-income individuals presumably has a high share of residents receiving federal benefits, regardless of the states low-fiscal capacity.
Significant changes in federal cash assistance have also occurred. In 1996, the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) transferred some of the responsibility for social programs, and the fiscal risk, from the federal government to states. Under the earlier AFDC program, states and the federal government shared the risk of increased entitlement welfare spending. Under the TANF program, which replaced AFDC, states bear the full cost of spending increases above the value of their federal block grant and reap the full savings of spending reductions as long as maintenance-of-effort (MOE) and certain other requirements are satisfied. In some ways, these reforms reduced the incentives for poorer states to increase spending on social welfare programs, even if their needs increased, because their increased spending is not matched with increases in federal support.
Around this time, the Medicaid program3 was experiencing explosive growth, placing more stress on state budgets. In fact, the Medicaid program increased nearly 150 percent, from $91.5 billion in 1991 to $228 billion in 2001 (Snell, Eckl, & Williams, 2003). Several factors contributed to the increase in expenditures, including the early 1990s recession, which increased the number of families eligible for Medicaid; extensions in the Medicaid program to cover more of the uninsured, working poor; demographic trends that increased the share of enrollees who were disabled and required more medical services; and increases in the overall costs for medical services.
Some have expressed concern that spending on Medicaid will crowd out state spending on other social welfare programs, such as cash assistance (e.g., see Steuerle & Mermin, 1997; Ladenheim, 2002). Given states increased flexibility in funding cash assistance, changed incentives, and increasing Medicaid costs, understanding how fiscal capacity, especially in poorer states, might affect state policy choices about social welfare programs is important.
C. Review of Related Literature
The following literature review touches on the highlights of prior literature on trends in social welfare spending, issues in measurement of state fiscal capacity, and determinants of state and local spending on social welfare, including state fiscal capacity, need for services, and political and institutional factors.
2 The Food Stamp Program requires a state match for administrative costs.
3 Medicaid is a program that pays for medical assistance for certain individuals and families with low incomes and resources. This program became law in 1965 and is jointly funded by the Federal and State governments (including the District of Columbia and the Territories) to assist States in providing medical long-term care assistance to people who meet certain eligibility criteria. Medicaid is the largest source of funding for medical and health-related services for people with limited income. Source: <http://www.cms.hhs.gov/medicaid/>
4 Section 401 (a) of the Social Security Act says that the purpose of TANF is to increase flexibility of States in operating a program designed to: 1) Provide assistance to needy families so that children may be cared for in their own homes or in the homes of relatives; 2) End the dependence of needy parents on government benefits by promoting job preparation, work, and marriage; 3) Prevent and reduce the incidence of out-of-wedlock pregnancies and establish annual numerical goals for preventing and reducing the incidence of these pregnancies; and 4) Encourage the formation and maintenance of two-parent families.
5 Two commonly cited examples are states that impose severance and property taxes on oil, gas, and coal companies for extracting fossil fuels and states that derive large amounts of sales tax and fee revenue from a substantial tourist trade. Also, it fails to count the income of nonresident commuters (e.g., New Jersey and Connecticut residents who work in New York).
6 Tannenwald (1998) calculates each state's "fiscal comfort" by dividing its index of RTS tax capacity by its index of fiscal need. The fiscal need is based on how much is required to provide a standard level of services in the state. Tax effort is measured by the ratio of state tax collections to the taxes it would have collected under the RTS.