Legislative Analyst's Office, August 31, 1999

Budget and Policy Implications: California Meets Federal Work Participation Rates for CalWORKs in 1998

The Federal Work Participation Requirement

The federal welfare reform legislation of 1996 replaced the Aid to Families with Dependent Children (AFDC) program with the Temporary Assistance for Needy Families (TANF) block grant program. Under the TANF program, states receive a federal block grant but must meet various performance measures, including work participation. Specifically, states that fail to have specified percentages of their caseload engaged in work or some other type of work-related education, job training, or job search activity shall be penalized by reductions in their federal TANF block grant.

The required rate of participation for each FFY is based on two elements: (1) a statutory base participation rate and (2) a caseload reduction factor. Figure 1 shows the specified base participation rates for both the overall caseload and the two-parent caseload before adjusting for the respective caseload reduction factors.

Meeting the Federal Work Requirement. Federal law specifies that the rates shown in Figure 1 shall be adjusted downward to reflect the percentage reduction in the respective caseloads since FFY 1995. Thus, states can meet the work participation requirements through a combination of caseload reduction and/or increased work participation. States with higher caseload reductions will need to achieve lower levels of work participation than states with only modest caseload reductions.

Caseload Reduction Factor. The final TANF regulations, released by the U.S. Department of Health and Human Services (DHHS) in April 1999, established a framework for states to determine their caseload reduction factors. This framework (1) requires states to use previously reported figures and definitions for establishing the 1995 base year, and (2) uses a different definition of two-parent cases for purposes of estimating the caseloads in all years following the base year. The caseload reduction factors are calculated for the year prior to the year in which work participation is being monitored by DHHS. For example, the work participation calculation for FFY 1998 would employ the caseload reduction through the prior year, FFY 1997. As we discuss later, the framework has the effect of permitting states to "maximize" the amount of their caseload reductions.

Amount of Penalty. The penalty for failing to meet the specified work participation rates is up to 5 percent of the federal block grant, increasing 2 percent for each year of successive failure, to a maximum of 21 percent. California's block grant is $3.7 billion, so 1 percent is equal to $37 million. A federal penalty results in a reduction in TANF funds and a corresponding increase in a state's maintenance-of-effort spending requirement. The DHHS has discretionary authority to reduce penalties based on the degree of noncompliance.

The CalWORKs Program. In response to the federal welfare reform legislation, the California Legislature created the CalWORKs program in 1997. This program, which replaced the AFDC program, provides cash grants and welfare-to-work services to families with children whose incomes are not adequate to meet their basic needs. The program requires able-bodied adult recipients to work or engage in some type of work-related education or training activity.

California's Performance with Respect
To Work Participation Rates

To date, the DHHS has evaluated states with respect to work participation compliance in FFY 1997 and FFY 1998. Below, we review California's performance.

FFY 1997 Results

For FFY 1997, California met the participation rate for all families but failed to meet the higher rate for two-parent families.

Overall Performance. With respect to the overall rate, California attained a caseload reduction of 5.5 percent. Thus, California needed to have 19.5 percent (the 25 percent statutory base rate less the 5.5 percent caseload reduction factor) of its entire caseload engaged in work or some other work-related activity. For the entire caseload, California achieved a 20.6 percent participation rate (therefore exceeding the threshold).

Two-Parent Performance. For the two-parent caseload, California attained a caseload reduction of 7 percent. Thus, the state needed to have 68 percent (the 75 percent statutory base rate less the 7 percent caseload reduction factor) of its two-parent caseload engaged in work or some other work-related activity. For this caseload, California achieved a 24.5 percent participation ratewell below the 68 percent required rate.

Penalty for 1997. On December 30, 1998, the DHHS notified California that it was assessing a penalty of $6,964,321, based on the finding that the state failed to meet the work participation rate for two-parent families in FFY 1997. The amount of the penalty was determined as follows: according to federal law, California became subject to the work participation requirement effective July 1, 1997. So, with respect to FFY 1997 (October 1996 through September 1997), California was subject to the requirement for just one quarter of the year.

The DHHS calculated the penalty by applying the penalty rate of 5 percent to one quarter of the state's block grant ($3.7 billion). The DHHS then used its discretionary authority to reduce the penalty based on the "degree of noncompliance" by multiplying the gross penalty by 17.7 percent (the proportion of two-parent cases in our caseload).

California's Response. In February 1999, California responded to the federal penalty notification. The response (1) presented a case for "reasonable cause" for noncompliance, (2) requested a waiver of the penalty on the basis of reasonable cause, and (3) included a corrective compliance plan in the event that the DHHS did not accept the reasonable cause explanation. In July 1999, the DHHS notified California that it had accepted California's corrective compliance plan. Thus, the penalty was deferred pending the outcome of this plan. In brief, the corrective compliance plan is full implementation of the CalWORKs program, which did not begin until January 1998. Under this plan, DHHS will not impose the penalty if California is in compliance by September 2000.

FFY 1998 Results

In contrast to FFY 1997, California met both work participation rates in FFY 1998 and is now in compliance with the federal work requirements. As discussed below, the key to meeting the higher two-parent rate was the magnitude of the caseload reduction factor.

Overall Performance. With respect to the overall participation rate, California attained a caseload reduction of 12.3 percent, thus California needed to have 17.7 percent (the 30 percent statutory base rate less the 12.3 percent caseload reduction factor) of its entire caseload engaged in work or some other work-related activity. For the entire caseload, California achieved a 36.6 percent participation rate (therefore exceeding the threshold by nearly 20 percentage points).

Two-Parent Performance. For the two-parent caseload, California attained a caseload reduction of 42.3 percent. Thus the state needed to have 32.7 percent (the 75 percent statutory base rate less the 42.3 percent caseload reduction factor) of its two-parent caseload engaged in work or some other work-related activity. For this caseload, California achieved a 36.2 percent participation rate3.5 percentage points above the required rate.

The Importance of Caseload Reduction. The key to meeting the two-parent participation rate was the caseload reduction factor of 42.3 percent. California's participation rate of 36.2 percent was well below the base participation requirement of 75 percent. As discussed in the inset box on page 5, the specific federal framework for calculating the caseload reduction factor significantly benefitted California.

Comparison to Other States

For FFY 1998, all 50 states and the District of Columbia met the work participation rate for all families. Twenty-eight of the 41 states subject to the two-parent work participation requirement (including California) achieved their required two-parent rates. (Some states are not subject to the two-parent participation requirement because they (1) have no two-parent cases, (2) fund their two-parent cases in a separate state [non-TANF] program, or (3) have pre-welfare reform waivers in effect.) Figure 2 shows the performance of the eight largest states subject to the two-parent work participation rate. Among these large states, California had the second highest caseload reduction factor but the sixth highest two-parent participation rate.

Budget and Policy Implications

Meeting the federal work participation rates for FFY 1998 has significant budget and policy implications for California. These are discussed below.

Will California Continue to
Meet the Work Participation Rates?

Meeting the Overall Participation Requirement in 1999. In FFY 1998, California exceeded the required work participation threshold for all families by nearly 20 percentage points. Although, the base participation rate for all families increases from 30 percent to 35 percent in FFY 1999, this increase should be more than offset by an increase in the caseload reduction factor. Accordingly, it is very likely that California will meet the work participation rate for all families in FFY 1999.

Meeting the Two-Parent Participation Requirement in 1999. For FFY 1999, the base participation rate for two-parent families increases from 75 percent to 90 percent. This increase will be partially offset by an increase in the caseload reduction factor. California's ability to meet the two-parent participation rate will depend on (1) the magnitude of the caseload reduction factor and (2) the impact of the CalWORKs program on increasing work participation among recipients. Our analysis of available data suggests that California's participation rate in FFY 1999 will be close to the required level for two-parent families. At this time, however, we cannot say with certainty that California will be in compliance with the federal requirements.

If California were unable to meet the two-parent work participation rate in FFY 1999, the first-year penalty would be approximately $28 million (based on the current DHHS methodology) because it would be based on a full year, rather than just one quarter of the fiscal year as was the case in FFY 1997. In subsequent years, if California were unable to meet the work participation requirements, the penalty would increase by about $11 million annually for each successive year of failure.

Meeting the Work Participation Requirement in FFY 2000 and Beyond. Some states have reorganized their two-parent caseload into a separate state-funded program, in which case they are not subject to the federal work participation requirements for two-parent families. In California, the State Department of Social Services has issued a county directive indicating that it will follow this practice, effective FFY 2000 (beginning October 1999). Reorganizing the two-parent cases into this separate state-funded program is budget neutral because it is achieved by a fund shift (of state and federal monies) between the two-parent and one-parent components of the CalWORKs program.

Since the two-parent cases will be served in a nonfederal program, the only work participation requirement applicable to California will be the rate for all families. Given that in 1998 California exceeded the required rate of participation for all families by nearly 20 percentage points, we believe it is likely that the state will comply with this federal work requirement in FFY 2000 and beyond. We note, however, that a recession could have two distinct negative impacts on work participation. First, the caseload would tend to increase, resulting in an increase in the participation threshold. Second, clients are likely to experience more difficulties in finding work, which could reduce the rate of work participation for purposes of meeting the federal requirement.

Maintenance-of-Effort (MOE)

To receive the annual federal TANF block grant ($3.7 billion for California), states must meet an MOE requirement that state spending on welfare for needy families be at least 80 percent of the FFY 1994 expenditure level, which is $2.9 billion for California. The MOE requirement drops to 75 percent if a state meets the applicable work participation rates.

To date, California's CalWORKs budgets have assumed that it would be very difficult for the state to achieve the two-parent work participation rate and have therefore been based on a target of spending at the 80 percent MOE level. If California can continue to be in compliance with federal work participation requirements, it has the option of reducing state spending on CalWORKs to the 75 percent MOE level. Potentially, this could result in General Fund savings of up to $176 million. Actual savings will depend on caseloads, program costs, available federal TANF funds, and budget decisions by the Governor and Legislature concerning the CalWORKs program.

Conclusion

If California can continue to meet the federal work participation rates, the state will have greater flexibility in determining the General Fund budget for CalWORKs. Specifically, the state would be able to reduce General Fund spending to the 75 percent MOE level, resulting in a potential savings of about $176 million. This could be an issue for the Legislature when considering the 2000-01 budget.

The ability to achieve these savings will depend on various factors that affect future decisions on the size of the CalWORKs program. We note, for example, that to remain in compliance, California will need to continue to meet work participation rates for all families in subsequent years. Thus, it may be necessary for the state to continue to fully fund employment services for CalWORKs recipients in order to remain in compliance with federal work requirements. On the other hand, it is possible that future caseload declines may sufficiently reduce CalWORKs program costs, enabling the state to realize these General Fund savings while fully funding the program.