The 2020-21 May Revision

CalWORKs Caseload-Driven Costs in the 2020‑21 May Revision

The 2020‑21 May Revision includes unprecedented assumptions concerning California Work Opportunity and Responsibility to Kids (CalWORKs) caseload and associated costs. In this post, we describe these assumptions, assess them in light of recent data and historical trends, and recommend an alternative set of assumptions.

Background

CalWORKs Provides Cash Assistance and Employment Services to Low-Income Families. To qualify for CalWORKs, families must have one or more children and generally earn no more than about 80 percent of the federal poverty level. Once qualified, adults generally are limited to a total of 48 months of cash assistance. After adults have timed out, their children remain eligible for cash assistance until their 18^th birthdays. Cash grants generally are adjusted for family size and income, such that larger families and families with less income receive larger grants than smaller families and families with more income.

Program Costs Largely Are Driven by Underlying Caseload. CalWORKs is an entitlement program, meaning all eligible families receive cash assistance regardless of how much funding is appropriated in the state budget. Consequently, program costs typically increase in proportion to increased caseload.

Historically, CalWORKs Caseload Increases Follow Economic Downturns. During economic downturns, many households lose jobs and other sources of income. Some of these households will enroll in CalWORKs. Historically, families have enrolled in CalWORKs after exhausting other sources of economic support like unemployment benefits. Program caseload reached its all-time high (about 600,000) in 2010‑11 following the Great Recession, and mostly declined as the economy improved over the next decade (to about 385,000 in 2018‑19).

Governor’s Proposal

Administration Proposes an Unprecedented Increase in CalWORKs Caseload and Funding. Figure 1 compares the administration’s proposed CalWORKs budget by fund source in both the January budget and May Revision. Figure 2 shows this budget by expenditure category. Both the proposed year-over-year increase to CalWORKs funding ($3.2 billion) and proposed 2020‑21 total level of program funding ($9 billion) are the highest in the program’s 22-year history.

Proposed Funding Increase Primarily Is Driven by Estimated Caseload Increase. As a result of the public health and economic crisis brought on by coronavirus disease 2019 (COVID-19), the administration projects CalWORKs caseload to average 724,000 cases per month in 2020‑21, or about 25 percent above the previous all-time high and more than double the amount projected in the January budget. This caseload increase (along with a smaller increase projected for 2019‑20) accounts for the increase in total program costs in the May Revision. We understand the administration’s estimate is based on how they expect the caseload to grow based on recent CalWORKs applications and jobless claims.

Administration Assumes Relatively Low Utilization of Employment Services and Child Care in 2020‑21. The administration assumes that new CalWORKs cases will largely be composed of the recently unemployed, and therefore will already be work-ready and require less-intensive employment services than other CalWORKs households. The administration further assumes that child care center closures and stay-at-home orders related to COVID-19 will affect the ability of households to obtain child care, further suppressing utilization. Because of this, the May Revision assumes a lower cost per case for employment services and child care for the new cases.

Increased Funding Largely Covered by Reserves, Federal Relief Funding. Relative to the January budget, the administration’s May Revision projects $485 million of additional General Fund cost pressure in 2019‑20 and $3 billion in 2020‑21. The administration proposes covering most of these costs using a mix of funding from the federal Coronavirus Relief Fund ($2.6 billion over the two years) and the state’s Safety Net Reserve ($450 million in 2020‑21).

Assessment

Historically, CalWORKs Caseload Lags Unemployment Trends by a Year or More. As noted above, CalWORKs caseload reached its all-time high in 2010‑11, whereas both initial jobless claims and the unemployment rate peaked in 2009‑10. This pattern, by which CalWORKs caseload follows jobless trends on a long lag, has occurred throughout the program’s history, including not only the Great Recession, but also the recession of the early 2000’s, the economic expansion between those two recessions, and the most recent economic expansion. One important reason for this lag is that recently unemployed CalWORKs applicants generally are required to apply for unemployment insurance (UI) before they can qualify for cash assistance. The typical weekly benefit for a Californian on UI is about $320, nearly equal to the maximum income allowed for a CalWORKs family of three. Consequently, households may choose not to apply for CalWORKs at least until their UI benefits expire, typically after about six months.

Current Economic Situation Has Few Precedents… The current COVID-19 recession is unique to modern history in both its extent and speed. Both the unemployment rate and UI caseload reached historic highs less than two months after the introduction of stay-at-home orders. The lack of historic precedents for such a large and quick economic downturn complicates any effort to forecast secondary effects such as the impact on CalWORKs caseload. Further compounding these challenges, neither the administration nor our office has seen CalWORKs caseload data more current than February 2020, before the initial wave of COVID-19-related unemployment.

...But Expansion of Unemployment Benefits Provides Important Buffer for CalWORKs Caseload Growth. An important consideration for any CalWORKs forecast is the role of UI benefits. As noted above, UI benefits contribute to the long lags between initial jobless claims and increased CalWORKs caseload that the state experienced in previous recessions. Recent state and federal actions have expanded UI benefits in two important ways. First, all UI recipients are entitled to receive $600 per week above their traditional UI benefit through July 31, 2020. Although these additional dollars are excluded when calculating CalWORKs grant levels, we expect them to nevertheless impact recipients’ interest in applying for CalWORKs, as the $600 weekly benefit far exceeds the maximum CalWORKs weekly benefit for a family of three (about $245). Second, the time limit on traditional UI benefits has been extended from 26 to 39 weeks. Again, we expect this to impact CalWORKs caseload as traditional UI benefits render many households ineligible for CalWORKs. (The administration has indicated to us that they did not explicitly account for the effects of expanded UI benefits in formulating their caseload projections.)

Administration Assumes Almost No Lag Between Jobless Claims and CalWORKs Caseload. In contrast to the historical data, and in spite of recent increases to UI benefits, the administration assumes CalWORKs caseload will grow immediately alongside initial jobless claims. The administration projects CalWORKs will nearly equal its previous all-time high in June 2020, just two months after the first wave of COVID-19 unemployment claims.

Most Recent Data Suggests Caseload Is Lower Than Administration Estimates. Although the most recent CalWORKs caseload data are from February 2020, the administration has shared the total number of applications for CalWORKs through mid-May. These data suggest to us that CalWORKs caseload is currently below the administration’s 2019‑20 projections. Specifically, the administration projects CalWORKs added 125,514 cases in March and April, but reports having received 78,837 applications. So far in May, applications have come in not only below the administration’s projections but also below the number of applications received during May 2019.

Rationale for Assuming Lower Employment Services Utilization Is Unclear. We understand that the administration assumes that since the new CalWORKs cases likely will be recently unemployed, they will therefore require less intensive employment services. In contrast, counties and other stakeholders have responded that many of these cases will come from industries (such as the hospitality sector) which may be particularly slow to recover from the current recession, and these individuals will require intensive support to find employment in a new field. Both of these arguments have some intuitive appeal, however, historical data suggests utilization is unlikely to fall as much as the administration assumes. During the Great Recession, employment services utilization declined only modestly, and then only in response to deliberate policy decisions to cut back on these services.

In Our Spring Fiscal Outlook, Our Office Projected Substantially Lower Caseload Growth in 2020‑21… As we explained in our analysis of the administration’s January budget proposal, our office projects CalWORKs caseload using three factors: (1) current economic conditions, (2) economic conditions over the last two years, and (3) the number of Californians ages 0 to 18. For our Spring Fiscal Outlook—which we released just prior to the release of the May Revision—our model projected CalWORKs caseload would average about 375,000 in 2019‑20 (up from the 363,000 cases the administration estimated in January) and about 420,000 in 2020‑21 (up from the 358,000 the administration estimated in January). (These estimates reflect our L-shaped recession scenario.) These figures are about 37,000 (9 percent) and 304,000 (42 percent) lower than the administration's caseload projections, respectively. Figure 3 illustrates how we estimate that these caseload differences translate into differences in overall program spending. This is a somewhat rough estimate given the available data, and exact savings associated with our caseload estimate would have to be determined by the Department of Social Services.

(In our May estimate we neither reduced the Stage 1 Regional Market Rate nor assumed, as the administration has, that new entrants will utilize employment services and child care at a lower rate. The difference between our estimate and the administration's would be larger if we adopted the administration's approach on either of these two issues.)

…But Also Estimates Continued, Larger Caseloads in the Outyears. Because our model anticipates that (as in previous recessions) CalWORKs caseload will follow initial jobless claims on a long lag, it projects large caseload increases in both 2021‑22 (when we project 440,000 cases) and 2022‑23 (500,000 cases) with commensurate estimated increases in cost (the projected year-to-year increase in CalWORKs is about $250 million in 2021‑22 and $600 million in 2022‑23). (That our caseload peak in the outyears is lower than the administration’s estimate for 2020‑21 mostly reflects our differing projections of the unemployment rate.)

Recommendation

Adopt a Lower Estimate of CalWORKs Caseload With Some Room for Uncertainty. The administration’s caseload estimate appears to be overstated for 2019‑20 and 2020‑21. We recommend the Legislature adopt a lower CalWORKs caseload projection in its budget package. We continue to consider the estimate included in our Spring Fiscal Outlook reasonable given the available program and economic data. However, given the unprecedented nature of current events, the Legislature may wish to be especially conservative when adopting any caseload estimate. This could be accomplished by choosing a reasonable projection and then adding a “buffer” as a precaution against anomalously large caseload increases. Based on a sensitivity analysis of our CalWORKs model, we believe a reasonable buffer on our caseload forecast is about 50,000 cases—bringing average monthly caseload to 470,000 in 2020‑21. We estimate that adding these cases to our projected caseload would increase estimated costs by about $600 million in the budget year, resulting in total estimated savings of about $2.3 billion in 2020‑21 relative to the May Revision.

Use Existing Funding Methodology for Employment Services and Child Care. As the administration has not provided a compelling rationale for its employment services utilization estimate, we recommend the Legislature adopt a more conservative approach and use the existing methodology to fund employment services and child care. (Note that the savings presented in Figure 3 already assumes the Legislature adopts this recommendation.)

Consider Building in Safeguards in the Event Larger Caseload Materializes. Given the enormous uncertainty surrounding any caseload projection in this recession, even a reasonably conservative caseload estimate (for example, our projection plus 50,000 cases) could potentially fall short of the final target. In the event of an unanticipated caseload increase, existing law allows CalWORKs cash assistance expenditures to increase but makes no such allowance for employment services and child care. To ensure counties are able to adequately serve all CalWORKs families, the Legislature may wish to consider options such as setting aside additional employment services and child care funding to be appropriated to counties, upon approval of the Legislature, in the event caseload surpasses specific thresholds.

Delay Use of Social Safety Net Reserve, or Use on Other Programs. If the Legislature adopts a caseload projection nearer to our projection than to the May Revision, they will not likely require the full $450 million the administration proposes to draw down from the Safety Net Reserve. Rather, we recommend either saving the reserve balance to cover unanticipated or future caseload increases or using it to cover expenses in Medi-Cal.

Develop Alternative Plan for Federal Relief Funding. Again, if the Legislature adopts a notably lower caseload projection than the administration’s, it will not likely require the full $2.6 billion the administration proposes to spend on CalWORKs from the federal Coronavirus Relief Fund. Consequently, we recommend the Legislature consider alternative options for its use that are consistent with federal guidance.