The state hospitals provide inpatient treatment services for mentally disabled county clients, judicially committed clients, clients civilly committed as sexually violent predators, and mentally disordered offenders and mentally disabled clients transferred from the California Department of Corrections (CDC) and California Youth Authority.

The budget proposes $1.3 billion from all funds for support of DMH programs in 1998-99, which is an increase of 1.9 percent over estimated current-year expenditures. The budget proposes $570 million from the General Fund, which is an increase of $17 million or 3.1 percent above estimated current-year expenditures. This increase is primarily due to (1) increases in the Judicially Committed/Penal Code and Sexually Violent Predator populations in the state hospitals and (2) an increase in funding for managed care to reflect increased costs and additional services provided by counties.

Inflation Increase Overbudgeted

The Governor proposes a net increase of $7.3 million from the General Fund for support of the Mental Health Managed Care Program. This augmentation includes an increase in the amount budgeted to allocate among the counties, reflecting a $6.3 million cost adjustment for inpatient care based on the medical component of the U.S. Consumer Price Index (CPI). The proposed increase is calculated using the Department of Finance's planning forecast, which projects a medical CPI of 4.8 percent for 1998-99. However, the department's final forecast projects a medical CPI of 3.2 percent, which yields a $4.2 million cost adjustment. Accordingly, we recommend that the Legislature reduce the Mental Health Managed Care Program augmentation by $2.1 million.

In addition, the department collects taxes and pays benefits under the UI and DI Programs. The department collects from employers (1) their UI contributions, (2) the Employment Training Tax, and (3) employee contributions for DI. It also collects personal income tax withholdings. In addition, it pays UI and DI benefits to eligible claimants.

The budget proposes expenditures totaling $5.9 billion from various funds for support of the EDD in 1998-99. This is a decrease of $239 million, or 3.9 percent, from estimated current-year expenditures, primarily due to a decrease in projected UI and DI benefit payments and a decrease in expenditures in the Job Training Partnership Act Program. The budget proposes $23.6 million from the General Fund in 1998-99, which represents the same level of funding as in the current year.

Federal Welfare-to-Work Block Grant Program

Background

If California provides the one-third match ($181.5 million) required for the Formula Grants, the state is eligible to receive up to approximately $190 million in federal funds in FFY 98 (October 1997 through September 1998) and $173 million in FFY 99 (October 1998 through September 1999). At least 85 percent of these federal funds must be allocated to PICs, which are regional organizations created by the Job Training Partnership Act to provide employment and training services to both welfare and non-welfare recipients. The remaining "discretionary funds"--up to 15 percent-- are to be spent on projects to help long-term welfare recipients.

All Formula Grant expenditures are subject to state legislative appropriation, according to the following rules:

• Funds must Be Spent on Eligible Individuals According to the 70/30 Rule. At least 70 percent must be spent on TANF recipients on aid 30 or more months who meet two of three specified conditions, or to certain noncustodial parents. Up to 30 percent must be spent on other TANF recipients who have characteristics associated with long-term welfare dependence. Once awarded, states have three years to spend the federal funds.
• Funds Must Be Spent on Allowable Activities. These activities are: (1) community service or work experience programs; (2) job creation through public or private sector employment wage subsidies; (3) contracts with public or private providers of readiness, placement, and post-employment services; (4) job vouchers for placement, readiness, and post-employment services; or (5) job retention or support services if such services are not otherwise available.
• State Match. States shall receive $2 in Welfare-to-Work formula grants for each $1 in state matching expenditures (up to the state maximum allotment). State matching funds must be in addition to the funds spent to meet the TANF maintenance-of-effort (MOE) requirement and must be spent on eligible individuals and activities. States have three years to spend the necessary match.
• Formula for Allocating Funds to PICs. Federal law establishes three factors for states to use when allocating funds to their local PICs: (1) excess poverty (number of persons in poverty above a 7.5 percent threshold), (2) adults receiving TANF for 30 months or more ("long-term TANF recipients"), and (3) the number of unemployed persons. The first factor (excess poverty) must be weighted at least 50 percent. States may use excess poverty as the sole factor or may combine it with one or both of the other two factors.

Governor's Proposal

• State Match. The state will provide the first part of the required match by allocating to counties $95 million from the General Fund for the California Work Opportunity and Responsibility to Kids (CalWORKs) program employment services. As required by federal law, this is above the state MOE for the TANF (CalWORKs) program. The remaining $86.5 million in required matching funds are proposed to come from future expenditures between July 1, 1999 and September 30, 2001, as permitted by federal regulations.
• Formula Grant Allocation to PICs. Following the award of federal funds (probably in April or May of 1998), the budget proposes to allocate the required 85 percent of the federal funds to the PICs--specifically, $162 million in 1997-98 and $147 million in 1998-99. The PICs will have three years to spend the funds on eligible individuals and activities pursuant to plans that they are required to submit to the EDD. These local plans, developed by the PICs, must be approved by the local county welfare director.
• Allocation Formula. The proposed formula for allocating funds to the PICs assigns (1) a weight of 55 percent to the number of persons in poverty above the 7.5 percent threshold, (2) a weight of 30 percent to the number of adults receiving TANF for at least 30 months, and (3) a weight of 15 percent to the number of unemployed individuals.
• Local Competitive Grants. With most of the remaining 15 percent of the Formula Grants ($50.5 million), the budget proposes to create a local competitive grant program. Cities, counties, community-based organizations, and faith-based organizations would be eligible to apply for these grants based on their proposals for assisting hard-to-employ CalWORKs recipients.
• Administration. The budget proposes to spend $4 million of the federal funds for state administration of the program, by allocating $1 million in 1998-99 and $1 million annually in the following three years. The PICs may spend no more than 13 percent of their Formula Grant allocation on administration.

Legislature Has Options

Use of Matching Funds. In order to qualify as a match for the Welfare-to-Work block grants, state spending must meet two tests. The first test is that total state spending on TANF must exceed the TANF MOE requirement. This amount can be thought of as the TANF "overmatch." This TANF overmatch will count toward the Welfare-to-Work match if the second test is satisfied. The second test is that an amount of spending equal to the TANF overmatch must be identified--out of either the overmatch itself or the baseline spending for CalWORKs/TANF services--which meets the federal criteria for expenditures of the Welfare-to-Work grant.

We note that the budget proposal to spend $95 million as the state match does not have to be spent for employment services, as proposed in the budget. The budget proposal would fully fund the employment services component of CalWORKs without the $95 million, based on the budget's caseload and cost assumptions. Thus, the Legislature might wish to consider alternative uses for these funds, which could include grants, employment services for non-custodial parents who have child support obligations, CalWORKs job creation programs, or allocating the funds to the PICs. Under this last option, the funds could be used as a state match on the condition that the PICs choose to spend the federal money in a manner consistent with legislative priorities. Should the Legislature choose any of these alternatives, however, it would need to identify $95 million from the remaining General Fund expenditures for CalWORKs which meet the federal criteria for the Welfare-to-Work state match. We believe that this would be feasible.

Timing of State Match Expenditures. The Governor proposes to spend $95 million toward the state match in 1998-99 and the remaining $86.5 million sometime between July 1, 1999 and September 30, 2001. We note that the Legislature could elect to spend the matching funds on its own schedule, which could be faster or slower than the schedule proposed by the Governor, with virtually no impact on the timing of the availability of the federal funds. In our analysis of the CalWORKs program (Item 5180), we recommend deferring this match payment until 1999-00 because we estimate that the required match could be identified from the base budget for CalWORKs services in that year, at no additional cost to the General Fund.

State Discretionary Funds. Up to 15 percent of the federal funds ($54.5 million) must be spent on projects designed to help long-term welfare recipients. The Governor proposes to use these funds to create a competitive grant program for local entities. We note that this proposed statecompetitive grant program is in addition to the federal competitive Welfare-to-Work grant program which will provide approximately $368 million per year to local entities throughout the United States in FFY 98 and FFY 99. The Legislature could, as an alternative, use the discretionary funds to further its own priorities in CalWORKs, as long as the funds are spent on Welfare-to-Work eligible individuals and activities.

"Freeing-Up" Federal TANF Block Grant Funds. Pursuant to the federal welfare reform legislation enacted in August 1996, California is entitled to receive an annual federal block grant of $3.7 billion, provided that the state meets the TANF MOE requirement that the state spend 80 percent of what it spent in FFY 94 on TANF recipients. Unlike the Welfare-to-Work funds which must be spent within three years, federal TANF funds may be carried over indefinitely.

The federal Welfare-to-Work block grant funds included in the Balanced Budget Act of 1997 are an additional source of federal funding for services for certain TANF/CalWORKs recipients. The issue facing the Legislature is whether to take into account the new Welfare-to-Work funds in determining the budget for the CalWORKs program. If the Legislature wishes to treat the new funds as a partial funding source for CalWORKs, it could reduce the proposed appropriation for the program. Because of the TANF MOE requirement, state and county spending could not be reduced. Federal block grant funds, however, could be reduced and carried over indefinitely into future years. These "freed-up" TANF funds could be placed in a reserve for future years or could be used for other legislative priorities in the CalWORKs program. We will address this issue in our analysis of the CalWORKs program (Item 5180).

Allocating Funds to PICs. As noted above, the three factors established by federal law for states to use when allocating Welfare-to-Work funds to the PICs are: (1) the incidence of poverty above a specified threshold, (2) the number of adults receiving TANF for 30 months or more, and (3) the number of unemployed persons. The law further provides that the poverty factor must be weighted at least 50 percent.

Because almost all of these funds must be spent on TANF recipients that have been on aid for 30 months or more, or on TANF recipients having characteristics associated with long-term welfare receipt, we believe that the number of long-term TANF recipients residing in each PIC should be one of the allocation factors. Specifically, we recommend legislation be enacted providing that the formula assign a weight of at least 25 percent to this factor. We note that the Governor's proposed weight of 30 percent for this factor is consistent with our recommendation. (In our January report, CalWORKs Welfare Reform: Major Provisions and Issues, we illustrate the fiscal impact on the PICs under three alternative distribution formulas that would meet our recommended criterion.)

The budget proposes $368 million from all funds for support of DR programs in 1998-99, an increase of less than 1 percent over estimated current-year expenditures. The budget proposes $126 million from the General Fund, which is $1.8 million, or 1.4 percent, above estimated current-year expenditures from this funding source.

Governor's Proposal Does Not Fund Statutory Rate Increase

Current state law requires the department to recalculate rates for WAP providers every two years. The next recalculation is scheduled to take effect July 1, 1998, and the department expects total payments to WAP providers to increase during 1998-99 if this statutory requirement is followed. In addition, payments would increase to some SEP providers because rates for the group-placement component of SEP are tied to the rates for WAP providers. Based on preliminary calculations, the department estimates that the rate increase would cost a total of $10.9 million ($9.6 million from the General Fund and $1.3 million in federal funds) in 1998-99.

Caseload Projections Do Not Reflect Trends

The budget proposes expenditures of $112 million in total funds ($91 million General Fund) to support vocational rehabilitation and habilitation services programs for clients with developmental disabilities. This is an increase of $1.8 million from the General Fund, or 1 percent, to add 201 clients to the caseload.

Our analysis of the department's caseload projections indicates that the projections do not account for recent Habilitation Services Program/WAP (HSP/WAP), Vocational Rehabilitation/WAP (VR/WAP) and SEP group-placement caseload trends.

Habilitation Services Program/Work Activity Program Projection Too High. The budget proposal projects an increase of ten HSP/WAP cases per month during 1998-99, with total cases increasing from 9,850 at the beginning of the fiscal year to 9,960 in June 1999, as shown in Figure 21. Based on our analysis of the most recent 12 months of data (October 1996 through September 1997), the actual caseload is decreasing by an average of 29 cases monthly. Applying this trend to the actual caseload of 9,341 in September 1997, we estimate that the caseload will decrease to 8,732 by June 1999, which is 1,228 cases lower than the department's projection. This caseload adjustment would result in a General Fund savings of $5.2 million in 1998-99.

Vocational Rehabilitation/Work Activity Program Projection Too Low. The budget proposal projects a steady VR/WAP caseload of 1,950 clients during 1998-99. However, our review of the most recent 12 months of data shows that the actual caseload is increasing by an average of 18 cases per month. Applying this trend to the actual caseload of 2,243 clients in September 1997, we estimate that the caseload will increase to 2,621 clients in 1998-99, which is 671 clients above the department's projection. This caseload adjustment results in an increase of $3 million ($644,000 General Fund) in 1998-99.

Figure 21
Department of Rehabilitation Program Caseload Trends
	Recent Caseload Trends		1998-99 Year-End Projection June 1999
Program	Monthly Change a	Actual September 1997	Governor's Budget	Legislative Analyst's Office	Difference
HSP/WAP	-29	9,341	9,960	8,732	-1,288
VR/WAP	18	2,243	1,950	2,621	671
aBased on most recent 12 months (October 1996 through September 1997).

Habilitation Services Program/Supported Employment Program Group-Placement Projection Does Not Reflect Seasonal Trend. The budget proposal projects a monthly increase of 20 HSP/SEP group-placement clients during 1998-99. Our analysis of the most recent 24 months of data from the HSP/SEP group-placement program shows an average increase in cases during nonsummer months offset by a pronounced decrease in cases during the months of May, June, July, and August. According to the department, this trend could be caused by an increased number of clients taking vacations during the summer months.

Given an actual caseload of 2,930 in September 1997 and taking the seasonal trend into account results in a slightly lower average projected caseload than assumed in the budget. Our projection would result in a $273,000 decrease in General Fund expenditures in 1998-99.

Summary. We recommend that the Legislature reduce caseload-related funding for a net reduction of $4.8 million from the General Fund. We note that more recent caseload data will be available at the time of the May Revision, allowing for further analysis of these trends.

Legislative Oversight: Delay in Submission Of Supported Employment Cost Study

The 1996-97 Budget Act appropriated $175,000 for the department to contract for an independent study of the costs of providing work activity and supported employment services, with the purpose of developing a proposal for "standardized" rates that would reimburse providers on the same basis for providing a particular type of service. The department was required to report the results of the study to the Legislature by February 1, 1997. Due to problems with the contractor, the work activity section of the study was submitted after the deadline. At the time that this analysis was prepared, the department had not submitted the supported employment section of the study.

We recommend that the department report at budget hearings on the status of the study or, if the study has been submitted by that time, on its findings and recommendations.

Federal Waiver for Habilitation Services Could Result in State Savings

The budget proposes expenditures of $5.9 billion ($2 billion General Fund, $27 million county funds, and $3.9 billion federal funds) for the CalWORKs program in 1998-99. In total funds, this is an increase of $307 million, or 5.5 percent. General Fund spending is projected to decline by $88 million, or 4.2 percent. This decrease in General Fund spending is primarily due to the availability in the budget year of a large carryover balance ($489 million) of TANF bock grant funds from the current and prior years.

Current-Year Update of CalWORKs/TANF Program

Major Changes in 1997-98

Figure 22

CalWORKs Program (AB 1542) Major Features

Eligibility

"Look Back" Provision. Eliminates the requirement that two-parent families applying for assistance have a prior connection to the labor force.

Resource Limits. Conforms resource limits to the amounts permitted under federal law for the Food Stamps program. (This increases the asset limit for automobiles, as applied to applicants, from $1,500 to $4,650.)

Diversion Program. Permits counties to provide eligible applicant families with up to three months of aid payments in the form of a lump sum for purposes of providing temporary assistance so that the family does not enter the program.

Grants

Maximum Grants. Continues 4.9 percent statewide grant reduction and suspension of the statutory COLA through October 31, 1998.

Beno Exemptions. Eliminates Beno court case grant reduction exemptions (applicable to certain recipients not able to work).

Income Disregards. Replaces the existing "fill the gap" and "$30 and one-third disregard" with a $225 plus 50 percent earned income disregard, whereby the first $225 of earnings plus 50 percent of each additional dollar of earnings are disregarded in determining the family's grant.

Services

Welfare-to-Work Activities. Specifies the following sequence of services: job search; assessment; welfare-to-work activities (education and training); and community service employment.

Child Care. Creates a new delivery system administered by county welfare departments and the State Department of Education.

Employment Retention. Authorizes up to one year of case management and other job retention services for persons leaving aid due to employment.

Continued

Participation Requirements

Weekly Hours. Adults in single parent families must participate in work or approved education or training activities for 20 hours per week effective January 1, 1998, 26 hours effective July 1, 1998, and 32 hours effective July 1, 1999 and thereafter. An adult recipient in a two-parent family must participate for 35 hours per week.

Sanctions. The sanction for failure to participate in work activities or community service is removal of the adult portion of the grant.

Time Limits

Welfare-to-Work Services. New applicants are limited to 18 months of job training/education services. Existing recipients are limited to 24 months. Counties may extend the 18 month limit by 6 months if the extension is likely to lead to nonsubsidized employment or if no jobs are available. Able-bodied adults must commence community service employment at the end of these time limits, if the county certifies that a nonsubsidized job is not available.

Five-Year Time Limit/Safety Net. After five cumulative years on aid, the amount of the grant is reduced by the portion for the adult. Counties have the option of providing subsequent aid in the form of cash or vouchers. Certain recipients are exempt, including specified caretaker relatives and disabled persons.

County Administration

County Training. Provides funding for county training and "retooling."

County Fiscal Incentives. Provides 100 percent of certain grant savings to the counties. Specifically, allocates 75 percent of the state's grant savings resulting from (1) program exits due to employment lasting six months, (2) increased earnings due to employment, and (3) diversion of applicants from the program. The remaining 25 percent of such grant savings shall be allocated to counties that have not achieved savings but have performed in a manner "worthy of recognition." Counties must use these savings in the CalWORKs program unless expenditure of these funds is not needed to meet the federal TANF maintenance-of-effort requirement.

Fraud Savings. Reallocates 25 percent of the state's savings from fraud detection activities to the counties.

for adult recipients, a participation mandate for certain recipients that exceeds federal requirements, a community service component for recipients on aid after 18 months (with county discretion to extend to two years), and a simplified grant structure whereby recipients retain the first $225 of any earned income and 50 percent of any earnings above $225. (Please see the K-12 Education chapter for a discussion of child care issues related to the CalWORKs program.)

Grants. Chapter 270 also extended the statewide 4.9 percent grant reduction and the suspension of the statutory cost-of-living adjustment (COLA) through October 31, 1998. These changes result in a General Fund cost avoidance of $218 million in 1997-98.

Recent Federal Action on Welfare Reform

The Balanced Budget Act (BBA) of 1997. On August 5, 1997, the President signed the BBA (H.R. 2015), which significantly amended the 1996 federal welfare reform provisions. Key changes are summarized below.

• Welfare-to-Work Block Grant Program. The BBA includes $1.5 billion in both federal fiscal year (FFY) 98 and FFY 99 for Welfare-to-Work block grants administered by the Department of Labor. If California provides the required one-third match, the state is eligible to receive a total of $363 million in "Formula Grants," $190 million in FFY 98 and $173 million in FFY 99. These funds must be spent on certain hard-to-employ TANF/CalWORKs recipients. We discuss this new program in our analysis of the Employment Development Department budget in this chapter of the Analysis.
• Pass-Through of Child Support. The BBA allows states to count up to $50 per month in child support that is passed through to TANF families toward meeting the federal maintenance-of-effort (MOE) requirement. (This change means that California's countable MOE spending increases by about $40 million in both the current year and the budget year.)
• Federal Penalties. The BBA adds and modifies the penalties for not meeting specified federal performance measures. For a discussion of the changes in the federal penalties, please see our report

CalWORKs Welfare Reform: Major Provisions and Issues (January 23, 1998).

• Simplified Transfer to the Social Services Block Grant (SSBG). The BBA allows states to transfer up to 10 percent of their federal block grant into the SSBG. Previously, states had to transfer $2 into the child care development block grant for each $1 transferred into the SSBG, subject to a combined total transfer of 30 percent.
• Supplemental Security Income/State Supplementary Program (SSI/SSP) Eligibility for Noncitizens. The BBA reversed earlier policy and retains SSI/SSP eligibility for all noncitizens in the United States who were receiving such grants as of August 22, 1996. The act also allows noncitizens in the U.S. prior to August 1996 who subsequently become disabled to obtain SSI/SSP benefits.

Proposed Federal Regulations. On November 20, 1997, the federal Department of Health and Human Services (DHHS) issued proposed regulations for the TANF program. Although these regulations are subject to change when the final rules are issued, they give an indication of the department's thinking on many issues, including the imposition of penalties. Some of the most significant regulations are summarized below.

• Work Participation Penalty. Federal welfare reform requires states to meet work participation rates for both the overall caseload and separate higher rates for two-parent families. The DHHS proposes that any states that meet the overall work participation requirement, but fail to meet the higher rate for two-parent families, should have their penalty based on the proportion of the caseload represented by two-parent families. Because approximately 14 percent of California's TANF cases are two-parent families, this would reduce the potential first year penalty from $185 million (5 percent of the $3.7 billion block grant) to $26 million ($185 million times 14 percent). States will be eligible for further reductions if they come within 90 percent of the required rates of work participation.
• Corrective Action Plans. States that come into compliance within six months of acceptance of a corrective action plan by the DHHS will not be penalized. States that achieve a 50 percent or greater improvement within six months will have their penalties reduced.
• No Penalty Relief for States That "Game" the System. States that attempt to evade work participation requirements or retain the federal share of child support collections--for example, through the creation of state-only funded programs--will be denied specified penalty relief (such as the proration of the penalty for failure to meet the two-parent work participation rate).

1998-99 Budget Issues

Budget Proposes to Continue Past Grant Reduction and Eliminate Cost-of-Living Adjustment

Making Past Reductions Permanent. The budget proposes to (1) make permanent the statewide 4.9 percent grant reduction that is scheduled to be restored November 1, 1998 and (2) eliminate the statutory requirement to resume the COLA, which has been suspended since 1991-92. As Figure 23 shows, these changes result in a combined General Fund cost avoidance of $247.6 million. Specifically, the proposal to make the 4.9 percent grant reduction permanent results in a General Fund cost avoidance of $150.8 million in 1998-99. The proposal to delete the requirement to restore the COLA (2.84 percent for 1998-99) results in a General Fund cost avoidance of $96.8 million in 1998-99.

Figure 23
Governor's CalWORKs Grant Proposals General Fund Savings
1998-99 (In Millions)
Proposal	General Fund Savings a
Make permanent the 4.9 percent statewide grant reduction	$150.8
Eliminate the requirement to restore the statutory COLA	96.8
Total	$247.6
aAssumes that total cost of policy proposals will, at the margin, be General Fund costs with no federal share.

As indicated, the Governor's proposals will result in significant savings. To assist the Legislature in evaluating these proposals, we offer the following comments and findings on how the proposals would affect the income of nonworking families and how they would affect the financial work incentives for CalWORKs recipients.

Figure 24
CalWORKs Maximum Monthly Grant and Food Stamps Family of Three Current Law and Governor's Proposal
1998-99
	Current Law	Governor's Proposal	Change From Current Law
Region 1: High-cost counties
January 1, 1998 actual grant	$565
1998-99 grant assuming:
Make 4.9 percent statewide reduction permanent and delete statutory COLA	--	$565
Restore 4.9 percent statewide grant reduction November 1, 1998	$594	--
Restore COLA (2.84 percent) November 1, 1998	611	--
Food Stamps	253	267
Totals	$864	$832	-$32
Region 2: Low-cost counties
January 1, 1998 actual grant	$538	--
1998-99 grant assuming:
Make 4.9 percent statewide reduction permanent and delete statutory COLA	--	$538
Restore 4.9 percent statewide grant reduction November 1, 1998	$565	--
Restore COLA (2.84 percent) November 1, 1998	582	--
Food Stamps	262	275
Totals	$844	$813	-$31

Impact on Families. Figure 24 shows how both current-law provisions and the Governor's proposals would affect monthly grants for a family of three (assuming the family is not exempt from past grant reductions). As the figure shows, the proposed maximum grant in Region 1 (counties with high rental costs) is $565, or $46 below the level required by current law in 1998-99. Under the Governor's proposal, the combined maximum monthly grant and food stamp allowance is $832 (75 percent of the poverty level), or $32 below the level required by current law ($864, 78 percent of poverty). In Region 2, the proposed grant level is $538, or $44 below the level required by current law. When combined with food stamps, total benefits under the Governor's proposal are $813 (73 percent of poverty), which is $31 less than the level required by current law ($844, 76 percent of poverty).

Impact on the "Work Incentive." Under CalWORKs, the first $225 and 50 percent of each additional dollar of earned income are disregarded in determining a family's grant. Restoring the 4.9 percent grant reduction, and thereby raising grants pursuant to current law, would not reduce from a financial perspective the "work incentive" for CalWORKs recipients. (We note that under prior law, raising grants could have reduced the work incentive because it would have reduced the "gap" between the need standard [$778, family of three] and the maximum grant [$565, family of three]. Previously, recipients could earn the difference between the maximum grant and the need standard with no reduction in their grant.)

Impact on Caseload. Increasing grants will not affect a family's eligibility for the CalWORKs program. (Eligibility will continue to be based on a "need standard" established in statute.) However, a grant increase might induce some families, that are currently eligible but have elected not to participate, to apply for assistance.

Conclusion. In summary, an assessment of the Governor's grant proposals involves balancing the benefits of budgetary savings against the impact of setting grants for families with children further below the poverty line.

Defer Expenditure of State Match For Welfare-to-Work Program Until 1999-00

Background. To receive the annual federal TANF block grant ($3.7 billion for California), states must meet a MOE requirement that state spending on welfare for needy families be at least 80 percent of the FFY 94 level, which is $2.9 billion for California. The MOE requirement drops to 75 percent if states meet two specified work participation rates, but California is unlikely to meet both rates in the budget year. For 1998-99, the Governor's budget for CalWORKs is at the MOE floor, with the exception of $95 million above the MOE for purposes of providing matching expenditures for the federal Welfare-to-Work block grant funds. A total of $181.5 million in state matching funds must spent by September 30, 2001 in order to receive the maximum allocation of these federal funds.

As discussed in our analysis of the Employment Development Department, it is in the state's interest to put up the state match in order to qualify for the federal Welfare-to-Work block grant funds. Federal law, however, permits the states to spend the match at any time prior to September 30, 2001 and still receive the federal allocation in the current and budget years as assumed in the budget. Thus, the Legislature can fund the state match on its own schedule, which may be faster or slower than the schedule proposed by the Governor.

Recommendation. As discussed above, the Governor proposes to spend the first $95 million in 1998-99 toward the total match obligation of $181.5 million. We recommend delaying this expenditure by one year because we estimate that General Fund spending for CalWORKs in 1999-00 will be at least $200 million above the TANF MOE floor, thus allowing the match to be identified from within the base budget in that year at no additional cost to the General Fund.

We project that General Fund spending for CalWORKs will increase in 1999-00 for two reasons. First, the $489 million carryover balance of federal funds that the budget proposes to use as an offset to General Fund costs in CalWORKs in 1998-99 will not be available in 1999-00. Second, 1999-00 is the first state fiscal year in which all recipients will be receiving CalWORKs services for an entire year, which will result in additional costs for employment services. We also note that in 1999-00, many CalWORKs recipients will have phased into the community service component of the program, which is an allowable activity for matching funds for the Welfare-to-Work grant. For these reasons we believe that it will be feasible to identify the entire required match for the Welfare-to-Work funds out of the base budget requirement for the CalWORKs program in 1999-00. Accordingly, we recommend deleting the proposed expenditure of $95 million in matching funds in 1998-99, for a corresponding General Fund savings.

Impact of Budget Reductions in CalWORKs

Options for the Legislature. As indicated above, the budget proposal for state spending in CalWORKs is at the MOE floor (excepting the $95 million match for the Welfare-to-Work block grant). Thus, if the Legislature makes any budget reductions (beyond the $95 million) the resulting savings would be in federal funds. The savings are retained by the state because they are TANF block grant funds.

The Legislature has three options with respect to any such savings: (1) redirecting the savings into other priorities in the CalWORKs program (such as increasing grants or establishing job creation programs); (2) placing the federal savings in a reserve for expenditure in future years; and/or (3) transferring the federal funds into the SSBG, where the funds could be used to replace General Fund spending in certain other departments. This last option requires some explanation.

In accordance with federal law (TANF and the BBA), California may transfer up to $370 million in federal TANF funds into the SSBG, also known as Title XX funds. Once transferred, the funds become subject to the rules of the SSBG, subject to the condition that spending of any transferred TANF funds must be for children or their families with incomes under 200 percent of poverty.

For 1998-99, the budget proposes to use about $255 million in Title XX SSBG funds to offset General Fund costs, primarily in the In-Home Supportive Services (IHSS) program and in the community-based programs of the Department of Developmental Services (DDS). We estimate that additional SSBG funds (from a TANF transfer) could be used to supplant approximately $100 million in General Fund spending for low-income children and families in these two programs.

To illustrate the impact of such a transfer on the General Fund, the "residual" (state-only) component of the IHSS program can be used as an example. Currently, the budget allocates $87 million in SSBG funds to the residual IHSS program, which results in a corresponding General Fund savings. We estimate that about 6 percent of the residual IHSS caseload consists of children whose family incomes are under 200 percent of poverty and that General Fund spending for these children is about $15 million. Thus, the state could transfer $15 million in TANF funds into the SSBG, which could be used to offset $15 million in General Fund spending. Using a similar approach in the DDS, about $85 million in General Fund spending could be offset by TANF funds transferred into the SSBG. Alternatively, these SSBG funds could be used to augment spending in these programs, subject to the conditions noted above.

In the following discussion, we identify various savings with respect to the Governor's budget for CalWORKs. As noted above, proposed General Fund spending cannot be reduced, so we identify all savings as federal TANF savings. In each of the following issues, we recommend that expenditure of federal TANF funds be reduced. Following the specific budget issues, we make a recommendation on how the identified savings should be allocated among the three options discussed above.

Budget for CalWORKs Administration Does Not Reflect Savings From Projected Caseload Decline

Typically, the methodology used to budget for county administration of the CalWORKs program is based on the amount counties actually spent in the past year, adjusted for projected changes in caseload and inflation in the budget year. This amount is also adjusted for policy changes, if any. The budget proposal for county administration, however, does not reflect the 5.6 percent caseload reduction that the budget projects for the CalWORKs program in 1998-99. Making this adjustment would result in General Fund savings of $14.5 million and federal TANF savings of $20 million, based on the former state/federal cost sharing ratios. Because of the federal MOE requirement, General Fund spending cannot be reduced, so the reduction must be in federal funds. Accordingly, we recommend that the budget for county administration be reduced by $34.5 million to be consistent with the caseload projections.

In addition, our recommendation would result in a $5.4 million reduction for the county share of expenditures, but for technical reasons this would also translate into a reduction of federal TANF block grant funds. (This is due to the interaction between our recommended action and an existing statutory provision.)

Historical Context. In recent years, we made similar recommendations with respect to the budget proposal for county welfare administration. The counties responded by pointing out that the current-year baseline level of expenditures understates the counties' needs because of recent historical budgeting trends. Prior to 1993-94, the budget for county administration was based on workload standards developed in the 1980s, projected changes in caseload, and changes in the "county cost of doing business" (inflation). During the tight fiscal constraints of the early 1990s, counties generally spent less on administration than was required to match the entire state appropriation (the county share was about 15 percent of total program costs). In reaction to this, beginning in 1993-94 the state appropriation for county administration was reduced to reflect this inability of the counties to provide their match. Essentially, administration of the welfare programs was underfunded with respect to the previously developed workload standards due to the counties' inability to match. Our analysis of spending for CalWORKs (AFDC) administration, however, indicates that since 1993-94 it has increased substantially in "real" dollars (that is adjusted for inflation and excluding policy changes) on a per-case basis.

Figure 25 shows the basic administrative cost per case from 1989-90 through 1998-99 in constant 1989-90 (inflation adjusted) dollars. In terms of constant dollars, the Governor's budget proposes an appropriation for 1998-99 equal to $796 dollars per case, a level that is higher than in all of the past nine state fiscal years except 1991-92. We note that if our recommendation is adopted, the budget for 1998-99 would be $752 per case in constant dollars, just above the current-year level and higher than in six of the past nine fiscal years.

CalWORKs Employment Services Are Overbudgeted

Background. The budget for CalWORKs employment services is based on the estimated caseload that requires such services, and the estimated cost of the various service components, such as job search. For 1998-99, the total budget for CalWORKs "basic" employment services is $883 million. This budget allocation is designed to fully fund the program, assuming that counties would begin implementing CalWORKs in January 1998 and would phase in all existing recipients by January 1999 at the latest.

The budget, however, proposes substantially more for employment services than the amount in the basic allocation. Figure 26 (see next page) shows all funds budgeted for employment services for CalWORKs recipients in 1997-98 and 1998-99. According to the figure, the budget for employment services exceeds the estimated need by $766 million over the two-year period. Not all of this "excess" funding, however, should necessarily be considered "overbudgeting." We review specific elements below.

Current-Year CalWORKs Employment Services Augmentations. The current-year appropriation for CalWORKs includes a legislative augmentation of $62.5 million for CalWORKs employment services. This funding was placed in the budget to permit counties to implement the program more quickly than assumed in the basic cost estimate for 1997-98. There is some indication, however, that the counties are implementing CalWORKs more slowly than assumed in the budget (for example, Los Angeles County is not likely to begin until April 1998). Nevertheless, the funds have been allocated to the counties and, pursuant to Chapter 270, they may retain the funds until July 2000. Given that counties apparently are implementing CalWORKs more slowly than budgeted, and given that the Legislature has already provided an augmentation of $62.5 million, we see no analytical basis for increasing the current-year appropriation by $42.9 million as proposed by the Governor. Accordingly, we recommend rejecting this proposal. We further recommend that the $42.9 million in available federal TANF funds be carried over into 1998-99, and that they be considered for other legislative priorities, as we discuss later in this Analysis.

Figure 26
CalWORKs Employment Services Budget Total Funds
1997-98 and 1998-99 (In Thousands)
	1997-98	1998-99	Two-Year Total
Budgeted for Services
CalWORKs/AFDC basic allocation
GAIN basic	$192,933	--	$192,933
GAIN augmentation	60,000	--	60,000
Reappropriation of GAIN augmentation	59,000	--	59,000
CalWORKs basic	160,086	$882,822	1,042,908
CalWORKs augmentations
Legislative	$62,520	--	$62,520
Governor's budget	42,899	--	42,899
Welfare-to-Work funds
State matching funds	--	$95,000	$95,000
Federal funds (to PICs)a	$29,000	192,700	221,700
Federal funds (local competitive grants)	--	50,500	50,500
County fiscal incentives	26,005	266,879	292,884
Total budget	$632,443	$1,487,901	$2,120,344
Estimated Need for Servicesb
GAIN basic	$192,933	--	$192,933
GAIN augmentations	119,000	--	--
CalWORKs basic	160,086	$882,822	1,042,908
Total estimated need	$472,019	$882,822	$1,235,841
Budgeted amount in excess of estimated need	$160,424	$605,079	$765,503
aAlthough the budget proposes $162 million in 1997-98 and $147 million in 1998-99 for allocation to the PICs, the draft state plan indicates that only $29 million and $192.7 million, in 1997-98 and 1998-99 respectively, are likely to be spent by the PICs.
bBased on caseload and service costs.

County Fiscal Incentives. As discussed previously, under CalWORKs, the state and federal grant savings from increased earnings and specified exits due to employment are to be allocated to the counties as "fiscal incentives." The budget estimates these fiscal incentives to be $26 million in 1997-98 and $267 million in 1998-99. Because the Governor's budget is set at the MOE floor, however, counties will be required to expend the state share of the fiscal incentives in the CalWORKs program in the year they are paid to the counties. (The federal share must be spent on TANF eligible recipients and activities, but could be carried over by the counties into future years.) We believe it would be reasonable to assume that the CalWORKs legislation intended that county fiscal incentives be provided to the counties even if total budgeted expenditures exceed the amount needed. Accordingly, we recommend that the fiscal incentives be considered a county-run program enhancement, and we therefore do not assume these funds represent overbudgeting.

Federal Welfare-to-Work Funds Allocated to Private Industry Councils (PICs). The budget proposes to allocate $162 million in 1997-98 and $147 million in 1998-99 to PICs in order to serve hard-to-employ TANF recipients. Although a total of $309 million will be available to the PICs, over the two-year period, the administration's draft state Welfare-to-Work plan indicates that counties are likely to spend just $29 million in 1997-98 and $192.7 million in 1998-99 as shown in Figure 27. These funds will be used to provide specified welfare-to-work services to certain hard-to-employ CalWORKs recipients. It is likely that a significant amount of these funds will address the projected need for employment services in the CalWORKs program because PICs must use these funds to serve CalWORKs recipients. We recommend that 75 percent of these Welfare-to-Work funds ($166 million) be considered as an offset to the basic budget for CalWORKs employment services. (In other words, the new federal Welfare-to-Work funds could replace federal TANF funds that are budgeted to meet the projected need for employment services.) Accordingly, we recommend reducing the amount proposed for CalWORKs employment services by $166 million in federal TANF funds.

Welfare-to-Work State Competitive Grant Program. The budget also proposes allocating $50.5 million of the federal funds to establish a state competitive grant program. Funds will be awarded to local organizations based on their ability to assist CalWORKs recipients in obtaining employment and their ability in leveraging other funding. We also note that the federal Welfare-to-Work program includes a separate competitive grants program which could make additional funds available to local entities in California, including county welfare departments. Because there is significant uncertainty concerning how the funds provided under these grant programs will be used, at this time, we do not recommend considering these funds as an offset to the CalWORKs employment services budget.

State Matching Funds for the Welfare-to-Work Program. As discussed above, we recommend deleting the $95 million for employment services that is proposed to serve as part of the state match for the federal Welfare-to-Work funds. Consequently, we do not need to address this component of employment services "overbudgeting" in this issue.

Summary. To summarize our specific recommendations, we believe that the budget for CalWORKs employment services is overbudgeted by a total of $209 million, and should be reduced accordingly. These savings would be in federal TANF block grant funds. Figure 27 shows the components that result in this total. We note that, in conjunction with our previous recommendation to delete the $95 million state match, this recommendation would still leave about $450 million (out of the $766 million identified in Figure 26) over the estimated amount needed to fully fund CalWORKs employment services.

Figure 27
Recommended Reductions in CalWORKs Employment Services Program Federal Block Grant Funds
(In Millions)
LAO Recommendation	Amount
Treat 75 percent of federal funds for Welfare-to-Work allocated to PICs as an offset to basic employment services budget	-$166.3
Reject Governor's proposed current-year augmentation to employment services budget	-42.9
Total	-$209.2

Establish a TANF Reserve

Background. As discussed in the previous section, we recommend reducing the employment services budget by $209 million. Because of the federal MOE requirement, all of these savings are in federal funds. In addition, we have recommended that the budget proposals for CalWORKs administration and Food Stamps administration be reduced, based on the budget's projected caseload decline. If the Legislature adopts the latter two recommendations, there will be $42.6 million in additional federal TANF savings. In total, we recommend reducing CalWORKs federal TANF funds expenditures by $252 million. Below, we discuss four options for using these funds.

Option 1: Allocating Excess Employment Services Funds to the Counties. Essentially, the Governor proposes to overbudget employment services and let the counties decide how best to spend these funds on services for CalWORKs recipients. An advantage of this approach is that it provides counties with flexibility. (Pursuant to the CalWORKs legislation, counties may shift funds between administration, services, and child care.) While it is reasonable to assume that some benefit will be derived from these expenditures, we note that this spending presumably will be for purposes not encompassed in the estimated need for employment services in the program and may not reflect legislative priorities.

Option 2: Reducing General Fund Expenditures by Transferring TANF Funds to the SSBG. As described above, we believe that about $100 million of the identified savings could be transferred to the SSBG and then used to offset General Fund spending in the "residual" IHSS program or in the community-based programs in the DDS. An advantage of this approach is that it maximizes the Legislature's discretion by freeing up General Fund monies for any legislative priorities, while not resulting in a reduction in IHSS or community-based programs.

Option 3: Other CalWORKs Priorities. The identified savings could be redirected to other legislative priorities in the CalWORKs program, such as grants or job creation programs.

Option 4: Establish a TANF Reserve. Another option is to set aside the identified savings into a reserve for future years. There are three advantages to this approach. First, we note that in the event of a recession, the state will be responsible for 100 percent of any increased CalWORKs grant costs associated with an increase in the caseload. Establishing a TANF reserve would help mitigate the impact of a recession. Second, General Fund spending for CalWORKs is likely to increase in 1999-00 because the Governor proposes to spend all available TANF federal funds in 1998-99, including $489 million carried over from prior years. These carry-over funds will not be available in 1999-00, thereby creating a potential General Fund obligation to replace the one-time carry-over funds. (We note, for example, that if this balance were not available, General Fund spending would have increased by $393 million in 1998-99 compared to the prior year.) The third advantage to creating a TANF reserve is that it would provide legislative flexibility. If counties need more funds for CalWORKs services, they could request them during the budget year and the Legislature could authorize additional funding.

Recommendation. We recommend that the Legislature place at least 50 percent of the savings we have identified in the CalWORKs program (or $126 million) into the TANF reserve. The remaining savings--about $100 million of which could be transferred into the SSBG and used to offset General Fund costs--could be used for other legislative priorities.