Legislative Analyst's Office Analysis of the 2002-03 Budget Bill

Department of Social Services CalWORKs Program (5180)

In response to federal welfare reform, the Legislature created the California Work Opportunity and Responsibility to Kids (CalWORKs) program, enacted by Chapter 270, Statutes of 1997 (AB 1542, Ducheny, Ashburn, Thompson, and Maddy). Like its predecessor, Aid to Families with Dependent Children, the new program provides cash grants and welfare-to-work services to families whose incomes are not adequate to meet their basic needs. A family is eligible for the one-parent component of the program if it includes a child who is financially needy due to the death, incapacity, or continued absence of one or both parents. A family is eligible for the two-parent component if it includes a child who is financially needy due to the unemployment of one or both parents.

The budget proposes an appropriation of $5.9 billion ($2.2 billion General Fund, $155 million county funds, $30 million from the Employment Training Fund, and $3.6 billion federal funds) to the Department of Social Services (DSS) for the CalWORKs program. In total funds, this is an increase of $392 million, or 7.1 percent. Although the 2002-03 budget for CalWORKs is at the maintenance-of-effort (MOE) floor, General Fund spending is proposed to increase by $136 million (6.8 percent). This increase is primarily due to lower MOE spending in non-CalWORKs programs, which must be replaced by an increase in CalWORKs General Fund spending of the same amount in order to maintain MOE compliance. The increase in CalWORKs MOE spending is partially offset by deferring $25 million in spending for the Department of Labor's Welfare-to-Work program match requirement.

We note that the Governor's budget assumes that the Temporary Assistance for Needy Families (TANF) block grant will be reauthorized by October 1, 2002, and that California will continue to receive $3.7 billion annually in TANF funding. To the extent the TANF block grant is reauthorized at a lower level, this assumption represents a potential risk to CalWORKs program funding.

Caseload and Grants

Caseload Decline Ends

The California Work Opportunity and Responsibility to Kids caseload has declined significantly since 1994-95. However, recent caseload data suggest that this trend may be ending. The Governor's budget projects that the caseload decline will end in the current year, and that caseloads will increase by 2 percent in the budget year.

The CalWORKs caseload has declined every year since 1994-95, when caseloads reached their peak. During 2000-01, the average monthly number of CalWORKs cases decreased by approximately 9 percent compared to the prior year. However, the Governor's budget projects that the caseload decline will end in 2001-02, when caseloads will begin to steadily increase for the first time since 1994-95. Caseloads are projected to continue to increase through the budget year, resulting in a year-over increase of 2 percent. Figure 1 illustrates the projected end of the caseload decline.

As shown in Figure 1, actual caseloads for the first part of 2001-02 (July through September, the most recent months for which actuals are available) were lower than the Governor's projections for these months. However, given the recent economic downturn and its projected impact on caseload growth, we believe the Governor's year-over caseload estimates are realistic. Because the CalWORKs caseload drives program costs, we will continue to monitor caseload trends and advise the Legislature accordingly.

Budget Suspends Statutory Cost-of-Living Adjustment

The Governor's budget proposes suspending the statutory cost-of-living adjustment. Compared to current law, this results in a savings of $112 million.

The Governor's budget proposes to suspend the statutory cost-of-living adjustment (COLA) effective October 2002. Compared to current law, suspending the COLA results in General Fund/TANF savings of $112 million. The statutory COLA is based on the change in the California Necessities Index (CNI) from December 2000 to December 2001 (3.74 percent).

Figure 2 shows the maximum CalWORKs grant and food stamps benefits for a family of three in the current year, and what the maximum grant and benefits would be in the budget year if the COLA were provided. As the figure shows, grants for a family of three in high-cost counties would have increased by $25 to a total of $704, and grants in low-cost counties would have increased by $24 to a total of $671.

As a point of reference, the federal poverty guideline for 2001 (the latest reported figure) for a family of three is $1,219 per month. (We note that the federal poverty guidelines are adjusted annually for inflation.) Under current law, combined maximum grant and food stamps benefits in high-cost counties would be $978 per month (80 percent of the poverty guideline). Under the Governor's proposal to suspend the COLA, combined benefits in high-cost counties would instead be $964 per month (79 percent of poverty). Combined benefits in low-cost counties would be $960 per month (79 percent of poverty) under current law, versus $946 (78 percent of poverty) as proposed in the Governor's budget.

The CalWORKs Time Limit: Implementation Issues

The statute establishing the California Work Opportunity and Responsibility to Kids (CalWORKs) program does not resolve two issues related to time limits: (1) how counties should apply exemptions from the CalWORKs five-year time limit and (2) the circumstances under which employment services may continue to be provided after an individual reaches the time limit. We present options on how counties should apply exemptions from the CalWORKs five-year time limit. As regards employment services, we recommend enactment of legislation to provide transportation assistance without a community service requirement for time-limited individuals working at least 20 hours per week.

Background

The federal welfare reform law of 1996, which created the TANF block grant, established a lifetime limit on federal assistance. Specifically, states may not use TANF funds to provide assistance to families in which an adult has received a cumulative total of 60 months of assistance. However, a state may exempt up to 20 percent of its caseload from the federal time limit for reasons of "hardship," as defined by the state.

States also have the flexibility to create a separate state program, using state-only funds, to provide assistance to families that have reached the federal time limit. Such families would remain eligible for assistance under the state program. California has availed itself of this option. Such state expenditures for post time-limit families are countable toward the state's maintenance-of-effort (MOE) requirement. Thus, the federal time limit may be viewed more as a limit on the use of federal funds than a strict requirement that aid be limited to five years.

Adult CalWORKs recipients began hitting the federal five-year lifetime limit in December 2001. However, because the CalWORKs program did not start until January 1998, adult recipients will not begin to reach the state five-year lifetime limit until January 2003. The Governor's budget projects that about 100,000 families will reach their CalWORKs time limit during 2002-03.

The CalWORKs Time Limit. Under CalWORKs, adults are generally limited to 60 months of cash assistance. However, the CalWORKs statute provides for both categorical and county discretionary exemptions from the time limit. Conditions under which categorical exemptions shall be granted include age (60 or older), certain caretaking responsibilities, and disabilities.

In addition to these categorical exemptions, counties have discretion to extend the time limit for individuals who are unable to find and maintain employment (including individuals who are victims of domestic violence). This determination will be based in part on the individual's history of participation and cooperation. The department is currently in the process of developing regulatory guidance to the counties for making such a determination. These regulations will also provide guidelines to the counties on (1) when to notify recipients who are close to reaching their time limit, (2) establishing a process by which recipients may claim a time extension, (3) tracking cases that have been granted time extensions, and (4) reviewing such cases for redetermination.

Grant Reductions. Once a nonexempt adult reaches the time limit, the grant payment is reduced by the adult portion of the grant. Thus, in the case of a family of three (a parent with two children), the grant payment would be reduced to the maximum aid payment for a family of two. For cases in which the timed-out adult is working, the actual grant payment would depend on net income as determined by the CalWORKs income disregard policy. (Under this policy, some of an individual's earnings are disregarded for the purpose of determining the grant amount.) Reduced grants may be issued in the form of a voucher, at county option. Figure 3 illustrates the effect of grant reductions for a family of three.

Post Time-Limit Services. Working recipients who have reached their 60-month time limit are eligible to receive child care for up to 24 months after leaving cash assistance. For all other employment services, counties have the option to provide services to individuals who have reached their time limit, but whose families remain eligible for assistance. Similar to the employment services available to recipients before they reach the time limit, these county-optional services may include case management; mental health, substance abuse or domestic violence treatment and counseling; transportation; education and training; and other services needed to maintain employment.

Unresolved Policy Issues

While the CalWORKs statute clearly establishes a lifetime limit on cash assistance, it provides less clear direction on two important policy issues. These are (1) how counties should apply exemptions from the time limit and (2) the circumstances under which services may be provided after an individual reaches the time limit. Below we discuss these unresolved policy issues.

Issue 1: How Should Counties Apply Exemptions From the Time Limit?

State law states its intent that California not exceed the 20 percent federal exemption limit. Accordingly, if California exceeds that limit, counties that have granted time extensions to more than 20 percent of their caseload would be responsible for the costs associated with the additional cases. However, the statute also states that counties shall not be penalized "for circumstances beyond their control" (for example, high local unemployment rates). Thus, the state may reduce or waive the county share of costs if a county is determined to have good cause for exceeding its 20 percent limit. The department is currently in the process of establishing guidelines for this good cause review.

Administration's Funding Policy Eliminates County Fiscal Risk. In both the current and the budget years, the Governor's budget uses state-only funds for cases that have reached their federal time limit. In other words, the state will not claim any federal funds under the 20 percent federal exemption provision. As noted above, counties face a fiscal risk for exceeding a 20 percent exemption limit only if the state exceeds the federal 20 percent limit. Since there is no state risk of exceeding the federal limit when time-limited cases are shifted to the state-only program, the administration's funding policy essentially eliminates the fiscal risk to counties of exceeding the 20 percent exemption limit. Elimination of this fiscal risk means that counties essentially have no guidance (and therefore no limit) on the number of exemptions they can grant. As described earlier, this funding policy is possible (with no additional General Fund costs above the MOE floor) because such state-only spending is countable towards California's MOE spending requirement.

Policy Options. We have identified three approaches to address the issue of how time limit exemptions should be applied. These approaches are (1) the current practice of effectively permitting unlimited exemptions, (2) reestablishing a numerical guideline for the number of exemptions that counties may grant, and (3) statutorily limiting county discretion in granting exemptions.

• Current Practice. If the Legislature simply wants to avoid a federal penalty for exceeding the 20 percent
• exemption limit, then current law, in combination with the administration's funding policy, will achieve that goal. The administration's policy of using state-only funds for time-limited cases is consistent with that goal since it ensures that California does not exceed the federal limit.
• Reestablish a Guideline. If, conversely, the Legislature wants to provide counties and the department a guideline on the absolute percentage of the caseload that should be exempted at any one time, then clarifying legislation is necessary. Clarifying legislation could be enacted to explicitly hold counties responsible for the costs associated with granting exemptions to more than a specified percent of their caseloads, regardless of whether the state exceeds the 20 percent federal limit. The good cause review provisions could remain intact.
• Limit County Discretion. We note that the amount of the federal 20 percent exemption limit is arbitrary. Accordingly, it may not reflect either the categorical exemptions that the Legislature has already established, or additional exemption policies the Legislature may wish to establish given a variety of factors, including local economic conditions. At the same time, giving counties the discretion to grant exemptions to an unlimited number of cases may significantly weaken the effect of the CalWORKs time limit policy. Therefore, rather than either setting a numerical exemption rate guideline or having none at all, a third approach would involve prescribing more specific conditions under which exemptions could be granted. Specifically, the Legislature could limit county discretion in determining whether an individual is unable to maintain employment. For example, counties might be allowed to grant exemptions only if the local unemployment rate is above a specified level, and only to individuals who have either shown a specified number of attempts to find employment and/or who have been sanctioned no more than twice.

Conclusion. Although all three approaches have merit, we are concerned that current practice of allowing unlimited exemptions may weaken the time limit policy. Accordingly, we would recommend that the Legislature either reestablish a guideline or statutorily limit county discretion.

Issue 2: Post Time-Limit Services

State law is unclear about the conditions under which a working adult who has reached the time limit can continue to receive employment services. Specifically, certain code sections conflict as to (1) whether time-limited recipients who are working must participate in community service activities in order to receive employment services, and (2) how long such recipients may receive these services. Further, current law does not specify an hourly requirement for community service activities.

Analyst's Recommendation. We recommend that clarifying legislation be enacted to remove this ambiguity regarding employment services for working, time-limited adults whose families continue to receive assistance. Given that the goal of employment services is to help individuals find and retain employment, we believe that a community service requirement for individuals who are not working and wish to receive services has a sound policy basis. However, for individuals who are working, a community service requirement may disrupt their employment effort.

We therefore recommend that former recipients working at least 20 hours per week be provided transportation assistance without any community service requirement. Such assistance could be capped at a certain amount per month, and, similar to the availability of child care services, could be available for up to 24 months after leaving assistance. Because transportation is a critical work support service, providing such assistance to working, time-limited adults would likely result in lower grant costs in the short term, since working families receive a lower grant amount than nonworking families. It could also achieve long-term savings to the extent that enabling parents to remain employed and increase their earning potential results in more families eventually leaving cash assistance altogether.

For all other employment services, we further recommend giving counties the option to explicitly waive the community service requirement for individuals working at least 20 hours a week. We believe that counties are in the best position to judge whether families making a good faith effort to work and who demonstrate a need for additional employment services would benefit from a community service assignment. We also believe that counties are best able to judge whether such a benefit outweighs the costs associated with providing a community service assignment.

MOE Spending Requirement

Achieving General Fund Savings While Meeting MOE Requirement

The Governor's budget proposes the minimum amount of General Fund monies required by federal law for the California Work Opportunity and Responsibility to Kids (CalWORKs) program in 2002-03. Any net reduction in CalWORKs expenditures would generally result in federal block grant savings, but not General Fund savings. However, we identify two methods by which a CalWORKs reduction could result in General Fund savings, while meeting the maintenance-of-effort requirement.

Maintenance-of-Effort (MOE) Requirement. To receive the federal TANF block grant, states must meet a MOE requirement that state spending on assistance for needy families be at least 75 percent of the federal fiscal year (FFY) 1994 level, which is $2.7 billion for California. (The requirement increases to 80 percent if the state fails to comply with federal work participation requirements.) Although the MOE requirement is primarily met with state and county spending in CalWORKs and other programs administered by DSS, state spending in other departments totaling $364 million is also used to satisfy the requirement.

Proposed Budget Is at MOE Floor. For 2002-03, the Governor's budget for CalWORKs is at the MOE floor. The budget also proposes to spend all but $40 million of available federal TANF funds in 2002-03, including both the projected carryover of unexpended funds ($253 million) from 2001-02 and $189 million in reclaimed county performance incentives (discussed later in this Analysis). The $40 million will be held in a reserve for unanticipated future program needs. We note that any net augmentation to the CalWORKs program above the $40 million reserve amount would result in additional General Fund costs above the MOE requirement.

Conversely, because the budget proposes to spend the minimum amount of General Fund monies required by federal law, any net program reductions would generally result in TANF savings, but not General Fund savings. However, below we identify two methods by which CalWORKs savings could result in General Fund savings. These include (1) recognizing additional non-CalWORKs MOE-countable expenditures and (2) transferring freed-up TANF funds into the Social Services Block Grant (SSBG).

Method 1: Recognize Other MOE-Countable Expenditures. As noted above, the Governor's budget assumes that $364 million in spending in other departments will be used to satisfy the MOE spending requirement in 2002-03. If additional non-CalWORKs MOE-countable expenditures were identified, the required level of CalWORKs MOE spending would decrease by a like amount. Thus, General Fund spending in CalWORKs could be reduced while still maintaining MOE compliance. Achieving General Fund savings in this way would require either (1) a program reduction in CalWORKs or (2) drawing on the TANF reserve in order to keep the program whole.

Later in our analysis of this program, we recommend that certain current state spending for (1) supplemental cash payments to disabled adults and children, (2) nonemergency health services to legal immigrants, and (3) subsidized child care for certain families be counted toward the MOE requirement. Recognizing these payments (which we estimate to be in the range of $30 million to $100 million) as MOE-countable expenditures would permit a General Fund reduction in CalWORKs of a like amount. To the extent that TANF funds are available to replace any General Fund reduction, these General Fund savings could be achieved without a program reduction.

Method 2: Transfer Freed-Up TANF Funds Into the Social Services Block Grant (SSBG). The federal TANF block grant provisions allow California to transfer up to $373 million in TANF funds to the SSBG, also known as Title XX funds, under the condition that the transferred funds are spent on children or their families with incomes under 200 percent of poverty. Once transferred, the funds may be used to support any programs that meet the SSBG goals. These include achieving economic self-sufficiency, preventing abuse or neglect, enabling families to stay together, and preventing inappropriate institutional care.

For 2002-03, the Governor's budget proposes to expend the full amount of available SSBG funding to offset General Fund costs in programs that meet the SSBG goals. We estimate that an additional $125 million in current General Fund spending, mostly on developmental services, could be replaced with TANF funds transferred to the SSBG. Later in the Child Welfare Services section of this Analysis, we recommend transferring freed-up TANF funds into the SSBG for the purpose of reducing General Fund expenditures for developmental services.

Count Additional Spending Toward MOE Requirement

We recommend that the department count toward the California Work Opportunity and Responsibility to Kids maintenance-of-effort requirement General Fund expenditures for (1) supplemental cash payments to disabled adults and children, (2) nonemergency health services for certain immigrants, and (3) subsidized child care for certain families. We estimate such countable expenditures to be in the range of $30 million to $100 million. Counting such expenditures would increase legislative flexibility in allocating General Fund monies for CalWORKs.

Countable MOE Funds. Pursuant to federal welfare reform, California may count toward meeting its MOE requirement all state spending on families eligible for CalWORKs, even if they are not in the CalWORKs program. To be countable, such spending must be consistent with the broad purposes of federal welfare reform. These include providing assistance to needy families so that children may be cared for in their own homes and families can become self-sufficient. Countable expenditures must also satisfy a "new spending" test, whereby only the amount by which they have grown since federal fiscal year (FFY) 1995 is counted.

State Supplementary Program (SSP). The SSP supplements federal Supplemental Security Income payments for low-income aged, blind, and disabled individuals. For 2002-03, the Governor's budget proposes $3 billion from the General Fund for SSP payments. Some of these payments enable children to be cared for at home, and therefore are consistent with the intent of the federal welfare reform law.

After applying the new spending test described above, we believe that between $30 million and $50 million in SSP spending could be counted toward the MOE requirement in 2002-03. This includes payments to disabled children and payments to disabled adults with children.

Nonemergency Health Services for Federally Ineligible Immigrants. California currently uses state-only funds to provide nonemergency health services to certain legal immigrants who, pursuant to federal welfare reform, were made ineligible for federally reimbursable nonemergency services. Providing preventive health services for families with children keeps parents and children healthy, thereby assisting the parents in keeping regular work hours. Expenditures for such services are therefore consistent with the intent of federal welfare reform. Because they began after 1995, these expenditures also meet the MOE new spending test. We believe that at least $3 million in state spending on these health services could be counted toward the MOE requirement in 2002-03.

Subsidized Child Care. Currently, the budget recognizes $322 million in expenditures within the State Department of Education (SDE) for subsidized child care toward the MOE spending requirement. This amount only reflects expenditures for families who are current or former CalWORKs recipients. However, as noted earlier in our analysis of this program, spending for families that are eligible but not necessarily receiving assistance is also countable toward the MOE requirement. We believe a significant portion of SDE's child care expenditures (potentially in the tens of millions of dollars) in the general subsidized child care system are for such eligible families, and therefore would be countable toward the MOE requirement. Counting such expenditures may require amending the state TANF plan's definition of needy families for purposes of providing child care.

Statutory Change and State Plan Amendment Are Necessary. In order to count the identified SSP, health, and child care expenditures toward the MOE requirement, statutory changes recognizing such expenditures as counting toward the MOE requirement are likely to be necessary. Similarly, the state TANF plan may also need to be amended to recognize such expenditures. We note that neither a statutory change nor a state plan amendment would impact eligibility rules for CalWORKs assistance.

Analyst's Recommendation. We are working with the Department of Social Services to refine the estimate of countable MOE spending. Once this amount is determined, we would recommend that the CalWORKs budget reflect all countable SSP, nonemergency health, and subsidized child care expenditures toward the MOE requirement in 2002-03, and that the department amend the state TANF plan accordingly. We recommend that the Legislature adopt the necessary statutory changes to recognize these expenditures as MOE-eligible. Recognizing additional MOE-countable spending creates options and policy trade-offs for the Legislature, which we discuss below.

One option is to count General Fund expenditures in CalWORKs above the MOE requirement toward California's remaining match requirement for the federal Welfare-to-Work block grant. We note that the remaining obligation--$69 million--must be spent by the end of 2003-04. Alternatively, if the Legislature wants to maintain CalWORKs spending at (or as close as possible to) the MOE floor, the Legislature could simply reduce General Fund spending in CalWORKs. This would be possible either by replacing General Fund monies with available TANF funds from the reserve, or, to the extent TANF funds are unavailable, through a program reduction. We note that the maximum General Fund savings that could be achieved without a program reduction would be $40 million (the proposed TANF reserve).

Other Budget and Policy Issues

Budget Proposes Redirecting County Performance Incentives

The Governor's budget proposes to redirect $189 million in unspent county performance incentives in 2001-02 and 2002-03. We comment on the advantages and disadvantages of this proposal.

Background. Prior to 2000-01, the CalWORKs statute provided that savings resulting from (1) exits due to employment, (2) increased earnings, and (3) diverting potential recipients from aid with one-time payments, would be paid to the counties as performance incentives. The 2000-01 budget trailer bill for social services--Chapter 108, Statutes of 2000 (AB 2876, Aroner)--changed the treatment of performance incentives in several important ways. Among these changes, it:

• Prohibited counties from earning new incentives beginning in 2000-01 until the estimated prior obligation owed to the counties had been paid by the state.
• Made future performance incentive payments subject to annual budget act appropriations, rather than being treated as an "entitlement."

Performance Incentives Expenditures. By the end of 1999-00, the last year for which an appropriation for new performance incentives was made, counties had earned approximately $1.2 billion in performance incentives, and had been paid $1.1 billion. The 2001-02 Budget Act appropriated an additional $20 million to the counties, as payment towards the prior-year obligation for previously earned incentives ($97 million). However, as of October 2001, counties had spent only $161 million of their paid incentive funds, leaving $931 million in unspent funds. The department estimates that by the end of 2001-02, approximately $600 million in performance incentive funds will remain unspent.

Budget Proposal. In order to reduce CalWORKs funding pressures in 2002-03, the Governor proposes to redirect $189 million in unspent performance incentives to fund CalWORKs grants, basic services, and administration. Specifically, the Governor proposes budget trailer bill language to redirect the $20 million appropriation in 2001-02. In addition, the Governor proposes to (1) reclaim the estimated $600 million in unspent performance incentives in 2002-03, (2) reappropriate $431 million of the reclaimed amount to the counties as performance incentive funds, and (3) redirect the "recaptured" $169 million for grants, basic services, and administration. If the Legislature approves the redirections, the state's unpaid obligation to the counties for prior-year performance incentive earnings will be $266 million ($169 million plus the full prior-year obligation of $97 million).

Policy Considerations. The amount of unspent performance incentives to be reappropriated to the counties in the budget year, versus the size of the state's out-year obligation to repay the counties for previously earned performance incentives, is a policy decision for the Legislature. Specifically, the Legislature could retain more than the proposed $169 million redirection of unspent funds. These funds could be used, for example, to provide the statutory COLA (described earlier in our analysis of this program), augment the TANF reserve for future program needs, or to reduce General Fund expenditures through one of the methods described earlier in our analysis of the MOE requirement. The disadvantages of retaining additional incentive funds are that it (1) increases the obligation to the counties in the out-years and (2) reduces the level of services that counties are able to provide with these funds. We note that some counties believe their employment services allocations are insufficient to provide necessary services, and rely on performance incentive funds to provide such services.

Budget Expands County Block Grant But Proposed "Holdback" Is Disruptive

The Governor proposes three significant changes to the California Work Opportunity and Responsibility to Kids budgeting system. These changes include (1) funding county administrative and employment services costs at their current-year levels, (2) substantially expanding the county block grant, and (3) retaining up to 5 percent of the county allocations to pay for potential cost increases for assistance payments. We recommend that the Legislature (1) build on the Governor's county block grant proposal by including additional Temporary Assistance for Needy Families (TANF) allocations in this block grant but (2) reject the proposed 5 percent "hold-back" and instead establish a larger TANF reserve to pay for the potential program cost increases.

The CalWORKs Budget System. Funding for CalWORKs employment services, child care, and program administration are provided to the counties in a block grant known as the "single allocation." Counties have the discretion to move these block grant funds among programs in order to address actual need at the local level. Beginning in 2000-01, the budgeting system for the employment services component of the single allocation was changed from a statewide model to a county-driven system based on projected county costs, similar to the system used to budget the administrative cost component of the single allocation. Under this system, known as the proposed county administrative budget (PCAB) process, the department reviews the counties' PCAB requests for consistency with state law and workload needs and adjusts the county funding requests accordingly.

Budget Proposal. The budget proposes three significant changes to the CalWORKs budgeting system. These changes include (1) suspending the PCAB process, (2) replacing the single allocation with an expanded block grant known as a "county program grant," and (3) retaining up to 5 percent of the county allocations to cover potential cost increases for assistance payments.

• PCAB Suspension. Due to funding pressures in the CalWORKs program, the budget proposes to suspend the PCAB process for 2002-03. (This suspension also applies to funding for county administrative costs for Medi-Cal, Foster Care, and Food Stamps.) Specifically, the budget proposes to fund county administrative and employment services costs at their current-year funding levels, adjusted for caseload changes. Current funding levels will not be adjusted for inflation.

Analyst's Comments. Given the state's fiscal situation, suspending PCAB for CalWORKs and the administration of other health and social services programs appears prudent. It is difficult to estimate the savings to the CalWORKs program of suspending PCAB in the budget year. We note that in 2001-02, the budget for administration and employment services was frozen at the 2000-01 level, due to funding pressures. As a result, in the current year the counties' single allocations were approximately $250 million lower than what the counties had requested. Assuming the counties' funding requests for 2002-03 would have been at least equal to their 2001-02 requests, suspending PCAB in the budget year would result in savings to the CalWORKs program of about $250 million (the exact amount depends on what the department would have approved in the absence of funding pressures). We note that from the perspective of the counties, such program savings mean that the budget for core services and administration is underfunded.

• County Block Grant. The Governor proposes budget and budget trailer bill language to replace the county single allocation with a new county block grant, known as the "county program grant." In addition to the single allocation funding for services, administration, and child care, the county block grant will include $109 million in funding currently earmarked for mental
• health and substance abuse treatment and $201 million in funding currently earmarked for probation camps and juvenile treatment facilities. Rolling these separate allocations into a county block grant will increase county flexibility to move funds across program purposes as needed. It is our understanding that the department will introduce trailer bill language to prevent counties from using this increased funding flexibility to supplant existing county expenditures for probation and juvenile treatment services.

Analyst's Recommendation. We believe that counties are in the best position to weigh the service needs of their CalWORKs caseloads against various competing county priorities, both within and outside of the CalWORKs program. We therefore believe that increasing county flexibility to determine the best use of available TANF funds has a sound policy basis. For this reason, we recommend building on the Governor's county block grant proposal by including additional proposed TANF funds currently categorically allocated to other agencies.

Specifically, the Governor proposes to pass through $44 million in TANF funds to various state agencies and community-based organizations that provide (1) employment and educational services to CalWORKs recipients and (2) teen pregnancy prevention services. These agencies and organizations include the California Community Colleges, the State Department of Education, the Department of Health Services, and local Boys and Girls Clubs.

We believe that counties are best able to evaluate the educational and employment needs of their caseloads, and to consider those needs in the context of available funding for other basic services, child care, and program administrative costs. Similarly, we believe that counties are in the best position to evaluate the effectiveness of local pregnancy prevention efforts and to weigh the merits of such efforts with competing TANF funding priorities within the CalWORKs program. Therefore, without prejudice to the merits of the particular services that would be funded with the proposed $44 million pass-through, we recommend that the Legislature include those TANF categorical allocations in the county block grant allocation. Counties would have the flexibility to contract with local colleges, universities, and community-based organizations on an as-needed basis.

• Holdback of County Allocations. The budget proposes budget bill language to retain up to 5 percent (approximately $95 million) of the county block grant allocations to cover potential cost increases for assistance payments in CalWORKs or the Kinship Guardianship Assistance Payment Program (Kin-GAP)a program that enables dependent children to exit the foster care system and live with a relative guardian. Both CalWORKs and Kin-GAP assistance payments are entitlements, meaning that if grant costs exceed budget authority, funding is automatically provided to pay for the increased costs. Under current law, unanticipated increases in program costs due to caseload growth or changes in federal law would be funded automatically with either TANF or General Fund resources. Under the Governor's proposal, such program cost increases would instead be funded first from the 5 percent holdback funds, which would otherwise support employment services and program administration. In other words, the Governor proposes to use up to approximately $95 million of county program grant funds to mitigate the potential General Fund impact of unanticipated caseload growth.

Analyst's Recommendation. The primary disadvantage of the Governor's 5 percent holdback proposal is that the potential $95 million reduction in county block grant funding would result in a lower level of employment services and a lower level of funding for county administrative costs. Additionally, because the actual amount of county funds that will ultimately be redirected for grant payments is unspecified, the Governor's proposal is disruptive to the counties' planning process and their ability to budget for employment services and administrative costs.

While we recognize the need to limit the risk to the General Fund in the budget year given the General Fund condition, we believe that a less disruptive approach to protecting the General Fund in the event of unanticipated caseload growth would be to establish a larger TANF reserve. This could be accomplished either through an outright program reduction (for example, reducing the level of employment services), or by retaining a portion of the proposed $431 million reappropriation for performance incentives (discussed earlier in our analysis of this program). In our view, these incentive funds are not as necessary for core program services as the basic allocation for employment services. We therefore recommend that the Legislature reject the Governor's 5 percent "holdback" of the county block grant. To the extent the Legislature wishes to augment the TANF reserve for the purpose of protecting the General Fund, we would recommend that the Legislature retain a portion of the proposed reappropriation for performance incentives.

CalWORKs Needs Long-Term Budget Plan

Absent legislative action, funding pressures in the California Work Opportunity and Responsibility to Kids (CalWORKs) program will continue to erode the program's welfare-to-work component (employment services and administration). Accordingly, the Legislature faces difficult policy choices in determining the appropriate level of CalWORKs funding. We present policy considerations for the Legislature in developing a long-term budget plan for CalWORKs.

Background. Since its enactment in 1997, CalWORKs funding has remained essentially stable. The program's relatively flat funding level is due to a fixed amount of TANF block grant funds and the state's decision to limit its share of funding to the minimum MOE spending requirement. This funding level was sufficient to support the CalWORKs program in its early years for several reasons. Prior to the current year, the continuous caseload decline, coupled with the relatively slow implementation of the employment services component of the CalWORKs program, resulted in TANF reserves that were sufficient to fully fund the program's core elementsgrants, basic employment services, and child careas well as to provide the counties with approximately $1 billion in performance incentive funds, which could be spent on "noncore" program enhancements.

Beginning in 2000-01, however, no new funding has been provided for performance incentives. Further, in 2001-02, the budget for the welfare-to-work component (employment services and administration) was frozen at the 2000-01 level due to funding pressures. These pressures resulted from a combination of a slowing caseload decline, a matured welfare-to-work component, and fewer carryover TANF funds available from prior years.

Our February 2001 report on Changing the Employment Services Budget Process provided further evidence of upcoming funding pressures. Specifically, we showed that some counties' employment services and administrative cost allocations were underfunded. Building on this prior analysis, we find that in 2001-02, 11 counties (representing approximately 50 percent of the statewide caseload) had welfare-to-work allocations that were below a minimum funding standard that we calculated based on 1999-00 allocations to Riverside and San Bernardino Counties. (These are two relatively large counties with programs that have no particularly high-cost components, but are nevertheless successful in engaging the majority of participants who are subject to the CalWORKs work participation requirements.) The cost of bringing all counties up to this standard (without redistributing funding from the higher-funded counties) would be approximately $125 million.

Legislature Requests New Budgeting Methodology. Recognizing the likelihood that funding pressures would continue to intensify in future years, in 2001 the Legislature adopted budget trailer bill language directing the department to develop a new budgeting methodology for all components of the CalWORKs program as well as all non-CalWORKs programs funded with TANF funds. This methodology was due to the Legislature by November 15, 2001, and was to be the basis for the 2002-03 budget.

Governor's Budget Does Not Incorporate New Methodology. Although the department met with stakeholders as directed, the department has not submitted a new budgeting methodology to the Legislature, nor is the Governor's budget based on a new methodology. Instead, the Governor again proposes to use the budget for the welfare-to-work component as the "balancing entry" in order to maintain CalWORKs expenditures within available resources. Specifically, the budget proposes to (1) continue to freeze the county allocations for employment services and administration and (2) retain up to 5 percent of these allocations to cover potential cost increases for assistance payments. In addition, the budget "reclaims" $169 million in performance incentives from the counties in order to fund core program elements without exceeding the MOE floor. (These issues are discussed earlier in our analysis of this program.) The Governor's budget summary further indicates that funding pressure in future years will be addressed by reducing the county allocations as necessary.

Policy Considerations for the Legislature. As noted above, in certain counties the CalWORKs welfare-to-work component is underfunded in the current year. Because the Governor proposes to freeze budget-year allocations, this underfunding would persist in 2002-03. Funding pressures within CalWORKs are likely to intensify in future years, for several reasons. These include the potential for continued caseload increases as a result of the recession, counties exhausting their performance incentive funds, reductions in the level of TANF carryforward balances, the cost of providing the statutory COLA, and the potential for reduced federal funding pursuant to TANF reauthorization. These pressures will be only partially offset by savings due to some recipients reaching their five-year time limit on cash assistance. We believe the CalWORKs program requires a long-term budget plan to address these fiscal pressures. We have identified several issues for legislative consideration in developing such a plan. These include (1) whether to maintain General Fund spending at the MOE floor, (2) the relative importance of fully funding employment services versus maintaining grant levels, and (3) whether to standardize funding allocations for employment services and administration.

• Should the Legislature Fund CalWORKs Above the MOE Floor? Since CalWORKs was enacted, the Legislature has taken steps to maintain General Fund spending at the MOE floor. Prior to the current year, this budgeting approach was possible without funding reductions in core program elements. However, as caseloads increase and available resources decrease, maintaining General Fund spending at the MOE floor will require reductions either in the employment services level or in the level of assistance payments. The decision about whether to exceed the minimum state spending requirement therefore involves balancing the benefits of budgetary savings against the impact on CalWORKs families of a program reduction.
• How Should the Legislature Weigh Funding of Grants Versus Services? The decision about the appropriate funding level for CalWORKs also involves weighing the relative importance of two primary goals of a welfare-to-work program: (1) providing an adequate level of cash assistance to enable needy families to maintain a minimum standard of living and (2) providing an adequate level of employment services to enable recipients to gain the skills needed to work and eventually become self-sufficient. Investing in employment services is especially important given the lifetime limit on cash assistance for adult recipients. However, the costs of this investment must be balanced against the costs of ensuring that needy families are provided with sufficient income maintenance. We note that if the Legislature elected to reduce grants, about 45 percent of any such reduction
• would be offset by an increase in federal food stamp benefits.

Current law--like the Governor's budget--favors preserving grant payments at the expense of funding employment services. Specifically, grant payments are an entitlement under state law, meaning that if grant costs are greater than budgeted, increased funding is automatically provided. State law also provides for statutory COLAs. Conversely, funding for employment services and county administration is capped by the annual budget appropriation. Thus, absent legislative action to increase funding for employment services and administration (or to redirect funding from grant payments), funding pressures will continue to erode the welfare-to-work component of the CalWORKs program.

• How Should Funds Be Allocated to Counties? Finally, developing a long-term budget plan requires consideration of how funding for employment services and administration is allocated among counties. As noted above, current funding allocations per aided adult vary widely across the counties. Such variation in allocations raises concerns about equitable access to employment services. In determining whether to implement a more equitable allocation process, the Legislature could consider allocating all funding for employment services and administration on a per-aided adult basis (because adults receive the employment services). Final allocations could be adjusted for high- and low-cost regions and for small counties with high fixed costs. In order to avoid unnecessary disruption, this change could be phased in over two to three years.

Alternatively, in recognition that some variation in county allocations is to be expected--given differences in local economic conditions, costs of providing services, and program designs--the Legislature could consider standardizing funding only for the program administration component of the county allocation, and leaving intact the current allocation formula for employment services. For example, after determining an appropriate caseworker-to-recipient ratio, county funding for administration could be based on the number of cases with an adult. Again, adjustments could be made for high- and low-cost regions.

Summary. The Legislature faces difficult policy choices in determining the appropriate level of CalWORKs funding. Given the state's fiscal situation, the Governor's approach of freezing the budget for employment services and administration may be appropriate in the budget year. However, for future years, we believe that the Legislature should establish its priorities with respect to (1) the level of General Fund support for CalWORKs (whether or not to go above the MOE floor), (2) the relative importance of income maintenance (grant payment levels) versus employment services, and (3) addressing the current inequities in funding allocations for employment services and administration. Given caseload and cost trends, we believe that continuing the practice of spending at the MOE floor is likely to result in further underfunding of the program.

Eliminate CalWORKs Grant Payments Under $150

We recommend eliminating grant payments for families with incomes (including earnings and benefits) of at least 122 percent of the federal poverty level. Such families currently receive relatively modest grant payments (up to about $150 monthly). Removing these families from cash assistance would preserve their time on aid for future periods during which they may become unemployed, and would result in program savings of approximately $37 million. (Reduce Item 5180-101-0890 by $37 million.)

CalWORKs Grant Payments. Under the CalWORKs income disregard policy, a portion of a recipient's earnings is disregarded for the purpose of calculating the family's grant payment. This policydesigned to "make work pay"means that a working family of three would remain eligible for cash assistance as long as the family's monthly earnings are below $1,583 (130 percent of the federal poverty level). For example, a family of three with earnings of $1,400 would receive a grant of $91. While families with significant earnings receive relatively modest grant payments, the months in which they receive such payments are still counted toward their 60-month lifetime limit on cash assistance.

Interaction of Income Disregard Policy With Time Limits. We believe the earned income disregard policy is an important component of any welfare program that is designed to encourage recipients to make the transition from welfare to work. However, there is an inherent tension between California's relatively generous disregard policy and the CalWORKs lifetime limit on cash assistance. Specifically, the 60-month time limit may motivate recipients to leave assistance as soon as possible in order to preserve any remaining months on assistance for the future. However, the disregard policy enables working families to continue to receive increasingly modest grant payments until their earnings are well above the federal poverty level.

Analyst's Recommendation. We recommend eliminating grant payments for families with total incomes (including earnings and benefits) of at least 122 percent of the federal poverty level. Under this policy, a family of three could lose up to $150 in cash assistance. This would be partially offset by an increase of about $68 in food stamp benefits, leaving the family's total income at approximately 116 percent of the federal poverty level. While this policy would reduce a family's total income somewhat, it would preserve the family's remaining time on aid for periods in which the recipient might become unemployed or unable to work. We note that currently families who leave cash assistance due to earnings may receive up to 12 months of post-employment services after leaving aid (at county option).

We estimate that this policy change would result in grant savings of approximately $19 million. In addition, we estimate that the administrative savings associated with this policy change would be approximately $18 million. Such savings (mostly TANF funds) could be used to augment the TANF reserve for future program needs, increase county block grant allocations (described earlier in our analysis of this program), partially adjust grant payments for inflation (in place of providing the full statutory COLA, also described earlier), or to reduce General Fund expenditures through one of the methods described earlier in our analysis of the MOE requirement.

Reinstate Senior Parent Deeming

We recommend that a senior parent's income be counted for the purpose of determining financial eligibility of a minor parent's child for California Work Opportunity and Responsibility to Kids assistance. This would result in program savings of approximately $11 million. (Reduce Item 5180-101-0890 by $11 million.)

Current Law. Under the Teen Pregnancy Disincentive policy--enacted by Chapter 307, Statutes of 1995 (AB 908, Brulte)--a minor parent is generally required to live with her parent(s) (referred to as "senior parents") in order to receive cash assistance. (Certain exceptions exist, for example, in cases in which the senior parent's home is unsafe for the minor parent and/or her child.) Although the minor parent cannot open her own CalWORKs case, the senior parent may apply for and receive aid on behalf of the grandchild, even if the senior parent's income would otherwise make the family ineligible for assistance. We note that prior to the implementation of the Teen Pregnancy Disincentive policy, the senior parent's income was "deemed" to the grandchild--meaning that the grandparent's income was considered to be available for the support of the grandchild, and therefore counted for the purpose of determining eligibility of the grandchild for cash assistance.

Policy Considerations. The advantage of current law is that it may encourage teen parents to live with their own parents, in what may be a more appropriate child-rearing environment than if the teen parent lived on her own. (We note that if the teen moved out, she would generally not be entitled to a grant for herself or her child pursuant to Chapter 307.) The disadvantage of guaranteeing an aid payment for the minor parent's child (current law) is that it permits nonneedy families to receive cash assistance by establishing a "child-only" case. Because such cases do not include an adult, the family is not subject to either the CalWORKs work participation requirement or the 60-month lifetime limit on cash assistance.

Analyst's Recommendation. The primary mission of the CalWORKs program is to help needy families with children become self-sufficient through work. Providing income support to nonneedy child-only cases with no participation requirements is not consistent with that mission. We therefore recommend that the Legislature reinstate senior deeming in the case of a minor parent living at home. Reinstating senior deeming would result in about 3,000 nonneedy child-only cases (approximately 2 percent of the child-only caseload) losing monthly cash benefits of about $320.

We estimate that this policy change would result in savings of approximately $11 million (mostly TANF funds). Such savings could be used to augment the TANF reserve for future program needs, increase county block grant allocations (described earlier in our analysis of this program), partially adjust grant payments for inflation (in place of providing the full statutory COLA, also described earlier), or to reduce General Fund expenditures through one of the methods described earlier in our analysis of the MOE requirement.

The CalWORKs Child Care Program

As part of systemwide child care reforms, the Governor proposes to eliminate the Stage 3 "set-aside" designed to provide former CalWORKs families with child care beyond the two-year guarantee for such services. We review the Governor's child care reform proposals and their impact on the CalWORKs program.

The CalWORKs Child Care System. Under current law, CalWORKs child care is delivered in three stages. Stage 1 is administered by county welfare departments and begins when a participant enters CalWORKs. Participants transition to Stage 2, which is administered by the State Department of Education (SDE), once their situations become stable as determined by the counties. Participants can stay in Stage 2 while they remain on CalWORKs and for up to two years after they leave CalWORKs. Stage 3 refers to the broader subsidized child care system administered by SDE that serves both former CalWORKs recipients and working poor families who have never been on CalWORKs. Because there typically are waiting lists for Stage 3, in 1997 the Legislature created the Stage 3 "set-aside" as part of the CalWORKs child care system in order to provide continuing child care for former CalWORKs recipients who are unable to find "regular" Stage 3 child care once they "time-out" of Stage 2.

Budget Proposal. The Governor's budget proposes $1.3 billion for CalWORKs child care. This is a decrease of $271 million (17 percent) over the current-year appropriation. As discussed below, this decrease is due to savings associated with the Governor's child care reform proposals. Figure 4 summarizes the proposed spending plan. As the figure shows, the budget includes a reserve of $164.7 million for Stage 1 and Stage 2 child care. This total includes a "hold back" of 5 percent of the estimated need for Stages 1 and 2 ($64.7 million). The remaining $100 million is above the estimated need and represents a "true" reserve for Stages 1 and 2.

Governor's Child Care Reform Proposal. The Governor proposes to reform California's subsidized child care system (which includes both CalWORKs and non-CalWORKs child care) by modifying current eligibility rules, reimbursement rate limits, and family fees. Specifically, the Governor proposes to reduce income eligibility limits, reduce reimburse ment rates, implement fees for lower-income families, and increase current fees for higher-income families.

Impact on CalWORKs Child Care. The department estimates that the proposed reforms will result in savings of approximately $183 million ($50 million in Stage 1 and $133 million in Stage 2). These savings result from a combination of higher family fees, lower reimbursement rates, and some families losing eligibility for CalWORKs child care. Specifically, about 6,000 children would lose eligibility. Additionally, many CalWORKs families will be responsible for a child care copayment for the first time. Families would be required to pay such fees directly to their child care providers. We note that the Governor proposes to reinvest the savings resulting from this proposal, thereby increasing the number of child care slots.

Eliminating the Long-Term Guarantee. In addition to these systemwide changes to California's subsidized child care system, the Governor also proposes to eliminate the Stage 3 set-aside for former CalWORKs recipients who have timed-out of Stage 2. Specifically, the Governor's budget includes funding for Stage 3 child care through the end of 2002-03 for families who time-out of Stage 2 between July 2002 and March 2003. Most families who will transition from Stage 2 during 2002-03 will thus be guaranteed Stage 3 child care through the end of the budget year. The proposed Stage 3 phase-out therefore results in minimal budget risk associated with former recipients returning to aid due to a lack of child care in 2002-03. However, the Governor's proposal may represent a budget risk in the out-years to the extent that the broader subsidized child care system is unable to absorb families who will time out of Stage 2 beginning in April 2003 as well as those families who will lose their Stage 3 guarantee at the end of 2002-03.

Policy Considerations. The primary advantage of eliminating the Stage 3 set-aside is that it would create more equitable access to subsidized child care. Specifically, ending the child care guarantee for former CalWORKs recipients who have been off aid for at least two years would help ensure that working poor families with similar income levels have an equal chance of receiving subsidized child care regardless of whether they have ever received CalWORKs assistance. The disadvantage of this approach is that former CalWORKs recipients--having received aid in the past--may be more likely to go back on CalWORKs if they lose their child care than would a non-CalWORKs working poor family, even though the incomes of the two families may be very similar.

No Penalty for Cash Management Violation

As directed by the U.S. Department of Health and Human Services, California will return unspent Temporary Assistance to Needy Families funds drawn down in violation of the Cash Management Improvement Act, along with interest earned on the advance draw-down funds, but will incur no penalties.

In our Analysis of the 2001-02 Budget Bill, we indicated that California's practice of paying counties performance incentives when they are earned, rather than when they are used for program purposes, may not be consistent with the Cash Management Improvement Act (CMIA) and U.S. Department of Health and Human Services (DHHS) regulations. In August 2001, the Administration for Children and Families (ACF), DHHS--which administers the TANF program--notified the department that California's advance draw down of TANF funds for county performance incentives was in violation of both CMIA and DHHS regulations. The ACF directed the department to return the unexpended incentives, including any interest earned on the funds.

To avoid any penalties, the department has negotiated the use of an offset process to recoup the unspent incentives, whereby no new TANF funds will be drawn down for assistance payments until the unspent incentives have been "repaid." The ACF has further agreed to accept the actual interest that counties have earned on the awarded incentives, rather than an amount based on an augmented (penalty) interest rate. Counties have been instructed to remit the interest they have earned through the end of 2001-02 by July 31, 2002.

Withhold Recommendation on Impact of Federal Eligibility Changes

We withhold recommendation on the estimated cost of recent federal eligibility changes, pending review of the Governor's May Revision of the budget.

Eligibility for CalWORKs is based on a number of factors, including the value of a household's assets. State law conforms the CalWORKs asset rules to the federal food stamp rules. As a result of recent federal food stamp changes affecting how vehicles are valued for the purpose of determining eligibility, more households are now eligible for CalWORKs assistance.

These eligibility changes only went into effect in June 2001. We believe that by the time of the Governor's May Revision, when more actual caseload data are available, the impact of these changes should largely be reflected in the basic caseload trend. We therefore withhold recommendation on the estimated cost of the federal changes pending review of the Governor's May estimates.