Analysis of the 2004-05 Budget Bill Legislative Analyst's Office February 2004

Department of Social Services CalWORKs Program (5180)

In response to federal welfare reform legislation, 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 $4.9 billion ($2 billion General Fund, $147 million county funds, $56 million from the Employment Training Fund, and $2.7 billion federal funds), to the Department of Social Services (DSS) for the CalWORKs program in 2004-05. In total funds, this is a decrease of $555 million, or 10 percent, compared to estimated spending of $5.4 billion in 2003-04. This decrease is primarily attributable to savings from (1) a proposed 5 percent maximum grant reduction, (2) proposed changes in work participation and sanction policies, (3) savings from adults reaching their 60 month CalWORKS time limit, and (4) savings from proposed child care reforms.

We note that Congress extended funding for the Temporary Assistance for Needy Families (TANF) block grant through March 31, 2004. The Governor's budget assumes TANF funding will eventually be extended or reauthorized at current funding levels ($3.7 billion annually for California) at least through state fiscal year 2004-05.

Caseload and Grants

Caseload Decline Ends

The California Work Opportunity and Responsibility to Kids caseload has declined significantly since 1994-95. Recent caseload trend data suggest that, absent any policy changes, the caseload would increase by about 1 percent in the budget year. However, the administration estimates that implementation of the Governor's proposed policy changes would result in a 1.3 percent decrease in caseload which would more than offset this baseline 1 percent increase.

Caseload Levels in the Budget Year. Actual caseload data shows that the CalWORKs caseload has declined every year from 1994-95, when caseloads reached their peak, through 2002-03. Since October 2002, the caseload has been relatively flat. Absent any changes to the CalWORKs program, the administration projects that the caseload would increase by about 1 percent in the budget year. However, the Governor's budget anticipates that the caseload will decrease by about 1.3 percent from what it would have otherwise been in the budget year as a result of proposed program changes.

Figure 1 compares the administration's current law caseload projections with the caseload that would result under the proposed policy changes. Under current law, the average monthly caseload would be expected to increase slightly in the current and budget years. However, the administration's proposed policy changes are estimated to remove 6,363 cases (1.3 percent) from the caseload by 2004-05.

The caseload reduction is primarily attributable to a proposed 5 percent grant reduction. The proposed grant reduction will eliminate eligibility for about 6,000 average monthly cases in the budget year because lowering the grant levels has the effect of lowering the income threshold at which working families become income-ineligible for cash assistance. As a result, families with relatively high earnings would no longer be eligible and would lose aid.

Child-Only Cases Increasing, While Cases With Adults Continues to Decrease. While the total caseload is projected to remain relatively flat, the composition of the caseload is changing. Under CalWORKs, adults are generally limited to 60 months of cash assistance. Adults began reaching the time limit in January 2003. When a family reaches the time limit, the adult is removed from the assistance unit and the case becomes a child-only case. Caseload trends reflect this shift. The budget estimates that by June 2005, about 57,000 families will have reached the time limit, and be in the safety net.

Conclusion. The administration's monthly caseload projection is consistent with our review of the most recent actual caseload data. 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 Adjustments and Reduces Grant Payments

The Governor's budget proposes to (1) reduce grant payments by 5 percent and (2) suspend both the October 2003 and July 2004 cost-of-living adjustments. Compared to current law, these proposals result in estimated state savings of $135 million in 2003-04 and $408 million in 2004-05.

Cost-of-Living Adjustment (COLA) Suspensions. State law requires that CalWORKs recipients receive a COLA equal to the percent change in the California Necessities Index. The Governor's budget proposes to suspend the July 2004 statutory COLA, and assumes that the October 2003 COLA will not be granted.

Figure 2 shows the savings in the current and budget years as a result of the proposed grant reductions. Not providing the October COLA results in savings of $91 million in 2003-04 and $126 million in 2004-05, compared to current law. Suspending the July 2004 COLA results in additional savings of $105 million in 2004-05. These savings estimates assume that the October 2003 COLA is required by law. We note, however, that the administration believes that the October 2003 COLA is not part of current law and is arguing the issue in court.

CalWORKs COLAs and the Vehicle License Fee (VLF). The state law enacting a VLF rate reduction beginning in 1999 included an accompanying provision stating that from 2000-01 through 2003-04, CalWORKs COLAs would be granted only in fiscal years in which VLF tax relief is granted. In June 2003, the Director of Finance determined that there would be a rate increase for VLF payments due on or after October 1, 2003. Because this tax relief was eliminated, the CalWORKs October 2003 COLA (for 2003-04) was suspended. However, in November 2003, the new administration rolled back the VLF tax rate increase, thereby triggering tax relief and an assumed requirement to provide the October CalWORKs COLA. As noted above, the administration contends that the October 2003 CalWORKs COLA is not required by current law, arguing that the previous administration's action to increase the VLF was not legal, and that in accordance with the statute, no COLA is required since there was no increase in tax relief. At the time this analysis was prepared, the issue was being litigated. Until this issue is resolved by the courts, we assume throughout this analysis that granting the October 2003 COLA is part of current law. Finally, we note that the October 2003 COLA has thus far not been included in recipients' grant payments.

Grant Reduction. In addition to the COLA suspensions, the Governor proposes to reduce the maximum monthly aid payment by 5 percent, effective April 1, 2004. As shown in Figure 2, compared to current law, this reduction results in state savings of $44 million in the current year and $177 million in the budget year. The reduction also results in a caseload decline of about 6,000 cases effective April 2004. As discussed previously, lowering the maximum aid payment levels has the effect of lowering the income threshold at which working families become income-ineligible for cash assistance. As a result, families currently receiving a small grant would no longer be eligible for CalWORKs and would lose aid.

Figure 3 shows the maximum CalWORKs grant and food stamps benefits for a family of three under current law, and what the maximum grant and benefits would be under the Governor's reduction proposals. 

As the figure shows, under the Governor's proposals, in 2004-05 the maximum CalWORKs grant for a family of three in a high-cost county would be $669, compared to $749 under current law. The maximum CalWORKs grant for a family of three in a low-cost county would be $637 under the Governor's proposals, compared to $713 under current law.

As a point of reference, the federal poverty guideline for 2003 (the latest reported figure) for a family of three is $1,271 per month. (Federal poverty guidelines are adjusted annually for inflation.) Under current law, the combined maximum CalWORKs grant and food stamps benefits in high-cost counties is $1,030 per month (81 percent of the poverty guideline). Under the Governor's proposals, combined benefits in high-cost counties would instead be $986 per month (78 percent of poverty guideline). Combined benefits in low-cost counties would be $1,010 per month (79 percent of poverty guideline) under current law, compared to $968 (76 percent of poverty) under the Governor's proposals. 

Expanding TANF Transfers Results in General Fund Savings

State Spending Budgeted at TANF Maintenance-of-Effort (MOE) Floor

The Governor's budget proposes to (1) spend the minimum amount of General Fund monies needed to meet the MOE spending requirement for the CalWORKs program and (2) maintain a $160 million TANF reserve. Because of the MOE requirement, any net augmentation to the Governor's spending plan would deplete the TANF reserve amount, and/or result in General Fund costs. Any net reduction in program spending will generally result in TANF savings, not General Fund savings because the budget proposes spending at the MOE minimum.

TANF MOE Requirement. To receive the federal TANF block grant, states must meet an 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 through state and county spending on CalWORKs and other programs administered by DSS, state spending in other departments is also used to satisfy the requirement. The Governor's budget includes $468 million in countable MOE expenditures outside of the CalWORKs program in the budget year.

Effect of Spending Changes. If spending is augmented for CalWORKs above what is proposed in the Governor's budget, it would reduce the budgeted $160 million TANF reserve and/or decrease the amount of TANF funds that would be available for new transfers outside of the CalWORKs program. Reducing the amount of new transfers would result in additional General Fund spending in the programs that were to receive the TANF transfers absent other budget actions by the Legislature. If CalWORKs spending is augmented beyond the Governor's proposal so that both the reserve and the TANF grant have been exhausted, General Fund spending would need to increase above the MOE floor.

TANF Transfers

The Governor's budget achieves General Fund savings by increasing Temporary Assistance for Needy Families (TANF) transfers to the Title XX Social Services Block Grant (Title XX) by $41 million in the current year and $120 million in the budget year. The transferred TANF would be used to offset General Fund costs in In-Home Supportive Services (IHSS), Child Welfare Services (CWS), the Department of Developmental Services (DDS), and Foster Care.

Budget Increases TANF Transfers to Title XX to Achieve General Fund Savings. The Governor's budget proposes a series of TANF expenditure reductions discussed in more detail elsewhere in this analysis, which (1) enable CalWORKs spending to stay at the MOE floor, (2) generates funds for new TANF transfers, and (3) provides a $160 million TANF reserve. For 2004-05, the budget proposes $120 million in new TANF transfers outside of the program for the purpose of offsetting General Fund spending. Figure 4 shows the amount of the proposed transfers and General Fund offset by department and program. Specifically, the budget increases TANF transfers to the Title XX Social Services Block Grant by $41 million in the current year and $120 million in the budget year. The Title XX funds are then used to offset General Fund costs in In-Home Supportive Services, Child Welfare Services, DDS, and Foster Care.

Based on preliminary information from the administration about the proposal, it appears that the proposed fund transfers are viable options for achieving General Fund savings. (Please see the DDS section of this chapter for a more detailed discussion of implementation issues associated with the proposed transfer.) The federal TANF block grant provisions allow the state to transfer up to 10 percent of its TANF funds to Title XX. The transferred TANF funds must be spent on children or their families with incomes under 200 percent of the federal poverty level. Once transferred, the funds may be used to support any programs that meet the stated Title XX goals, including, achieving economic self-sufficiency, preventing abuse or neglect, enabling families to stay together, and preventing inappropriate institutional care.

As noted, the new TANF transfers are designed to achieve General Fund savings. Rejecting the TANF transfers would not change the CalWORKs program or the programs to which the funds are transferred absent other policy decisions. Rejecting the transfers would make more resources available for the CalWORKs program, but would result in General Fund costs elsewhere. 

Budget Proposes Significant CalWORKs Reforms

The Governor's budget proposes a number of changes to the CalWORKs program, including stricter work requirements and greater sanctions. These program reforms would result in $167 million in grant savings, partially offset by $134 million in child care costs and $2.5 million in automation costs in 2004-05. We discuss welfare reform in California, summarize the Governor's reform proposals, present a framework for considering the proposals, and offer comments and recommendations.

Welfare Reform in California

The 1996 Federal Welfare Reform Legislation. The 1996 federal welfare reform law ended the individual entitlement to welfare and replaced it with a block grant ($3.7 billion annually for California) that gives states significant programmatic flexibility. To receive the block grant, states must meet an MOE requirement that state spending on welfare for needy families be at least 75 percent of the federal fiscal year FFY 94 level, which is $2.7 billion for California (80 percent, or $2.9 billion, if the state fails to meet the federal work participation requirement). Federal law holds states accountable for moving families from welfare to work by requiring states to meet statewide work participation rates of 50 percent for all families and 90 percent for two-parent families. Federal law allows states to reduce their required participation rate by applying a caseload reduction credit, which is based on caseload decline since FFY 1995. Failure to meet federal work participation requirements results in a penalty equal to 5 percent of a state's TANF block grant, which would be $370 million for California. Federal penalties may increase if the state continues to fail to meet participation rates in successive years. Finally, the federal welfare reform legislation set a five-year lifetime limit on an individual's receipt of federally-funded welfare grants or services. The law permits states to exempt up to 20 percent of its cases from the time-limit for reasons of hardship.

CalWORKs Participation and Time Limits. California implemented federal welfare reform by enacting the CalWORKs program. The CalWORKs program requires that adults in single-parent families participate in work or approved education or training activities for 32 hours each week. Two-parent families must participate at least 35 hours a week, with one adult working at least 20 hours. This emphasis on helping people become employed as quickly as possible is often referred to as a "work-first" approach. Noncompliance with participation requirements results in a sanction equal to the amount of the adult portion of the grant. In this situation, the adult is removed from the case, the grant is reduced by the adult portion, and the case becomes a "child-only" case. The CalWORKs program also imposes a time limit on adults. After five cumulative years on aid, a family's grant is reduced by the adult's portion and the case becomes a child-only "safety-net" case.

County Control and Flexibility. Counties have broad flexibility in the design and implementation of the CalWORKs program, including administration, employment services, and child care. Each county has a county-designed CalWORKs plan and is responsible for moving CalWORKs recipients into program participation. Counties also share in 50 percent of any financial penalties the federal government assesses for not meeting federal TANF work participation requirements.

CalWORKs Outcomes. California has met federal work participation requirements each year since CalWORKs was implemented, thus avoiding federal penalties. We note that the state's required participation rate is significantly reduced by the federal caseload reduction credit. Because California has experienced a significant caseload decline since FFY 1995, the caseload reduction credit reduces the statutorily required level of participation from 50 percent to less than 10 percent. For FFY 2002, California's actual participation rate was 27 percent, which was above the state's FFY 2002 required federal participation level of about 7 percent.

While California has met the federally required participation rate, and increased the number of people working, the overall percentage of adults who are meeting their CalWORKs participation requirements is much lower than one might expect given the work-first approach envisioned in the CalWORKs statute. Figure 5 summarizes the status of work participation in the CalWORKs program. Of particular concern are the 55,500 cases that are neither working, participating in any welfare-to-work activities, nor in sanction or pending sanction status. This 55,500 represents nearly 20 percent of all cases with adults and 28 percent of all cases subject to participation. We refer to these cases as "disengaged."

We note that some of these disengaged cases may in fact be complying with program requirements, but are in between activities. Figure 5 also shows that an additional 18,500 cases are not working, but are meeting program requirements through other activities, such as vocational training or substance abuse treatment. (For more information on the disengaged, please see our discussion of CalWORKs participation in the 2002-03 Budget: Perspectives and Issues.)

As Figure 5 shows, three-quarters (75 percent) of the cases that are expected to participate are working less than 20 hours per week. About 26 percent are working, but less than 20 hours; 28 percent are disengaged from program participation; and 26 percent are in sanction status. These low participation rates are of concern for two primary reasons. First, failure to meet new higher federal participation rates (please see our discussion on federal welfare reauthorization later in this section) could lead to a significant federal financial penalty. Second, low engagement with program activities indicates that some adults who are facing the five-year lifetime limit on cash assistance may not be receiving the services they need to become self-sufficient as quickly as possible.

Framework for Evaluating the Governor's Proposals

The Governor proposes broad reforms to the California Work Opportunity and Responsibility to Kids program designed to increase program participation. In order to assist the Legislature in evaluating these proposals, we summarize the Governor's approach, and offer a framework for assessing specific aspects of the proposal.

The Governor's Approach to CalWORKs Reform. Figure 6 summarizes the Governor's proposals compared to current law. As the figure shows, the Governor's budget includes significant changes to fundamental components of the CalWORKs program. Specifically, the Governor's proposal includes a 25 percent grant reduction (beyond the current law reduction) for families in sanction status more than one month and for nonworking families in which the adult has reached the CalWORKs time limit. The Governor's proposal also narrows the activities that would count towards meeting the first 20 hours of the individual participation requirement. In addition, the Governor proposes to require job search while applications are pending and to require all nonworking cases to have a welfare-to-work plan within 60 days of receiving aid. The administration estimates that these program reforms would result in $167 million in savings, offset by $136 million in child care and automation costs in the budget year, for a net savings of about $31 million. 

In presenting his proposals, the Governor has offered several reasons why these changes are needed, including (1) increasing work participation and personal responsibility, (2) anticipation of federal welfare reauthorization reforms, and (3) prioritizing funding for core services. In evaluating the Governor's proposals, we believe the Legislature should consider pending federal welfare reform, and how the proposal impacts county flexibility, work incentives and participation, and the state budget.

How Does the Proposal Address Pending Federal Welfare Reform Reauthorization? The 1996 federal welfare reform law authorized the TANF block grant through September 2002. Congress was unable to pass a reauthorization bill before September 2002, and the program is now being funded through a continuing resolution, which maintains current TANF funding, rules, and regulations through March 31, 2004.

In February 2003, The House passed H.R. 4, its version of TANF reauthorization. In September 2003, the Senate Finance Committee passed its version of H.R. 4, but the full Senate has yet to act on reauthorization legislation. Both the Senate and House versions of reauthorization contain provisions that require stricter work requirements, including a requirement that recipients participate in a minimum number of "core work activities." Both bills also incrementally increase minimum state participation rates to 70 percent with varying participation credits. If finally adopted by Congress, and taking into account the participation credit, it appears likely that California would ultimately need to reach a work participation rate of at least 50 percent. (Please see our overview of federal welfare reauthorization later in this section.)

Will the Proposal Limit County Flexibility? When the Legislature created the CalWORKs program, it gave the counties broad programmatic flexibility. The program was designed to allow counties to provide a broad array of welfare-to-work service options in order to help recipients become self-sufficient and to meet federal participation requirements. In considering the Governor's proposals, the Legislature should determine whether proposed reductions in county flexibility will help achieve statewide program goals.

Will the Proposal Increase Work Incentives and Participation? Moving families into stable employment is a principle goal of the CalWORKs program. The Governor's proposed policy changes put an even greater emphasis on moving participants into work quickly. The Legislature should consider the extent to which each proposed policy change is likely to increase employment and participation as well as the policy's impact on the long-term goals of self-sufficiency.

What Impact Does the Proposal Have on Families? The administration's proposals may result in negative consequences for some CalWORKs families and positive outcomes for others. Designing effective welfare-to-work strategies is difficult because policies can simultaneously have positive and negative impacts on families. For example a sanction for failure to participate should have the positive effect of improving work participation, by presenting families with a negative consequence if they choose not to participate. On the other hand, those families unable or unwilling to comply with a participation requirement will face a reduction in family income, with potential adverse consequences for the children in such a family. The Legislature should consider both the positive impacts of moving families into employment and the potential hardships that grant reductions could have on families. 

What Is the Fiscal Impact of the Proposals. The administration estimates that the Governor's CalWORKs reform proposals would decrease grant costs by $167 million and increase child care and automation costs by an estimated $136 million, for a net savings of about $31 million in 2004-05. Net savings are estimated to increase to about $90 million in 2005-06. Given the state's difficult fiscal situation, we believe the Legislature should weigh the state fiscal effects of each proposal against the impact on counties, families, and children.

Our framework is summarized in Figure 7. Below we discuss each of the Governor's proposals using this framework. We begin by reviewing the Governor's proposed work participation reforms and then discuss the proposed sanctions.

Work Participation Reforms

In the area of work participation, the Governor proposes (1) requiring an up-front job search while applications are pending, (2) requiring aided adults to sign a welfare-to-work plan within 60 days of the receipt of aid, and (3) limiting the activities that count as participation. Below we review the Governor's proposals and offer comments and recommendations.

Proposal Requires Job Search While CalWORKs Application Is Pending  

The Governor's budget proposes to require applicants to search for a job while their application for California Work Opportunity and Responsibility to Kids aid is pending. Although counties would have broad flexibility in determining job search requirements and verification, this up-front job search would be mandatory for all applicants. We recommend that the Legislature ensure county programmatic and fiscal flexibility by making the policy to require job search as a condition of eligibility, a county option.

Governor's Proposal. Current law prohibits counties from requiring an up-front job search while applications are pending. The administration proposes requiring individuals to participate in job search while their CalWORKs application is pending. The administration has indicated that under the proposal, counties will have broad flexibility in determining the number of hours of job search required, type of search, and required verification. Child care and transportation would be provided to applicants while they are searching for a job.

Proposal May Help to Increase Participation. The extent to which the Governor's proposal helps to increase work participation will largely depend on county policy design and implementation. Requiring job search may, among other things, serve to clearly outline the work-first expectation to participants as they enter the CalWORKs program. We note that such high expectations could also be instilled with an up-front program expectations orientation, as is the practice in Riverside County.

Research Shows Programs Which Include Flexibility in Determining Initial Activities Are the Most Successful. There has been continued debate about the most effective way to help welfare recipients move from welfare to stable employment. Some welfare programs emphasize employment services, while others focus on providing education and training. A 2001 study done by the Manpower Demonstration Research Corporation (MDRC) found that welfare programs that offered a mix of work first for some recipients, and education and training for others were the most successful. This research points to the importance of allowing counties to maintain the flexibility to decide on the best course of action for recipients.

Proposal May Lead to Additional County Costs. The administration's proposal could increase county costs for child care, transportation, and administration. The most recent data show that over 50 percent of all CalWORKs applications were not approved. Under the Governor's proposal, counties could potentially be responsible for paying for child care and transportation for a significant number of people that do not end up participating in the program. Because the administration's proposal gives counties flexibility in implementation of up-front job search, the extent to which counties would incur new costs will largely depend on the program design and requirements that each county establishes.

Analyst's Recommendation. As research has shown, a flexible approach to providing a mix of employment services (including job search), training, and education may be the most effective way to move individuals from welfare to long-term employment. We recommend that the Legislature give counties the option of requiring job search while an individual's application is pending. This would allow counties to assess what would work best in their communities.

Proposal Requires Aided Adults to Complete A Welfare-to-Work Plan Within 60 Days of Aid

The administration proposes requiring aided adults who are not already meeting program requirements to complete and sign a welfare-to-work plan within 60 days of the receipt of aid. This proposal may help to engage recipients who are not currently participating in program requirements, but may also limit county flexibility to evaluate the needs of the local labor market as they relate to the abilities and barriers of the participant. We recommend that the Legislature consider modifying the Governor's proposal to give counties more flexibility in meeting this potentially beneficial requirement.

Governor's Proposal. The administration proposes to require all aided adults who are not already meeting work requirements to sign a welfare-to-work plan within 60 days of the receipt of aid. A welfare-to-work plan specifies the activities in which a participant will be engaged and what services will be provided to the participant in order achieve the stated goals. Currently, counties are required to complete a welfare-to-work plan after a four-week job search. However, if the county determines that additional job search would help to secure employment, then job search can be extended. Thus currently, some recipients may go a number of months without a signed plan.

Proposal May Help Increase Work Participation. Requiring a welfare-to-work plan to be completed two months after the receipt of aid may help to increase participation, especially among the caseload that is disengaged from the program. As noted earlier, 55,500 cases are disengaged. For these and other cases, the certainty of a welfare-to-work plan may help case managers keep recipients on a path toward self sufficiency.

Proposal May Not Be the Best Use of Limited County Resources. Currently, a welfare-to-work plan is used to help structure a participant's long-term goals of moving from welfare to work. For many CalWORKs recipients, 60 days would be an adequate amount of time to complete an effective welfare-to-work plan. However, for some individuals, 60 days would not be sufficient time to assess and test the recipient's abilities and barriers, and how those abilities fit with the needs of the local labor market. Requiring a completed welfare-to-work plan within 60 days for all participants who are not already meeting program work requirements may hinder county efforts to use job search and other activities to complete an effective welfare-to-work plan for some recipients. Moreover, hastily completed welfare-to-work plans could limit county ability to decide the most effective mix of up-front services and activities for a participant. This may result in the need for counties to reassess and modify the welfare-to-work plan using limited county resources, or lead to less desirable long-term employment outcomes.

Analyst's Recommendation: Modify the Governor's Approach. The Governor's proposal addresses an important CalWORKs program issue, that a significant percent of the nonexempt caseload is not participating in program requirements. We concur with the goal that all nonworking recipients have a welfare-to-work plan. However, by allowing only 60 days for plan completion, the Governor's proposal restricts the tools that counties have to help determine local labor market conditions, as well as a participant's employment barriers and abilities. This information helps counties develop a plan that moves participants into stable, long-term employment. Accordingly, we recommend that the Legislature modify the Governor's proposal to provide counties with the flexibility to extend the 60-day time frame up to 120 days for certain recipients. This would give counties the time needed to more thoroughly explore the needs of the local labor market and the barriers and abilities of the participant.

Proposal Requires 20 Hours of Core Work Activities

The Governor's proposal narrows the list of activities that would count towards the first 20 weekly hours of required participation. This limits the counties' available options to help participants move from welfare to work. In addition, this requirement is more restrictive than both of the Congressional welfare reauthorization proposals currently being considered. We recommend that the Legislature retain as much county flexibility as possible with respect to participation activities.

Governor's Proposal. The Governor's proposal requires that all nonexempt CalWORKs recipients engage in 20 hours of core work activities each week in addition to other approved activities to meet the 32 hour (or 35 for two-parent families) a week work requirement. Figure 8 lists the activities that currently count toward meeting participation requirements and the activities that would be defined as core work activities under the Governor's proposal. After meeting the core work requirements, recipients could meet the remaining weekly requirement with other current law activities, such as education related to employment, vocational training, English as a second language, and substance abuse and mental health treatment.

The administration estimates that about 97,000 families will increase their work participation in response to stricter work requirements. The administration also estimates that about 530 eligible families will be deterred from applying for CalWORKs each month as a result of the more stringent requirements. The administration further estimates that the proposal would result in $120 million in grant savings, partially offset by additional child care costs of $90 million, for a net savings of about $30 million.

Proposal Limits County Flexibility. Counties currently have broad flexibility in determining the appropriate mix of work, education, vocational training, and barrier removal activities (such as mental health and substance abuse) that will help a CalWORKs participant move from welfare to work. Under current law, the CalWORKs program allows recipients to participate in work-related activities including barrier removal, education, and training for up to two years after a welfare-to-work plan has been developed. The Governor's proposal would limit the flexibility that counties have to engage a participant in work-related activities, instead requiring nonexempt adults to work 20 hours a week in a core work activity within 60 days of aid. This approach is not likely to be effective for recipients facing up-front employment barriers. For example, about 12,000 cases per month currently receive mental health or substance abuse treatment. Under the Governor's proposal, such participants would only be able to receive these services if they were also working or participating in community service jobs (CSJ) or on-the-job training (OJT) for 20 hours per week. The Governor's proposal thereby limits counties' ability to identify and address these barriers.

Unrealistic Assumptions. The department estimates that its proposal to narrow the activities that would count toward meeting participation requirements would impact about 125,000 recipients (51,000 currently working less than 20 hours per week, 18,000 meeting participation through activities other than work, and 55,500 who are not participating). We believe the administration's assumption that those working less than 20 hours and those that are meeting participation without work will either obtain employment or be able to attend CSJ or OJT is probably somewhat optimistic, but on balance is reasonable.

However, with respect to the 55,500 cases who are disengaged, we believe the administration's assumptions are unrealistic. Specifically, the administration assumed that 82 percent of the disengaged cases would meet the new requirements and 18 percent would be sanctioned. The administration provides no information to support its assumption that such a large percentage of the disengaged cases will begin meeting more rigid participation requirements. Given that this group is already disengaged from program participation, it is unlikely that narrowing the allowable participation activities would result in significantly greater program participation. In summary, we believe the administration has overestimated the potential success of this proposed policy change. This means that child care costs and grant savings due to employment are overestimated, and sanction savings are underestimated. 

No Additional Employment Services Funding Included in the Proposal. The administration estimates that about 86 percent (64,000 cases) of adults that had previously not been working will meet the new participation requirements for 20 weekly hours of core work activities within two months. Some of these individuals will obtain nonsubsidized employment, however, while others will be unable to find employment and will need OJT or CSJ slots. The budget includes no additional funding to support OJT and CSJ slots. If for example, 5 percent of adults who had previously not been working need OJT and 5 percent need a CSJ slot, it could result in more than $8 million in additional county costs.

In addition, some of those recipients who obtain employment may be working less than 32 hours and may require some other education or training activity to make up the difference between employment hours and the 32 hour requirement. The budget includes no additional funding for these employment services. We note that some of these costs, and costs for OJT and CSJ noted above, could in part be offset by savings from recipients shifting from training activities to unsubsidized employment.

Proposal Is More Narrow Than Federal Welfare Reform Proposals. Both the House and Senate reauthorization bills include provisions that increase the minimum hours of work required. In addition, the House bill restricts the types of activities that count toward the first 24 hours of participation. However, both bills also include a provision that allows for up to three months (House) and six months (Senate) of barrier removal instead of core work activities within a 24-month period.

Proposal to Narrow Participation Activities Is Flawed. As described above, the proposal to narrow the range of participation activities severely restricts county flexibility to determine which services and activities are most likely to help recipients become self sufficient. The administration has not presented evidence how their proposal will not only increase participation, but will do so within a more narrowly defined set of activities. The disengaged in particular may have barriers to employment that would need to be resolved before they could successfully engage in 20 hours or more of core work activities.

Analyst's Recommendation. We believe that counties are in the best position to identify which activities will help recipients become self-sufficient. Narrowing the list of allowable activities is unlikely to increase participation among the disengaged to the extent envisioned by the administration. Under current law, counties have a fiscal incentive to ensure that recipients are participating in that they are responsible for sharing in any federal penalty to the extent the state fails to meet the higher participation rates contemplated in pending versions of federal welfare reform reauthorization. We recommend that the Legislature retain as much county flexibility as possible with respect to participation activities.

Our analysis indicates that the Governor's proposal to narrow the activities that count toward meeting individual participation requirements may excessively limit county flexibility. However, given the current number of people who are not meeting program requirements and given that the state shares in any federal penalty for not meeting requirements, the Legislature may wish to consider some changes to work requirements pursuant to federal proposals. For example, the Legislature may want to consider providing the counties with guidelines for managing their caseloads under the potentially more narrow definitions of participation that may be part of federal welfare reauthorization by limiting the number of recipients who can participate in non-core work activities.

Grant Reductions for Sanctioned And Safety Net Cases

The administration proposes to reduce grants by 25 percent for cases that have been in sanction status for longer than one month, and for safety net cases with nonworking parents. We discuss each proposal below.

Proposal Would Reduce Grant for Sanctioned Cases

The administration estimates that reducing child-only grants by 25 percent after one month in sanction status will result in a grant reduction for 26,200 families and will motivate 13,400 families to address and remedy ("cure") their sanction. Although it is likely that an additional grant reduction will result in some sanctioned adults complying with program requirements, research is inconclusive as to the magnitude of such a work incentive. The Legislature should weigh the benefits of higher participation against any potential negative impact of a grant reduction on children.

Governor's Proposal. The administration proposes to reduce grants by 25 percent for families that are in sanction status for more than one month. Currently, a family's grant is reduced (on average) by about $146 each month when the adult is removed from the case. This proposal represents a further grant reduction of about $150 per month, leaving the total monthly grant for a family of three at about $375 (assuming the Governor's proposed grant reductions). Currently, there are 39,600 cases with sanctions lasting more than one month. The administration estimates that about 26,200 cases (66 percent) will receive the 25 percent reduction and that 13,400 (34 percent) cases will cure their sanction. This policy change is expected to result in grant savings of $36 million, offset by an estimated $19 million in grant costs attributable to cases curing their sanction to avoid the proposed 25 percent reduction, and by about $45 million for additional child care costs, for net increased costs of about $28 million.

Research Is Inconclusive as to Whether a 25 Percent Grant Reduction Will Motivate Individuals to Avoid and/or Cure Their Sanction. The administration assumes that about 13,350 cases will cure their sanction as a result of the more stringent sanction policy. Research is inconclusive as to how large a sanction must be in order to motivate individuals to remedy a sanction. As noted above, currently a family's grant is reduced (on average) by about $146 when the adult is removed from the case. Despite this significant reduction, on average, about 4,000 cases are sanctioned each month. Given inconclusive research, it is difficult to predict how many adults will be motivated to avoid or cure their sanction with an additional $150 grant reduction.

The administration provides no basis for its estimate that 34 percent of the cases subject to sanction will cure their sanction status as a result of the proposed policy change. To the extent that recipients do not cure their sanction as anticipated by the administration, there will be greater net savings because the cost of grants as well as the cost of child care will decrease.

Proposal Unlikely to Increase Federal Work Participation Rates. When a case is sanctioned, the adult is removed from the case and it becomes a child-only case, thereby excluding the case from the state's federal work participation rate. Therefore, a case in sanction status does not negatively impact the state's ability to meet work participation requirements. Once the sanction is cured, the adult portion of the grant is restored and the case will once again be included in the federal participation figure. We assume that formerly sanctioned cases have the same work participation behavior as all other cases. Accordingly, bringing such a case back into the caseload will not change the state's federal participation rate.

Analyst's Comments. The administration's proposal to reduce the grant for sanctioned cases will probably increase the number of adults that cure their sanctions and begin program participation which could help them become self-sufficient. However, the proposal will not help the state's federal work participation rate because sanctioned cases are currently excluded from the participation rate calculation. The Legislature should weigh the potential increased program participation against the potential negative impact to children as a result of the grant reduction. 

Proposal Would Reduce Grant for Safety Net Cases With a Nonworking Adult

The Governor's proposal to reduce grants by 25 percent for safety net cases in which the adult is not working will reduce program expenditures. However, the policy will not help the state's work participation rate because the adults in safety net cases are currently not counted toward the state's work participation rate. The Legislature must weigh the $29 million savings against the negative impact that the grant reduction may have on families and children.

Governor's Proposal. Under current law, when an adult CalWORKs recipient has reached his/her 60 month time limit, the adult is removed from the assistance unit and the children are moved into the child-only safety net caseload. The administration proposes to further reduce the grant for safety net cases with nonworking adults by 25 percent. On average, this would result in a monthly grant reduction of about $135 in the child-only grant. The administration indicates that the work requirement could be satisfied with any earnings in a quarter. In addition, it is our understanding that employment would be self-certified, but would require some sort of verification (such as a paycheck stub). Counties would not have the flexibility to set more stringent work or verification requirements.

Proposal Will Not Impact Federal Work Participation Rates. Adults in the safety-net case are not counted toward the state's work participation calculation. As a result, even if adults increased their participation, it would not improve the state's work participation rate.

Minimal Work Incentive. Currently there are 23,600 nonworking safety net cases. The administration assumes that all of these nonworking cases will have their grants reduced by an average of $135 per month, and that no cases will begin work as a result of the grant reduction. This assumption indicates that the expected goal of the policy is grant savings rather than higher levels of employment for adults with children in safety net cases. The administration's estimated $29 million in savings is probably overstated, in that some recipients may in fact meet the minimal work requirements. Given that the work requirement could be satisfied with very little work effort, we anticipate that the proposal will result in only a minor increase in the hours of employment.

Analyst's Comments. The Governor's proposal would not directly help the state's federal work participation rate, although it may minimally influence the training, education, and employment decisions of current recipients. Given the proposal's minimal work requirements, we believe that some nonworking adults will meet the new requirements and avoid the grant reduction. Therefore, we believe the administration has overstated savings associated with this proposal, because it assumes no impact on employment behavior. The Legislature should weigh the estimated savings against the potential negative impact to children in families in which the adult is not working and has little or no access to CalWORKs employment support services.

Update: Federal Welfare Reauthorization

As of February 2004, Congress had not completed action on federal welfare reauthorization. We describe the major features of the currently pending House and Senate versions of welfare reform and update our fiscal estimates of these measures.

Status of Federal Welfare Reauthorization

The 1996 welfare reform law created the TANF block grant program, replacing the Aid to Families with Dependent Children (AFDC) program. The welfare reform law authorized the TANF block grant through September 2002. Congress was unable to pass a reauthorization bill before September 2002, and the program has been funded through a series of continuing resolutions, which maintain current TANF funding, rules, and regulations. The current continuing resolution expires at the end of March 2004.

In February 2003, the House passed H.R. 4, the "Personal Responsibility, Work and Family Promotion Act of 2003," its TANF reauthorization bill. In September 2003, the Senate Finance Committee passed its version of H.R. 4, but the full Senate has yet to act on reauthorization legislation. Both the Senate and House versions of reauthorization make substantial changes to TANF, health care, and child support. We limit our discussion here to the TANF changes, especially provisions that impose stricter work requirements and higher participation rates.

Major Provisions of Federal Proposals

Common Elements. Figure 9 summarizes the major work participation provisions in current law, and the House and Senate welfare reform proposals. Both the House and Senate proposals maintain current TANF block grant funding levels, state spending requirements, five-year federal time limit, and the 20 percent caseload time-limit exemption option. The proposals share other common elements that differ from current law. Both proposals require a self-sufficiency plan (welfare-to-work type plan) within 60 days of enrollment and increase the state's participation rate. In addition, both proposals make significant changes to allowable work activities and increase the hourly work requirement. 

Key Differences. While sharing some common elements, the House-passed welfare reform proposal differs significantly from the version passed by the Senate Finance Committee. In general, H.R. 4 proposes more stringent work requirements and sanction policies, and less flexibility in participation rate credits and exclusions. Below we discuss key features of the two proposals and their potential impact on the CalWORKs program.

State Participation Rates  

Current Law. Figure 10 shows the required state participation rates under the House and Senate proposals. Under current law, states must meet a statewide work participation rate requiring that 50 percent of single-parent families and 90 percent of two-parent families are meeting hourly work participation requirements. California, like many other states, has moved its two-parent caseload into a separate state program that is not subject to the 90 percent participation requirement.

Federal law reduces the required participation rate by applying a caseload reduction credit. This adjustment is based on the percentage decline in each state's welfare caseload since FFY 1995. California, like most states, has experienced a significant caseload decline since FFY 1995. Consequently, the FFY 2002 required participation rate for California was about 7 percent. In addition, single-parent cases with a child under 12 months of age may be excluded from the participation rate calculation.

H.R. 4. The House bill increases the states' minimum work participation requirement by 5 percent each year from 50 percent to 70 percent five years later. The caseload reduction credit is changed so that when fully implemented, the reduction credit is based on caseload decline over the most recent four-year period. Assuming that the caseload remains relatively flat, this would mean that California would not receive a caseload credit after four years (full implementation). 

Senate. Like the House bill, the Senate bill also increases the state's minimum work participation requirement by 5 percent each year from 50 percent to 70 percent five years later. The Senate bill replaces the caseload reduction credit with an employment credit that gives states credit for individuals who are diverted from receiving welfare, leave welfare for a job, or find a higher paying job. The credit is capped at 40 percent for the first year, and is reduced to 20 percent over the next five years.

Work Participation Requirements

Current Law. Figure 11 shows work participation requirements under current law, the House proposal, and the Senate proposal. Current federal law requires that single parents with a child under age 6 work for at least 20 hours per week and those with older children work for at least 30 hours per week. Two-parent families must work at least 35 hours per week. No credit is given for partial participation. California law requires single-parent families to participate in 32 hours per week and two-parent families to participate 35 hours per week. 

House Proposal. H.R. 4 increases the number of hours that parents are required to work to 40 hours a week for all families. The two-parent family work participation rate is eliminated. A pro-rated partial credit is given for families that participate in core activities for at least 24 hours a week.

Senate Proposal. The Senate bill increases the number of required work hours from 20 to 24 hours per week for single parents with a child under age 6 and 30 to 34 hours per week for single parent families with children over age 6. Two-parent families are required to work 39 hours, which is increased to 55 hours per week if the family receives subsidized child care. Partial credit is given for single parents who participate for at least 20 hours and for two-parent families that participate for at least 26 hours per week.

Work Activities

Current Law. Under current law there are nine core work activities which must account for at least 20 hours of required work participation. These core activities are: unsubsidized employment, job search, vocational educational training, work experience, community service, private subsidized employment, public subsidized employment, OJT and childcare for community service participants.

House Proposal. The bill increases the number of required core work activity weekly hours from 20 to 24 and narrows the set of allowable core work activities. The allowable core work activities are: unsubsidized employment, subsidized employment, on-the-job training, supervised work experience, and supervised community service. H.R. 4 no longer allows job search/job readiness or vocational education to count towards the first 24 hours of participation. However, H.R. 4 does allow participation in substance abuse and rehabilitation treatment, job search, and other activities as defined by the state to count toward the core work requirement for up to three months in a two-year period.

While H.R. 4 restricts allowable core work activities, it provides additional flexibility to states to define work activities above the 24 hours of core work activities.

Senate. The Senate bill requires 24 weekly hours of priority work activities. The remaining hours may include broader activities including job search, barrier removal, substance abuse, and education.

Universal Engagement

Current Law. Adults are required to participate in work activities within 24 months on aid. Work activities are defined by the state. It is a state option to develop an individual responsibility plan for recipients. California currently requires the completion of a self-sufficiency plan (welfare-to-work plan) following the completion of the four week job search. Counties can extend job search (and the welfare-to-work plan) if the county determines that additional job search would help to secure employment. The completion of the welfare-to-work plan starts the 18 or 24 month time limit in work-related activities such as education and vocational training.

House Proposal. The House proposal requires states to develop a self-sufficiency plan, that includes detail on planned work activities for all adults within 60 days of welfare enrollment. A federal sanction may be imposed on states that fail to comply.

Senate Proposal. The Senate proposal also requires a self sufficiency plan within 60 days of welfare enrollment. The Senate bill specifies what the plan should contain, including detail about how the recipient intends to engage in work or other sufficiency activities, steps to promote child well-being, and information about support services the state will provide. A federal sanction may be imposed on states that fail to comply with the self-sufficiency plan requirement.

Sanctions

Current Law. Federal TANF law directs states to sanction clients for failure to participate in work and other program requirements. States that do not sanction noncompliant recipients are subject to a federal financial penalty. Current federal law gives states flexibility to determine the structure of its sanctions policies. However, federal law prohibits states from penalizing a single parent with a child under age 6 if childcare is not available.

California implemented a sanction policy that impacts only the adult portion of the grant, unlike many other states that impose a full family sanction, or cut the entire family grant. In California, when someone has been sanctioned for the first time, benefits are reinstated as soon as the person comes into compliance, known as curing the sanction. A second instance of noncompliance results in a sanction of at least three months or until the sanction is cured. A third and subsequent instance of noncompliance results in a sanction being imposed for a minimum of six months or until cured.

House Proposal. The House bill requires that states terminate assistance to all family members (full family sanction) if any adult is not meeting program requirements for more than two months. It also requires that the state plan must describe how it will provide services for noncompliant families. Any state funds expended for cases in sanction status more than two months may not be counted toward the state's MOE spending requirement.

Senate. The Senate bill largely maintains current law. However, it requires that the state plan include strategies the state will take to address services for noncompliant families and requires the state to review the noncompliant persons self-sufficiency plan before imposing the sanction.

Child Care

Current Law. Currently, states receive a total of $2.7 billion annually in Child Care Development Funds for child care. California's share of these funds is about $520 million. California law requires that adequate child care be available to all CalWORKS recipients receiving cash aid in order to meet their program participation requirements (a combination of work and/or training activities).

House Proposal. The House bill proposes increasing mandatory (required) child care funding by $1 billion over five years. These funds would require a federal match set at the current federal Medicaid assistance percentage (FMAP) match. The proposal also includes increasing discretionary funding by $1 billion over five years. The discretionary funds are subject to appropriation.

Senate. The Senate bill also increases mandatory spending by $1 billion and discretionary spending by $1 billion over five years.

Impact on the CalWORKs Program

Both H.R. 4 and the Senate Finance bill contain new provisions that will have significant fiscal and programmatic effects on the CalWORKs program. As discussed above, the bills differ in several key areas including the caseload reduction/employment credit, full family sanction requirement, required recipient participation rate, and allowable core work activities. However, the proposals share a number of similar provisions including, an increase in the state participation rate, an increase in the number of required hours, and a universal engagement requirement. Below we discuss the potential impacts of these expected federal policy changes on the CalWORKs program.

Federal Proposals Likely to Result in Rate "Gap"

Both the House and the Senate proposals impose a significant increase in both the number of hours for which families must participate each week, and the percentage of families who must participate. 

Changes to Definition of Participation. California's actual participation rate under current law was 27 percent (FFY 2002). The DSS has estimated that under both the House and the Senate proposals, the state's participation rate would increase to 34 percent. Most of the increase is due to provisions allowing partial credit for partial participation, and the elimination of a separate two-parent rate, which will allow California to move two-parent families (who have higher participation rates) back into the federal participation rate calculation. Currently, no credit is given for those who are participating, but not fully meeting requirement.

We note that the Congressional Research Service estimates that California's actual participation rate will be higher under the Senate proposal than the House proposal. This is largely because under the Senate version, partial credit begins at 20 hours, rather than 24 hours, and work participation requirements are lower for single-parent families. Our own preliminary analysis also suggests that the Senate proposal may result in somewhat higher participation rates than the House version for the reasons noted above. Nevertheless, we have used the somewhat more conservative DSS estimates for purposes of estimating the participation gap.

Participation Gap. Taken together, the work requirement and state participation rate provisions would result in a significant "gap" between California's estimated participation rate and the effective participation rate requirement. Figure 10 shows the DSS estimates of California's "effective" participation requirement (participation rate less caseload reduction/employment credit) under both the House and Senate proposals compared to the state's current participation rate. As the figure shows, under current state law California would be significantly below the required participation rate under the House bill by the third year of implementation and under the Senate proposal by the fourth year. If the state does not meet its federal participation requirement, it is subject to a significant federal penalty.

Update on the State Fiscal Impact

Estimated Fiscal Impact of H.R. 4. In September 2002, we estimated that once fully implemented, the then pending House version of welfare reform authorization would result in annual state costs of about $750 million above current expenditures. (For more information, please see our report Fiscal Effect on California: Congressional Welfare Reform Reauthorization Proposals, August 29, 2002.) From a fiscal impact perspective, H.R. 4 as passed by the House in February 2003 is not significantly different than the version passed by the House in 2002. Based on the same methodology we used in 2002 (with updates for caseload, child care utilization, and county welfare-to-work allocations) we estimate that when fully implemented, H.R. 4 would result in additional annual costs above cur rent expenditures in the range of $375 million to $450 million. Most of the impact is from employment service and child care costs that the state would likely incur in order to bridge the projected participation gap of about 36 percent. This estimate assumes that California follows current state law and makes only the minimum changes required by the federal measure. It does not reflect the Governor's proposed welfare reforms. The reduction in our most recent cost estimate from our 2002 estimate is largely due to an increase in the amount of funding that each county receives from the state for employment and related services, and a decrease in child care utilization.

Fiscal Impact of the Senate Version. The Senate Finance Committee bill passed in September 2003 is significantly different than the version passed by the same committee in 2002. Hence, our 2002 estimate of the Senate legislation is not a relevant reference point for estimating the impact the current bill. Nevertheless, given that the participation gap under the Senate measure is significantly less than under H.R. 4 (36 percent House gap, 16 percent Senate gap), we would expect that annual cost increases compared to current law expenditures under the most recent Senate version would probably be less than half of the costs that we estimated for the H.R. 4.

Conclusion

Outcome Uncertain. It is not clear when Congress will take final action on federal welfare reform and what specific provisions will be included. We will continue to monitor the federal welfare reform debate and keep the Legislature informed of the major changes to the TANF program and their effects on the CalWORKs program.

CalWORKs Automation

Withhold Recommendation on Proposed Increased to Consortium System

The budget proposes to increase funding by $35.6 million ($12.8 million General Fund) for the continued implementation of the Statewide Automated Welfare System C-IV Project. We withhold recommendation on the proposed increase pending additional information on the specific activities being proposed on the project.

The budget proposes to increase funding by $35.6 million ($12.8 million General Fund) for the continued implementation of the Statewide Automated Welfare System (SAWS) C-IV Project. The purpose of SAWS is to provide improved and uniform information technology capability to county welfare operations. The system is being delivered through a state partnership with the counties, which have chosen to be in one of four consortia. The SAWS C-IV consortium consists of Merced, Riverside, San Bernardino, and Stanislaus Counties. The SAWS C-IV project has a total project cost of $589 million and it is currently being piloted in Stanislaus.

Withhold Recommendation Pending Additional Information. It is our understanding that the increased funding is to continue the implementation of SAWS C-IV. The administration, however, has not identified the specific activities that the additional funding will provide for the project. For this reason, we withhold recommendation on the proposed increase pending additional information from the administration.