Analysis of the 2007-08 Budget Bill: Health and Social Services

California Work Opportunity and Responsibility to Kids (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 (AFDC), 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 ($1.4 billion General Fund, $136 million county funds, $35 million from the Employment Training Fund, and $3.4 billion federal funds) to the Department of Social Services (DSS) for the CalWORKs program in 2007-08. In total funds, this is a decrease of $207 million, or 4.4 percent, compared to estimated spending of $5.1 billion in 2006-07. This decrease is primarily attributable to estimated savings from the Governor’s proposed policy changes to establish time limits for children whose parents cannot or will not comply with participation requirements.

General Fund spending for 2007-08 is proposed to be $690 million, 34 percent, less than estimated spending for 2006-07. This substantial reduction is due to (1) the savings from the proposed time-limit policy noted above and (2) shifting $269 million in Proposition 98 funds to CalWORKs child care. For a discussion of this fund shift, please see the “Proposition 98 Priorities” write-up within the “Crosscutting Issues” section of the “Education” chapter of this Analysis.

Budget Suspends Statutory COLA

By suspending the statutory cost-of-living adjustment (COLA), the budget achieves a cost avoidance of $124.4 million.

Current law requires that the CalWORKs grant be adjusted each July based on the change in the California Necessities Index (CNI). From December 2005 to December 2006, the CNI increased by 3.7 percent. For a typical family of three receiving CalWORKs assistance, this COLA would increase the maximum monthly grant by about $27. Suspending the COLA eliminates this grant increase and results in cost avoidance of $124.4 million. (The Governor’s budget, prepared prior to the release of the final CNI data, estimated the CNI to be 4.2 percent, and scored a cost avoidance of $140.3 million.)

Guillen Lawsuit. A superior court has ruled in the Guillen court case that the October 2003 COLA (which was tied in statute to reductions in the vehicle license fee) is required by current law. In December 2006, an appellate court heard the state’s appeal and a decision is anticipated in early 2007. Unless the appellate court overturns the lower court decision, the state faces one-time CalWORKs grant costs of $434 million, plus ongoing costs of $114 million, neither of which are included in the Governor’s budget. The one-time costs refer to 45 months of grant payments (October 2003 through June 2007) owed to recipients on aid during this time period. The ongoing costs of $114 million represent the cost of providing the grant increase during 2007-08. The one-time costs are typically subject to a settlement agreement and which cannot be modified by the Legislature. With respect to the ongoing costs, the Legislature could prospectively reduce grants by the amount of the October COLA, thereby avoiding the ongoing costs of $114 million.

Governor’s Proposed Grant Levels Compared to Current Law. At the time this Analysis was prepared, the outcome of the Guillen lawsuit was unknown. Figure 1 compares combined cash grant and food stamps benefits under the Governor’s proposal to the grant levels required by current law. The top portion of the figure shows the grants if the state prevails in its appeal of the Guillen case. The bottom portion shows grants if the Guillen case is upheld by the appellate court. Combined cash grant and Food Stamps benefits are about $15 less per month under the Governor’s proposal than under current law.

Figure 1 also compares the combined grant and food stamp benefits to the federal poverty guideline for 2007. Under the Governor’s proposal, the combined cash grant and food stamps benefit would be 74 percent of the federal poverty guideline for a family of three in a high-cost county and 73 percent of the guideline for a family of three in a low-cost county (assuming the Guillen case is overturned). Under current law, combined benefits would be about 1 percent closer to the federal poverty guideline than the Governor’s proposal.

Redirecting SSI/SSP COLA Funding to CalWORKs

In order to more effectively utilize General Fund resources for poverty reduction, we recommend redirecting $124.4 million of the funds proposed for the Supplemental Security Income/State Supplementary Program (SSI/SSP) COLA to provide the CalWORKs COLA. Please see the “Crosscutting Issues” section of this chapter for the rationale for this recommendation.

LEADER Computer System Replacement

Rather than joining one of the other two recently completed automation consortia, the budget proposes $2 million for planning activities for replacing the Los Angeles Eligibility, Automated Determination, Evaluation and Reporting (LEADER) computer system with an entirely new system. We recommend that the Department of Social Services and the Health and Human Services Agency’s Office of System Integration report at budget hearings on why joining an existing system is not feasible and the costs and benefits of an entirely new system. We further recommend that the Legislature withhold funding for planning activities until a cost-benefit analysis for a new system is provided.

Background. The Statewide Automated Welfare System (SAWS) is divided into four consortia: (1) ISAWS (Interim SAWS), comprised of 35 small and medium size counties, (2) CalWIN (CalWORKs Information Network) which covers 18 middle-sized counties that are part of the Welfare Client Data System, (3) C-IV (Consortium IV), which is comprised of San Bernardino, Riverside, Merced, and Stanislaus counties, and (4) LEADER, which is the system for Los Angeles County. These automated welfare systems support the delivery of social services programs including CalWORKs, Food Stamps, and Medi-Cal. Each system cost several hundred million dollars to develop. The ISAWS counties are in the process of migrating to C-IV. When this migration to C-IV is complete, there will be three consortia.

LEADER Replacement. The budget proposes a total of $2 million for planning activities for replacing LEADER. The stated goal is to award a contract for the new system in June 2008. Los Angles County has viewed demonstrations of the other consortia systems and has concluded these systems are inappropriate solutions for replacing LEADER. The DSS concurs with this finding, but has not provided an explanation as to why the other two consortia cannot be modified to become a LEADER replacement solution.

Analyst’s Recommendation. Given the substantial costs (probably over $200 million total funds) associated with developing a new system, we recommend that DSS and the Office of System Integration (which oversees the development of human services automation systems and is part of the Health and Human Services Agency) report at budget hearings on why Los Angeles County cannot join one of the existing systems (potentially with some modifications) and the costs and benefits associated with the development of a new system. We further recommend withholding funding for additional LEADER planning activities until a cost-benefit analysis is provided to the Legislature.

TANF Transfer to CWS Contrary to Legislative Approach

By using federal Temporary Assistance for Needy Families (TANF) block grant funds to replace General Fund support for certain Child Welfare Services (CWS) emergency assistance costs, the Governor’s budget achieves General Fund savings of $56 million in 2007-08. The Legislature should assess whether this proposed fund shift meets its priorities for limited TANF block grant funds.

TANF Expenditures May Offset General Fund Costs in Other Programs. Each year California receives $3.7 billion in federal TANF block grant funds. The majority of these funds are used for the CalWORKs program. However, federal law permits the expenditure of TANF funds on a variety of programs and activities. Specifically, the TANF block grant funds may be expended on any program designed to (1) provide assistance to needy families and children; (2) end the dependence of needy parents on government benefits by promoting job preparation, work, and marriage; (3) prevent and reduce the incidence of out-of-wedlock pregnancies; and (4) encourage the formation and maintenance of two-parent families. Moreover, TANF funds can be spent for any purpose permitted under the AFDC program or under AFDC-Emergency Assistance (EA). (For example, AFDC-EA could be used for juvenile probation.) Finally, up to 10 percent of TANF funds may be transferred to the Title XX Social Services Block Grant and then expended in accordance with the federal rules pertaining to Title XX. Unexpended TANF funds can be carried over indefinitely into future years.

Legislative Action in 2006-07. For 2006-07, the Legislature shifted $100 million in TANF funds proposed for CWS back to the CalWORKs program. This funding shift required a backfill of $100 million from the General Fund to CWS. The purpose of the shift was to ensure scarce TANF block grant funds were used in the CalWORKs program.

Governor’s Proposal and Legislative Oversight. For 2007-08, the budget proposes to replace General Fund monies for CWS emergency assistance activities with $56 million in TANF federal funds. This results in General Fund savings of $56 million, but is contrary to legislative action in the current year, which used General Fund support in lieu of TANF funds for CWS.

The Governor’s proposal to save $56 million General Fund by using TANF funds for emergency assistance costs in child welfare services is permissible under federal law. Whether to make this fund shift is a policy issue for the Legislature. Because TANF can be used for both CalWORKs and non-CalWORKs purposes, the Legislature should review this proposal to determine if it is consistent with its priorities for TANF and the General Fund. If the Legislature rejects the Governor’s fund shift proposal, it would need to adopt some offsetting budget solution to avoid increasing the state’s structural deficit.

Maintenance-of-Effort and Caseload Reduction Credit

The budget proposes to spend above the federally required maintenance-of-effort (MOE) level, thereby achieving a caseload reduction credit (CRC) which reduces California’s work participation requirement in the California Work Opportunity and Responsibility to Kids (CalWORKs) program. We review the MOE requirement, the impact of the Deficit Reduction Act (DRA) of 2005 on countable MOE spending, and the Governor’s proposal to obtain a CRC.

TANF 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.) Countable MOE expenditures include those made on behalf of CalWORKs recipients, as well as for families who are eligible for CalWORKs but are not receiving cash assistance. 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 counted toward satisfying the requirement.

DRA Expands Definition of MOE Spending. The DRA expands the definition of what types of state spending may be used to meet the MOE requirement. Previously, countable state spending had to be for aided families or for families who were otherwise eligible for assistance. The DRA allows state expenditures designed to prevent out-of-wedlock pregnancies or promote the formation of two-parent families to count toward the MOE requirement, even if the program participants are not otherwise eligible for aid. Essentially, the act removes the requirement that countable spending for these purposes be on behalf of low-income families with children.

We would note that some states have already claimed expenditures for these types of services as part of their MOE spending. Because of this change, California can now count some existing spending on higher education tuition assistance (CalGrants and community college fee waivers) and after school programs toward the MOE requirement. The rationale for tuition assistance is that higher education is generally associated with better employment and life outcomes, which in turn may result in fewer out-of-wedlock births. Similarly, after school programs are associated with better school attendance and achievement, which in turn improves employment and life outcomes, potentially resulting in fewer teen pregnancies.

Excess MOE Spending Results in Caseload Reduction Credit. As discussed more fully in the next section, pursuant to the DRA, states must meet federal work participation rates (50 percent for all families) less a caseload reduction credit based on the decline in their caseloads since FFY 2005. Current federal regulations allow states that spend above their required MOE level to subtract out cases funded with excess MOE for the purpose of calculating the CRC. States first used this regulation during FFY 2005. Based on the amount of excess MOE spending during FFY 2006, California increased its CRC from 3.5 percent to 4.7 percent on an FFY basis. Pursuant to federal rules, the CRC percentage that is due to excess MOE spending during FFY 2006, is subtracted from the federal work participation requirement for the subsequent year (FFY 2007).

We note that the authority to increase the CRC based on excess MOE spending is part of current regulations, not current law. Accordingly, the federal administration could end this authority by changing the regulations, and some observers believe this may happen in future years. Also, the federal government has not yet approved California’s methodology for determining the amount of excess MOE cases. Thus, we would caution that long-term plans for attaining compliance with federal work participation rates should not overly rely on the excess MOE caseload reduction regulations.

Figure 2 shows base MOE spending and excess MOE spending proposals for 2006-07 and 2007-08. For both years, base MOE spending will be approximately $2.7 billion. With respect to excess MOE, the budget proposes a reduction from $470 million to $203 million. Figure 2 also shows that based on the Governor’s proposed spending levels, the CRC would be 12.6 percent in 2006-07, falling to 5.4 percent in 2007-08. As a point of reference, we show estimated excess MOE spending in 2007-08 under current law (if the Legislature rejects the Governor’s time limit aid sanction proposals). (These CRCs are estimates on a state fiscal year basis, and will differ from the actual CRCs which are calculated on an FFY basis.)

Current Work Participation Requirement and Status

Federal law requires that states meet a work participation rate of 50 percent for all families and 90 percent for two-parent families, less a caseload reduction credit (CRC). The Deficit Reduction Act of 2005 and associated regulations significantly changed the calculation of the participation rate and the CRC.

Background

Required Hours of Work for Adults. To comply with federal work participation rates, adults must meet an hourly participation requirement each week. For single-parent families with a child under age 6, the weekly participation requirement is 20 hours. The requirement goes up to 30 hours for single parents in which the youngest child is at least age 6. For two-parent families the requirement is 35 hours per week. The participation hours can be met through unsubsidized employment, subsidized employment, certain types of training and education related to work, and job search (for a limited time period).

Work Participation Penalties for States. If a state fails to meet the work participation rates, it is subject to a penalty equal to a 5 percent reduction of its federal TANF block grant. For each successive year of noncompliance, the penalty increases by 2 percent to a maximum of 21 percent. For California, the 5 percent penalty would be approximately $149 million annually, potentially growing by up to $60 million per year. Penalties are based on the degree of noncompliance. For example, if a state is in compliance with the all-families rate, but is out of compliance for the two-parent rate, the penalty would be prorated down based on the percentage of cases that are two-parent cases.

State Impact of Penalties. States that fail to meet their work participation requirements are required to (1) backfill their federal penalty with state expenditures and (2) increase their MOE spending by 5 percent. States out of compliance may enter into corrective action plans which can reduce or eliminate penalties, depending on state progress in meeting the negotiated goals of the corrective plan.

Prior Law Work Participation Requirements for States. Prior to enactment of DRA, states had to meet two separate work participation rates—an all-families rate of 50 percent and a two-parent rate of 90 percent. Both of these rates were adjusted downward to reflect the caseload decline since FFY 1995. From 1995 through 2004, California’s caseload declined by approximately 46 percent, but has been relatively stable since then. Thus, California achieved a substantial CRC pursuant to prior law. Specifically, this 46 percent reduction reduced California’s required participation rate to about 4 percent (the 50 percent requirement, less the 46 percent credit).

With respect to two-parent families, prior law permitted states to create state-only funded programs, and families served in such programs were removed from TANF work participation calculations. Given this prior flexibility, California served two-parent families in a separate state-only program, and thus was not subject to the 90 percent two-parent family rate. (The two-parent families, however, are subject to state work participation requirements.)

Deficit Reduction Act Effectively Increases Participation Requirements for States

The DRA increased participation requirements on states in three different ways. First, it moved the base period for calculating the CRC from 1995 to 2005. Because California’s caseload decline mostly occurred before 2005, this substantially reduces the CRC, from about 46 percent to about 3.5 percent. Second, it made families served in separate state programs subject to federal participation rates. Thus, beginning in FFY 2007 California is subject to the 90 percent federal work participation rate for two-parent families. Third, it provided the Secretary of Health and Human Services with broad authority to adopt federal regulations (which he exercised) to (1) narrow the definition of work and participation and (2) expand the number of families who are included in work participation calculations.

Figure 3 summarizes how the DRA and associated regulations changed the work participation mandate on states. The two middle columns compare prior law and regulations to the new law and regulations under the DRA. The final column summarizes the impact on the participation calculation for California. A state’s actual work participation rate is calculated as follows:

number of families meeting participation requirement	=  participation rate
number of families subject to participation requirement

As Figure 3 indicates, new regulations pertaining to cases in sanction status (child-only cases where the adult is removed from aid for noncompliance), and safety net cases (child-only cases where the adult is removed from aid for hitting the five-year time limit) make an additional 86,100 cases subject to the work participation calculation. On the other hand, the state may now exclude those caring for an ill or incapacitated family member from the calculation (about 5,000 cases). Also, about 9,000 cases which have received aid for five years and are in the safety net are now counted as participating in the numerator.

Current Participation Status

The most recent participation data for California is from FFY 2005. Figure 4 shows the calculation of the all families participation rate under prior law and under current law with DRA regulations. In both calculations, the two-parent families have been added into the numerator and denominator, pursuant to the DRA which prevents their exclusion through a separate state funded program. As Figure 4 shows, under prior rules, California’s participation rate would be almost 28 percent. Under the new rules, the rate falls to just over 23 percent. Most of the decline is attributable to adding sanctioned cases and safety net cases to the participation rate in the denominator (81,153 cases). For two-parent families (not shown in Figure 4), the participation rate is 33.6 percent based on data from FFY 2005.

Impact of Recent Policy Changes on Participation

In recent years, California has made significant changes in the California Work Opportunity and Responsibility to Kids program in order to increase work participation among recipients. Estimates by the administration of the participation increases associated with recent policy changes, in conjunction with the caseload reduction credit, suggest that California would likely be in compliance with federal work participation requirements in federal fiscal year 2008.

Over the past two years, the Legislature has made significant program changes that should increase work participation to some unknown extent among CalWORKs families. First, Chapter 68, Statutes of 2005 (SB 68, Committee on Budget and Fiscal Review), created the Pay-for-Performance program for counties. This program creates a performance incentive system whereby counties earn a share of $40 million based on improving performance on three specified measures related to employment, earnings, and participation. Then, Chapter 75, Statutes of 2006 (AB 1808, Committee on Budget), made the following changes designed to improve program operations and engagement of clients with participation:

• County Plan Addenda. Each county is required to indicate how it intends to meet program goals and work participation requirements, by amending it CalWORKs plan.

• County Penalty Pass-On. Statute requires that counties backfill their share of any federal penalties the state might receive for failing to meet federal participation requirements.

• Data Master Plan. Among other changes, the master plan prepared by the state will result in a new monthly report which tracks hourly participation rates in each country. It is anticipated that this will focus case managers and administrators on the work participation status of their caseloads.

• Ending Durational Sanctions. Chapter 75 allows recipients to end their sanction immediately after coming into compliance. Under prior law, recipients being sanctioned for the second or third time would be required to remain in sanction status and, thereby, excluded from the participation rate even if they are employed.

• Expanding Homeless Assistance Eligibility. Under prior law, CalWORKs recipients were entitled to a once-in-a-lifetime assistance payment if they became homeless. Chapter 75 permits this payment to be provided upon threat of eviction. This should stabilize housing situations, enabling more families to participate in work.

• Temporary Assistance Program (TAP). Chapter 75 created a non-MOE funded TAP for CalWORKs recipients who are exempt from work participation (usually temporarily disabled). This program would have increased the participation rate and resulted in a CRC. However, as discussed below, the program cannot be implemented as intended by the Legislature.

Budget Estimate of Work Participation Impact. With the exception of the TAP program (which cannot be implemented at this time), all of the changes described above should increase work participation. The difficult question is estimating the magnitude of the impact on participation. The Governor’s budget estimates that together these changes will increase California’s work participation rate by just over 5 percent in FFY 2007 and 11.4 percent in FFY 2008, as shown in Figure 5. The administration specifically estimates that the homeless assistance policy change will stabilize housing for certain CalWORKs recipients resulting in about 700 and 1,400 cases meeting work participation in FFY 2007 and FFY 2008, respectively. Based on the change in durational sanctions, the budget estimates further respective participation increases of 3,000 and 3,750 over the next two years. Finally, from all other changes, the budget anticipates 12,000 cases will meet work participation in FFY 2007 and 29,600 cases in FFY 2008. Figure 5 estimates how these policy changes will increase participation to 34.7 percent in FFY 2008.

LAO Comments on Increased Participation Estimates. Estimating the impact of policy changes on work participation is difficult. The administration’s estimates for homeless assistance stabilization (0.5 percent) and ending durational sanctions (1 percent) appear reasonable. However, the estimate that all other changes will increase participation by 10 percentage points may be overstated, given the magnitude of this estimated growth. The administration provides no specific evidence explaining how these changes will increase participation among recipients. To assume an increase of 10 percent in a single year from what are essentially better incentives for counties (pay-for-performance, potential county penalties, and better data tracking), may be risky.

California Likely to Meet Work Participation Requirements in FFY 2008

As described above, California is required to meet a work participation rate of 50 percent, less a CRC. Currently, participation is about 23 percent, but the budget assumes as existing law changes are implemented, participation will increase by 11.4 percent by FFY 2008. Figure 6 compares the net participation requirement (after CRC) to the estimated level of participation in FFY 2007 and FFY 2008. As the figure shows, California is projected to be 16.7 percent below the net requirement in FFY 2007, but to exceed the requirement by 1.7 percent in FFY 2008. Although California is projected to be in compliance as of FFY 2008, there are risks associated with this projection. First, much of the compliance is based on the “excess” MOE CRC. This credit is based on regulations, not statute, and could be terminated by the federal administration. Moreover, California’s method for calculating the excess MOE credit has not yet been approved by the federal Government. Finally, California’s rate of 34.7 percent is dependent on the assumption that existing policies will increase participation by 11.4 percent.

TAP Implementation Issues

As noted above, TAP cannot be implemented as planned. Before describing the implementation issues, we discuss the potential benefits of TAP.

Potential Benefits of TAP. Currently, certain CalWORKs recipients (such as those temporarily disabled, caring for a disabled relative, or over age 60) are statutorily exempt from work participation requirements. Chapter 75 created a separate state program funded exclusively with state monies which are not used to meet the MOE requirement. The TAP would serve CalWORKs recipients who are exempt from participation. Because of the exclusive state funding, the recipients of this program are outside the federal TANF program and are excluded from the federal work participation rate calculation. If implemented, it is estimated that this program would have increased the work participation rate by about 1.5 percent. It is also estimated that the program would have resulted in a CRC of about 5 percent, because the families would have exited TANF. Given these positive impacts on participation and caseload reduction, TAP would be an effective way of achieving compliance with federal work participation requirements. The Legislature required that TAP be a voluntary program providing identical benefits and obligations for TAP recipients as for CalWORKs participants.

Child Support Issues Threaten Implementation. This voluntary program was to be implemented in April 2007. Chapter 75 authorizes the administration to delay implementation until October 2007 under specified circumstances. Since enactment of this program, a working group of legislative staff, administration representatives, county staff, and advocates have learned that federal law appears to require that TAP receive a pass-through of all child support collected on behalf of participants. Because this requirement differs from the way child support payments are treated with respect to CalWORKs families (where child support beyond $50 is retained by the government), TAP cannot be implemented as scheduled. Pursuant to Chapter 75, DSS notified the Joint Legislative Budget Committee in January 2007 that TAP implementation would be delayed indefinitely.

On a very preliminary basis, the Department of Child Support Services indicates that to resolve the child support distribution issues, substantial automation changes are necessary, and these changes could not be implemented until after Phase 2 of the child support automation project is completed in 2008. Accordingly, it is likely that implementation will be delayed beyond October 2007. Because current law requires that TAP be implemented no later than October 2007, the Legislature will need to address the issue of when and whether to implement TAP.

Governor’s Sanction Proposal

In order to increase work participation, the Governor’s budget proposes new sanctions on children whose parents cannot or will not comply with California Work Opportunity and Responsibility to Kids participation requirements. We review the sanction proposal’s impact on work participation, families, and the state budget. We recommend rejecting the sanction proposal because by the administration’s own estimates it is not needed to meet federal work participation requirements.

The budget proposes a full-family sanction (eliminating all cash assistance) for families in which the adult has been out of compliance with program requirements for at least three months. The Governor’s budget states that a stronger sanction is necessary to increase the work participation rate so that the state can avoid substantial federal penalties. However, as discussed above, based on the Governor’s own assumptions about the impacts of current law and the ability of the state to obtain a CRC, it appears that this change is not necessary to attain federal compliance by FFY 2008. Below we discuss the sanction proposal in terms of its impact on the budget, work participation, and families.

Full-Family Sanction

Policy Description. Currently, when an able-bodied adult does not comply with CalWORKs participation requirements, the family’s grant is reduced by the adult portion, resulting in a “child-only” grant. The budget proposes a full-family sanction whereby the reduced grant for the children is eliminated if an adult is out of compliance with participation requirements for at least three months. In order to restore the family’s grant, the noncompliant adult would need to sign an agreement to come into compliance and then complete the terms of the agreement for up to 30 days.

The agreements are to address the specific reason for noncompliance. For example, if the sanction was due to failing to complete a job club/job search program, the agreement would typically require the individual to complete the job club. Once completed, aid would be fully restored back to the day the client signed the agreement. These procedures are the same as current law.

The Governor proposes that this policy would be implemented on November 1, 2007. Families would be entitled to food stamp benefits during the period that they were not receiving a grant. For a family of three, we estimate that their monthly food stamps allotment would increase by about $10 to a total of $408, after the full-family sanction was imposed.

Impact on Families. According to sample data from 2005, there are about 36,400 cases that have been in sanction status for three months or more. These cases have an average of 1.9 children, so potentially about 70,000 children could lose cash aid unless their parents met work participation requirements. The Governor’s budget assumes that 70 percent of cases, facing a full-family sanction, would fully participate through unsubsidized employment or a combination of other eligible participation activities so as to avoid the sanction. The budget estimates that it will take 12 months for these changes to occur as recipients may appeal their sanctions. As of November 2008, DSS estimates that 25,450 families would have avoided the sanction through compliance and that 10,950 families would receive the full family sanction. The 10,950 families include about 21,000 children. Below, we discuss why this 70 percent success rate is overly optimistic.

Impact on Work Participation. Based on the Governor’s 70 percent assumption, there are two impacts on the state’s work participation rate. First, the 70 percent of families meeting work participation raise the numerator in the work participation fraction. Second, the 30 percent of families unable to meet participation will exit the program and reduce the denominator. Together, the budget estimates that these changes will increase the work participation rate by about 3 percent in FFY 2008, rising to 9.6 percent in FFY 2009. We note that regardless of the success rate of this policy in encouraging families to work, the policy will increase the work participation rate, because families who experience the full-family sanction will be excluded from the denominator. The only question is the number who will be excluded.

Impact on Budget. Because of the estimated increase in compliance and work participation, the budget estimates increased child care and welfare-to-work services costs of about $27.8 million in 2007-08. These costs would be offset by grant savings ($16.4 million) from the families that experience the full-family sanction. Thus, the Governor’s budget estimates these net costs to be $11.4 million in 2007-08, rising to $81 million in 2008-09.

Comments on the Governor’s Full-Family Sanction Proposal

Estimated Behavioral Response Is Overly Optimistic. We believe the Governor’s assumption that 70 percent of those cases already in sanction status will meet the federal participation requirements in response to a full-family sanction is substantially overstated. Using sanction data from 1999-00, the administration developed a “sanction cure rate” of 45 percent. It obtained this compliance rate by dividing the average number families ending their sanction by the average number of new sanctions per month. This 45 percent rate is overstated, however, because it is based on aggregate data, not the individual behavior of families returning to compliance. (As we discuss below, Riverside County, tracking individual families, found that 27 percent of sanctioned families eventually came into compliance.) Moreover, “compliance” was not exclusively defined as meeting the federal work requirements (20 to 30 hours per week) but included signing an agreement and completing the required activity, such as attending orientation. It could also mean that the family was found to be exempt. Based on our review, although some families coming into compliance would participate sufficiently to meet federal requirements (20 to 30 hours per week), far less than 45 percent of those ending would be at this high level of participation. Finally, the administration presents no specific evidence that a full-family sanction would increase their estimated rate of attaining compliance from 45 percent to 70 percent.

Available Research Does Not Directly Address Relationship of Sanctions to Work Participation. There is no consensus in the research community on whether stronger sanctions correlate with better employment outcomes for families. This is mostly because there have been no controlled studies that compare the impacts of randomly assigned participants to weaker and stronger sanctions. Changes in sanction policy are typically accompanied by other changes, such as time limits and work incentives (such as allowing recipients to keep more of their cash grant even as their earnings increase). Nevertheless, there is research on the characteristics of sanctioned cases and what happens to them over time.

Longitudinal and Characteristics Data. Research from California and other states consistently finds that sanctioned cases face more barriers to employment than their nonsanctioned counterparts. Given that the sanctioned caseload faces greater barriers to employment, there is no basis to conclude that their estimated participation (assumed to be 70 percent) would be greater than the nonsanctioned caseload, which currently has a work participation rate of about 24 percent. A longitudinal study by Riverside County showed that within ten months, 27 percent of sanction cases ended their sanction and “participated.” However, in this study, “participation” meant any level of participation, for example, attending job club. It did not necessarily mean participating for sufficient hours to meet federal requirements. We note that a full-family sanction represents a greater financial hardship and, therefore, a greater incentive to comply than the current “adult-only” sanction. Nevertheless, our review of the research on sanction impacts suggests that the success rate from a full-family sanction is likely to be substantially less than 70 percent.

What Happens to Sanctioned Families? Some studies indicate that families experiencing a full-family sanction have greater material hardships (such as utility shut off), than nonsanctioned families. However, none of the studies finding greater hardship could establish a causal relationship between the sanctions and the hardship.

Research from some states with graduated full-family sanctions indicates that some sanctioned families turned to other sources of support, primarily other family members when they were removed from aid.

Some observers predicted that sanctions and time limits associated with the 1996 federal welfare reform legislation would increase child welfare caseloads nationally. However, an Urban Institute study from 2001 found no such impacts.

Because there are no controlled studies of states that increased their sanction from adult only to full family, it is difficult to generalize about how a full-family sanction might impact families and work participation in California.

Analyst’s Recommendation. Because the full-family sanction policy is not necessary to meet federal work participation rates and would substantially reduce the income for children in families where the adult is unwilling to participate, we recommend that the Legislature reject the Governor’s proposal. Below we present an alternative approach to strengthen and improve the sanction policy.

Alternative Approach to Strengthening the CalWORKs Sanction

We recommend an in-person engagement strategy for each case that is in sanction status for three or more months. If upon being contacted by a caseworker, the family does not have good cause, cannot meet an exemption criteria, and is unwilling to participate, we recommend reducing the family’s grant to one-half of its original total.

There are some CalWORKs families headed by able-bodied adults who could meet program participation requirements, but choose not to do so and accept the current sanction. In order to engage the adults in these families in work participation, we propose a reengagement strategy, in part modeled on a sanction prevention project in Los Angeles County.

Los Angeles County Approach to Preventing Sanctions. In order to improve compliance with work participation and avoid sanctions, Los Angles County developed a project designed to engage noncompliant families. Specifically, within ten days of sending the notice of noncompliance, a telephone contact is attempted. If the phone contact fails, a letter notifying them of a home visit is mailed to the recipient. (Recipients may decline the home visit.) Then, by phone or home visit, welfare caseworkers provide information about supportive services, program requirements, program exemptions, and the sanction process. Based on the discussion with the client, the caseworker attempts to resolve the pending sanction. The majority of the cases contacted in this project were able to avoid a sanction because:

• The recipient agreed to participate (20 percent) or went to work (6 percent);

• The caseworker determined that the client met the criteria for good cause for nonparticipation (20 percent), or met an exemption criteria (9 percent); or

• Compliance was met through other means (22 percent).

Long-Term Sanctions. Many cases resolve their sanction sometime after entering sanction status. Over a 24-month period, Riverside County found that 69 percent of cases never experienced a sanction while 31 percent had at least one month in sanction status. Of the 31 percent that were sanctioned, about 62 percent resolved their sanction at some point over the two years. The remaining 38 percent of sanctioned cases never ended their sanction, apparently because they were unwilling to do so.

A Stronger Sanction for Those Unwilling to Comply. We think a sanction more narrowly targeted at those unwilling to comply has merit. Specifically we believe that those in sanction status for over three months should be contacted, by phone or home visit, based on the Los Angeles County engagement model described above. If upon making contact with a caseworker, the family does not have good cause, cannot meet an exemption criteria, and is unwilling to participate, their grant could be reduced to one-half of its original total. If this stronger sanction were adopted by the Legislature, we recommend requiring DSS to report on the impacts on families of this increased sanction. Based on the results of the report, the Legislature could further modify the sanction policy.

Analyst’s Recommendation

We recommend enactment of legislation (1) requiring a home visit or other in-person contact with each family who is out of compliance for three months or more, and (2) increasing the sanction to 50 percent of a family’s grant if the adult refuses to comply with participation requirements.

Governor’s Time-Limit Proposals

In order to increase work participation, the Governor’s budget proposes new time limits on children whose parents cannot or will not comply with the California Work Opportunity and Responsibility to Kids participation requirements. We review the impact of these time limits on work participation, families, and the state budget. We recommend rejecting the proposed time limits because they are not needed to meet federal work participation requirements.

Safety Net Time Limit. Currently, after five years of assistance, a family’s grant is reduced by the adult portion, and the children continue to receive a child-only grant in the safety net program. The budget proposes to eliminate the safety net grant for children whose parents fail to comply with the federal work participation requirements as of November 1, 2007. Families currently on the safety net would be given 90 days to increase their work hours to remain eligible. Families unable to meet federal requirements would be terminated from aid.

Working Families Could Not Reenter Safety Net. We note that families who are unable to sufficiently increase their work participation within the 90-day window described above would generally be unable to return to the safety net even if they later worked sufficient hours. This is because the income ceiling for families applying for CalWORKs is below the income one would typically earn if one met federal participation requirements. This represents a “catch-22” because the family will be unable to return to the safety net regardless of work effort.

Child-Only Time Limit. The budget also proposes to limit assistance to five years for most other child-only cases (such as those with parents who are undocumented or ineligible due to a previous felony drug conviction). These time-limit policies are estimated to result in savings of about $336 million in 2007-08.

Time-Limit Impacts on Safety Net Recipients. In the current year, the budget estimates that there are 45,100 families in the safety net, rising to about 50,000 in 2007-08. The budget assumes that in 2007-08, 26 percent of these families—13,000 cases—will work sufficient hours to maintain eligibility for the safety net. The DSS bases this 26 percent rate on data indicating that currently about 19 percent of safety net cases are meeting the federal participation requirements, and that when faced with complete benefit termination, an additional 7 percent who are working part time would increase their hours so as to remain eligible. The budget estimates that the other 37,000 cases, with 94,400 children, would lose aid as of November 2007, rising to 39,600 cases (101,000 children) by June 2008.

Time-Limit Impacts on Other Child-Only Cases. The budget estimates that there are approximately 38,000 child-only cases with undocumented parents or parents with felony convictions making them ineligible for CalWORKs, that have received aid for five or more years. These cases have approximately 73,300 children. As of November 1, 2007, the budget proposes to eliminate the grants for these 73,300 children.

Fiscal Impacts. The budget estimates that the safety net time limit will result in savings of $176 million in 2007-08 based on part-year implementation, rising to $268 million in 2008-09. The child-only time limit is estimated to result in savings of $160 million in 2007-08 rising to $239 million in 2008-09.

Impacts on Work Participation Rate. The safety net time limit would increase participation in two ways. First, it modestly increases the number of families working enough hours to meet federal requirements (the 7 percent of families on the safety net who are working part-time and are assumed to reach the federally required levels in response to potential benefit termination). Second, those unable to meet federal participation would have their benefits terminated. By removing these cases from assistance, it reduces the denominator, thus increasing the participation rate. The budget estimates that these combined impacts will raise the work participation rate by 3 percent in FFY 2008, and just over 4 percent in FFY 2009. These estimates appear reasonable. Time limiting benefits for other child-only cases (where the parents are ineligible because they are drug felons or undocumented) has no impact on work participation. This is because they are already excluded from the work participation calculation. If the Legislature were to reject these time-limit proposals, the CalWORKs budget would increase by $336 million in 2007-08. We note that this increase in expenditures would increase the CRC by approximately 9 percent due to the additional excess MOE spending.

Analyst’s Recommendation. Because the proposed five-year time limits for safety net cases and other child-only cases are not necessary to meet federal work participation rates and would substantially reduce the income for children in these families, we recommend that the Legislature reject these time limit proposals. We note that these proposals provide savings of $336 million in 2007-08, rising to $507 million in 2008-09. Rejecting these policies will require the Legislature to identify alternative budget solutions elsewhere.

Increasing Participation Through Food Stamps Benefits

By providing additional state-funded food stamps to families who are working sufficient hours to meet federal participation requirements but are not on California Work Opportunity and Responsibility to Kids, California could increase its work participation rate by nearly 10 percent.

Based on data from Los Angeles County, we estimate that there are approximately 42,000 families statewide who are working enough hours to meet federal participation requirements and are receiving food stamps but no CalWORKs grant. Some of these families are former CalWORKs families while others are not. If California were to increase the food stamps allotment for these families (for example, by $50 per month) using MOE funds, these cases would become assistance cases for purposes of calculating the federal work participation rate. By adding them to the calculation, California’s work participation rate would increase by approximately 9.5 percent. We note that adding these cases would increase the caseload, thus reducing CRC by about 3.5 percent. The net benefit in terms of work participation would be about 6 percent (9.5 percent participation increase less a 3.5 percent reduction in the CRC).

Impacts on Recipients. Receiving this benefit (which does not involve a cash grant, only food stamps) would be seamless to recipients. The benefits would be added to their regular food stamps allotment which is currently provided through Electronic Benefit Transfer (EBT) cards which work like debit cards at food retailers. Recipients already complete a quarterly report regarding their income and eligibility status in order to receive food stamps. It may be necessary to make minor modifications to this form, but completing the form would not be an additional burden for recipients. Because these are state funded benefits, there would be no impact on the federal five-year time limit for receiving TANF-funded benefits.

Implementation Issues. The most significant barrier to implementation of this change is making the necessary programming changes to the EBT system and to the four welfare automation consortia. Costs for reprogramming are unknown. A DSS sponsored workgroup (comprised of state staff, legislative staff, county representatives, and advocates) is currently examining these implementation issues. The annual cost of the enhanced benefit would be about $25 million if it were set at $50 per month. The exact food stamp level would be a policy decision for the Legislature.

Analyst’s Recommendation. Although the Governor’s budget projects that California will attain federal compliance by FFY 2008, there are risks associated with this projection. First, attaining compliance is dependent on receiving the excess MOE CRC. This credit is part of current regulations and may be eliminated administratively in future years. Moreover, the federal government has not yet approved California’s methodology for estimating the credit. If there is disagreement, the magnitude of the credit could be smaller. Second, attaining compliance assumes that current law policies will increase participation by 10 percent by FFY 2008. Although this is possible, we believe this 10 percent increase may be overly optimistic. Given the potential risk that California may not be in compliance in FFY 2008 (resulting in federal penalties of up to $149 million), the Legislature may wish to consider this strategy which would improve participation compliance by about 6 percentage points, and provide additional food stamp benefits for the working poor.

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