Analysis of the 2008-09 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, 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 $4.8 billion ($1.5 billion General Fund, $107 million county funds, $35 million from the Employment Training Fund, and $3.1 billion federal funds) to the Department of Social Services (DSS) for the CalWORKs program in 2008–09. In total funds, this is a decrease of $378 million, or 7.3 percent, compared to estimated spending of $5.2 billion in 2007–08. 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 2008–09 is proposed to be $59 million, 4 percent, more than estimated spending for 2007–08. This General Fund increase is due to a higher federal maintenance–of–effort (MOE) requirement, partially offset by using more countable MOE funds from other departments.

Budget Underestimates Cost of CalWORKs COLA

The Governor’s budget provides $131 million to fund the California Work Opportunity and Responsibility to Kids (CalWORKs) cost–of–living adjustment (COLA) based on an estimated California Necessities Index (CNI) of 4.25 percent. Our review of the actual data indicate the CNI will be 5.26 percent, which raises the cost of the CalWORKs COLA by $31 million, to a total of $162 million.

Actual CNI Exceeds Governor’s Estimate. Current law requires that the CalWORKs grant be adjusted in July 2008 based on the change in the CNI from December 2006 through December 2007. The Governor’s budget, which is prepared prior to the release of the actual data from December 2007, estimates that the CNI will be 4.25 percent. Our review of the actual data, however, indicates that the CNI will be 5.26 percent.

Higher State Cost to Provide COLA. Based on its estimate of CNI, the Governor’s budget provides $131 million to fund the CalWORKs cost–of–living adjustment (COLA) beginning in July 2008. Based on the actual CNI of 5.26 percent, we estimate the cost of providing the CalWORKs COLA to be $162 million, an increase of $31 million compared to the Governor’s budget.

Grant Levels Compared to Poverty. Figure 1 shows the combined cash and food stamps in 2007–08 and in 2008–09 after the July COLA has been provided. As the figure shows, maximum monthly cash grants increase by $38 in high–cost counties, and $36 in low–cost counties. These increases are in part offset by a $17 monthly reduction in food stamps benefits. The figure also compares the combined grant and food stamps benefit to the federal poverty guideline for 2008. As the figure shows, combined benefits will be about 75 percent of the guideline in high–cost counties and 74 percent of the guideline in low–cost counties.

Maintenance–of–Effort and Caseload Reduction Credit (CRC)

Pursuant to federal law, any spending above the federally required maintenance–of–effort (MOE) level results in a caseload reduction credit (CRC) which reduces California’s work participation requirement in the California Work Opportunity and Responsibility to Kids program. Recent federal changes are likely to reduce the amount of countable MOE spending and CRC available to California. We review the MOE requirement, the impact of the recent federal changes, and forecast the CRC through 2010–11.

Temporary Assistance for Needy Families (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.) Because California is likely to fail the work participation requirement for FFY 2007, the required spending level rises to 80 percent beginning in the 2008–09 budget. 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.

Expanded Definition of MOE Spending. The federal Deficit Reduction Act (DRA) of 2005 expanded 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.

Because of this change, California now counts 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 CRC. As discussed more fully in the next section, pursuant to DRA, states must meet federal work participation rates (50 percent for all families) less a CRC 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 CRC. Based on the amount of excess MOE spending during FFY 2006, California increased its CRC from 3.5 percent to a total of 14.4 percent. 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).

New Federal Regulations

On February 5, 2008, the federal Administration for Children and Families published new regulations regarding the implementation of DRA. Although these regulations make many modifications to the prior rules, the most significant changes are to (1) the method by which CRC from excess MOE is calculated and (2) which types of expenditures may be counted as MOE. The new rules take effect on October 1, 2008.

Change in Calculation of the MOE CRC. Many states have claimed excess MOE spending and have submitted federal reports which calculate CRC based on their amount of excess spending. The new regulations limit the amount of countable excess MOE spending to that portion of the excess MOE spending that represents “assistance.” Because California’s assistance spending is about one–half of its total MOE expenditures, imposition of this calculation methodology will significantly reduce California’s credit by about 50 percent compared to the existing California calculation method.

To date, the federal government has not yet notified California that its credit will be reduced, but such notification is expected in the near future.

Limits on Spending Which May Be Counted as MOE. As described earlier, DRA allowed states to count spending on individuals and families that were not eligible for TANF so long as the spending was reasonably calculated to reduce out–of–wedlock births or promote marriage. The new regulations only allow expenditures on specified programs that support marriage (such as mentoring programs, and marriage education) to be counted as MOE. States will no longer be able to count tuition assistance and other programs for families and individuals not otherwise eligible for TANF. Because these regulations go into effect on October 1, 2008, they impact how state spending is counted during FFY 2009 (October 2008 through September 2009), and impact the FFY 2010 CRC.

Given this recent federal change, further analysis of California’s spending which is outside of the regular CalWORKs program, and used to satisfy either the MOE requirement and/or create excess MOE CRC, is needed. On a preliminary basis, we are concerned that these regulations would substantially reduce countable excess MOE spending, most likely eliminating the excess MOE CRC beginning in FFY 2010. Moreover, the ability to meet the base MOE requirement under the Governor’s budget may be jeopardized. This problem is compounded by recent information suggesting that Proposition 49 after school funds may not be countable toward MOE because they are in part used to obtain federal education funds. On the other hand, it may be possible to create TANF fund shifts to restore the some of the excess MOE funds. After we have more carefully reviewed the regulations we will provide the Legislature with options for potentially mitigating this loss of MOE funds.

From FFY 2007 through FFY 2010, Figure 2 shows estimated excess MOE spending under both the Governor’s budget and under current law. For comparison purposes, the current law version backs out the savings from the Governor’s reforms discussed later in this chapter. The only difference is the credit for FFY 2009, which is based on spending in FFY 2008. The Governor’s proposals reduce spending during 2007–08 and 2008–09, and approximately $75 million of this savings impacts the FFY 2009 CRC. For FFY 2010, the figure shows no excess MOE spending because of the impact of the new federal regulations. Depending on the level of spending within the regular CalWORKs program, it may be possible, through fund shifts, to restore some of the excess MOE CRC in FFY 2010.

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 CRC. We estimate California’s work participation rate under these federal changes, and find that absent policy changes, California is out of compliance with federal requirements.

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 six, 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 six. 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 $70 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. Pursuant to current state law, the state and counties would share in any federal penalty.

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. Given past practice and regulations, if California were notified in late 2008 that it was out of compliance with work participation in FFY 2007, California would have until FFY 2010 to meet the goals of a corrective action plan.

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 CRC from 1995 to 2005. Because California’s caseload decline mostly occurred before 2005, this substantially reduces the state’s CRC, from about 46 percent to about 3.5 percent for FFY 2007 and an estimated 6.8 percent in FFY 2008. Second, it made families served in separate state programs subject to federal participation rates. Thus, beginning with FFY 2007, California is subject to the 90 percent federal work participation rate for two–parent families. In the past, these families were not subject to federal work participation requirements. Third, it provided the Secretary of Health and Human Services with broad authority to adopt federal regulations to (1) narrow the definition of work and participation and (2) expand the number of families who are included in work participation calculations. (For a complete description of how the DRA and the regulations changed the work participation calculations see Figure 3 on page C–123 of the Analysis of the 2007–08 Budget Bill.)

Current Participation Rate

The most recent data on California’s work participation rate are from FFY 2006. The DRA provisions, which became effective in FFY 2007, increase the number of families required to participate and also expand the definition of which families are meeting the rate. Based on data from FFY 2006, Figure 3 estimates California’s work participation for 2007 under DRA. As the figure shows, DRA changes have the effect of reducing the participation rate from 25 percent to 21 percent. Most of this loss is attributable to changes requiring that families sanctioned for more than three months and families in the safety net program (who have been on aid for five years) be included in the work participation rate.

Estimated Impact of Recently Enacted State Reforms. Through enactment of Chapter 68, Statutes of 2005 (SB 68, Committee on Budget and Fiscal Review) and Chapter 75, Statutes of 2006 (AB 1808, Committee on Budget), the Legislature has made significant program changes that should increase work participation among CalWORKs families. Last year, DSS estimated that these measures would increase participation by 4 percentage points in FFY 2007 and 10 percentage points in FFY 2008. Now DSS is forecasting that these changes will have almost the same impact, but one year later. In other words, the 4 percent increase is projected to occur in FFY 2008 with an additional 6 percent in FFY 2009. Thus, given the current participation rate of 21 percent, DSS estimates that participation will be 25 percent in FFY 2008 and 31 percent in FFY 2009.

Projected Participation Shortfalls

In order to assess where California stands with respect to meeting the federal work participation requirements, we have projected future participation and future CRCs based on the assumptions described above. Figure 4 projects that California will fall substantially below (19 percent) the required work participation rate in FFY 2007. However, in FFY 2008 the shortfall is reduced to 7 percent, falling to just under 4 percent in FFY 2009. In FFY 2010 the shortfall goes up to 12 percent, assuming the new federal rules regarding countable MOE spending cannot be mitigated by state changes. We note that the shortfall in 2009 would rise to about 12 percent if it turns out Proposition 49 funds for after school programs cannot be counted.

Governor’s Reforms Address Participation Shortfall and Achieve Budgetary Savings

In order to increase work participation and achieve budgetary savings, the Governor proposes a series policy changes for the California Work Opportunity and Responsibility to Kids program. These are (1) a graduated full–family sanction that increases to 100 percent of the grant after one year in sanction status, (2) a five–year time limit on children whose parents cannot meet federal work participation requirements, (3) a nutritional supplement for working poor families, and (4) a five–year time limit for other child–only cases. We review the Governor’s proposals and comment on them.

Overview of Governor’s Proposal

The Governor’s budget proposes four major policy changes which would significantly alter the CalWORKs program. As a package, these proposals result in net savings of $471 million in 2008–09, and are estimated to increase work participation by 9.7 percent in FFY 2009 and 19.8 percent in FFY 2010. Figure 5 summarizes the estimated fiscal and work participation impacts of each component. We discuss each aspect of the Governor’s proposal below.

LAO Bottom Line. The Governor’s CalWORKs proposals would increase the work participation rate and result in substantial budgetary savings because many children would lose access to cash assistance. The proposals raise significant policy and budget issues. Later in this chapter we present alternative policy approaches which increase work participation but provide much less budgetary savings. In order to address federal work participation requirements, the Legislature will need to set its own priorities with respect to the policies and budget for CalWORKs.

Graduated 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 Governor proposes to increase this sanction to 50 percent of the remaining child–only grant after six months in sanction status, and completely eliminate the family’s grant after another six months elapses, unless the adult comes into compliance. Families would be able to end the sanction and restore their grants by complying with program requirements.

Proposed trailer bill language “strongly encourages” counties to contact noncompliant cases by phone, letters, or home visits, before imposing the increased sanction. However, the budget does not include any additional funds for these activities (meaning that counties would have to absorb these contact costs within their existing block grants).

The Governor proposes that this policy be enacted through special session legislation. Clients would be notified in March about this sanction, and would begin experiencing the increased sanction in June 2007 unless they complied with program rules.

Impact on Families. Here we describe the financial impact of this proposal using a family of three in a high–cost county for purposes of example. Currently, the maximum grant for a family of three is $723 per month plus $361 in food stamps, for a total of $1,084 per month. When a family moves into sanction status, the adult is removed, the grant drops to $584 and the food stamps increase to $416, for a total of $1,000 per month. Under the Governor’s proposal, after six months in sanction status, the grant for the noncomplying family would drop by 50 percent to $292 plus $426 in food stamps (for a combined benefit package of $718). After an additional six months, the grant would be completely eliminated and the family would retain its food stamps benefits of $426 per month.

Behavioral Impacts on Families. For 2007–08, the estimated number of families in sanction status is 41,700 (with an average of 1.9 children per family). The Governor’s budget assumes that 13,000 families (31 percent) will participate sufficiently to come into compliance and avoid further sanction. The remaining 28,700 would receive a 50 percent reduction in their grant. Of this remaining group, the budget assumes that 5,800 families (20 percent) would comply with program requirements and avoid the full–family sanction. The remaining 23,000 families are estimated to experience the full–family sanction. This represents about 44,000 children. The budget further estimates that about 6,300 families experiencing the full–family sanction would subsequently comply with program requirements and return to aid within six months.

Impact on Work Participation. There are two impacts on the state’s work participation rate from this policy. First, some families will work sufficient hours to meet federal participation requirements. Specifically, the budget estimates there will be about 1,200 newly participating families in FFY 2008, rising to 8,400 in FFY 2009, and 11,500 in FFY 2010. This increases the numerator, thus raising the work participation rate. Second, the families which experience the full–family sanction exit the program and reduce the denominator. Together, the budget estimates that these changes will increase the work participation rate by about 0.44 percent in FFY 2008, rising to 3.7 percent in FFY 2009, and 5.7 percent in FFY 2010. 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 go off aid and therefore be excluded from the denominator. The only question is the number who would leave aid and be excluded.

Fiscal Impact. Because of the estimated increase in compliance and work participation, the budget estimates increased child care and welfare–to–work services costs of about $83 million in 2008–09. These costs would be offset by grant savings ($62 million) from the families that experience the full–family sanction. Thus, the Governor’s budget estimates these net costs to be about $21 million in 2008–09.

LAO Assessment of Graduated Full–Family Sanction

Assumptions Concerning Impacts Reasonable. It is difficult to assess the behavioral impacts of sanction policies because 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 rigorous studies that compare the impacts of randomly assigned participants to weaker and stronger sanctions. (There is research on the characteristics of sanctioned cases and what happens to them. We summarized this research in the CalWORKs section of the Analysis of the 2007–08 Budget Bill.)

Last year, the administration assumed that 70 percent of cases experiencing a full–family sanction would not only come into compliance and end their sanction, but would actually participate sufficient hours to meet federal participation requirements. As described in the Analysis of the 2007–08 Budget Bill, we concluded that these assumptions were overly optimistic.

This year, the budget distinguishes between cases that will comply with program requirements (attend orientation, and participate in required activities for example) and end their sanction and cases that will actually participate enough to meet the federal hourly requirements. The administration assumes that about 28 percent of the sanctioned parents will meet federal participation requirements while 55 percent will experience the full–family sanction. We believe these assumptions are reasonable.

Graduated Sanction Policy Could Be Pilot Tested. The graduated full–family sanction is a high risk and high reward strategy. On the one hand, it is likely to substantially increase work participation by 5.7 percent when fully implemented in 2010. The graduated aspect of the policy gives sanctioned cases more time to come into compliance than last year’s immediate sanction proposal. On the other hand, it could result in hardship for children whose parents cannot or will not cooperate with work participation requirements. Given the lack of research on the behavioral impacts of sanction policies, the Legislature could consider pilot testing this policy in several counties. After seeing the results of these pilots, the Legislature could decide whether to end or expand the sanction policy pilot.

Five–Year Time Limit for Children in Safety Net

Policy Description. 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 June 1, 2008. 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 removed from aid.

Working Families Could Reenter Safety Net. In contrast to last year’s proposal, families who are removed from aid under this policy would be able to return to the safety net under certain conditions. Specifically, the proposed trailer bill legislation allows former safety net children of adults who work sufficient hours to meet federal participation requirements to rejoin the safety net. This is because for the first six months after being removed from aid, the proposed trailer bill applies the income limits for recipients (about $1,670 per month for a family of three) to this population, rather than the much lower income limits for applicants (about $800 per month for a similar family). The income limits for recipients are higher than those for applicants because recipients have the first $225, and one–half of all earnings above $225, “disregarded” when calculating their grant.

Impacts on Families. The budget estimates that there would be approximately 47,500 safety net cases in June 2008, rising to 48,500 cases during 2008–09. The budget assumes that in 2008–09, 26 percent of these families—about 12,400 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 35,100 cases, with approximately 67,000 children, would lose aid because of this policy.

Fiscal Impacts. The budget estimates that the safety net time limit will result in savings of $18 million in June 2008, rising to $259 million in 2008–09.

Impact on Work Participation. 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 1.6 percent in FFY 2008, and 5 percent in FFY 2009. These estimates appear reasonable.

Work Incentive Nutritional Supplement (WINS)

Policy Description. Beginning on July 1, 2009, the budget proposes to provide a $40 per month nutritional supplement to working families who are not in the CalWORKs program but are working sufficient hours to meet the federal work participation requirements. The benefits would be provided in the form of additional food stamps, which are usually made available to recipients through the use of electronic benefit transfer cards. The budget estimates that approximately 40,000 families will be eligible for this supplement. For 2008–09, the budget proposes $8.4 million to make necessary automation changes. The administration estimates that during 2009–10, the cost of providing benefits under this program would be $18.6 million, rising to $24 million each year thereafter.

Impact on Work Participation. Besides increasing food benefits for the working poor, the primary advantage of this proposal is adding about 40,000 working families to the numerator for purposes of calculating the federal work participation rate. The administration estimates that this proposal will increase the work participation rate by 0.9 percent in FFY 2009, 9 percent in FFY 2010, and 10 percent in FFY 2011.

Because this proposal adds to the CalWORKs caseload, in isolation it reduces the natural caseload reduction credit of 7.3 percent in FFY 2010 and FFY 2011 as shown in Figure 4. This is because the cases receiving WINS would be new CalWORKs cases, creating a caseload increase, which would reverse the 7.3 percent reduction. However, federal rules allow caseload increases from eligibility changes such as this to be offset against eligibility changes that reduce the caseload. The Governor’s full–family sanction is an example of such an eligibility change which could be offset against the increase of WINS, thus preserving the full work participation impact of WINS discussed above.

LAO Assessment. We believe that the WINS proposal is a cost–effective way of raising work participation, and we previously recommended adoption of a program like this in the 2007–08 Analysis. This WINS proposal is incorporated into the LAO CalWORKs reform package presented below.

Child–Only Time Limit

Fiscal Impacts. Effective June 1, 2008, the budget proposes to limit assistance to five years for most child–only cases (such as those with parents who are undocumented or ineligible due to a previous felony drug conviction). There are approximately 37,000 cases which have been aided for five years and would lose assistance under this proposal. Removing these families from assistance results in General Fund savings of $18 million in June 2008, rising to $242 million in 2008–09. There are about 70,300 children in these families.

No Impact on Work Participation. Limiting benefits to other child–only cases to five years (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.

Governor’s Proposals Address Participation

As discussed above, the Governor’s proposals substantially increase work participation. Figure 6 compares the estimated work participation rates assuming adoption of the Governor’s proposals against the estimated federal requirements. The figure shows that the Governor’s proposal would result in participation surpluses beginning in FFY 2009. However, if Proposition 49 after school funds cannot be counted as MOE, then there would be a 2.7 percent shortfall in FFY 2009, with surpluses beginning in FFY 2010.

Governor’s Proposals Likely to Result in MOE Shortfall

One potential problem with the Governor’s proposal is that there may not be sufficient countable MOE expenditures from outside of CalWORKs to meet the base MOE requirement of $2.9 billion. This is because the Governor’s proposals result in savings of about $471 million, and the new federal regulations substantially reduce the amount of countable MOE spending. This most likely creates an MOE shortfall beginning in FFY 2009. If Proposition 49 after school funds cannot be counted as MOE, the problem would begin in FFY 2008. To address this MOE shortfall, the Legislature could (1) reject some or all of the Governor’s proposals which result in savings, (2) identify alternative sources of countable MOE spending from other departments, (3) shift TANF funds, or (4) some other combination of these solutions.

Alternatives to the Governor’s Proposals

We have identified two alternatives to the Governor’s proposals which would increase work participation but with less budgetary savings. The two alternatives are a pre–assistance program which prepares incoming recipients to enter the labor force within four months of their application and a community service requirement for adults who have received five years of assistance. We discuss these alternatives, estimate their impacts, and present an alternative package of California Work Opportunity and Responsibility to Kids reforms which includes the Governor’s Work Incentive Nutritional Supplement proposal. This package might meet federal requirements in FFY 2009 and would very likely meet these requirements in FFY 2010 and thereafter.

Pre–Assistance Program for Entering CalWORKs Recipients

Federal Flexibility for up to Four Months. When states provide assistance to TANF recipients, all TANF rules concerning work participation, child support assignment, and federal time limits apply. Assistance typically means ongoing cash assistance. Federal regulations specifically allow states to provide up to four months of aid without it being counted as assistance because four months is considered short term rather than ongoing. One potential use of this flexibility is that when recipients receive “non–assistance” they are removed from the federal work participation calculation for up to the first four months of aid. States such as Washington, Pennsylvania, and Minnesota, have adopted pre–assistance programs using this federal flexibility.

Currently, there are about 12,000 new families with adults entering CalWORKs each month. In general, able–bodied adults attend orientation and then proceed to a job club/job search program where many recipients find employment. Those unable to find employment are usually assessed for their job skills and barriers to employment. They then sign a welfare–to–work plan with the county indicating what steps the client will take toward becoming self–sufficient. Plans might include substance abuse treatment, English as a second language, vocational training, work experience, attending community college, or a combination of activities. Below we present a four–month pre–assistance program for these newly entering families.

Pre–Assistance Employment Readiness System (PAERS). Under this option, each approved family (meeting current eligibility requirements) entering aid would be placed in PAERS for up to 120 days. The goal of PAERS is to help recipients either become employed or to sign a welfare–to–work plan. The main change under this option is that in order for the family to continue receiving aid after PAERS by entering the CalWORKs program, they must become employed for sufficient hours to meet federal work participation requirements, or sign the welfare–to–work plan, unless they can establish that they are exempt or have good cause under current law for nonparticipation. Failure to meet at least one of these requirements would mean that the family does not enter CalWORKs. Families could immediately have aid restored upon agreeing to sign their plan. There would be no sanction or conciliation process during PAERS. Noncompliant families would be reminded of the requirement that they sign their plan or become employed with 120 days of entering PAERS.

Advantages of PAERS. One advantage of PAERS is the potential that it will improve the work participation rate by more directly focusing clients on quickly obtaining employment or establishing a self–sufficiency plan. Currently some families fail to attend orientation and eventually slip into sanction status where it may take months before a family becomes reengaged with program activities. The 120–day PAERS time limit helps ensure that engagement occurs promptly.

A second advantage of PAERS is that it delays entry into the federal work participation calculation for those unable to find employment. This is because pursuant to the federal flexibility discussed above, PAERS families are not counted in the work participation rate because they are for federal purposes in non–assistance status for 120 days (although they continue to receive cash grants). As soon as families obtain employment they would transfer to the CalWORKs program where their presence would help satisfy the work participation rate. Preliminarily, we estimate that adopting a PAERS would increase the work participation rate by 1.9 percent (when fully implemented) and result in annual net savings of about $10 million per year.

Interaction With Other Policy Changes. As noted in the discussion of the Governor’s proposals, the WINS program results in a caseload increase which, in isolation, would reduce CRC by 7.3 percentage points. The PAERS described above would reduce the TANF caseload because PAERS cases are not receiving assistance pursuant to federal rules and thus are outside of the TANF program. This caseload reduction attributable to PEARS could be used to offset the caseload increase associated with WINS, thereby eliminating the loss of 7.3 CRC percentage points that would occur if WINS were implemented in isolation.

Community Service Requirement After Five Years of Assistance

Background. The current safety net provides cash grants to the children of approximately 48,000 families where the adult has been on aid for five years. The safety net caseload includes many situations. About 29 percent of the safety net adults are working at least 17 hours per week. Another 16 percent have some level of participation either in employment or other activities. About 55 percent are not participating at all. These non–participants (about 26,000 families) can be further subdivided into three groups: (1) adults unable to work because of substantial barriers to employment, (2) adults who are working but not reporting their income, and (3) adults who are choosing not to work or participate. However, it is difficult to know which cases are in each category. We believe a community service job requirement after five years of assistance could help sort out who is choosing not to participate from who is truly unable to participate.

Required Community Service Job. Under this option, after five years of assistance, each safety net adult would be required to work in non–subsidized employment for 20 hours per week, participate for sufficient hours to meet federal participation requirements, or accept a subsidized employment or community service job for 20 hours per week arranged by his/her county.

Counties would have discretion in how to set up the community service position and/or whether to offer a subsidized employment opportunity. Adults who refuse to accept the county community service or subsidized job assignment, would have their families removed from aid. Before any such removal, there would be a required county home visit. At the home visit, county staff would attempt to determine if the client has barriers to employment that could be remedied through assistance, whether the client qualifies for an exemption from program participation requirements, or is determined to be incapable of participating pursuant to current law.

Periodic Test of the Labor Market. After every three months of community service or subsidized employment, each client would be placed in a job club/job search program for one month. Some would find non–subsidized employment and thus meet their participation requirement. Those unable to find employment would be required to return to community service for at least 20 hours per week. After three community service/job club cycles have been completed, at the one–year mark, counties would have the option of exempting the client from the community service job requirement while continuing aid to the children.

Clients found to be out compliance with the 20–hour requirement for community service would have the same process that exists in current law with respect to the sanction for nonparticipation. This approach would strengthen the message that in order to receive government paid income assistance, clients must meet an obligation to work or participate in community service if they are able.

Impacts. The exact impacts of this proposal are difficult to estimate. We believe that most clients who are unable to participate would be identified by the county home visit. Most families who are employed but not reporting their income would either leave the program or begin reporting their income and thus retain eligibility by working sufficient hours. As with the Governor’s proposal, we estimate that the 5,600 current safety net cases working at least 17 hours per week would choose to increase their participation level so as to meet federal requirements (20 or 30 hours per week depending on the age of the child), thereby retaining their family’s grant (less the adult portion). Those who refuse to participate would also exit the program. Preliminarily, we estimate that adoption of this program would increase the work participation rate by 2.9 percent and result in net annual savings of about $30 million.

LAO CalWORKs Reform Package

In order to meet the work participation requirement, we suggest the following package.

• Adopt the Governor’s Work Incentive Nutritional Supplement which increases work participation by an eventual 10 percent.
• Adopt the Pre–Assistance Employment Readiness System which increases work participation by 1.9 percent.
• Adopt the requirement that safety net adults either work sufficient hours to meet federal participation or accept a community service job, which raises work participation by 2.9 percent.

This package results in net General Fund savings of about $16 million per year compared to the Governor’s workload budget. (Savings of about $40 million from the community service job requirement and PAERS are partially offset by WINS costs of $24 million.)

Figure 7 shows the estimated work participation rates compared to the requirements. In FFY 2009, we estimate that adopting this combination would probably meet work participation requirements if the Proposition 49 after school funding is countable toward the MOE. In FFY 2010 and FFY 2011, when the program changes are completely phased in, we estimate that California would likely exceed the estimated requirements.

The LAO alternative budget (presented in “Part V” of The 2008–09 Budget: Perspectives and Issues) does not include this CalWORKs reform package. The alternative budget reflects the current law “workload” funding level without policy changes. In order to address federal work participation requirements, the Legislature will need to set its own budget policy and priorities for CalWORKs.