Temporary Assistance for Needy Families (TANF): Financing Issues

Contents

• Introduction
• TANF Funding and History
• Financing the Pre-TANF Programs
• The 1996 Law: "Freezing" Historical Funding Levels in the Basic TANF Block Grant
• Additional Federal Funds
• The State Maintenance of Effort (MOE) Requirement
• How States May Use TANF Funds
• Federal Funds Expended Under TANF
• Transfers of Federal Funds
• Reservation of Unused Funds
• Expenditures Countable Toward the Maintenance of Effort (MOE) Requirement
• How States Have Used TANF Funds
• Selected TANF Financing Issues
• The Budget Baseline and TANF
• The Impact of Inflation on the Block Grant
• Funding Based on the TANF-Relevant Population
• The Allocation of Federal TANF Funds among the States
• Recessions and the TANF Block Grant
• TANF Reserve Funds
• The TANF Contingency Fund
• Uses of TANF Funds
• Conclusion

Summary

The Temporary Assistance for Needy Families (TANF) block grant provides grants to states, Indian tribes, and territories to help them fund a wide range of benefits and services for needy families with children. It was created in the 1996 welfare reform law, which rewrote the rules for cash assistance programs for these families. The 1996 law also created TANF as a broad-purpose block grant with state flexibility to design programs to address both the effects of and root causes of childhood economic disadvantage.

TANF funding is based on the amount of federal and state expenditures in its predecessor programs (Aid to Families with Dependent Children (AFDC), and related programs) in the early to mid-1990s. The bulk of federal TANF funds is in a basic block grant. Both the national total of the basic block grant, $16.5 billion per year, and each state's grant are based on federal funding in the predecessor programs during this period. States must also expend a minimum amount of their own funds on TANF or TANF-related programs under the maintenance of effort (MOE) requirement. That minimum totals $10.4 billion per year. The MOE is based on state expenditures in the predecessor programs in FY1994. Over time, states have received some extra TANF funding: welfare-to-work grants, contingency funds, supplemental grants, and bonus funds. However, these grants were small relative to the basic block grant and MOE funding.

The cash assistance caseload declined substantially in the late 1990s from its 1994 peak, resulting in a decline in spending on TANF basic assistance. In FY1995, under TANF's predecessor programs, AFDC cash assistance represented 70% of total expenditures in the programs consolidated into TANF. By FY2000 cash assistance had declined to 40% of total TANF and MOE funds; in FY2014 cash assistance represented 26% of all TANF and MOE funds. TANF also provides funds for state-subsidized child care programs ($5.1 billion or 16% of total FY2014 TANF and MOE funds) as well as a wide range of services, including those addressing child abuse and neglect and pre-kindergarten programs.

Most of TANF's financing issues relate to its fixed level of funding, based on programs and conditions that existed in the early and mid-1990s. Neither the national total funding level nor each state's level of funding has been adjusted for changes since then, such as inflation, the size of the cash assistance caseload, or changes in the poverty population. From FY1997 through FY2014, the TANF block grant lost 32% of its value due to inflation alone. The TANF allocation "locked in" historical differences among the states that resulted in a wide range of funding levels relative to the number of poor children. Further, TANF potentially lacks a source of sufficient additional funding in case of a future economic downturn. Should Congress seek to address these issues, it would do so in the context of budget rules that apply to TANF as a mandatory program with fixed funding. Current budget rules would require legislation to increase TANF funding to contain corresponding offsets by reducing other mandatory funds and/or increasing revenues.

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Temporary Assistance for Needy Families (TANF): Financing Issues

Introduction

The Temporary Assistance for Needy Families (TANF) block grant provides grants to states, territories, and Indian tribes for benefits and services to help ameliorate, or address the root causes of, childhood economic disadvantage. It was created in the 1996 welfare reform law (the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, PRWORA, P.L. 104-193), which ended the pre-welfare reform program of cash assistance, rewrote the federal rules for cash assistance for needy families, and gave states broad flexibility to meet TANF's statutory goals.

This report discusses the financing of the TANF block grant. It

• describes the national funding level, the distribution of funds among the states, and the basis for these funding levels;
• describes how states may use TANF funds;
• describes how states have actually used TANF funding; and
• discusses selected policy issues regarding TANF funding.¹

TANF Funding and History

The 1996 welfare reform law that created TANF based the bulk of its funding on historical expenditures in its predecessor programs. Therefore, the amount of funding a state receives in TANF today depends on the size of its pre-TANF programs before the enactment of that law.

Financing the Pre-TANF Programs

Before the 1996 welfare reform law, federal grants helped states fund the Aid to Families with Dependent Children (AFDC) programs of cash assistance for needy families with children; Emergency Assistance (EA) for families with children; and the Job Opportunity and Basic Skills (JOBS) training program, which provided employment services and education to AFDC recipients. These three programs provided matching grants to states, reimbursing them for a share of the expenditures in their programs. Thus, the federal government and the states shared in the costs of these programs. The system of matching grants for cash assistance for needy families dated back to the Social Security Act of 1935 (P.L. 74-271).

Under the pre-TANF cash welfare program of AFDC, federal funding was generally provided at the Medicaid matching rate.² Under that rate, states with lower per-capita incomes received a higher match, with a statutory minimum matching rate of 50% (for higher income states) and a maximum matching rate of 83% (for the lowest income states). Federal grants for AFDC benefits, AFDC administration (matched at a 50% rate), and EA (matched at a 50% rate) were not subject to caps; federal funds reimbursed states in full for a share of expenditures in their programs. Federal grants for JOBS were subject to annual caps, with matching funds provided up to the cap. The matching rate for JOBS was the Medicaid matching rate, though the statutory minimum matching rate for JOBS was 60% instead of 50%.

The amount of federal funding in the predecessor programs for a state depended on the expenditures in the state. While there were some federal rules for these predecessor programs, states had a great deal of discretion in determining which families were financially "needy," and hence eligible for benefits, and the amount of benefits received in the state. Under AFDC, there was a great deal of state variation in both income eligibility thresholds and benefits paid in the states,³ creating variation in state grants relative to their cash assistance caseloads or population related to the program (e.g., number of poor children). This variation is depicted in Figure 1, which shows the relationship between the AFDC maximum benefit for a family of three in January 1995 and the amount of federal funding per poor child under AFDC and related programs in 1995. As shown, there is a clear relationship between the size of the AFDC benefit provided by a state and federal funding provided per poor child: states with higher maximum benefits also received more federal funding per poor child. ⁴ For example, in January 1995 Mississippi paid a maximum benefit for a family of three of $120 per month; its grant per poor child in FY1995 was $343. On the other hand, in that month Alaska paid a maximum benefit of $923 per month for a family of three; its FY1995 grant per poor child was $2,403.

Figure 1. AFDC Maximum Benefits for a Family of Three in January 1995 and Federal Funding Per Poor Child in FY1995

Source: Congressional Research Service (CRS). AFDC maximum benefits for a family of three are from a CRS survey of the states. AFDC and related funding data are from the U.S. Department of Health and Human Services (HHS). Poverty data represent the Small Area Income and Poverty estimates (SAIPE) and are from the U.S. Census Bureau.

The 1996 Law: "Freezing" Historical Funding Levels in the Basic TANF Block Grant

The 1996 welfare reform law substantially rewrote the rules for state cash assistance programs, imposing time limits on benefit receipt and revamping work requirements for adult recipients of aid. Along with these policy changes was a change in the financing of state cash assistance programs and other activities from matching grants to a block grant.

The 1996 law consolidated into TANF the three predecessor programs—AFDC, EA, and JOBS—creating a single funding stream. ⁵ The bulk of the funding is provided in a basic block grant. That block grant reflects peak spending for each state during the FY1992 to FY1995 period in TANF's predecessor programs. (For the formula used in the computation and TANF basic block grant per state, see Table A-1.) The total of the basic block grant distributed to the 50 states and the District of Columbia is $16.5 billion per year.⁶ This is also known as the State Family Assistance Grant. It is not adjusted for changes in conditions either nationally or in each state, such as changes in prices (inflation), the cash assistance caseload, or the population (e.g., poor children). According to the House Committee report accompanying the legislation that became the 1996 welfare reform law, states were given fixed funding to provide them "with an incentive to help recipients leave welfare because, unlike current law, States do not get more money for having more recipients on the welfare rolls."⁷

Though the 1996 welfare reform law contemplated no increases in the basic TANF block grant for future years, it also provided that a state could receive no less under the block grant than it historically did under the old system of matching grants to the states. That is, it was "held harmless" for the change in financing. However, having the TANF block grant based on historical expenditures had a number of additional implications. One of these is that it also "froze" the differences among the states in federal funding relative to their populations. Figure 1 shows how these differences were related to state decisions about their AFDC program; Figure 2 shows a sharp regional pattern in these differences, portraying FY1995 federal funding in TANF's predecessor programs per poor child. Grants per poor child for FY1995 varied from $2,530 in Connecticut to $263 in Arkansas. Generally, grants per poor child in states in the South were less than grants per poor child in states in the Northeast and Midwest, along the Pacific Coast, and Alaska and Hawaii.

Figure 2. AFDC and Related Program Funding Per Poor Child, FY1995

Source: Congressional Research Service (CRS). AFDC and related program funding data are from the U.S. Department of Health and Human Services (HHS). Poverty data represent the Small Area Income and Poverty estimates (SAIPE) and are from the U.S. Census Bureau.

These state differences have been continued over time as each state's basic block grant has remained "frozen" since FY1997.⁸ Figure 3 shows the basic TANF block grant (State Family Assistance Grant) per poor child in FY2013. The regional pattern of historical funding differences per poor child from the pre-TANF programs remained in place during that year. In general, funding per poor child was lower in FY2013 than in FY1995 (there were more poor children in 2013 than in 1995), but states in the South continue to have lower grants per poor child than those in the Northeast and Midwest, and along the Pacific Coast. Note that these dollars per poor children are in nominal dollars, not adjusted for inflation. The impact of inflation is discussed in the "Selected TANF Financing Issues" section of this report.

Figure 3. Basic TANF Block Grant Per Poor Child, 2013

Source: Congressional Research Service (CRS), based on data from the U.S. Department of Health and Human Services (HHS) and the U.S. Census Bureau.

Though funding became more limited, states were given increased flexibility in how funds could be spent. Under TANF, states have the authority to spend their block grants on activities to address both the effects of economic disadvantage (e.g., cash assistance) and what were viewed as some of the root causes of childhood disadvantage (e.g., preventing out-of-wedlock pregnancies and promoting the formation and maintenance of two-parent families).

Additional Federal Funds

The $16.5 billion basic block grant has constituted the bulk of federal funding each year since the enactment of TANF. However, this basic funding has been supplemented in most years by some additional grants to states funded in the TANF law. The additional funding streams are listed below:

• Supplemental grants. During consideration of legislation that led to the 1996 law, funding frozen at levels based on historical expenditures was thought to disadvantage two groups of states: (1) those that had relatively high population growth and (2) those that had historically low welfare grants relative to poverty in the state. One of the purposes of supplemental grants was to address the differences in state funding per assistance family or per poor person shown in Figure 2. The other purpose was to provide additional funding to states with high rates of population growth. In total, 17 states qualified for supplemental grants: Alabama, Alaska, Arizona, Arkansas, Colorado, Florida, Georgia, Idaho, Louisiana, Mississippi, Montana, Nevada, New Mexico, North Carolina, Tennessee, Texas, and Utah. Funding for TANF supplemental grants was discontinued after June 30, 2011.
• Welfare-to-Work Grants. In 1997, President Clinton proposed additional funding for "welfare-to-work" grants on the presumption that the basic TANF block grant provided insufficient funding for the increased emphasis on moving cash assistance recipients to work. Congress accepted the proposal in the Balanced Budget Act of 1997 (P.L. 105-33), providing $3 billion over two years (FY1998 to FY1999) to augment TANF funds with special "welfare-to-work" grants. These grants were administered through the Department of Labor (DOL) rather than the Department of Health and Human Services (HHS), where TANF is administered, and at the state and local level through the workforce system. Additionally, funding was split between formula grants to states (and then passed-through to local workforce boards) and competitive grants. No new welfare-to-work funding was provided after FY1999.
• Contingency Fund. The fixed basic grant under TANF also led to concerns that funding might be inadequate during economic downturns. The 1996 welfare reform law established a $2 billion "regular" TANF contingency fund. To draw upon contingency funds, a state must both (1) meet a test of economic "need" and (2) spend from its own funds more than what the state spent in FY1994 on cash, emergency assistance, and job training in TANF's predecessor programs. The original $2 billion in the contingency fund was depleted in early FY2010; annual appropriations have provided new contingency fund monies for FY2011 through FY2015.
• Emergency Contingency Fund. The American Recovery and Reinvestment Act (ARRA, P.L. 111-5) provided an additional $5 billion for FY2009 and FY2010. This was partially in response to the anticipated depletion of the regular contingency fund and partially to address that the contingency fund had not always responded to changes in economic circumstances (see Figure 9). Unlike regular contingency funds, which could be used for any TANF activity, the ARRA "Emergency Contingency Fund" (ECF) financed only increased spending on basic (cash) assistance, short-term emergency aid, and subsidized employment. No ECF funding was provided after FY2010.
• Bonus Funds. The 1996 welfare reform law, while giving states flexibility, had a number of provisions to hold a state accountable for its performance in meeting TANF's statutory goals. These accountability provisions included two "bonus funds"—one for states with reduced out-of-wedlock pregnancy rates and a second that provided bonuses for states with "high" levels of performance in meeting TANF's statutory goals. The bonus for reduced out-of-wedlock pregnancies was funded at up to $100 million per year and up to five states could receive funds; the "high-performance bonus" provided an average of $200 million per year to states that qualified for it. FY2005 was the last year for which states received bonus funds.

Figure 4 shows total TANF state grant funding for FY1997 through FY2015.⁹ As shown, funding has remained at approximately the same level with slight annual variations since FY1998, with the exception of a spike in funding from the "Emergency Contingency Fund" during FY2009 and FY2010. (The funding level discussed here is without adjustment for inflation. The impact of inflation on grants is discussed in the "Issues" section of this report.) However, there were no additional "Emergency Contingency Funds" after FY2010, and supplemental grants were ended after FY2011.

Figure 4. TANF Grants to States, FY1997-FY2015

Source: Congressional Research Service (CRS), based on data from the U.S. Department of Health and Human Services (HHS). Notes: Welfare-to-work grants represent those that went to states based on a formula in law, though most of these funds were passed through to local workforce entities. They do not include competitively awarded welfare-to-work grants. For a tabular display of these data, see Table A-3.

Though the overall level of federal TANF grants to states in FY2015 is about the same as in earlier years, the composition of the grants differs. In the earlier years, funding in addition to the basic block grant came from welfare-to-work grants, supplemental grants, and bonus funds. For FY2012 through FY2015, the only funds in addition to the basic block grant for states were from the contingency fund. While overall funding levels in FY2015 were similar to overall levels in the early 2000s, the group of states that received contingency funds in that year differed from the group of states that received supplemental grants and bonus funds in earlier years. Also, as discussed in "Recessions and the TANF Block Grant," the level of funding provided by the contingency fund has not been responsive to improvements in the economy over the FY2011 through FY2015 period.

The State Maintenance of Effort (MOE) Requirement

TANF consolidated and replaced programs that provided matching grants to the states. This meant that there were considerable state dollars contributing to the pre-TANF programs. It also meant that the federal and state shares in financing these programs varied by state, as the Medicaid matching rate is higher in states with lower per-capita incomes than in those with higher per-capita incomes.

TANF requires states to maintain spending from their own funds on TANF or TANF-related activities. States are required in the aggregate to maintain at least $10.4 billion in spending on specified activities for needy families with children.¹⁰ The $10.4 billion, called the maintenance-of-effort level, represents 75% of what was spent from state funds in FY1994 in TANF's predecessor programs of cash, emergency assistance, job training, and welfare-related child care spending.¹¹ States are required to maintain their own spending of at least that level, and the MOE requirement increases to 80% of FY1994 spending for states that fail to meet TANF work participation requirements (discussed below). State expenditures under this requirement are often referred to as state MOE funds. (MOE levels by state are shown in Table A-2.)

It should be noted that the MOE sets a minimum amount for required state spending. There are incentives in TANF law for states to spend more than this minimum amount. First, more state spending than the minimum is required to access the TANF contingency fund. Second, states may receive a "credit" (reduction) in their TANF work participation standards if they expend more than the minimum required under the MOE.

How States May Use TANF Funds

TANF is a broad-purpose block grant that gives states the flexibility to use its funds to address both the effects of, and the root causes of, childhood economic disadvantage. There are two sets of rules: those that relate to the use of federal TANF grants, and those for which state expenditures count toward meeting the TANF MOE state spending requirement.

Federal Funds Expended Under TANF

States have broad discretion on how they expend federal TANF grants. States may use TANF funds "in any manner that is reasonably calculated"¹² to accomplish the block grant's statutory purpose. That purpose is to increase the flexibility of states in operating a program designed to

• 1. provide assistance to needy families so that children may be cared for in their own homes or in the homes of relatives;
• 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 establish annual numerical goals for preventing and reducing the incidence of these pregnancies; and
• 4. encourage the formation and maintenance of two-parent families.

In addition, states may also expend federal TANF grants on any activity financed by pre-TANF programs. These are known as "grandfathered" activities." Examples of activities that do not meet a TANF goal but may be financed by TANF grants include foster care payments and funding for juvenile justice activities, if they were financed in the pre-TANF programs.

Transfers of Federal Funds

In addition to expending federal funds on allowable TANF activities, federal law permits a limited amount of the federal TANF basic block grant to be used for other programs. A maximum of 30% of the TANF block grant may be used for the following combined transfers or expenditures:

• Transfers to the Child Care and Development Block Grant;
• Transfers to the Social Services Block Grant (SSBG), with a maximum transfer to the SSBG set at 10% of the basic block grant;
• As a state match for "reverse commuter grants," providing public transportation from inner cities to the suburbs.

Reservation of Unused Funds

States may reserve unused federal TANF funds for use in later fiscal years. Funds may be reserved without fiscal year limit. This permits states to "save" any federal funds not needed in one fiscal year for use in other years—for example, to save for a recession or any other event (e.g., natural disaster) that might cause an increase in the demand for TANF funds.

Expenditures Countable Toward the Maintenance of Effort (MOE) Requirement

The range of expenditures on activities that states may count toward the maintenance of effort requirement is—like the authority to spend federal funds—quite broad. The expenditures need not be in the "TANF program" itself, but in any program that provides benefits and services to TANF-eligible families in cash assistance, child care assistance, education and job training, administrative costs, or any other activity designed to meet TANF's statutory goals. States may count expenditures made by local governments toward the MOE requirement. Additionally, there is a general rule of federal grants management that permits states to count as a state expenditure "third-party" (e.g., nongovernmental) in-kind donations, as long as they meet the requirements of providing benefits or services to TANF-eligible families and meet the requirements of the types of activities that states may count toward the MOE requirement.

How States Have Used TANF Funds

TANF allows states to spend their funds on a wider range of activities than did the pre-1996 programs. AFDC was a cash assistance program; Emergency Assistance provided grants to states for a range of activities that provided short-term assistance; and JOBS was an employment services and education and training program for AFDC adult recipients.

The number of families receiving cash assistance reached its historical peak in March 1994, at 5.1 million families. In the mid- and late 1990s, the cash assistance caseload shrank rapidly, with a 64% decline in the number of families with children receiving cash assistance from FY1995 to FY2000. (See CRS Report R43187, Temporary Assistance for Needy Families (TANF): Size and Characteristics of the Cash Assistance Caseload, by [author name scrubbed].) Spending on cash assistance declined correspondingly.¹³

Figure 5 shows both the level and composition of spending in FY1995 under the pre-TANF programs and in FY2000 and FY2014 under TANF. While the overall funding levels in FY1995 and FY2014 were similar, the composition of spending was different. The figure shows that in FY1995, AFDC cash assistance accounted for 70% of all spending under TANF's predecessor programs. In FY2014, cash assistance accounted for 26% of all TANF and MOE dollars. Child care expenditures represented 3% of total pre-TANF expenditures in FY1995, a share that grew to 16% of all spending in FY2014. On the other hand, work, education, and training expenditures grew only from 5% to 7% of total spending from FY1995 to FY2014.

"Other work supports" represents spending for state refundable tax credits (such as state versions of the earned income tax credit) and transportation aid. Other work supports represented $4.5 billion in FY2014, or 14.3% of total TANF and MOE dollars.

The figure shows that the largest increase in expenditures (particularly during the FY2000 to FY2014 period) was in "other spending." Under TANF, this category represents a wide range of benefits and social services related to families with children. It includes funding for services related to child abuse and neglect, pre-kindergarten and other early childhood programs, short-term emergency aid, state responsible-fatherhood and marriage programs, and programs for adolescents. The expenditure reporting system in place for FY2014 did not have enough information to categorize much of this spending properly. However, the Department of Health and Human Services (HHS) implemented a new reporting system for FY2015 and later years that will permit a better characterization of spending in the "other" category.¹⁴

Figure 5. Uses of TANF, MOE, and Predecessor Program Funds, FY1995, FY2000, and FY2014

Source: Congressional Research Service (CRS), based on data from the U.S. Department of Health and Human Services (HHS). Notes: FY1995 funds represent federal funding for AFDC, EA, and JOBS, state funding for those programs, and state funding for AFDC-related child care programs. For a tabular presentation of those data, see Table B-5.

Selected TANF Financing Issues

The TANF funding level, both nationally and for each state, is rooted in what states spent in the early to mid-1990s in the pre-TANF programs that were focused on cash assistance for needy families with children. The 1996 welfare reform law contemplated no adjustments for changes that have been made to those funding levels since the enactment of TANF. The law also authorized and provided TANF funding through FY2002. However, extensions of TANF funding since FY2002 have maintained basic block grant funding at the $16.5 billion level with no change—neither increases or decreases—extending the "freeze" in funding for now close to 20 years.

The Budget Baseline and TANF

Addressing any of TANF's financing issues would be done in the context of the current federal budget environment and rules that govern the congressional budget process. Though TANF law says that its benefits and services are not entitlements to individuals, the amount of block grant funding is set in authorizing law (the Social Security Act) and thus represents an entitlement to the states. Thus, in the federal budget process, TANF is considered "mandatory" spending. Mandatory spending is subject to "pay-as-you-go" rules. These rules would require legislation to increase spending for TANF to be offset by corresponding decreases in other mandatory spending programs or through increases in revenue.

In congressional budgeting, spending increases or decreases are measured relative to a current law budget baseline that is computed under the rules of the Budget Act. For the basic TANF block grant, this represents the $16.5 billion funding amount because that amount is statutorily determined. Like the block grant itself, the baseline for future years contemplates no changes to this funding amount due to changes in circumstances (e.g., inflation or population change).

The rules for computing the TANF baseline are the same as for other mandatory spending programs with statutorily set grant amounts, such as the Social Services Block Grant (SSBG) or mandatory funding for the Child Care and Development fund. However, these rules differ from those of mandatory programs that provide direct benefits for individuals. The baselines for those programs are based on estimates of their caseloads (families, individuals served) and benefit amounts. In addition, the TANF baseline differs from those computed for discretionary grant programs in that they generally are provided an annual adjustment for inflation. Under current budget rules, total discretionary programs are subject to a statutory cap and the baseline for discretionary spending is limited to the cap.

The Impact of Inflation on the Block Grant

Over time, price inflation reduces the purchasing power of a dollar. Hence, the frozen $16.5 billion per year basic TANF block grant can "buy" less in FY2015 than it did in FY1997. Figure 6 shows the gradual reduction in "real" funding from the TANF basic block for FY1997 through FY2014, and as projected under the Congressional Budget Office (CBO) August 2015 economic forecast for FY2015 through FY2025. In FY2013, the TANF basic block grant could "buy" 31% less in goods and services than it could in FY1997. In FY2015, the block grant is estimated to purchase 33% less than it did in FY1997. If the basic block grant remains at the current funding level and prices increase over the FY2015 through FY2025 period as forecast by CBO, the block grant's purchasing power would in FY2025 be close to half of what it was in FY1997 (a 46% reduction).

Figure 6. Federal Funding for the Basic TANF Block Grant: FY1997 through FY2025 (In billions of dollars)

Source: Congressional Research Service (CRS), based on data from the Department of Health and Human Services (HHS), U.S. Bureau of Labor Statistics (BLS), and the Congressional Budget Office (CBO). Notes: Constant FY2013 dollars were computed using the Consumer Price Index for All Urban Consumers (CPI-U).

As discussed in "The Budget Baseline and TANF," adjusting the basic block grant for inflation would be viewed as increased spending under the current congressional budget rules. If Congress sought to increase TANF funding to keep pace with inflation, CBO estimates it would increase cumulative spending by $22 billion over the next 10 years.¹⁵ Under current budget rules, this cost would have to be offset by a corresponding decrease in other mandatory spending and/or increase in revenues.

Funding Based on the TANF-Relevant Population

In addition to not being adjusted for inflation, the basic TANF block grant is also not adjusted for changes in the relevant population for TANF. However, with TANF there is no clear-cut answer about a relevant population to which TANF funding should be compared. The relevant population depends on opinions about whether TANF should be focused on providing benefits and services to the cash assistance population; whether the current size of the cash assistance caseload is indicative of meeting the needs of the population eligible for TANF cash assistance; or whether TANF should be viewed as a block grant to address child poverty more broadly.

This report examines inflation-adjusted TANF funding relative to the following three populations:

• The number of families receiving TANF cash assistance. As discussed in the "How States Have Used TANF Funds" section of this report, a large share of actual TANF expenditures were made on activities that were not related to traditional cash assistance programs (cash aid, administration, or work activities), and hence were made on populations other than families receiving cash assistance. Thus, showing TANF funding relative to the cash assistance population is an illustrative measure showing the amount of federal dollars that would be available if TANF funds were focused on those families receiving cash assistance.
• The estimated number of families eligible for TANF-funded cash assistance. This reflects the number of families estimated as eligible under state TANF program rules regarding family types and income and asset rules. Not all families who are eligible for TANF cash assistance actually receive benefits. Some families who are eligible do not apply or do not receive benefits for other reasons. It is estimated that a large share of the decline in the TANF cash assistance caseload resulted from a decline in the share of families eligible for cash assistance who actually received assistance.¹⁶ In 1997, an estimated 73% of families eligible for assistance received TANF-funded cash aid. By 2012, this percentage had declined to 30%. This is an illustrative measure showing the amount of federal dollars that would be available per family for all families eligible for cash aid.
• The estimated number of poor families with children. This is an illustrative measure to show TANF funding relative to the broader population targeted by all TANF benefits and services to address both the effects of and the root causes of child poverty.

Figure 7 shows TANF basic funding per family receiving cash assistance, eligible for cash assistance, and with children and in poverty for 1997, 2000, and 2013.

The figure shows that by any of these three measures, TANF basic funding per family increased from FY1997 to FY2000. In the late 1990s, the cash assistance caseload, the number of families eligible for cash assistance, and the number of poor families with children all declined sufficiently to more than offset the effects of inflation. That is, even adjusted for inflation, states had more resources per family in 2000 than in 1997 under any of the three measures.

However, the circumstances in the post-2000 period differed substantially from those in TANF's early years. Child poverty increased during the 2000s, with some of the increase occurring even before the deep 2007-2009 recession. The number of families estimated as eligible for TANF cash assistance rose together with child poverty. Yet the TANF cash assistance caseload continued to decline, albeit at a slower pace than it did in the late 1990s.

The figure shows that by any of these three measures, basic TANF funding per cash assistance family declined from 2000 to 2013. However, in 2013 basic TANF funding per family receiving cash assistance remained above that of 1997. For the other two measures, TANF funding per family had declined sufficiently by 2013 so that its inflation-adjusted value was below that of 1997. In 2013, TANF basic funding per family eligible for cash assistance was 35% below its 1997 level when considering the effects of inflation. That year, TANF basic funding per poor family with children was 37% below its 1997 level when considering the effects of inflation.

Figure 7. Basic TANF Funding Compared to Number of Families Receiving Assistance, Number of Families Eligible for Assistance, and Number of Poor Families with Children, Selected Years (In constant 2013 dollars)

Source: Congressional Research Service (CRS), based on data from the U.S. Department of Health and Human Services (HHS), U.S. Census Bureau, and estimates of families eligible for cash assistance from the TRIM3 micro-simulation model, funded by HHS and maintained at the Urban Institute. Notes: Constant dollars were computed using the Consumer Price Index for all Urban Consumers (CPI-U). Basic funding per family eligible for cash assistance in 2013 was projected, based on the percentage of families eligible for TANF actually receiving benefits in 2012 and the actual TANF cash assistance family in 2013.

The Allocation of Federal TANF Funds among the States

In addition to the total basic block grant being based on the early to mid-1990s levels, each state's funding is also based on what it received in federal grants in TANF's predecessor programs during this period. As discussed in "The 1996 Law: "Freezing" Historical Funding Levels in the Basic TANF Block Grant," when the law was enacted there were differences among the states in terms of funding per family receiving assistance or per poor child. The block grant froze these historical state differences in the current allocation of federal TANF funds.

How would a TANF block grant representing equal grants per poor child change the TANF allocations among the states? If the basic TANF block grant was altered to base state funding on poor children (equal grants per poor child) rather than historical expenditures, the allocation among the states would be very different. If this allocation is done in a budget-neutral way—maintaining the total basic block grant at $16.5 billion—such a change would result in large increases in funding for some states, and large decreases for others. States that have lower than national average grants per poor child under the current formula would be the states with funding increases, and those with higher than national average grants per poor child would experience funding decreases. Thus, there would be a regional pattern to the reallocation of funding: typically, states in the South would have their grants increased, and California and those in the Northeast and Midwest would experience funding decreases.

Figure 8 shows this regional pattern, and provides information on the percentage change from the current allocation that would occur with a reallocation of funds based on equal grants per poor child (child poverty in 2013). The state that would experience the largest increase would be Texas, with a 267% rise in its basic block grant relative to current law. The District of Columbia would be the jurisdiction with the largest decrease in block grant funding, with a cut of 64.5%. (For dollar allocations under equal grants per poor child and comparison with current law, see Table C-1.)

Figure 8. Percentage Change in TANF Basic Funding from Current State Family Assistance Grant to a Grant Based on Equal Grants Per Poor Child (Assumes $16.5 billion basic block grant is maintained)

Source: Estimates by the Congressional Research Service (CRS). Notes: Poverty allocations based on poverty counts under the "official" definition of poverty. A tabular display of this information, as well as dollar allocations, can be found in Table C-1.

Recessions and the TANF Block Grant

During the consideration of the 1996 welfare reform law, the fixed basic grant under TANF led to concerns that funding might be inadequate during economic downturns. TANF law includes two provisions to address such concerns: reserve funds and a "contingency fund."

TANF Reserve Funds

TANF law permits states to "reserve" unused basic block grant funds; for example, saving funds during periods of economic growth to have extra funding available during recessions. However, at the end of FY2013, unspent funds were at their lowest (inflation-adjusted) level in the history of the block grant. There was a slight increase in unspent TANF funds from the end of FY2013 to the end of FY2014.

Figure 9 shows the amount of unspent TANF funds in inflation-adjusted (constant 2014) dollars for FY1997 through FY2014. As shown in the figure, states accumulated unspent funds in the early years of the block grant. However, the value of unspent funds declined after FY2000. At the end of FY2014, the constant dollar value of unspent funds was 66% lower than it was at the end of FY2000.

Figure 9. Unspent TANF Funds, FY1997 through FY2014 (In billions of inflation-adjusted, constant FY2014 dollars)

Source: Congressional Research Service (CRS), based on data from the U.S. Department of Health and Human Services (HHS) and the U.S. Bureau of Labor Statistics (BLS). Notes: Constant FY2014 dollars were computed using the Consumer Price Index for all Urban Consumers (CPI-U).

The TANF Contingency Fund

The 1996 welfare reform law created a separate $2 billion fund to provide extra TANF funding during periods of economic hardship through a contingency fund. States would need to meet criteria of economic need in order to access the fund. The criteria of economic need are (1) a three-month average state unemployment rate of at least 6.5% and at least 10% higher than in the corresponding three months of either of the prior two years; or (2) the state's Supplemental Nutrition Assistance Programs (SNAP) caseload is at least 10% higher than it was in FY1994 or FY1995. Additionally, in order to access the TANF contingency fund states also have to spend more from their own funds than they spent in FY1994 on TANF-related programs.

Figure 10 shows TANF contingency fund grants and their relationship to the unemployment rate for FY1998 through FY2014. As shown in the figure, the contingency fund often has not behaved as a countercyclical source of extra TANF funds. The fund was little used before FY2008. Grants did not increase together with the unemployment rate during the 2001 recession. States generally did not sufficiently increase their own spending, criteria required to access this fund, during that recession.

Figure 10. TANF Contingency Fund Grants and the Unemployment Rate, FY1997 to FY2014

Beginning in 2008, grants did increase with the more severe recession of 2007-2009. With the increase in access, it was projected that the $2 billion contingency fund would be exhausted. In fact, the fund was exhausted in early FY2010. Figure 10 also shows grants from the ARRA ECF. It was the ECF—and not the regular contingency fund—that provided the bulk of extra TANF funding in response to the recent severe recession. The ECF expired at the end of FY2010.

Following the exhaustion of the original $2 billion for the TANF contingency fund, Congress provided it with annual appropriations in subsequent years. Over all years from FY2010 to FY2014, all states except Wyoming (which became ineligible during FY2014) were considered economically needy because they had higher SNAP caseloads than prior to welfare reform (FY1994 or FY1995). SNAP caseloads are projected to remain above those levels for the indefinite future. Therefore, the TANF contingency fund may continue to spend most of its annual appropriations into the future despite the economic recovery.

There are some implications of the potential lack of a counter-cyclical funding source for TANF. During the past recession, state government budgets were stressed, with many states cutting back on spending to meet balanced budget requirements. However, for the period when the ECF provided states with extra funds, states generally maintained their TANF benefit amounts. When the ECF expired at the end of FY2010, a number of states reduced their benefits and tightened eligibility for cash assistance.

Congress could opt to redesign the TANF contingency fund so that it would be more responsive to changes in economic conditions than the current contingency fund. That is, it could create a fund that would spend less than is currently projected during good economic times, and would provide a higher level of funding in case the economy falls into recession. Though a fund to provide extra grants during recessions might help TANF respond to future economic downturns, there are a number of difficulties in developing such a fund. Each recession is different—and there is no guarantee that a program that would have been responsive in past recessions will be responsive in future recessions.

Uses of TANF Funds

The uses of TANF grants by states to fund a wide range of benefits and services—some well outside the scope of benefits and services related to families receiving cash assistance—have raised some fundamental questions about the TANF block grant.

• Is its primary purpose to fund cash assistance and services for families receiving cash assistance, particularly those services that could move families from assistance to work? or
• Is TANF truly a broad-purpose block grant giving states the financial flexibility to provide a wide range of benefits and services to address childhood economic disadvantage?

State organizations, in general, have argued in favor of retaining the flexibility of the TANF block grant.¹⁷ There have been calls to rein in spending on certain activities to focus more dollars on cash assistance families.¹⁸ There has also been interest in tightening certain rules related to what expenditures can be counted toward the TANF MOE, restricting the ability of states to count "third-party" donated services as part of their MOE.

Conclusion

The bulk of TANF funding is based on what states spent in the pre-TANF programs in the early to mid-1990s. A freeze in the bulk of TANF funding that was originally authorized for 5 years (FY1997-FY2002) has now extended to close to 20 years. However, a number of considerations are raised by any potential changes in TANF funding, including the following:

• Under current budget rules any increase in TANF funding would have to be offset by spending reductions or revenue increases elsewhere in the budget.
• Addressing certain issues in a budget-neutral manner—such as disparities in funding among the states—could result in a large redistribution of funding from some states to others.
• There are different perspectives with which to evaluate the adequacies of TANF funding.

These different perspectives lead policymakers to fundamental questions about TANF and its goals in conjunction with addressing its financing issues.

History of the TANF Block Grant Funding

Table A-1 shows how the TANF basic block grant was derived. The TANF basic block grant (state family assistance grant) provides each state a grant based on its peak funding during the early to-mid 1990s. The data underlying the formula were the federal share of expenditures in TANF predecessor programs for FY1992 through FY1995. The formula provided that each state receive the greatest of

• the average federal share of expenditures in these programs for FY1992 through FY1994 (column A);
• the federal share of expenditures for these programs in FY1994, adjusted for states that amended their EA programs in FY1994 or FY1995¹⁹ (column D); or
• 4/3 times²⁰ the federal share of expenditures for these programs in the first three quarters of FY1995 (column E).

Table A-2 provides the amount of federal funding through the TANF basic block grant by state as well as state MOE levels at 75% and 80% rates of FY1994 predecessor program state expenditures. The MOE is 75% of FY1994 predecessor program state expenditures, but if a state fails to meet TANF work participation standards, the MOE rises to 80% of FY1994 expenditures.

Table A-3 shows the total TANF grants to states for FY1997 through FY2015.

Federal and State Expenditures Under TANF and its Predecessor Programs

Table Showing Allocations Based on Poor Children Compared with the Current TANF Basic Block Grant

Unspent TANF Funds