Effects of Welfare Reform on Western States

• Major provisions of the new law
• Factors affecting relative impact
• Potential near-term effects on California state and local government finances
• Potential near-term impact in other District states
• Conclusions

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 provides a new framework for welfare in the United States. The act ends the 61-year federal entitlement to public assistance for needy individuals and further shifts control over public assistance distribution and benefit levels from the federal to the state governments. The pros and cons of the devolution of federal control to the states are widely debated, and it will be many years before the long-run effects on efficiency and coverage of welfare systems can be known. However, in the near term, states must prepare for their new role. This Economic Letter discusses the potential near-term impact of the reforms on state and local government finances in the western states of the Twelfth Federal Reserve District and suggests that the new law is likely to have a noticeable near-term impact on finances in some California local governments, but a much smaller near-term fiscal impact on governments in other District states.

Major provisions of the new law

Among the major provisions in the new law, two (Title I and Title IV) are most likely to have an immediate impact on state and local government finances. Title I of the act replaces Aid to Families with Dependent Children (AFDC), Emergency Assistance (EA), and a welfare-to-work program (JOBS) with Temporary Assistance for Needy Families (TANF), a single, state-level block grant with a capped funding level rather than an entitlement to federal funds for all eligible individuals. States qualify for TANF block grants by complying with federal restrictions on benefit eligibility, including time limits on years of recipiency, work requirements, and citizenship status. States that meet the federal requirements are given full control over the management and distribution of TANF funding.

Title IV of the act bars immigrants who are non-citizen legal aliens from receiving federal SSI benefits and Food Stamps, gives states the right to deny non-citizens benefits from TANF and Medicaid, and prohibits future legal aliens from receiving federally funded benefits until they have been continuous residents for at least five years. Illegal immigrants continue to be ineligible for federally funded non-emergency welfare programs.

Factors affecting relative impact

The fiscal impact on states and local communities of the welfare changes will depend in large part on the size of the population in each state that loses federal eligibility and the extent to which these newly displaced families and individuals are able to shift to state and local general assistance programs. The size of the population and the amount of shifting possible depends on a number of factors, including the size of the current caseload, the share of non-citizen public assistance recipients, and the extent to which existing state laws grant eligibility to displaced federal recipients.

Most states have general assistance programs that provide assistance to needy individuals, potentially including those newly denied federal benefits. However, within-state funding responsibilities and who is classified as needy vary significantly from state to state. Although most state general assistance programs are administered and funded at the state level, a few require that counties administer or fund such programs. Eligibility criteria also differ across states. The most common criteria cover low-income families with children and people with disabilities. However, in more restrictive states general assistance is extended only to people with disabilities, while in more liberal states, any individual who meets the low-income test can qualify for general assistance.

In addition to differences in the general assistance programs, there is considerable variation by state in current federal public assistance recipiency and usage. These differences have arisen for a number of reasons, including differences in program generosity and in structural factors, such as the ratio of low-skilled workers to jobs available. The average federal assistance recipiency rate of 8 percent masks state-specific rates as low as 4 percent and as high as 12 percent. The most immediate impact of the new law will be on non-citizen legal immigrants currently receiving public assistance, a group that is not evenly distributed across the country. States with large populations of non-citizen welfare recipients will shoulder a large fraction of the immediate costs of the transition.

Potential near-term effects on California state and local government finances

Of all the states in the Twelfth Federal Reserve District, California’s local governments are the most likely to experience noticeable near-term fiscal pressures under the new federal law. California stands out as a state on the positive side of each of the pre-reform factors most likely to increase the cost of transition. California is the only state in the nation with a state law mandating that counties care for all financially needy individuals within a state-designed and state-regulated framework. California claims one of the highest public assistance usage rates in general and the largest fraction of non-citizen public assistance recipients in particular. And California has not been among the front-runners in reforming public assistance eligibility at the state level. Taken together, these factors make California one of the states most likely to experience near-term fiscal impacts of federal welfare reform.

The California constitution requires counties to provide assistance to all categories of needy individuals. While other states in the U.S. have similar provisions, California is alone in requiring counties to fund general assistance programs while the state retains substantial control over program administration. In addition, California law limits the counties’ ability to raise local property tax revenues and, thus, forces counties to fund new program entrants from current resources.

California also claims one of the highest public assistance usage rates in the United States. More than 3.7 million individuals receive AFDC or SSI benefits, roughly 12 percent of California’s total population. This is more than 4 percentage points above the national average. California’s relatively high usage rate, coupled with its large size, make it home to more than 77 percent of all public assistance recipients in the Twelfth District. This pattern of above average recipiency rates in California also appears in statistics on benefit duration. The average AFDC recipient in California stays on the program for 3.3 years, about three and a half months longer than the average recipient in the U.S. and over one year longer than the average recipient in other Twelfth District states.

Federal reforms also will have a disproportionately large impact on California because of the state’s large number of non-citizen immigrants using welfare. More than 300,000 of the legal immigrants residing in California receive SSI benefits. This is more than ten times the number in all other Twelfth District states combined and accounts for over 40 percent of the total number of legal immigrants receiving SSI in the United States. While not all of these individuals will be denied benefits, the Legislative Analyst’s Office has predicted that more than 170,000 could be removed from the SSI rolls. Since the average federal benefit paid to legal aliens is $320 per month, this would amount to a loss of federal payments directed to California residents of about $650 million per year. Unless the California mandate on counties to provide general assistance to these individuals is modified or the state provides financial assistance to offset increased county-level welfare costs, the loss of federal funding is likely to create noticeable fiscal pressure on some of California’s county governments.

The effects of lost federal funding in California are likely to be the largest in Los Angeles County, which has a sizeable population of non-citizen welfare recipients. At one point, officials of the L.A. County government estimated that the new federal law would increase County welfare expenditures by about $300 million per year, which is about 2-1/2 percent of current L.A. County expenditures. Although this is only a small fraction of current expenditures, the County’s ability to raise revenues is limited.

Potential-near term impact in other District states

Apart from California, states in the Twelfth District are not likely to experience substantial near-term effects from federal welfare reform. Most states in the Twelfth District have either restrictive state assistance programs, small recipient populations, or pre-federal welfare reform initiatives designed to reduce public assistance caseloads. Each of these factors is likely to minimize the fiscal impact of the transition.

Idaho and Nevada are the only other District states with a mandate that counties fund general assistance to all needy individuals. However, in contrast to California, state governments in Idaho and Nevada have ceded control over benefit schedules and eligibility rules to counties, which have, in practice, been relatively restrictive in distributing benefits. Moreover, Idaho and Nevada stand out for their particularly low public assistance usage rates; less than 4 percent of the population in Idaho and Nevada receives AFDC or SSI benefits.

In other District states, AFDC and SSI usage rates also are below the national average, and general assistance programs are administered and funded by state governments (see Figure 1). In these states, general assistance eligibility standards are fairly restrictive and are likely to preclude large-scale shifting of newly denied federal assistance recipients to state programs. Arizona, Oregon, and Utah, for instance, exclude employable adults without children from general assistance and restrict the eligibility of families with children.

One area where District states other than California may notice a change is with non-citizen legal immigrants. Legal immigrants make up a disproportionate share of the public assistance caseload in a number of District states (see Figure 2). All but two states in the Twelfth District, Idaho and Utah, have a share of non-citizen legal immigrants in their AFDC/SSI caseload that exceeds the U.S. average. Washington and Hawaii have more than three times the average number of non-citizen legal immigrants on AFDC or SSI. However, while these states may have to provide for a larger than average percentage of newly denied legal aliens, the fact that the total caseload in these states is small means that the absolute effect will not be large.

Conclusions

In the near-term, states in the Twelfth District will face the task of finding alternative welfare funding, jobs, or other non-welfare opportunities for a significant number of individuals currently on public assistance. As with any beginning, the entry costs may put pressure on current resources. The factors reviewed in this Letter and relatively strong economic conditions in the Twelfth District are likely to limit the initial costs of federal welfare reform in all District states but California. How California fares in the near term will depend in large part on how the state and county governments agree to handle newly denied federal assistance recipients. Without state assistance, the near-term impact on some California counties, such as Los Angeles, could be noticeable.

Mary Daly
Economist

Joe Mattey
Senior Economist