Preparing For a Rainy Day

Throughout the year, states have been thoughtfully formulating new welfare policies as implementation of the new Temporary Assistance to Needy Families block grant (TANF) has begun. For most states, the formulation of new welfare policy has been coupled with substantial decreases in caseloads, higher funding levels, and a healthy economy. In this dynamic situation, states have had substantial flexibility and states have been able to invest in services that promote self-sufficiency. In addition, in recognition of the strong tie between the health of the economy and TANF caseloads, a few states have established rainy day funds for economic downturns. These rainy day funds consist of either a portion of the federal TANF block grant or state general funds.

Congress did establish a $2 billion federal contingency fund under the Personal Responsibility and Work Opportunities Act for states experiencing an economic downturn. The fund requires states to meet an unemployment and a food stamp trigger, and also maintain 100% of FY1994 state welfare spending levels. However, states predict that meeting a 100% maintenance of effort would be difficult and that the $2 billion would not mitigate costs in an economic downturn. This realization has led states to establish their own rainy day funds.

In a recent survey, five states (see table) indicated the establishment of state-funded rainy day funds for welfare related expenses. These five states are Arizona, Arkansas, Maryland, North Carolina, and Ohio. In other states, the governor and the legislature have agreed to reserve a percentage of the federal block grant for contingency purposes. However, because of federal restrictions, states are unable to draw down the federal funds for deposit into state accounts. Thus, federal funds designated for state rainy day funds will remain in the U.S. Treasury. Some states that have budgeted federal funds for reserve are Colorado, Georgia, Maine, Massachusetts, Minnesota, Wisconsin, Texas, and Utah.

The new TANF rules provide little fiscal incentive for states to plan for future welfare costs. For Example, state general funds dedicated to a welfare contingency fund cannot be counted toward the state's maintenance of effort until expended. Furthermore, if significant reserves remain in the U.S. Treasury for contingency purposes, there is the potential for Congress to reevaluate state funding levels. The General Accounting Office (GAO) plans to issue a report in the Spring of 1998 that will describe the plans some states are making to assure programmatic stability in their welfare programs in times of fiscal stress.