United States General Accounting Office

Challenges in Saving for a "Rainy Day"

In the block grant environment, the federal government has an interest in encouraging states to save for future contingencies, but within a framework that recognizes that the size of the reserve will remain largely a state determination made under conditions of inherent uncertainty. In 1998 we reported on states plans for financing their welfare programs in the event that the economy unexpectedly turned down.1 At that time most states budget forecasts predicted that the robust economy would continue providing strong revenue growth potential and, more important for states Temporary Assistance for Needy Families (TANF) budgets, diminishing costs in many social services programs. Last year, this subcommittee asked us to revisit the states examined in our 1998 report and to, among other things, look anew at their contingency plans. In part, my statement today includes research we conducted in 10 states (California, Colorado, Connecticut, Louisiana, Maryland, Michigan, New York, Oregon, Texas, and Wisconsin).

As we will discuss more fully later in this testimony, the data available on the levels and adequacy of states reserves is insufficient and misleading. Furthermore, our case studies suggest that most states have done little planning for economic contingencies. Because states new welfare programs remain untested in times of downturn, these uncertainties make it difficult for anyone to predict how states will respond and how former welfare recipients will be affected if and when economic conditions change. Despite the significant changes made to the nations welfare program, the economy will no doubt play a role in determining how many people return to the welfare rolls and how long they, and those currently on the rolls, will remain if there are fewer job opportunities available.

As economic forecasts have begun to change, there is some concern that the states might not be as prepared as they could be to manage the new fiscal challenges under welfare reform. Many adults have left the rolls for work since TANF was implemented caseloads have dropped more than 50 percent nationwide and those remaining on the rolls have increased their work efforts. Greater emphases on work implies a tighter link to work and hence the economy. This could make TANF more sensitive to an economic downturn than Aid to Families with Dependent Children (AFDC) if former recipients return to the rolls when they are laid off, causing state TANF budgets to rise. However, the flexibility of the grant combined with significant unspent TANF balances may help mitigate the fiscal fallout from economic downturns.

The shifting fiscal balance between the states and the federal government and the challenges this new partnership poses in financing and strengthening the safety net during times of economic stress.

The potential for states to draw on their TANF grants and state reserves to cushion fiscal and economic shocks to the program. 

The complexity in the design of existing TANF contingency mechanisms that limits the effectiveness of these mechanisms in responding to uncertainties in the economy.