Testimony of
Steve Bartolomei-Hill, Director
Maryland Budget and Tax Policy Institute

Presented to the
U.S. Committee on Ways and Means
Subcommittee on Human Resources

February 14, 2000

Related Reports

Thank you for the opportunity to address you today. My name is Steve Bartolomei-Hill, and I am director of the Maryland Budget and Tax Policy Institute. The Institute provides timely and accurate analysis of budget and tax priorities in Maryland. We focus on how policies affect low- and moderate-income people and other vulnerable populations, and the important community programs that serve them. The Institute is a project of the Maryland Association of Nonprofit Organizations.

Prior to directing the Institute, I worked for several years in the Office of the Assistant Secretary for Planning and Evaluation at the U.S. Department of Health and Human Services. Because of my prior experience analyzing welfare issues, the Institute has paid particular attention to the progress of welfare reform in Maryland.

My written testimony focuses on two aspects of welfare reform in Maryland:

• caseload declines and indicators of well-being among low-income families with children

• opportunities that exist for enhancing Maryland's welfare program, and the importance of federal leadership and incentives

For your information, I am also including the following two items:

• policy choices made upon initial enactment of the Personal Responsibility and Work Opportunity Act of 1996

• state plans to meet the Maintenance of Effort requirement
  

Behind the Numbers: Indicators of Success and Well-Being

In Maryland, as in many states, the most prominent number used to tout success under welfare reform is the dramatic decline in caseloads. At the pre-reform peak, three times as many families received cash assistance in Maryland compared to current enrollment levels. However, focusing on caseload declines masks the economic hardship that continues for most families that have stopped receiving cash assistance. Further, the declines in caseloads have not coincided with commensurate increases in employment.

Since October 1996, the Maryland Department of Human Resources has been tracking the employment status of families that have stopped receiving cash assistance. Their data, which is based on state employment records, shows the following outcomes:

• Half of exiting families had earnings in the quarter that they left welfare;

• Four in ten exiting families had any earnings in both the first and second quarters after leaving welfare;

• Three in ten exiting families had any earnings in each of the first four quarters after leaving welfare.
  

State employment data do not account for former recipients who are working in other states, those who are in jobs that are not covered by the state's unemployment insurance system. Thus, it understates the number of former recipients who are working. Nonetheless, as the majority of recipients live in Baltimore City, which does not border another state, this factor is unlikely to explain away the large percentage of families who cannot be found on state employment data.

Among those who are fortunate enough to work, earnings remain low. Median earnings are about $800 per month. Earnings at this level are less than the federal poverty level for any size family with children.

These employment and earnings outcomes say more about the "success" of welfare reform than simply looking at caseload declines. Yes, families are no longer receiving cash assistance, but most cannot be found to be working, and even those who are working remain poor.

Several factors contribute to the continuing poverty of those who have left welfare and those who remain. Benefit levels remain low enough such that the day to day financial hardship may itself be a barrier to work and the potential for economic well-being. When recipients do begin to work, benefit reductions begin at the first dollar of earnings, and are steep (benefits are reduced by $.65 for every dollar earned). As a result, a family of three loses eligibility for assistance when earnings are about $650 in a month-an amount that is slightly more than half of the federal poverty level.

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Current Opportunities

Amid the ongoing problem of economic hardship, a confluence of factors provides an unprecedented opportunity to help low-income families.

• The substantially reduced caseload leaves fewer cases to work with, though today's recipients may have greater needs and greater barriers to work.

• The continued poverty of those who have left the roles indicates the need to enact policies that help low-income, working families make ends meet.

• The availability of federal and required state welfare funds provides resources to meet some of the needs of low-income families with children.

• Independent of welfare-specific funds, the state has a budget surplus of nearly $1 billion, is projecting spending growth of nearly 9 percent for the coming fiscal year, and has an infusion of tobacco settlement funds. If just a portion of these funds were targeted to lower income families, Maryland would have the opportunity to make substantial program enhancements.
  

A few bills have been introduced in this session of the General Assembly that take advantage of this opportunity and address some of the issues that contribute to income inadequacy.

Child Support Pass-Through and Disregard Currently, none of the child support that is collected on behalf of families receiving cash assistance is actually passed on to the family. Like 26 other states, Maryland keeps all child support collected and shares it with the federal government. A proposal would pass through and disregard all child support.

Make Benefits Payable From the Date of Application Currently, new recipients and families who are re-enrolling in the program receive a first-month payment that is roughly half of the regular benefit-a maximum of $222 for a family of three. This is one of three cost-saving measures that was implemented in 1997 when there was concern that state and federal welfare funds would be insufficient to cover costs. A proposal would reverse this and provide the full benefit to new enrollees.

Earned Income Credit One proposal would increase the state's refundable earned income credit from 15 percent of the federal credit in tax year 2001 to 50 percent of the federal credit.

While these are important proposals, some simply reverse previously enacted cuts, and none are assured of enactment. More telling are the numerous areas where policy makers are not seeking to invest more state funds. These include essential items such as child care, health insurance for adults, and increases in benefits or disregards in the cash assistance program. This highlights an important point about state policy decisions affecting low-income people: the more significant, and thus costly, items continue to remain outside of state fiscal priorities, even in this time of plenty.

I believe that this indicates the importance of federal leadership to stimulate policy change. A good example of this is the Child Health Insurance Program, which has led states to substantially increase health care access for children. Federal financial incentives made expanding health care access to children a fiscal and policy priority. At the same time, without similar federal leadership and incentives, parent access to Medicaid has languished. In Maryland, a parent who makes a little more than $500 a month-less than half of the poverty level-earns too much money to qualify for Medicaid.

Another example exists in the area of child care. Maryland has made modest inroads in increasing access to child care. However, all of this has been done with federal funds. Without cost-sharing incentives, the state has invested no new funding in child care. As a result, a single parent with two children in day care and who earns a little more than $25,000 per year is ineligible for any child care assistance.

A final example is in the area of child support pass-throughs. When federal cost sharing stopped with passage of the welfare law in 1996, 27 states, including Maryland, ended their child support pass-throughs.

There are many advantages to state flexibility and the creation of block grants. However, the importance of federal leadership and incentives to states cannot be understated.

The remainder of my testimony provides information on how Maryland responded to welfare reform, and how Maryland is meeting its Maintenance of Effort requirement amid the dramatic caseload declines.

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Initial Responses to the Personal Responsibility and Work Opportunity Act of 1996

In addition to complying with the work-focused approach of the federal law, Maryland reacted to the Personal Responsibility and Work Opportunity Act of 1996 by enacting several policy changes in its welfare program. Some of these are described below.

• Changes in earnings disregards: Earnings disregards were simplified. If you recall, under prior federal law the first $120 of earnings and one-third of the remainder were disregarded for the first four months of earnings; the first $120 of earnings were disregarded in the fifth through twelfth month of earnings; and, the first $90 of earnings were disregarded thereafter. Many had complained that the time-limited nature of disregard policies were confusing and discourage work.
  

Maryland changed its disregard policy such that 20 percent of earnings were disregarded for determining program eligibility, and 26 percent of earnings were disregarded for recipients. This 26 percent disregard was increased to 35 percent in 1999. In 1999, legislators also took advantage of the flexibility allowed under federal law and removed from the federal 60-month time limit those families who are working.

As a result of the current disregard policy, a family of three must earn below $520 in a month in order to become eligible for cash assistance. Recipients who earn more than $650 in a month are ineligible for assistance. To give you some perspective, this ranks 41st among the 50 states in earnings level before eligibility ends.

Cost Saving Measures Initially, there was concern that the federal block grant and new federal cost sharing arrangement would not provide the state with enough money to meet cash assistance needs. As a result, changes were adopted to reduce cash assistance payments:

Child Support: Maryland repealed the $50 pass-through in child support. As a result, none of the child support that is collected on behalf of families receiving cash assistance is passed on to the families for whom it is collected.

Delayed Eligibility: New applicants, and families who re-enroll in the program, receive a reduced benefit in the first month of program eligibility. Under this policy that delays program eligibility until 15 days after the date of application, the maximum first-month benefit for a family of three is reduced to $222-an amount that would be less than 20 percent of the federal poverty level.

Housing Assistance is Counted as Unearned Income: Families who receive section 8 and public housing assistance have their benefits reduced by $60 per month.

All of these policies were implemented to save money when shortfalls were projected in state and federal funding for welfare. To this date, despite a caseload decline of two-thirds and ample federal and state funds, these policies remain in effect.

Indexing Benefits Cash assistance benefits are adjusted annually so that their value is no longer eroded by inflation. In 2000, maximum benefits in Maryland for a family of three are $417 per month, an amount roughly equal to one-third of the federal poverty level. However, the indexing that began in 1997 does not make up for benefit cuts that occurred in the early 90s. Between 1990 and 1997, benefit cuts and inflation reduced the value of cash assistance benefit by more than 25 percent.

Meeting Maintenance of Effort

One of the more challenging aspects of understanding state policy choices under welfare reform is following the money-both state and federal funds. In fact, tracking the funds can be so complicated that you may wish your General Accounting Office to examine how states are meeting the maintenance of effort requirement amid the caseload declines that have been experienced.

Maryland's TANF block grant is $229.1 million per year. Maryland's maintenance of effort level is based on pre-reform state spending of $236 million per year. Combining federal and state funds, pre-reform spending on welfare and related programs was $465 million per year.

However, total spending on cash assistance has fallen by nearly two-thirds-from $296 million in 1996 to a projected $104 million for the upcoming fiscal year. Still, Maryland does not have a significant surplus of unspent TANF funds, and the apparent lack of state funds continues to be a barrier to program enhancements. Where has the money gone, and how is the state meeting its MOE requirements?

In a hearing before the Senate Budget and Tax Committee last week, Department of Human Resources officials assured committee members that they had scoured the state budget to find every possible spending item that could help the state meet its MOE requirement without necessitating an actual increase in spending. Existing spending that is proposed to count as MOE includes the state's refundable earned income credit, education grants to high poverty areas, and after school programs.

Two relatively small items may be indicators of the state's aggressiveness in identifying spending to meet MOE. In both cases, items may be counted as MOE, even if state funds are not involved.

• In 1999, Montgomery County, Maryland enacted a local refundable earned income credit, to be financed with county funds. Under current regulations, these county funds may be counted as state Maintenance of Effort funds, and state fiscal analysts have suggested that the state do so.
  
• In 1999, as part of electric utility deregulation, a surcharge on utility companies was applied to create a universal service program for low-income consumers. Some of these utility company funds are likely to be counted as maintenance of effort funds.
  

All together, nearly $100 million of non-welfare funds have been found to count toward the state's MOE limit for the upcoming fiscal year. These funds offset the $100 million reduction in state funds from areas considered to be traditional welfare spending.

It is my understanding that some are calling for reductions in the MOE spending requirements. I believe that policy choices made in Maryland indicate that the opposite is needed. MOE requirements should be tightened to ensure that states maintain spending for lower-income families. For example, at the very least, MOE should be limited to state general funds.

Summary

• While many families have left welfare, their earnings remain very low, and their need for ongoing assistance such as child care, health care, and income support continue.

• Despite an abundance of funds, significant enhancements in state safety nets have remained outside of state budget priorities. This suggests the need for federal leadership to stimulate state investments in lower income families.

• Despite the maintenance of effort requirements in federal law, Maryland has not taken advantage of caseload reductions to invest in the well-being of families. Rather, the state has scoured the budget to find as many existing items as possible that can count under MOE, thus avoiding the need to actually maintain or increase spending. This suggests the need for tighter federal rules on how Maintenance of Effort funds can be spent.

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Related Reports:

Six policy options for expending surplus welfare funds
A Primer on Earned Income Credits in Maryland
Working but Poor in Maryland