Thank you for the opportunity to appear before you to present the views of the New York City Independent Budget Office (IBO) on implementation of the federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996 in New York State. The IBO was established last year pursuant to the New York City Charter to provide expert, nonpartisan analysis to both elected officials and the public on relevant fiscal and budgetary issues facing the City. Without question, federal welfare reform is highly relevant to the City's budget—not only now, but for years to come.

On October 31, 1996, IBO released The Fiscal Impact of the New Federal Welfare Law on New York City, the first in a series of comprehensive reports the agency will issue from time to time addressing major fiscal or budgetary matters affecting New York City. My testimony today will highlight the report's findings in light of the Governor's proposal for implementing the new federal welfare law and his 1997-1998 State Executive Budget.

Many residents of New York City depend on various forms of welfare assistance. A few telling statistics:

• Aid to Families with Dependent Children (AFDC): 771,000 recipients during October 1996. Cost to City in fiscal year 1996: $450 million. Total cost: $1.8 billion.

• Home Relief (HR): 200,000 recipients during October 1996. Cost to City in fiscal year 1996: $339 million. Total cost: $678 million.

• Supplemental Security Income (SSI): 378,000 aged, blind, or disabled low-income recipients during October 1996. No direct cost to City.

• Food Stamps: 1,342,000 recipients during October 1996. No direct cost to City.

City officials have implemented a number of measures designed to slow and possibly reverse the growth in the costs of these programs. The New York City Work, Accountability and You program (NYC WAY) has been the primary factor contributing to significant AFDC and Home Relief caseload reductions in recent years.

An objective analysis of the new federal law shows that several provisions are likely to have an impact on the New York City budget. These include provisions that will directly or indirectly affect the number of people receiving assistance and vastly increase the number of recipients required to participate in work programs.

• The AFDC program is replaced with Temporary Assistance for Needy Families (TANF). The movement from an entitlement-based system to a capped block grant to states is an increase in both local flexibility and fiscal risk.

• Under TANF there is a five-year lifetime limit for each individual, with states allowed to exempt a small number of hardship cases from the limit.

• The new law includes strengthened work quotas for TANF recipients. States are required to have 25 percent of adult recipients working in federal fiscal year 1997, increasing every year by 5 percentage points so that 50 percent in of recipients are working by 2002. States not fulfilling their work quotas can face significant financial penalties.

• Work activities are required for all recipients after two years of receiving benefits. Enforcement of this provision would effectively override the work rates discussed immediately above and speed up the rate at which states would have to create work programs. Significantly, the law does not penalize states for non-compliance with this provision.

• Federal child care funding through AFDC and the Child Care Development Block Grant is consolidated and increased to cover some of the increased daycare costs for the children of TANF work program participants.

• The new law restricts eligibility of children for Supplemental Security Income. Eligibility of children based on behavioral problems is limited.

• Newly convicted drug felons will be ineligible for TANF and food stamps for the rest of their lives. States can opt out of this provision.

• Non-citizens who entered this country prior to August 1996 are banned from receiving SSI and food stamps. Immigrants arriving after this date are banned from most federal programs for five years--after which their sponsor’s income is counted in determining eligibility. For certain classes of current and new aliens there are exemptions from these restrictions.

• Non-working childless adults are limited to three months on food stamps. Other changes will lower the average food stamp grant to all recipients.

A number of the decisions to be made by the New York State government to implement federal welfare reform will inevitably have a profound impact on the New York City budget. The most significant of these decisions involve the allocation of block grant funds, the division of non-federal costs, work requirements, the five-year TANF limit, and the response to aid restrictions for legal aliens and children.

The Governor’s plan can be viewed as an attempt to achieve two broad goals. The first is to reduce the size of the welfare system through gradual grant reductions, reduced eligibility for cash assistance, increased earned income disregards to encourage work, and stiff work requirements for employable adult recipients. At the same time, the plan attempts to satisfy Article XVII, Section 1 of the New York State constitution which requires the State and localities to provide for the aid, care and support of the needy.

While many details of the Governor’s legislative plan have not yet been revealed the main provisions are as follows:

• The two-tiered system of the soon to be defunct Aid to Families with Dependent Children (now called TANF) and Home Relief would be replaced by a new system including three categories of aid. The first of these, New York Works, would provide assistance to most TANF families. Family heads and childless adults who have temporary disabilities, who care for disabled dependents, or who are 60 through 64 years old would receive assistance under the Temporary Disability Assistance program (TDA). Finally, the Article XVII Safety Net Assistance program would cover destitute single adults, families that have exhausted their five-year limit in the New York Works program, those who are affected by the family payment cap, and aliens who are no longer eligible for federal assistance.

• Cash benefits for New York Works recipients would remain at a constant level for the first eighteen months that a family is on the rolls. After that, benefits gradually decline to 45 percent of initial levels by the fifth year. Recipients with jobs would be able to offset these reductions with a gradual increase in earned income disregards.

• Recipients of Article XVII Safety Net Assistance would not be provided with cash assistance. Instead they would receive in-kind or voucher assistance to cover such basic needs as food and shelter. They would also be eligible for medical assistance.

• Work requirements vary with the category of assistance. Those in the Temporary Disability Assistance program would not be required to work. In the New York Works program, the number of recipients required to work would be determined by the federal TANF work quotas for each year. The requirement that recipients must participate in a work program after receiving cash assistance for two years would also be applied, although there may be some flexibility in the number of work hours required each week. The work quotas for Safety Net recipients would be even higher, with 75 percent required to work in the first year and 90 percent by the third year.

• Individual districts would be given more flexibility to run their programs.

• Federal, State and local funding for child care and job programs would be increased.

If the Governor’s plan is enacted by the legislature it would bring about major changes in the structure and funding of welfare programs in New York City. In a number of respects it represents a sharp break with current policies, thus making it difficult to project future trends in caseloads and expenditures. It is possible, however, to identify several aspects of the plan could have a significant impact on the New York City budget.

• The plan does not identify the portion of federal and State funding earmarked for New York City. If the City’s share turns out to be lower than current levels--in recent years the City has accounted for about two-thirds of all AFDC dollars spent in the State--the City could be forced to cover additional costs with its own funds. This would be particularly significant in later years when expenditures for work programs and child care are expected to increase substantially.

• State funding to localities for the Article XVII Safety Net program would be capped. This means that if caseload increases due to an economic downturn or any other reason, the City could be forced to cover the additional costs with its own funds. Further, if demand for the Temporary Disability program is higher than expected, State funds could be borrowed from the Safety Net program, thereby lowering the amount of money available for the latter program.

• Special grant allowances would be restricted. In the past, as much as one-third of the average grant per case for AFDC and HR clients has been in the form of special grants to cover such needs as rent payments over the regular allowance and rent arrears. There would be no statewide special grants under the Governor’s plan, although counties could opt to maintain them. In addition, there would be a cap on the amount of State funds available for each county to cover the state portion of the special grant funds. These restrictions could put the City in a position of having to choose between covering additional expenses with its own funds or risking social dislocations that could put greater stress on other parts of the social welfare system such as homeless shelters.

• Grant payments to families in the New York Works program would gradually decrease with time spent on the rolls, with reductions totaling 45 percent by the fifth year. Grant reductions of this magnitude could result in greater demand for homeless shelter services. Costs to the City could be substantial due to the fact that the homeless family system would be funded through the TANF block grant which effectively caps federal funds for this program.

• The replacement of the Home Relief cash grant system with the new Safety Net program could also result in social dislocations and place added demands on other parts of the City’s social service system. It may prove difficult for policy makers to find the right mix of in-kind services that would meet the needs of clients and minimize costs to the City.

The IBO’s analysis assumes that minimal structural change in the existing State welfare system would be required to fully comply with the new federal law. The AFDC program is assumed to be replaced by a TANF-funded families program and the Home Relief program is assumed to be continued. Further, existing eligibility and benefit levels and fifty-fifty State/City cost sharing for the non-federal costs of both programs is assumed. Recipients removed from assistance by the five-year time limit and SSI eligibility restrictions are assumed to be absorbed into the Home Relief system.

Any estimate of the impact of the new law on New York City will critically depend not only on decisions made by the State but also on future economic performance. In order to provide a range of possible costs to the City, IBO’s analysis contains three scenarios: one assumes continued moderate economic performance so that any change in the number of welfare cases can be directly attributed to the new law and New York’s response (the moderate caseload scenario); a second assumes weaker, albeit positive, growth resulting in more public assistance cases than otherwise would result (the higher caseload scenario); and a third assumes stronger economic growth contributing to fewer cases (the lower caseload scenario). Because the same rate of economic growth is assumed as in the City’s adopted budget financial plan, the moderate caseload scenario is best suited for cost and caseload comparisons with financial plan projections.

Work Requirements and Child Care Cost Implications

Two distinct work requirements are established in the new law for adult recipients of TANF. First, states are required to ensure that 25 percent of recipients gain employment in 1997, rising by 5 percentage points each year through 2002. States unable to meet these quotas face significant fiscal penalties. Second, as noted above, work is mandated for all recipients within two years of first receiving assistance, but there is no penalty for non-compliance with this provision.

Most of the cost to the City results from two factors: the shift of welfare recipients from federally subsidized assistance to programs entirely funded by the State and City, and the costs of providing jobs and child care to public assistance recipients. Some of these costs are partially offset by the size of the TANF grant to New York State and the resulting City share. In fact, at least in the near term, the TANF grant will likely exceed the amount that would have been available to the State under the AFDC program. The difference between these two amounts, sometimes referred to as a “surplus” or “windfall,” represents an additional amount that could be made available to the City (depending on State decisions) to help defray the costs of implementing federal welfare reform.

Figure 1 illustrates estimated costs to the City under the moderate caseload scenario, assuming the two-year work rule is not enforced. The shaded and hatched bars represent total City costs while the white bars show the City’s share of federal TANF block grant funds remaining after assistance is provided. The difference between these bars represents the net additional cost to the New York City budget and is shown in Figure 3.

Although net costs are minimal over the first two years of implementation, costs begin to rise dramatically in 1999 and ultimately total $628 million over the 1997 to 2002 period. These estimates are based on the assumption that New York City would receive $1.415 billion or 60 percent of the entire New York State block grant of $2.359 billion. While recent indications suggest that the State may receive an additional $83 million per year, of which $50 million would go to the City under the 60 percent assumption, a share of closer to two-thirds would more accurately reflect the City’s share of public assistance spending.

As shown in Figure 2, these costs become even larger if the two-year work rule is enforced. Net costs over the six year period total nearly $3.8 billion. Most of this increased cost is attributable to the higher costs of funding worker placement and child care programs. As discussed earlier, it is unclear whether the State would choose to enforce the two-year work rule given both the absence of any fiscal penalty for non-compliance and the expected additional costs the State and its localities.

A comparison of net costs to the City of these two variations of the moderate caseload scenario is shown below as Figure 3. This figure clearly illustrates the substantially higher costs that would be incurred if the two-year work rule is enforced. It should be emphasized that these are net additional costs to the City, over and above amounts already included in the City’s most recent financial plan.

As shown in Figure 4, costs to the City rise dramatically under the higher caseload scenario – particularly if the two-year work rule is enforced. Even without enforcement, additional costs to the City would total $563 million by 2002. The higher caseload scenario would likely be realized (in the near term) only in the event of a mild economic downturn. On the other hand, the lower caseload scenario would result in substantially lower additional costs to the City. In fact, costs would be minimal if the two-year rule is not enforced. Such a scenario would result from more robust local economic growth coupled with an increase in welfare recipients securing unsubsidized private sector employment, perhaps partly in response to the new law’s welfare to work provisions.

Behavioral Changes and Caseload Scenarios

The incentives and sanctions contained in the new law--including time limits, eligibility limits, and work requirements--are designed to motivate recipients to leave the welfare system and secure employment in the private sector. If the new law were to succeed in changing the behavior of welfare recipients, the fiscal costs of implementing the law would be reduced. For example, under the moderate economic growth scenario, caseloads might continue to decline instead of remaining flat after 1998. Such a change would reduce City costs for income maintenance (in both the TANF and Home Relief programs), lower the percentage of recipients required to participate in work programs, and reduce overall workfare and child care costs.

If, under the moderate growth scenario, a total of 5,000 fewer cases were opened and/or remained on the TANF rolls each year starting in 1998, then 25,000 fewer adults would be on the City’s welfare rolls by the year 2002. As a result, the total additional cost of the new law in the City in 2002 would fall from $269 million to just $25 million (assuming no two-year work rule). Such a change in behavior would result in a significant cost reduction under the moderate economic growth scenario comparable to those under the assumption of faster growth.

While acknowledging the possibility that such a change in the behavior of welfare recipients could occur, it is also important to question the extent to which an additional 25,000 welfare recipients (above and beyond those who would otherwise leave the rolls) would succeed in securing private sector employment between 1998 and 2002. Under the moderate growth scenario, the New York City economy is forecast to add roughly 150,000 private sector jobs over the period. Such job growth, however, would only partly decrease the ranks of the City’s officially unemployed job seekers, who currently number close to 300,000. For this reason, the City’s economy would be unlikely to fully absorb the added labor force participation resulting from declining TANF and Home Relief enrollment without the job creation associated with more rapid economic growth.

Implications for State-City Share

It is important to note that total State costs for welfare programs in New York City will vary much less, and will generally be significantly lower, than City funded costs. This is a result of two factors. First, the City will bear the burden for almost all reform-related workfare and child care costs, less any costs covered by federal TANF funds available after paying for income maintenance. Second, the amount of TANF funds available for workfare and child care in New York City will be disproportionately low if the State allocates only 60 percent of the block grant to City programs. These disparities between the City and State shares of welfare costs would be substantially reduced, and the City’s fiscal risk under welfare reform would be significantly eased, if New York City were to receive a TANF allocation more in line with the size of its population expected to be in need of public assistance.

The new law sharply reduces the level of food stamp assistance in the City by eliminating some categories of recipients from the program and lowering benefits for those who retain their eligibility. The IBO estimates that overall food stamp spending in the City will be reduced by between $400 and $500 million per year, or approximately 35 percent of current spending levels. The food stamp program is funded entirely by the federal government; there is no State or City counterpart. Therefore, reductions in the program have no direct fiscal impact on the City's budget. There will likely be indirect fiscal impacts, however, as well as direct impacts on individuals. Persons losing assistance will be directly affected, and this in turn is likely to indirectly impact the New York City budget.

By their nature, indirect fiscal impacts are difficult to fully inventory, but some are fairly obvious. For instance, the reduction in overall spending will withdraw in the range of $400 million-$500 million of subsidized purchasing power from the local economy, most of which had been concentrated in low-income areas of the city. This withdrawal, accounting for more than a third of current food stamp spending in the city, could threaten the profitability of small merchants and businesses, particularly in poorer neighborhoods where food stamp subsidies and welfare payments account for much of the disposable income of residents. This in turn would lower business tax revenues and commercial property values in those areas.

Aside from the fiscal impacts, whether direct or indirect, the changes to the food stamp program will have very real direct impacts on the individuals involved. Many of those eliminated from the program will face substantial reductions in their disposable income. Those with reduced benefits will have smaller but still measurable reductions. The City might attempt to offset this impact on recipients and prior recipients by creating a new food subsidy program, but the cost of ameliorating these cutbacks would be considerable.

The new welfare law’s most significant fiscal impacts are likely to occur in the years 2002 and beyond. Important implications for future City budgets include:

• The full impact of the lifetime limit on welfare participation only begins to be felt in 2002, when the first cohort of recipients reaches the five-year limit.

• The decline in TANF caseloads as some recipients reach the five-year limit in the year 2002 could mark just the beginning of a larger long-term decline. Unless the five-year limit is allowed to expire after 2002, it will force the removal of progressively larger numbers of TANF recipients over subsequent years. Assuming the law remains unchanged, these post-2002 reductions will continue until the caseload is reduced to less than half its current size.

• The number of City children affected when their parents are forced off the TANF rolls as they reach the five-year lifetime benefit limit begins to increase in 2002. The table below shows the cumulative number of children who would be bumped from the program. For example, in 2002, 53,000 children would be affected while in the following year an additional 61,000—for a total of 114,00 children--would be off of the TANF rolls. It is interesting to note that the impact of the five-year rule (on both children and adults) is expected to peak in 2005 and then gradually decline.

• As in 2002, these reductions in TANF caseloads could cause the City’s welfare costs to rise. Assuming that the New York City economy is able to absorb only a small fraction of the individuals removed from TANF, and given the State’s constitutional mandate to care for the needy, individuals removed from TANF are likely to continue to shift to Home Relief, which costs the City double the amount of TANF.

• Given the constitutional requirement to care for the needy, the new law could potentially prompt a migration of benefit-seekers into New York, thereby swelling City welfare expenditures in the long run.

• Even if the cost of providing welfare does rise in 2002 and beyond, it is quite possible that New York State’s TANF block grant will decrease if the formula for determining each state’s share of TANF block grants remains the same and if total U.S. funding for the program does not rise.

Finally, expanding the time horizon beyond the year 2002 increases the probability of an economic downturn which would require the City and State to make difficult choices between decreasing expenditures as needs increase and/or raising revenues as ability to pay declines.