BLOCK GRANTING WELFARES FISCAL IMPACT ON THE STATES.pdfVIP

BLOCK GRANTING WELFARES: FISCAL IMPACT ON THE STATES by Elizabeth Powers March 1999 Working Paper #70 James H. Kuklinski, Editor Elizabeth Powers is Assistant Professor of Economics and a faculty member of the Institue of Govern- ment and Public Affairs at the University of Illinois, Urbana-Champaign. ABSTRACT Welfare reform changed the federal funding mechanism for the state-run welfare programs for families from an open-ended match to fixed block grants. There is great concern that states will receive less federal funding over the long-run and face hard-to-plan-for volatility in demands for state welfare funds. This paper uses historical expenditure data to explore the potential increased burden on state fiscal systems due to welfare reform. I simulate states’ use of the Block Grant, the Treasury Fund (in which states may save Block Grants for the future), and the federal Contingency Fund, from which states receive limited federal matching funds under certain conditions. I find that although total expense to the federal government would be reduced only trivially by this switch, the new system creates huge disparities in both the resources available to various states and in their potential scope for reducing the size of their welfare programs. I. Introduction One of the biggest changes to the welfare system embodied in the Personal Respon- sibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) is switching the federal funding mechanism for the state-run welfare programs for families with children from an open-ended match to fixed block grants. Some economists are particularly concerned that the quite different incentive structure of a block grant regime will lead to dram