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Stretched Net: Spending on the Poor October 2008

Stretched Net: Spending on the Poor

By Thomas Gais
Co-Director, the Rockefeller Institute of Government

Thomas gais

Will state and local social welfare systems hold up in this recession? Lucy Dadayan and I found reasons for concern in a Rockefeller Institute report we wrote on trends in social welfare expenditures. We learned that state and local social welfare spending, outside of medical assistance, fell in real terms after the last recession in 2001-02. Between 2002 and 2006, cash assistance, what many people call “welfare,” dropped by 7.4 percent after adjusting for inflation. Spending on social services — which include a wide variety of nonhealth services, such as childcare subsidies, protective services, foster care, employment services for low-income families, home heating assistance, and temporary shelters for homeless persons — also fell by 4.4 percent between 2002 and 2006.

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Thomas Gais is co-director of the Rockefeller Institute of Government. He has conducted research and written on American federalism and the implementation of social programs across the nation. With Lucy Dadayan, he is co-author of the Institute’s September 2008 report, The New Retrenchment.

While real spending dropped, however, the number of persons living in poverty grew by 5.5 percent over the same period. Nonhealth services and cash benefits thus declined in real, per-poor-person terms, meaning there was less money to support needy households as we approached the current economic downturn.

Low levels of spending just before a recession have not always indicated a lack of capacity to meet the needs of low-income people. In previous recessions, such as the downturn of 1990-1991, state and local resources usually grew.

But that probably won’t happen again. Except for Medicaid, nearly all major social welfare programs are now block grants, capped matching grants, or grants whose eligibility is highly restricted in some other way. In the immediate aftermath of the recession of 2001-2002, cash assistance increased by a small amount after adjusting for inflation; it rose 2.7 percent between 2002 and 2003. But that increment was not enough to cover the growing number of poor families.

Also, the brief expansion in cash assistance relied in part on the “surpluses” many states had in their block grant budgets, that is, money left over from prior-year federal grants received under the federal welfare reform law, Temporary Assistance for Needy Families (TANF). As of 2006 — the latest data available — such surpluses were smaller and less able to support even modest increases during the current recession.

State social welfare budgets were also squeezed by recent slowdowns in state revenues and declines in federal assistance. In some programs, such as TANF and childcare grants, the declines in federal assistance were the result of inflation eating away at the real value of block grants frozen in nominal terms. In other programs, the federal government simply cut aid to the states, as was the case for grants supporting substance abuse treatment and prevention, housing, and general social services.

Our research found that some states — typically wealthy ones, with high per capita incomes — compensated for these reductions in federal assistance by using their own tax revenues to support social programs. Yet most other states did not. Since states of different fiscal capacities have long differed in their expenditures for social programs — with higher levels found among wealthy states — one consequence of this shift in spending toward greater reliance on state resources was an increasing gap in social service spending between rich and poor states.

The concurrent declines in cash assistance and social services not only raised questions about the capacities of states to alleviate the pains of the current recession, they also threatened to undermine the broad political coalition that gave rise to the pro-work welfare reforms launched in the 1990s. The push to promote self-sufficiency through federal and state welfare reforms had at least two faces, what some people called “sticks” and “carrots”: restrictions on the receipt of cash assistance, such as time limits, work requirements, and sanctions; and expansions in services and benefits to help people enter and stay in the workforce (such as childcare subsidies and employment services) and to supplement their earnings (such as earned income tax credits).

However, our findings indicate that the latter face may be fading, as both types of assistance are increasingly restricted. Thus, if the current economic downturn leads states to make additional cuts in nonhealth social services, state and local governments will offer less of a safety net for low-income people not in the workforce and less of a service support system for the working poor.

Another important effect of these changes has been a shift in the relative size of federal as opposed to state and local programs. For instance, in 2002, total state and local spending on cash assistance and social services was 11 percent greater than total spending in the three largest programs whose benefits are paid (more or less) exclusively by the federal government: Supplemental Security Income (for aged, blind, and disabled persons), the Earned Income Tax Credit, and the Food Stamp Program.

Just four years later, however, in 2006, state and local spending on cash assistance and social services was 5 percent less than federal expenditures for these three programs. The biggest growth among the federal programs occurred in the Food Stamp Program, whose coverage is now vastly greater than TANF’s, even within TANF’s target population, low-income families with children. In 2000, Food Stamp cases with children numbered 30 percent less than all TANF cases (all of which, of course, included children). By 2006, Food Stamp cases with children outnumbered TANF cases by 44 percent. In several states — such as Texas, Georgia, and Oklahoma — Food Stamp cases with children exceeded TANF cases by ratios of four or more.

If state and local funds for social welfare programs continue to drop and federal programs become more and more dominant, some things would be gained, while others lost. We would see greater uniformity across states in the generosity and coverage of their safety nets, work supports, and other social services — a characteristic some people value. Also, because the federal government can run large deficits, programs supported only with federal funds can expand to cover growing social needs during economic downturns, while state and local governments have a harder time supporting counter-cyclical spending.

However, a smaller role for state and local governments may also mean a less adaptive, less innovative policy and administrative system. The nation would lose some of its capacity for experimenting with and learning from ideas initially palatable to only a few states. State citizens would lose some control over how disadvantaged families and individuals are treated in their own cities and rural areas. Such treatment would increasingly depend on shifts in partisan and ideological control over the national government. And because the federal government has little administrative capacity for direct implementation, tasks involving intensive case management or other labor-intensive services may be diminished. It is not easy to maintain a balance of fiscal roles in the social welfare system at both the federal and the state levels, yet it is probably essential to do so to prevent the narrow scope and remoteness of a system dominated by a few national programs.


The Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York, conducts fiscal and programmatic research on American state and local governments. It works closely with federal, state, and local government agencies nationally and in New York, and draws on the State University’s rich intellectual resources and on networks of public policy academic experts throughout the country.