Has Welfare Reform Changed State Expenditure Patterns?
Prepared from a paper by Therese J. McGuire , Kellogg School of Management and David F. Merriman , Loyola University.
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• States did not disproportionately cut cash welfare spending during the most recent recession despite their new flexibility via block grants to do so.
• Social assistance spending became more counter-cyclical after the 1996 welfare reform while total state spending became more pro-cyclical.
• State spending on public welfare programs increased as a share of total state spending, from 19.4 percent in 1980 to 26.9 percent in 2003. This growth was driven largely by medical vendor payments for Medicaid.
• Medicaid spending has far outpaced other social assistance spending over the past twenty-five years.
The passage of the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) in 1996 changed the way the federal government finances cash welfare to low-income families. Instead of a matching grant, states receive a set amount of federal funds in the form of a block grant with no adjustments for inflation, caseload numbers, or state spending. Social assistance programs, however, tend to experience increased demand in recessions – more people require assistance from the government during difficult economic times. To meet increased demand, states have to increase spending, but recessions usually bring lower revenues to states, requiring some cuts to discretionary spending. Analysts were concerned that PRWORA’s change to a block grant would jeopardize social spending during times of state fiscal stress and cause states to disproportionately cut welfare spending during recession.
In their paper, “State Spending on Social Assistance Programs over the Business Cycle,” which will appear in the National Poverty Center conference volume Working and Poor: How Economic and Policy Changes Are Affecting...