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| Six research papers, intended as background for the discussions, were prepared by RAND researchers and distributed to participants in advance of the conference. The full text of the papers, revised to reflect conference discussions, are in The New Fiscal Federalism and the Social Safety Net: A View from California. The papers analyze the fiscal effects of the new federalism on California and the potential impacts of block-grant funding on welfare, health care, child care, child protection and job training. The following summaries highlight major points from each of the essays. |
Despite uncertainties over the final shape of welfare reform legislation, changes are in the wind that could exacerbate the strain on California's already thinly stretched safety net. At the same time, the prospect of losing a large number of federal dollars may be the galvanic jolt California needs to begin putting its welfare house in order.
These are among the proposed changes and the issues they pose for California:
Still, these daunting challenges could disguise a golden opportunity for California and other states to undertake sorely needed structural overhauls of their social service systems. Less encumbered by federal restrictions, states should be able to tailor social service efforts to their own particular needs, make policy trade-offs that are based on cost-benefit criteria, and approach regional and local problems in a strategic rather than piecemeal fashion.
To accomplish these reforms, states will have to create an array of institutional mechanisms--for overseeing programs; for evaluating alternative policy options; and for collecting, analyzing and sharing information across agency boundaries and across different levels of government and private-sector interaction.
"The Impact of Federal and State Policy Changes on Child Care in California"
by M. Rebecca Kilburn and Lingxin Hao
The fiscal federalism movement affects child care through two proposals now before Congress--one dealing with the reform of the welfare system and the other with the consolidation of programs under block grants.
One of the major objectives of welfare reform has been to get people off welfare and into jobs. Tough new work requirements in the proposed legislation make that point. At the same time, lawmakers have written child care provisions into the welfare proposals in apparent recognition of the fact that moving mothers to the workplace entails a need for child care. Strong support for this course comes from a large body of research that shows child care assistance is a great boon to female labor force participation. But there is an apparent disconnect between what backers of the Contract with America intend and what they are willing to support. Despite the surge in demand for child care that is expected to result from the work requirements, federal funding would remain at roughly the same level as last year.
Making it easier for mothers to work is not the only goal of child care programs. Many initiatives in this policy area are designed to contribute to child development; the popular Head Start program is one example. Yet the research results are far from conclusive on the power of child care programs to enhance child development and school readiness.
Child care programs with the most potential for improving school readiness appear to be high-quality, full-day programs that serve older preschoolers from poor families. Such programs are expensive, however, leading to a direct conflict between the goal of moving women off the welfare rolls and into jobs and paying for effective child development programs. In an era of shrinking government funding and at a time when lawmakers are enamored of programs that encourage mothers to work, school readiness may become a casualty.
The second aspect of fiscal federalism that has an impact on child care is block-grant consolidation. Block grants have several potential benefits: They provide child care recipients with "seamless" benefits, cut administrative costs, and help the federal government reduce spending. But the block-grant approach also has a downside. One drawback is that child care would no longer be an entitlement but rather would become hostage to states' decisions about how to allocate a dwindling pot of federal dollars. Another is that states--in the absence of pressure from Washington--have shown an unwillingness to maintain quality standards, a stance that further compromises the government's mission of enhancing child development.
"Child Protection and Welfare Reform"
by Audrey Burnam and Elan Melamid
Over the past decade, the number of children reported to have suffered abuse or neglect and who require protective services has risen alarmingly. In the United States, reports of child maltreatment rose 39 percent from l988 to 1994; in California, they soared 256 percent in the same period. The reasons for the increases are not fully understood, but burgeoning rates of substance abuse and poverty are commonly implicated.
Currently, foster care and adoption assistance are open-ended federal entitlements for children who are eligible for AFDC, the single largest welfare program. That would not change under the proposed welfare reforms.
However, other core child protective services--such as preventive services, independent-living programs and foster-parent training--would be subject to caps and reduced federal spending. Because foster care remains an entitlement, states would have a strong incentive to increase their out-of-home placements at the expense of efforts to return children to their families.
This not only goes against the grain of current thinking about what is best for children, it would soon prove a false economy. It costs considerably more to support a child in substitute care than to support one who remains with an AFDC-eligible family. These costs would be borne not only by the federal government as part of the continuing uncapped entitlement, but also by states, which must match these expenditures to qualify for the entitlement.
The direct impact of the reforms on services may not be large in the first two years because funding levels would be stable during that time, but the indirect effects of tightening eligibility for AFDC would be felt immediately.
The new restrictions include limits on the number of years that families can receive assistance and the denial of benefits in some cases to teen mothers, families who have additional children and legal immigrants. Many fear that the strain on families who lose cash assistance because of these restrictions will lead to a significant rise in the incidence of child abuse and neglect, and thus to an increase in the demand for child protective services.
Unless the past decade's rise in reports of abuse and neglect is reversed, demand for child protective services over the next two to five years would almost certainly outstrip the growth in federal funding for these services. States and counties could step in to fill the gaps, but cash welfare and other social service programs may also be strained and may compete heavily for discretionary state and federal dollars.
Without funds commensurate with growing caseloads, the ability of the child protective system to prevent out-of-home placement, to channel children into the least restrictive settings, and to arrange for permanent placements will decline.
Severely constrained resources would also affect the quality of services provided to maltreated children. The time that staff spend investigating reports of abuse and neglect and managing their caseloads would be spread across a larger number of cases.
The longer-term effects of welfare reform are more difficult to gauge because they will be influenced by broader economic trends. Over time, welfare reform may contribute to reductions in poverty by providing stronger work incentives and job-related services. However, the past failure of government programs to raise families permanently out of poverty suggests that the goal will not be attained easily.
Medicaid is the program most governors have in mind when they protest "unfunded mandates" from Washington. Because the program is an entitlement and a joint federal-state responsibility, states must march in lock step every time the federal government expands eligibility for health care to new classes of low-income people. Largely as a result, state Medicaid payments have nearly tripled in recent years.
In response to states' complaints and as part of the current wave of budget-balancing reforms, the Repub-lican majority in Congress has proposed a radical restructuring of Medicaid. Two recent proposals adopting a block-grant approach--one by lawmakers and one by the National Governors Association--were rejected but offer an informative glimpse at the kinds of restructuring options Congress may consider in the future.
Strict block-grant funding would allow states more flexibility to determine their own eligibility standards and benefits and more freedom to experiment with cost-control measures like vouchers and managed care. But the entitlement status of the program, which ensures that federal funding will grow to meet increasing needs in the eligible population, would be eliminated. Instead, the federal share would go to the states in the form of a fixed budget based on a state's recent history of Medicaid spending.
The governors' proposal similarly grants more authority to the states in determining eligibility and benefits but retains some important elements of an entitlement program.
The shift to a fixed Medicaid budget, especially one based on a state's past expenditures, would have punishing repercussions for California. Two factors make this the case.
First, California has been more aggressive than other states in controlling Medicaid costs; thus, ironically, it would get less money under the reform legislation than states like New York that may have managed their Medicaid programs less efficiently.
Second, California has higher rates of growth in its eligible population than other states, due partly to increasing numbers of non-elderly adults and of the citizen children of undocumented immigrants.
The governors' plan would not have as great an adverse effect because it allows for limited growth in the numbers of people eligible for Medicaid and does not link future federal funding to states' historical spending patterns.
The proposed reforms create difficulties for California on another front as well. California has become dependent on supplemental payments that the federal government makes to hospitals serving disproportionately large numbers of Medicaid patients. The state relies on these funds to help underwrite health care for the growing numbers of Californians who have no medical insurance. Because these special payments are tied to hospital days paid by Medicaid, the local public health systems are disposed to provide expensive inpatient and emergency services rather than less-costly outpatient and preventive care.
These "disproportionate share" payments would be eliminated or greatly altered under the proposed reforms, forcing California to scramble for other sources of funding to cover its large and growing uninsured population. Nowhere will the bind be felt more acutely than in Los Angeles County, where the health services department currently faces a budget shortfall of $655 million. County facilities, mainly financed by federal Medicaid dollars, were providing 85 percent of uncompensated inpatient care and 60 percent of trauma care for the entire county when the fiscal crisis struck last year.
Recognizing the critical importance of the county health system to the local safety net, federal officials recently granted a temporary waiver of Medicaid regulations. This gives the county breathing space to begin the transformation from a hospital-based public health system to one that provides services in the most appropriate and least costly setting.
Whether the fundamental changes being planned for Medicaid come this year in the form under debate or next year in another shape, the signs of a rapidly shrinking federal contribution are unmistakable. Medi-Cal, California's version of Medicaid, must transform itself into a more cost-conscious, rational program. In pursuit of efficiency, the state has already begun the mandatory enrollment of Medi-Cal beneficiaries in the largest California counties in managed care plans.
Other crucial challenges confront the state and counties: financing care of "last resort" for poor people who are not eligible for Medicaid, accommodating to changes in welfare eligibility that are likely to swell the ranks of the uninsured, providing incentives for cost-efficient health care delivery, and ensuring that Medi-Cal delivers quality care for its beneficiaries.
Job training programs are an important component of the social safety net, and Congress has targeted them for reform along with welfare and Medicaid. The main provisions of the proposed jobs legislation call for consolidating job training and vocational education programs under a single block grant and transferring most authority for training policy and administration to local levels of government.
But there is little reason to expect that these reforms will fare better than past efforts to force a marriage between job training and vocational education. Previous attempts faltered largely because the two programs serve different clientele and offer different services. Nor is it likely that large gains will be realized from the further devolution of authority to local and state governments, a process that by now is almost complete. Job training reforms in 1973 and 1982 already consolidated many small-group training programs and decentralized their control to the local level.
Still, the Senate version of the jobs bill with its provision for a 50 percent flex account allocable by the governor would be a modest boon to California because it allows for greater statewide coordination of training programs. A statewide system can open a larger market for trainees and a larger range of occupations for which to train. Also, standardized training--with its assurance to graduates that their skills and credentials are widely recognized and portable--would be more feasible in a statewide system.
However, a troublesome question arises: Why bother with reforming the way programs are administered--whether at the state, local or federal level or under one block grant or many smaller categorical ones--when a large body of research suggests that the programs themselves are the problem? Despite three decades of federal investment in job training and a succession of ambitious initiatives from Washington, job training programs are largely viewed as failures. Here is what the evaluations show:
What are the implications for California if, as agreed, Congress and the president produce a balanced budget by 2002? Much will depend on how the federal government makes the cuts (about $228 billion) needed to bring revenues and spending into equilibrium. But even under the most optimistic scenario, California appears to be in for a bumpy ride.
In fact, California's budgetary picture in 2002 is likely to be bleak even if no reductions are made in federal spending. Particularly hard hit will be higher education because its funding is unprotected by either federal mandate or state law.
The money in California's budget is distributed among three types of funds. The general fund accounts for about 46 percent of the total budget and is replenished from state income taxes, general sales taxes and corporation taxes. This is money that the governor and the legislature can debate over, appropriate and control to some degree. Special funds make up another 15 percent of the total. This is money earmarked for specific purposes--like highways--and cannot be spent on anything else. The third account, representing about 39 percent of the state's budget, is federal money for which the state merely serves as a conduit.
General fund expenditures are not unconstrained, however. In fact, only about 17 percent of the spending from this fund is truly discretionary; the rest is effectively determined by state or federal mandates. For example, Propositions 98 and 111 define minimum state support for public elementary and secondary education and community colleges. Mandated sentencing laws and state and federal court decisions regarding the treatment of prisoners largely determine the amounts the state must spend for prison construction and operation. Federal mandates, however, determine much of California's spending on health and welfare.
Higher education and "other activities"--a catch-all category that includes all other state programs and services--must make do with whatever revenues remain in the general fund after all other claims are satisfied.
If current trends in federal spending and state revenue growth continue, California's budget in 2002 will be about $124 billion, including $62 billion in general-fund revenues. But without changes in the budgeting process, the state will have to make sharp cuts in higher education and "other activities"--on the order of 32 percent in real dollars--because of large increases in mandated spending on health and welfare, corrections and K14 education.
How then would federal spending cuts factor into the equation? If the reductions needed to balance the federal budget are spread equally across the states, California would lose about $17 billion (11 percent) of its federal funding in fiscal 2002.
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This loss would affect the budget in several ways. To begin, regardless of which federal programs are cut, a smaller stream of federal dollars flowing into the state would reduce overall economic activity and personal incomes. This, in turn, would cut into state tax revenues, and thus into the amount of money in the general fund. In this manner, a $17 billion cut in federal spending would translate into a $2.2 billion decline in general fund revenues.
Beyond that, the impact on the state budget would vary depending on whether direct grants to the state are decreased and, if so, by how much, and finally, on whether federal mandates are relaxed.
In theory, the federal government could concentrate the cuts in categories that do not involve the state--for example, federal salaries, defense procurement, and direct payments to individuals (primarily for Medicare and Social Security). Alternatively, it could make all the cuts in direct grants to the state. These options are at extreme ends of the spectrum and, thus, unlikely to happen. A more plausible scenario would have the federal government making cuts in all areas of federal spending.
If the federal government were to cut spending proportionately across the board, federal grants to California would be reduced by $5.1 billion. Also, as mentioned above, general fund revenues would decline by $2.2 billion as a result of a lower level of economic activity. Although total funds available for state programs would decrease by less than 7 percent, truly discretionary functions--like higher education--would bear the brunt of these changes.
If federal mandates on state spending were relaxed, the state could divert revenues from health and welfare to hard-hit areas. But if political forces in California precluded such a diversion, even deeper cuts in discretionary areas would be required. Conversely, drawing funds from higher education and other state services to make up the almost $4 billion needed to maintain health and welfare services at current levels would not be possible; there would simply not be enough funds remaining in those budgets to cover that amount.
How the federal government goes about eliminating its deficit will determine the range of spending options available to the state in 2002. Without relief from federal mandates, decreases in federal support will force the state to sharply reduce spending on higher education and on the "other programs" category. Even with mandate relief, sharp cuts in state spending in these areas seem unavoidable, unless the state is willing (and able) to make up some of the difference by cuts in health and welfare spending.