Welfare Time Bomb?

Federal reform has states edgy about hiked costs and lost innovation

For two years, Minnesota has been at the forefront of welfare reform, experimenting with a pilot program that has shifted 36% of aid recipients in eight counties into work. But now, officials are rushing back to the drawing board. A new federal law will require every state to place half its welfare population in jobs by 2002--a timetable few officials feel they can meet without huge sacrifices. "This will become more difficult than putting a square peg in a round hole," worries John Petraborg, Minnesota's Acting Commissioner of Human Services.

By mid-August, President Clinton is expected to sign legislation enabling the most radical welfare reform since the system was crafted 60 years ago. When he does, governors will get what they long clamored for--control over entitlement programs serving 12.8 million poor and 1 million legal immigrants. They may soon wish they had kept quiet: The bill will require a wholesale restructuring, even as projected funding is reduced over six years by $56 billion.

The legislation could also mark the start of the long-feared "race to the bottom," a competition to cut benefits in the name of fiscal prudence and economic competitiveness. "It will be tempting for some governors to focus on more popular areas for spending," such as economic development, says Cynthia Eisenhauer, director of the Iowa Workforce Development Dept. Officials also worry that generous benefits will lure legions of the poor from other states. Minnesota Governor Arne H. Carlson says he may even impose a law to limit new arrivals to the benefits they received where they had been living.

Minnesota is better off than many states. Consider Florida, where welfare reform is expected to leave a $550 million hole in funding for the state's growing legal immigrant population. The new legislation will cut off federal aid for food stamps, Medicaid, and supplemental Social Security to immigrants. And Florida cannot make up the difference from its own coffers without major policy changes or tax hikes. "This is a huge problem," seethes a spokeswoman for Governor Lawton Chiles. "We have pockets of elderly immigrants who will be drastically affected."

"GOING TO BE STRAPPED." The sense of alarm is mounting. "We're all going to be strapped for more capital," frets Colorado Governor Roy Romer. Two chief areas of concern: how to pay for immigrant benefits and how to take more people off the dole, particularly after the first easy-to-place people find jobs. Tremors are rippling through New York City, which could be required overnight to quadruple participation in its 15-month-old workfare program. Additional child-care bills alone could cost the city up to $300 million, says Richard J. Schwartz, senior adviser to Mayor Rudolph W. Giuliani.

Some 43 states already are experimenting with new welfare systems. They will be allowed to continue, but they won't be able to avoid mandates to shift 25% of welfare recipients into jobs within 18 months and 50% by the end of 2002. New enrollees must find work within two years. Certainly, many states will discover room to duck some requirements. "Disaster scenarios are unlikely to come true in the next year or so," says Paul Peterson, a Harvard government professor. But all states will eventually take a revenue hit. Federal matching grants, which ran as high as 80% of a state's spending and varied with welfare rolls, will be converted into fixed block grants. If states want to pay more for welfare recipients' child care or transportation, they'll have to do so without matching federal funds.

The result: "There's more incentive to simply cut people off," says Timothy Bartik, senior economist at the W.E. Upjohn Institute for Employment Research. Moreover, grants will be tied to the higher federal spending of several years ago, but the cushion is "small potatoes in the face of any recession," warns Donald Boyd, director of the Center for the Study of the States.

When the cushion gives out, the impact will fall unevenly across the country. Hardest hit, reckons Boyd, will be states with relatively high unemployment, few welfare recipients currently working, and large immigrant populations--states such as California, Florida, Texas, and New York. Larger welfare burdens could have "a significant impact" on the creditworthiness of such states, says Vladimir Y. Stadnyk, executive managing director at Standard & Poor's Ratings Group.

Even in states that have made progress with reform, uncertainty runs high. Iowa has shifted 35% of its welfare recipients into work within the past two years--easily the highest level in the nation. Now, though, its education funds are strapped, and federal job-training funds for welfare recipients and the working poor will be cut 23% over the next year. The new federal law may force Iowa to shift all its job-training money into welfare, hurting other workers who need training.

A similarly tricky balancing act faces Minnesota's Petraborg. As it tries to move the hard-core unemployed into work, the state may have to cut spending on social services for those already in low-paying jobs. "The pressures are increasing significantly," he says. Few would dispute that the old welfare system was broken. But state officials are already wondering whether a leap into the unknown will improve their lot.

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