Welfare Reform's Toughest Test

Danger ahead as jobs evaporate and public funds get scarce

Lou Ann Cataneo struggled with drugs, abusive boyfriends, and intermittent homelessness before she signed up for job training and counseling services that became available under the 1996 welfare-reform bill. "Welfare reform changed my life," the 41-year-old told a Brookings Institution seminar in Washington last summer, recounting her journey from single mother on the dole to concierge at the New York Marriott Financial Center hotel.

A little over a month later, however, Cataneo's life was turned upside down when attacks on the World Trade Center damaged the Marriott, robbing her of her job and independence. Supporting herself with unemployment insurance and a temporary stipend from Marriott, Cataneo is determined to reclaim her old position or land another job. "I think I'll find something," she says.

Unfortunately, Cataneo is hardly alone. Approximately 60% of the women who left welfare over the past five years secured jobs. But since September 11, unemployment has been rising at the fastest pace in 20 years. Particularly hard-hit is the service sector, which employed 43% of the former welfare recipients who found work, according to the Urban Institute, a nonpartisan social research group. As a result, many women who got off public assistance are losing their paychecks. To make matters worse, state money for social programs is drying up, services to prepare the unemployed for the workplace are being phased out, and tighter budgets in Washington could reduce welfare block grants to the states.

SECOND THOUGHTS. When welfare reform was instituted in the late '90s, states offered such services as child care, transportation, and job training to help single mothers land work. Now, with state revenues falling, legislators are looking to slash social-service budgets--in some cases by more than half.

Some states had been maintaining rainy-day funds to see themselves through a downturn. But when Representative Nancy L. Johnson (R-Conn.) warned governors last year that some of her colleagues were itching to reclaim unused welfare money, states quickly spent their stipends. Ohio, for example, had salted away 10% of its welfare block grant before officials became concerned that their nest egg would be seized. "There was a spend-or-lose mentality in Washington," says Joel Potts, administrator of Ohio's welfare program. "What we were doing was exactly the right thing. Now we find ourselves in a situation we tried to avoid."

In addition to laying off social workers and cutting back programs for the working poor, more local governments will probably start using some of their federal block grants to pay for social services that they previously bankrolled themselves. Under the terms of the 1996 law, states can use their federal funds for programs like Head Start or job-counseling services. In the past, states that took advantage of that option have used savings for priorities like tax cuts or paving roads. Now, with revenues dwindling, the savings will likely go to balancing budgets.

And those block grants could get smaller. With Washington back to deficit spending and focused on funding anti-terrorism efforts, there could be fireworks next year when Congress decides how much money to send the states for social programs. Liberals want spending to at least remain at 1996 levels: They point out that because welfare block grants are not adjusted for inflation, they have declined 14% in real terms over the past five years. However, Representative Wally Herger (R-Calif.), chairman of the House subcommittee on human resources, said in September that "the world changed" after the attacks and hinted that states will have to make do without additional money from Washington. In addition, supplemental grants and contingency funds for states that spend down their stipend were not renewed when they expired on Oct. 1.

EXTEND THE LIMIT? Funding isn't the only political donnybrook in the offing when the renewal of welfare reform is debated next year. The 1996 bill placed a five-year time limit on collecting federal welfare benefits, and many states imposed even stricter limits. In some states, people on public assistance will be kicked off just as jobs are becoming scarce. Groups like the National Campaign for Jobs & Income Support want time limits suspended in states with high unemployment. They also want the clock stopped for welfare recipients who are in job-training programs or are working but still receiving income supplements.

The picture isn't entirely bleak, though. Now that newly unemployed welfare recipients have work experience, their résumés will make it easier to find jobs. In addition, about 40% of ex-recipients have been working long enough to qualify for unemployment insurance if they are laid off, according to economist Harry Holzer of Georgetown University. Before welfare reform, the figure would have been around 15%. And because unemployment benefits are more generous than welfare, those who lose their jobs will be better off, at least in the short term, than if they had stayed on the dole.

The advantages of work are not only measured in economic terms, though. Drawing a paycheck fundamentally changed the outlook of many ex-welfare recipients, and the majority are loath to collect assistance again. "There is no going back," says Cataneo, the self-proclaimed welfare-to-work poster girl. But without government support, there may be no going forward either.

By Alexandra Starr in Washington

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