Welfare Reform and State Budgets

On August 22, 1996, President Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act. Among the major changes contained in the act were limits in eligibility for the Supplemental Security Income and Food Stamp programs and an end to the entitlement of families with children to cash assistance. The act replaced the cash assistance program, Aid to Families with Dependent Children (AFDC), with Temporary Assistance to Needy Families (TANF). The AFDC program had been an open-ended matching grant program, where federal grants grew in line with state expenditure. By contrast, the TANF program is a fixed block grant. While a block grant gives states greater flexibility, more financial independence, and the ability to innovate, it also renders the federal grant amount to a state independent of the state’s changing needs over the business cycle. In this Chicago Fed Letter, I compare the relationship between federal and state welfare spending and state budgets under the AFDC program and under the first two years of the TANF program.