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Welfare Under a Weaker Economy
By Gretchen Lehmann
October 16, 1998
Click for audio RealAudio 2.0 14.4
Part of the MPR Welfare to Work Series

Most state and federal officials have declared welfare reform a success. Since reforms have been in place, caseloads are down, more recipients are in the workforce, and state governments aren't spending as much. Economists concede most of these successes are due to a strong U.S economy. So what happens to the welfare system if there's a recession? Welfare officials aren't certain when or how a downturn will hit Minnesota, but they say they're ready for it when it does.

IT CAN BE ARGUED MINNESOTA'S STRONG ECONOMY is a mixed blessing for welfare reform. A labor shortage has made life a little easier for caseworkers charged with getting people back to work and it's meant economic stability for many welfare recipients. But the strong economy may have also created a false sense of security. Dr. Eugene Steuerle is a Senior Fellow with the Washington-based Urban Institute.

Steuerle: We haven't really sorted out what we want to do as a nation or as states if we go in the opposite direction.

Steuerly has been following the progress of welfare reform around the country and in particular, he's been charting how individual state's plan to handle an economic downturn. He says he hasn't found much planning.

Steuerle: Quite honestly, for the most part, they're just so busy trying to figure out what to do with the current system that it just hasn't been an issue.

Minnesota is one of the few exceptions. State officials have made sure there are contingency plans in place so the social service system keeps operating. According to Department of Human Services Assistant Commissioner Debra Huskins, state officials have been very aware of where to put their federal welfare dollars:

Huskins: What Minnesota has tried to do under the Carlson Administration is to take a very cautious approach to spend money now in trying to help people get off of assistance and get out of poverty, but also have some money left for economic downtime.

Minnesota and 25 other states have actually been able to set aside money because of how federal welfare reform funding was designed. Congress planned for the worst when it decided how much to give states in welfare block grants. In the case of Minnesota, the funding was based on welfare spending for 1994. That year, 64,000 families received public assistance. Today, there's a labor shortage in Minnesota, and only 49,000 families are on welfare. The math looks pretty good, says Urban Institute economist Eugene Steuerly.

Steuerly: Essentially it has served as a sort of windfall for states. In fact states on average, as best as we can guess are spending significantly less of their own resources on welfare because the federal government has increased its resources in a period where the economy is doing very, very well.

If Minnesota continues to save at its current rate, the state could have $39 million set aside by the year 2001. It's certainly not enough money to cover all the state's welfare expenses for even a year. If Minnesota experiences a major recession, the contingency plan is to dip into the general fund to help pay expenses.

Joyce Belford, Executive Director at the Workforce Center in St. Cloud says in her 25 years running welfare-to-work programs, state legislators have always acted quickly when an economic downturn puts people out of work. But she says she's also learned that there's only so much planning you can do.

Belford: Yeah, we can be prepared, but what can we actually do about it? You don't know when it's going to occur, which industries it would strike first, where it's going to go. I'm not sure what the preparation is other than that I know my colleagues across Minnesota and I are very poised to respond quickly and we also know which sorts of things legislatively would need to happen for a quick response.

Belford says she likes Minnesota's new welfare program because it puts welfare recipients in a better position to weather a recession. The Minnesota Family Investment Plan, or MFIP, eases recipients off the rolls by gradually reducing their benefits, a method Belford says should cushion the blow of an economic downturn.

Urban Institute Economist Gene Steuerly agrees the new reforms are better than the systems of the past but he points to one provision in the federal reforms which could make a recession more difficult for states. It requires welfare-to-work programs to have a certain percentage of people on their caseloads employed. During a recession, more people are out of work and so states will have to find jobs for a greater number of people or lose some of their federal funding.

Steuerly: So in other words the state goes into a recession, has, say 10,000 more welfare recipients, the federal law says, well, because of that you not only have to have 5,000 more people at work, but 12,000 or 13,000 more people working - at the very time the economy makes it very hard to find jobs for those people.

Steuerly says states with "rainy day" funds should be able to offset a loss of federal dollars, but those states that haven't planned won't fare as well. A downturn for them could mean welfare recipients lose childcare and transportation benefits - undermining any advantages gained by welfare reform.