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The New York Times.

Reliance on Welfare Windfall May Prove Costly for State and City, Report Warns
July 31, 2001

By Nina Bernstein

State and city budgets have become increasingly dependent on welfare windfalls that may evaporate in an economic downturn or in the reworking of the federal welfare overhaul next year, a nonpartisan city budget agency warns in an analysis to be released today.

"A smaller surplus in the future would force a choice among reducing services, raising taxes or shifting the priorities in their budgets," according to the report by the Independent Budget Office, which was created by the City Charter revision of 1989 to provide nonpartisan fiscal analysis for taxpayers and elected officials.

The report notes that the city's largest use of the surplus has been paying child care subsidies for an estimated 26,000 children.

But how will welfare rolls respond to the next recession? Nobody really knows. The question is increasingly occupying national economists. Their estimates depend in part on how much credit they give to the economic boom, and how much to welfare policy changes, for causing welfare rolls to fall more steeply than even the strongest proponents of the 1996 overhaul had dared to hope.

The budget office report underscores how much may depend on the answer. Five years of shrinking welfare rolls in New York and steady welfare allocations from Washington have meant a windfall for New York state and city budgets that totaled $6.7 billion statewide.

The spending of the windfall is controlled mainly at the state level. But the city used about $470 million of the money last year for services that have now been built in to the budget, the analysis estimated, especially child care subsidies that grew to $368 million, from $167 million three years ago.

This puts a significant part of the city's budget at risk if an economic downturn sends more people onto public aid, the analysis said, or if Congress cuts federal Temporary Assistance to Needy Families next year when it considers reauthorization of the welfare overhaul law.

Nationally, most economists estimate that for each percentage point the unemployment rate rises, the welfare caseload will rise 5 to 10 percent, said Harry J. Holzer, a professor of public policy at Georgetown University who was the Labor Department's chief economist during the Clinton administration. Typically, those at the bottom are the most vulnerable to losing their jobs or not being hired in a downturn, he said.

But there are many imponderables, he added.

"One possibility is that a lot of people might want to come back on the rolls, and the states might not let them," Mr. Holzer said. "That's not necessarily a good outcome, because they might have nowhere else to turn."

From another perspective, however, a study released last week by the conservative Manhattan Institute predicted that even a downturn that increased unemployment to 1993 levels -- 6.9 percent in the nation and 10.4 percent in the city -- from the current unemployment levels of 4.5 and 5.3 would increase the welfare participation rate of single mothers by no more than 5 percent.

The author, June E. O'Neill, an economist at Baruch College, said that her estimate assumed Congress and the states would hold the line on strict welfare rules, even in a recession. Ms. O'Neill credited policy changes with nearly half the decline in welfare participation, and prosperity with only 20 percent.

But others have given the economy most of the credit, said Sheila Zedlewski, an analyst with the moderate Urban Institute, a social policy research organization that has reviewed many similar studies. The consensus, she said, is that the boom, which created jobs, the expansion of the earned-income tax credit, which made work more rewarding, and the overhaul, which made it harder to get or stay on welfare, were all important in ways that cannot be disentangled.

Rebecca Blank, an economist who is dean of the University of Michigan's School of Public Policy, said that the best way to predict the impact of a recession was to look at the effects of past economic slowdowns on work behavior and public assistance caseloads. But in this case, she added, "the changes in programs and in behavior have been so great and so fundamental that historical evidence may be quite unreliable."

On the optimistic side, she said, because women with little education and young children significantly increased their work experience during the 1990's, they may be better able to find new jobs in a downturn or get by on unemployment benefits.

On the pessimistic side, the safety net provided by unemployment has shrunk sharply over the last 20 years, and most of the single mothers now working in part-time service jobs will not qualify for benefits if they are laid off, Ms. Blank said.

Like most states, New York has set aside part of the welfare windfall as a contingency fund for a rainy day. A modest downturn that raised the number of aid recipients by 100,000 in each of the next two years would likely consume about $250 million of that fund, which is expected to reach a total of $790 million this year, the Independent Budget Office said.

The city agency said a more serious, long-term problem would be posed by a substantial reduction in the city's surplus because of Congressional cuts. That, it said, could force city officials "to make difficult choices between curtailing child care, job training, and other services, or drawing on additional city funds to maintain these and other programs."

©2001 The New York Times



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