How Michigan ‘games’ the welfare-to-work system

A line forms at a church food bank in Alanson, Mich. Such third-party aid to the poor has been counted as "welfare spending" by the state to qualify for federal block grants to relieve poverty. (Bridge photo by John Russell)

Over the past 20 years, Michigan has spent roughly a half-billion dollars annually on what it characterizes as welfare. In return, Washington has rewarded the state with an even greater amount – $775 million a year in federal block grants – which, when joined together, are supposed to help the poor get off public assistance and join the workforce.

But a Bridge analysis reveals Michigan is increasingly diverting welfare-to-work funds to programs that provide neither cash assistance to the poorest families, nor the job-training skills they need to escape poverty.

Nationally, half of all the welfare money controlled by states goes to core programs intended to get those on welfare back to work – cash assistance, child care, and work-related initiatives. In Michigan, it’s less than 25 percent, one of the lowest rates in the country. Records show the state has used much of this money to plug shortfalls in the state budget, or to help families that hardly fit the definition of destitute.

Given this record, how has Michigan kept the spigot of federal welfare dollars flowing its way? Michigan takes advantage of (legal) loopholes that allow the state to inflate to the feds how much it actually sets aside to help low-income residents return to work.

“Michigan has done everything it can to avoid spending money on needy families. It uses federal funds to supplant state funds and fill budget holes,” said Peter Germanis, a former Reagan Administration official who now works for the U.S. Department of Health and Human Services, in a report published in May. In several critical analyses of the Temporary Assistance for Needy Families (TANF) program, Germanis singled out the state for what he terms “gaming” its welfare spending to win more federal matching funds.

Michigan’s dubious handling of welfare grants emerges as Washington appears poised to give states even more authority over how federal funds are spent. President-elect Donald Trump has signaled that he may also convert Medicaid – which provides medical coverage to the poor – into a block-grant program. Medicaid funds 46 percent of all births in Michigan and covers more than 2.3 million people.

Both current and former state officials, in Republican and Democratic administrations, defend the state’s handling of, and explanations for, how it has spent TANF money. The program provided flexibility during difficult economic times and the solutions found continued to help the poor, they said.

“The goal is for families to be self-sufficient and we want families to be self-sufficient,” said Bob Wheaton, a spokesman for the Department of Health and Human Services.

“What we always strive to do is help people get off public assistance.”

The Michigan method

The Clinton-era welfare reform deal of 1996 was intended to give states more flexibility to get low-income residents off public assistance and back to work. The theory being that once the poor secured jobs, states could more nimbly shift welfare funds to child care and work support programs to help people stay in the workforce.

But over time, some states began to shift federal funding to fill other budget needs, or to replace (rather than complement) the state’s share of welfare funding. With the help of a Massachusetts consulting firm, Michigan learned that it could devote less money to core welfare programs by labeling funds it already spent on other programs as welfare spending.

So it is that Michigan has co-opted the philanthropy of third-party charities, food banks and foundations, such as the United Way, to count as the state's welfare spending. It has labeled hundreds of millions of dollars in K-12 education dollars for at-risk students as “new spending” on welfare, even though the programs remained largely unchanged for years. Michigan calculated the volunteer efforts of state workers as in-kind spending by the state.

And earlier this year, legislators tapped $400,000 in TANF money to pay for a program that "must promote childbirth" for pregnant women, as well as alternatives to abortion such as adoption.

Critics see the state’s expanded definition of welfare spending as a shell game that has compromised the point of welfare-to-work programs. In effect, they argue, Michigan has replaced its own welfare obligations with federal dollars, while lowering overall assistance to the poor.

So while the books show state welfare spending has remained level, the number of Michigan families actually getting cash aid fell by half between 2007 and 2013, even as more people lost jobs and poverty rose during the Great Recession.

In the 2007 fiscal year, for instance, more than 76,000 Michigan families received cash aid, which covered more than one-in-three families living in poverty. By the 2013 fiscal year, with even more families in poverty, the number getting cash aid fell below 40,000.

Bridge recently reported on one way in which Michigan has made questionable use of TANF funds. Over the past decade, the state has spent more than a billion dollars from the welfare program on college scholarships, with money often going to middle and upper-income students attending expensive private Michigan colleges, including students from families earning more than $100,000.

State officials defend the scholarships as meeting the federal test for welfare spending. Their rationale: students who attend college are less likely to have children out of wedlock.

Yet as the state was claiming to spend enough on welfare programs to qualify for federal funds, it was also enacting policies that triggered huge declines in the number of people getting core welfare aid.

The state adopted some of the most stringent thresholds in the country to qualify for child care assistance, with an income cutoff of just under $24,000 for a family of three. Only one state – Kentucky – had a lower limit. From 2005 to 2013, the number of parents getting child care help – one of the primary ways to help the poor return to work – fell from 65,000 to 22,000, a 70 percent decline. Child care spending fell from $115.8 million to $19.7 million.

“Michigan is not using the money for what it was about – (aid for) the families while they transition back to work,” said Liz Schott, a senior fellow at the Center on Budget and Policy Priorities, a nonpartisan think tank based in Washington that is focused on reducing poverty and inequality.

Liz Schott, a senior fellow with the Center on Budget and Policy Priorities, said Michigan has one of the worst records when it comes to spending welfare-to-work money on core welfare programs. It spends far less than just a handful of states, she said.

The cuts – made under Democratic and Republican administrations – didn’t come because the economy soared and poverty fell: There were more families in poverty in the 2013-14 fiscal year than at the beginning of the recession, in 2006-07.

Schott acknowledges that the budget manipulations of welfare funds were legal and allowable under the welfare reform law, and Michigan is one of many states that does the same. But CBPP considers Michigan among the worst.

“Is this really what they should be doing with the money?” she said.

How we got here

When former President Bill Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act in 1996, promising to “end welfare as we know it,” 88 out of every 100 Michigan families in poverty was getting cash assistance, well above the national average.

The law, signed with bipartisan support and hailed as a victory by conservatives, granted states wide latitude in how they spent welfare money. Programs were expected to help put the poor on the path to employment while putting a time limit – at first, five years – on how long they could receive cash assistance.

In return, the feds wanted to ensure states kept up their own obligations to the poor. So in order to get TANF money from Washington, states had to show they were continuing to spend up to 80 percent of the money they’d devoted to low-income family assistance before the 1996 deal on core services for the poor.

Showing this “maintenance of effort,” as the feds call it, proved difficult in Michigan, which for much of the past two decades has struggled to balance its state budget amid declining revenues and a reluctance to raise taxes. The more lawmakers could label other, existing expenditures as state welfare spending, the less money the state would actually have to budget for these programs, while still remaining eligible for the TANF contributions from Washington.

“Things were so tight,” said Mitch Bean, former director of the nonpartisan House Fiscal Agency, which provides analysis for lawmakers. “We were scrambling. Resources were down so badly. (The state was) always finding ways around rules and regulation to maximize federal money.”

Mitch Bean, a former director of the House Fiscal Agency which helps legislators handle the state budget, said the TANF program’s flexibility was creatively stretched to balance the state budget.

“We tried every trick in the book,” Bean said of state budget officials.

During the 2007-08 fiscal year, at the onset of the Great Recession, the administration of Gov. Jennifer Granholm hired a Massachusetts consulting firm, Public Consulting Group (PCG), to look at the TANF program with instructions to “maximize revenue.”

PCG, which works with states across the country, figured out the state could take money used for college scholarships and transfer that money to the budget of the Department of Human Services (now called the Department of Health and Human Services). This would look like new spending on welfare-related programs – a move necessary to meet federal spending thresholds.

The state then took TANF dollars in the DHS budget and sent them to replace the scholarship money that was lost. However, this replacement scholarship money would still be considered as welfare spending, the state declared, because it met one of the goals of welfare, lowering the incidence of out-of-wedlock births. (Studies show that college gradutes are less likely to have unplanned pregnancies).

Neither program lost a penny. And the state retained its federal spending.

It would be one of several TANF-related budget moves over the years, some authored by PCG in subsequent years, and others proposed by state bureaucrats.

In 2010, PCG came up with another money-saving strategy. When spending on welfare-related programs fell as legislators cut funding across the budget, the state was in jeopardy of losing some of its TANF money because it hadn’t spent enough of its own money.

So with the state needing to identify millions more to secure the full federal match, PCG found cash in the K-12 budget: Money already being used to help at-risk students – reading programs, alternative education, health clinics – was relabeled as welfare spending. The state had previously counted some of that money toward its commitment to the poor but in 2010 doubled down – identifying $127.2 million as welfare-related spending, up from $54.6 million the year before. Welfare spending hadn’t increased at all, but how it was counted changed drastically.

“We were able to receive the maximum amount of (federal matching) funding because of what they were doing,” said Wheaton, a spokesman for the Department of Health and Human Services.

Over the years, PCG was paid millions of dollars to help the state, earning a commission on every dollar it helped the state ascribe to welfare spending.

Over those same years, state leaders were making it even harder for people who had lost a job or couldn’t find a new one to get aid. It passed a four-year lifetime cap on welfare benefits, adopted an “asset test” that meant recipients had to have less than $5,000 in assets (homes and the first $15,000 worth of vehicles didn’t count) to get aid. And it made recipients participate in a 21-day assessment period – up from three days – before they could draw an aid check.

The result: cash assistance caseloads plummeted. While the state once gave cash aid to 88 of every 100 families in poverty, by 2013-14 it was down to 18-in-100, below the national average of 23, a decline that disproportionately hit the urban poor. Poverty hadn’t declined so much as policies changed substantially, limiting opportunities for aid.

Gov. Snyder backed the changes, according to spokesman Ari Adler, because the previous welfare programs took too narrow a view of what kinds of programs would help recipients get off welfare. “Those (older) programs focus on one segment of someone’s life – without looking at the whole person and understanding what’s holding them back from success,” Adler wrote in an email response to Bridge.

“Governor Snyder believes that government can play an important role in helping Michiganders who find themselves in difficult times. That’s what TANF is all about,” Adler wrote.

Adler said the state still has programs for those who find “themselves in a tough position, whether it’s from lack of education, an illness, or a difficult life event – we need to get them back on their feet. So we have services available including TANF, the Healthy Michigan plan (the Medicaid expansion program, available through the Affordable Care Act, which covers 620,000 Michiganders), food assistance, child care and emergency services.”

But for Edward Hoort, interim director of the Center for Civil Justice, a Saginaw-based group that advocates for the poor, the hurdles erected to get those services are designed to limit, not help.

“The whole process is so vindictive now,” said Hoort, who said Lansing lawmakers won’t reconsider the matter. “They don’t want to change that. They don’t care,” he said.

State becomes charitable beneficiary

In the 2000s, billions more in federal TANF “contingency” funding was offered to states – the original lump sums to states of $16.5 billion had remained the same since 1996. But to get this additional federal money, the state needed to show it had upped its own commitment to welfare spending.

When the state couldn’t identify enough new money, PCG suggested Michigan reach beyond its own coffers to fulfill its spending goals – to the United Way, local food banks, private foundations and other charities.

“The whole process is so vindictive now. (Legislators) don’t want to change that. They don’t care.” – Edward Hoort, Center for Civil Justice

These outside organizations were told they could help Michigan get more federal welfare dollars, and it wouldn’t affect them or their tax status, so they agreed. All they had to do was allow the state to claim what these groups provided to the needy as part of the state’s spending obligations.

“When the state of Michigan approached us originally during challenging fiscal times the state was experiencing, we felt it was our opportunity to step up and help the state, to help them (qualify for) TANF contingency funds,” Scott Dzurka, president and CEO of the Michigan Association of United Ways, told Bridge.

Many others lent a hand and their balance sheet, from the W.K. Kellogg Foundation to the Wayne County Children and Family Services, to the Food Bank of South Central Michigan.

“We wanted to do whatever we could to make sure that TANF funds were coming in to help vulnerable families,” said Ali Webb, director for Michigan programing for Kellogg, which spends over $50 million annually in the state, focusing on vulnerable children (Disclosure: Kellogg is a funder of The Center for Michigan, which includes Bridge).

Even workers in the Department of Human Services lent a hand: Their volunteer hours – acting as mentors, working at food banks – were counted. For every volunteer hour that qualified, the state added $22 toward the state’s maintenance-of-effort requirements. All told the state claimed $1.3 million from DHS volunteers in one year.

For a couple of years, the state successfully drew more federal funding by leveraging the money or effort of third parties.

But Dzurka said his organization noticed that after the boost in TANF funds were no longer available (the program was reduced after the recession), the state wanted to continue to claim United Way spending as part of the state’s welfare contributions. At that point, he said his organization declined to participate, fearing it would allow the state to reduce how much it was spending elsewhere on needy families.

If the state was going to use the charities’ spending as a way of avoiding its own, Dzurka said he wanted no part in it. He saw it as potentially hurting the very population the United Way was trying to help by limiting potential resources.

“We looked long and hard at that and raised concerns that really our resources may in fact be working against what we were trying to do (which was to supplement state poverty efforts, not replace them). And therefore many of our members backed away from contributing to the TANF MOE,” Dzurka said.

Cheap solution, big consequences

In 2007, Michigan also employed another tactic to avoid questions from Washington about the state’s own level of welfare spending. The initiative, called the Extended Family Independence Program (EFIP), actually kept people on welfare longer.

Under welfare-to-work rules, states had to prove that at least 50 percent of those getting cash assistance were working. If they couldn’t hit that target, the state would be fined. In some years, Michigan found it difficult to meet those levels. So someone within state government had an idea: For families coming off welfare because they are making too much money, the state would give them an “extended benefit” of $10 a month for six months. The payment was nominal but it allowed Michigan to continue to label higher-earning workers as welfare recipients – in effect, artificially extending their stay on welfare.

But an unknown cost of that program was discovered years later, after the state enacted tough four-year limits on cash assistance in 2011. Some families that took the extended-benefits money were kicked off cash assistance when they needed it later because those six months on EFIP were counted against their lifetime cap of four years of cash assistance.

So for $60 in benefits, some families have been kicked off welfare, losing out on potentially six months of aid, which for a family of three can be as high as $492 a month.

Gilda Jacobs, a former Michigan lawmaker, said the state needs to find the money to help those in poverty like it did years ago. She is CEO of the Michigan League for Public Policy, which advocates for the poor.

Anti-poverty groups have unsuccessfully lobbied the legislature to change the law so those EFIP months no longer count. “The whole backlash against welfare recipients is so strong,” said Hoort of the Center for Civil Justice.

Last in line

In a state budget that remains strapped, getting Lansing to ensure that money marked for welfare actually goes to families that most need help is a tough sell.

“In terms of bolstering the social safety net, I think there’s very little interest there,” said Craig Thiel, a senior research associate for the Citizens Research Council of Michigan, an independent non-partisan research organization. Thiel previously worked for the House Fiscal Agency.

“The real story,” said Gilda Jacobs, president and CEO of the Michigan League for Public Policy, which advocates for policies that reduce poverty, “is really trying to identify those who are living in Michigan who have not benefited from the recovery in Michigan.”

“The fact is those needs are not going to go away,” she said. “At some point the state is going to have to figure out how to pay for the things that pull at the budget.”