Using Incentives in Welfare Reform: The New York State Child Assistance Program

Transcription

1 Using Incentives in Welfare Reform: The New York State Child Assistance Program Cambridge, MA Lexington, MA Hadley, MA Bethesda, MD Washington, DC Chicago, IL Cairo, Egypt Johannesburg, South Africa February 1998 Abt Associates Inc. 55 Wheeler Street Cambridge, MA Prepared by William L. Hamilton Nancy R. Burstein David Long

2 Using Incentives in Welfare Reform: The New York State Child Assistance Program William L. Hamilton, Nancy R. Burstein, and David Long Welfare reform has been one of the dominant themes of domestic policy making in recent years and, as a result, a myriad of reform schemes has emerged. The Child Assistance Program (CAP), which was developed by the New York State Department of Social Services and first implemented on a test basis in seven counties in 1988, is one of these many initiatives. CAP is distinctive, however, both in its approach to reducing welfare dependence and in its indisputable success in actually achieving its goals. It is very difficult to reduce both poverty and welfare dependence. If welfare benefits are increased in order to reduce poverty, work becomes comparatively less attractive and welfare dependence and government costs may grow. If welfare benefits are cut to reduce dependence and costs, families on welfare may experience more severe poverty. Alternatively, if benefits are held constant, and recipients are allowed to keep more of their earnings in order to encourage work and self-sufficiency, welfare is provided to families with higher incomes, which may seem unfair to low-income workers and also draw more people onto welfare. Many welfare reform initiatives have tried to solve this policy puzzle by altering the existing welfare benefits structure. They typically mandate specific actions on the part of welfare recipients (such as efforts to look for work), and focus on the single parents (usually mothers) who head most welfare cases in the United States. These initiatives have imposed restrictions and penalties that reduce the welfare benefits of recipients who do not take the desired steps toward self-sufficiency, but leave unchanged the incomes of those who do what is required. Since the enactment of the federal Personal Responsibility and Work Opportunity Reconciliation Act in 1996, states have begun to limit the time families can receive welfare unless they are exempted for health or other reasons. New York s CAP initiative stands out as different from most other welfare reform schemes in several respects: CAP is a voluntary alternative to regular welfare. Families who enroll in CAP 1 first leave the regular welfare system. All single-parent families with at least one child covered by a valid child support order are eligible to make this shift. If they

3 2 Using Incentives in Welfare Reform do so, financial assistance is provided under completely different rules by CAP workers located in separate CAP offices. CAP strongly encourages work. Public opinion polls indicate that the most 2 common objection to welfare is that it discourages work. CAP, however, provides a strong financial incentive not only to get a job, but to work steadily on at least a half-time basis. CAP pays less than welfare when an individual is not working, but is much more generous when a person has earnings. CAP promotes parental responsibility. Rather than prescribe how individuals should behave, CAP encourages parents absent parents as well as the single parents who receive welfare to take the steps necessary to achieve family self-sufficiency. Families must obtain a child support order in order to qualify for CAP, but there are no further mandates or restrictions. CAP was designed to increase family income through the earnings of the custodial parent, and the support of the noncustodial parent, supplemented by CAP assistance while minimizing both dependence on and interference from the welfare system. Table 1 contrasts these central features of CAP with the policies of the Aid to Families with Dependent Children (AFDC) program in effect at the time of the evaluation. The CAP model was subjected to a rigorous, five-year evaluation based on an experimental research design (described below). The evaluation found that CAP significantly increased families employment and earnings, produced more child support orders, lowered expenditures on public assistance, and ultimately produced net savings to government. At the same time, families who had the chance to switch to CAP had more income and a much smaller share of their income came from public assistance. These results are among the most positive to emerge from any welfare reform initiative that has been rigorously evaluated. 3

4 Using Incentives in Welfare Reform 3 Table 1 Key Differences Between AFDC and CAP AFDC CAP Grant Calculation AFDC grant based on budgeting needs for CAP grant based on number of AFDC-eligible family size children covered by support orders After work expense deduction, for every $1 For earnings under the 1990 poverty level, for every earned, AFDC grant reduced $1 (after initial $1 earned, CAP grant reduced 10 cents; over that 4 months of earnings) level, CAP grant reduced 67 cents for every $1 earned For every $1 of non-earned income, AFDC For every $1 of non-earned income, CAP grant grant reduced by $1 reduced by $1 (as in AFDC) Child Support Requires cooperation with child support Requires child support order for each child in CAP enforcement efforts grant $50 pass-through of child support No pass-through of child support Other Financial Features Resource limit of $1,000 plus the equity value of an automobile up to $1,500 Food stamp benefits in coupons Earned income disregard for child care expenses Medicaid eligible Transitional Medicaid for up to 12 months after case closed due to increased income No resource limit Food stamp benefits as part of CAP check Child care stipend in advance Medicaid eligible (as in AFDC) Transitional Medicaid for up to 12 months after case closed due to increased income (as in AFDC) Administration Income maintenance examiner focuses on eligibility and budgeting Quarterly reporting of income (monthly when demonstration began) Restricted payments allowed (e.g., rent payment to landlord) Generic case manager recruits cases to CAP, helps CAP families develop economic self-sufficiency Quarterly reporting of income Restricted payments not allowed

5 4 Using Incentives in Welfare Reform This paper reviews the results of the CAP evaluation, drawing on various published 4 evaluation reports. describes key features of the CAP program design and of the evaluation. Subsequent sections briefly summarize evaluation findings concerning operational issues, CAP participation, CAP s impacts on clients, its administrative cost, and its net fiscal impact on government. The paper concludes with some considerations of the possible utility of the CAP strategy in other welfare reform settings. How Does CAP Work? A single parent who decides to enroll in CAP must first have a valid court order for child support from the noncustodial parent, and then transfer out of the regular welfare program. Once in CAP, the parent is subject to new program rules. Two aspects of the CAP rules are critically important: Work incentive. Most welfare recipients who work have their benefits reduced by nearly one dollar for each dollar that they earn after an initial period. This constitutes an extremely high tax rate on earnings, offering little or no incentive to work. In contrast, CAP recipients benefits are reduced by just 10 cents per dollar for the first several hundred dollars of monthly earnings, and 67 cents per dollar thereafter. CAP s favorable treatment of earnings is coupled with a base grant that is about one-third lower than the basic welfare grant. Thus, a single parent with no earnings would receive a smaller payment under CAP than under welfare. Welfare recipients are expected to transfer to CAP only when their earnings reach the threshold at which their CAP grant exceeds their welfare grant. At the time CAP was evaluated, the threshold was typically about $350 in earnings per month, roughly equivalent to half-time work at the minimum wage. Child support incentive. Unlike welfare, the CAP base grant amount is determined by the number of children with child support orders. The family receives an amount for the first child with a valid court order for child support, plus an additional amount for each additional child with an order. Because children without orders are not covered by CAP, and also may not receive welfare benefits while the family is enrolled in CAP, it is in the interest of the single parent to establish orders for every child in the family. Participants receive program assistance in obtaining child support orders and upgrading existing orders. Other features. CAP has other features designed to strengthen these incentives, further encouraging self-sufficiency. These include providing food stamp benefits in cash rather than coupons, allowing recipients to build their savings without becoming ineligible for assistance, and eliminating the practice of paying part of some families grants directly to landlords or other vendors. CAP also deliberately projects a non-welfare image for example, by having separate, professional-looking office space to encourage participants to think of CAP as a step toward financial independence. CAP case managers work with individual parents, facilitating their CAP participation and helping them overcome obstacles to self-sufficiency. Part of the case managers time

6 Using Incentives in Welfare Reform 5 is devoted to encouraging welfare recipients to take up the CAP offer, and assisting them in obtaining the jobs and support orders they need to benefit from the program. The rest of their time is spent working with active CAP participants, helping with problems that threaten the participants ability to keep working and also aiding their efforts to find betterpaying or more secure employment. This intensive case management is possible because CAP staff have caseloads of about 50, much smaller than those of welfare workers, who typically had caseloads of about 150 in the experimental counties. How Was CAP Evaluated? The main objective of the evaluation was to measure CAP s net impacts that is, to determine the effects of the program on outcomes like employment, beyond the changes that would have occurred anyway. Random assignment of eligible welfare recipients, the most reliable method for measuring such effects, is the approach that was used. A sample of single parents receiving AFDC was divided, entirely by chance, into a treatment and a control group. Treatment group families had the opportunity to participate in CAP if they qualified and were interested (as discussed below, about one-sixth of the treatment group families actually participated in CAP). Those in the control group remained subject to the normal AFDC rules and procedures. A total of 4,287 families were randomly assigned to these two groups in three counties where CAP was initially implemented: Monroe 5 (Rochester), Niagara (Niagara Falls), and Suffolk (Long Island). The evaluation then followed these families for five years, collecting extensive data on employment and earnings, child support, and public assistance benefits. As shown in Figure 1, the evaluation judged CAP s effectiveness by comparing the entire treatment group including those who never participated in CAP with the entire control group. This comparison has two important features. First, it captures CAP s effects before and after families enrolled in the program that is, it covers the period when welfare recipients took jobs and sought child support orders in hope of qualifying for CAP, as well as the period after families enrolled in CAP. Second, it measures CAP s average effect for the entire single-parent welfare caseload, which includes many people who were not affected by CAP as well as those who were. Thus, the evaluation sought to measure CAP s full impact (before and after program enrollment) on the entire caseload (including cases

7 6 Using Incentives in Welfare Reform Treatment Group CAP participants Do not participate Figure 1 Full Treatment Group Is Compared to Full Control Group that were unaffected by the program as well as those who were). 6 The evaluation also examined how the program operated in all seven counties where CAP was implemented, including the three where the impact analysis was conducted. The findings of this implementation analysis are important in interpreting the results of the impact analysis. They are also useful to state and local administrators seeking to replicate an effective CAP-like program, as well as to avoid the pitfalls encountered by the counties included in New York s CAP demonstration. What Are the Key Operational Lessons From Implementing CAP? Involving top administrators. Instituting a full-blown alternative to welfare, which must operate side-by-side with the existing welfare system, can present some serious implementation challenges. One of the keys to CAP s success in addressing these challenges proved to be the full commitment and active involvement of high-level administrators. This happened in most of the counties where CAP operated, including Monroe and Niagara, two of the counties where the impact analysis was done. As might be expected, the CAP programs encountered obstacles in developing effective interagency linkages, securing agency resources, and handling staff communication problems and turf battles. The

8 Using Incentives in Welfare Reform 7 commitment of administrators, however, made successful implementation of the CAP program an agency priority and kept the implementation process on track. Two counties, however, including Suffolk (the third of the experimental sites), had to be pressed by state administrators to become involved in the CAP demonstration, mainly because county administrators were concerned about the program s long-term costs. These counties had the weakest performance records in the CAP demonstration, apparently reflecting their less than total enthusiasm for the program. Reaching out to the entire caseload. Another important factor in implementing CAP was targeting and recruitment. Several counties focused on those welfare recipients who were already working and/or had child support orders in place. In addition, some counties, including Niagara, viewed CAP as the final stage in a logical progression from employment and training services to self-sufficiency that is, the program provided the financial incentive and case management that enabled recipients to find employment and become financially independent once the services had been provided. As a result, these counties targeted CAP to welfare recipients who completed employment and training activities. Other counties, including Monroe, thought CAP could potentially help a majority of welfare recipients, and consequently recruited CAP participants from their entire caseloads. The problem with the first two approaches, which are intuitively appealing, is that they limit the program to job ready welfare recipients whose motivation has already been demonstrated and whose employability is indicated by work experience or participation in training activities. These are individuals who may be well on their way to finding and holding employment without CAP. Thus, consistent with evaluation research on other programs for welfare recipients, CAP may make less of a difference for these recipients than it does for less motivated and prepared individuals. 7 Distinguishing CAP from welfare. A third important element was physically and stylistically separating CAP from welfare. Welfare recipients were more likely to enroll in CAP when the program was located in non-welfare office space. State planners had recommended that CAP be located in separate facilities in order to create a fresh new image for the program. The counties that perceived CAP as a distinct alternative to welfare tended to house the program in private office space that projected this non-welfare image. Two counties, including Suffolk, placed the program in regular welfare office space, and experienced the lowest participation rates in the demonstration. Finally, the most successful CAP programs used close monitoring and personal contact to assist prospective and active participants. The counties with the highest participation rates also tended to have the most extensive and systematic procedures for monitoring and assisting the progress of potential participants. Several counties, including Niagara, had computerized tracking systems and used various tickler systems to remind workers to make appropriate follow-ups. In addition, the most pro-active counties, including Monroe, provided participants with varied services intended to speed their success. For example, they helped single parents by providing extensive help in securing child support orders and referring them to further child support enforcement services. In contrast, the more

9 8 Using Incentives in Welfare Reform hands off sites, including Suffolk County, expected prospective participants who had received a program orientation to return to CAP only when ready to enroll, and active participants to maintain their employment and child support without assistance. Who Participated in CAP? Over the course of the five years covered by the evaluation, 16 percent of the families in the treatment group participated in CAP at some time. It is unusual for a voluntary welfare-to-work program to reach such a high proportion of the AFDC single-parent population. Indeed, the 16 percent rate is only slightly lower than the rates of actual participation achieved in highly mandatory programs. 8 Beyond this overall enrollment rate, several aspects of the CAP participation findings are noteworthy. First, most people who participated in CAP took sizable steps to do so. Four-fifths of those who enrolled in CAP had no reported earnings when they entered the program. On average, they raised their earnings by the month of CAP enrollment to $679. Similarly, over 40 percent of CAP enrollees did not have a child support order, but obtained one or more prior to enrolling in CAP. Second, the requirement for child support orders clearly limited program participation. Families who had support orders for all of their children when they entered the sample had the highest CAP enrollment rate of any subgroup examined (26 percent). The lowest enrollment rate (8 percent) occurred among families lacking any support order and having a noncustodial parent who was unknown or living out of state. Third, apart from the population groups directly affected by the support order requirement, CAP reached most subgroups fairly evenly. In particular, clients with children under three years old a group that in the past was exempted from welfare-to-work requirements had virtually the same enrollment rate as families with older children. In addition, program enrollment rates were not closely related to previous work experience, education, age, or length of time on welfare. In short, there are no identifiable groups for which CAP was either totally inapplicable or uniquely appealing. What Difference Did CAP Make? CAP had substantial overall impacts on earnings, public assistance payments, and child support orders. The magnitude of these effects varied across counties, and in some instances county-specific impacts were not statistically significant. Increased earnings. Treatment group members earned an average of $15,882 over the course of the five years. They surpassed the control group s earnings by $2,613, on 9 average, or about 20 percent. This difference is statistically significant. It is important to recall that this impact is averaged across all households in the sample, not just the ones

10 Using Incentives in Welfare Reform 9 Figure 2 Impact on Annual Earnings that participated in CAP. Presumably, the average impact on CAP participants was much larger, whereas most nonparticipants earnings were probably not affected by the availability of CAP. As indicated in Figure 2, CAP s impact on earnings varied across counties. It ranged from over $3,600 in Monroe to about $1,000 in Suffolk, where the impact was not statistically significant. The impact began almost immediately and continued throughout the period covered by the study, suggesting that the earnings gains will continue beyond the five years. Earnings were higher in the treatment group, both because more people worked and because those who worked earned more money. On average over the five years, 29.4 percent of treatment group members were employed in any calendar quarter, compared to 26.1 percent of the control group. This statistically significant difference of 3.3 percentage points means that the number of treatment group members working was 13 percent greater than the number of control group workers. By itself, this additional quarterly employment accounts for just over half of the observed impact on earnings. The rest of the earnings gain occurred because treatment group workers earned more money than control group workers during quarters when they worked. It

11 10 Using Incentives in Welfare Reform seems likely that much of the remaining gain exists because treatment group workers were working more hours during the average quarter. In a survey conducted at the end of the fifth year after sample entry, the wage profiles for treatment and control group workers were highly similar. Because welfare recipients had to have at least $350 in monthly earnings before CAP was financially more advantageous than AFDC, CAP s impact on earnings often began clients actually enrolled in CAP. In fact, CAP clients achieved substantial earnings growth before enrolling: families that ever enrolled in CAP earned an average of $679 in the month of CAP enrollment, up from an average of $93 in the month they entered the sample. It is also likely that some clients increased their earnings with the intent of enrolling in CAP, but never actually participated. 10 Reduced public assistance payments. Counting both cash assistance (AFDC, CAP, and Home Relief) and food stamps, the average member of the treatment group received $1,613 less in assistance benefits over the five years than the average control group member. This amounts to a 4 percent reduction, which is statistically significant. As shown in Figure 3, because both treatment and control group members tended to gain earnings and leave the welfare rolls as time went on, public assistance payments to both groups declined. However, the decline was slightly steeper for the treatment group. 11 The reduction in assistance payments was greater in the last three years than the first two, and appears likely to continue beyond the end of the five-year study period. At first glance, one might expect CAP to increase rather than reduce assistance payments. CAP provides higher grants than AFDC to recipients with substantial earnings, which might lead to higher average payments to active cases. Moreover, CAP allows recipients to reach a higher level of income before they become ineligible for assistance, which might lead them to stay longer on the welfare rolls. In fact, the opposite occurred: average cash benefit payments for those on assistance were somewhat lower in the treatment group, and treatment group members spent slightly fewer months on assistance. These differences are not statistically significant, however. Average benefit payments for those on assistance were lower because treatment group members were more likely to work while they were on welfare:

12 Using Incentives in Welfare Reform 11 $2,400 $2,200 $2,000 $1,800 $1,600 $1,400 $1,200 Year 1 Year 2 Year 3 Year 4 Year 5 Control Treatment Figure 3 Average Quarterly Assistance Payments (Cash and Food Stamps, All Counties) Treatment group members reported earnings in 15 percent of the months when they received cash assistance, compared to 9 percent for control group clients. Among those who worked while they were on welfare, treatment group clients reported substantially higher average earnings than control group clients ($616 vs. $486 monthly). 12 CAP appears not only to induce more welfare recipients to work, but also to motivate them to report their earnings more fully to the welfare agency. The gain in earnings reported to the welfare agency is greater than the gain measured through independent data sources, although the independent data also show a positive gain. Over the five years, the average treatment group member received either AFDC or CAP benefits in 43.7 of the 60 months, whereas control group members averaged 44.3 months of AFDC benefits. This small reduction in months of benefit receipt, which is not statistically significant, masks two offsetting tendencies: treatment group members

13 12 Using Incentives in Welfare Reform stayed on assistance slightly longer, but once leaving the rolls, were less likely to return than control group members. The lower recidivism rate for treatment group members could lead to larger reductions in welfare participation after the five-year study period. Increased child support orders. CAP s support order requirement had the desired effect of generating additional support orders in the treatment group. In the average month during the five years, treatment group members had 21 percent more new support orders that is, orders established after the family entered the experimental sample than the control group. That translated into a 4 percent increase in total support orders, including those in place when the experiment began. Both differences are statistically significant. CAP seems partly to have generated additional orders, and partly to have accelerated the process of obtaining orders that would ultimately have been established without CAP. As Figure 4 shows, the treatment group gained a substantial advantage in new orders by the end of the first year, but the control group narrowed the gap considerably by the end of the third year. Even at the end of the fifth year, however, the treatment group still had Years Since Sample Entry Control Treatment Figure 4 Average Number of Orders Gained Since Sample Entry somewhat more orders.

14 Using Incentives in Welfare Reform 13 If the new orders added by CAP yielded support payments at the same rate as other orders, one would expect to see approximately a 4 percent increase in support payments collected by the Child Support Enforcement Program. Support collections for the treatment group were in fact about 5 percent greater than for the control group. Because the treatmentcontrol difference is not statistically significant, however, one cannot be certain that CAP caused an increase in support payments. Other Impacts. CAP is principally designed to motivate AFDC clients to move toward stable employment, to secure needed child support orders, and thereby to become less dependent on public assistance. Because CAP generated significant positive results in all of these areas, it is reasonable to ask whether these primary effects might have led to beneficial secondary effects as well. Analysis specifically looked at indicators of asset accumulation, of changing family composition, and of child development and behavior. In general, the analysis yields hints that positive secondary effects may occur, but provides no conclusive evidence. More specifically: CAP may have led to some small increases in asset acquisition. Five years after sample entry, only about one-third of all sample members had a vehicle, and fewer than one-quarter had checking accounts or savings accounts. The percentage of treatment group families with each type of asset was one to two percentage points higher than the control group, but the differences are not statistically significant. CAP may have led to a small reduction in birth rates. Somewhat more than one-third of control group clients reported having a child during the five years. The rate for treatment group clients was about two percentage points lower, but the difference is not statistically significant. There is no evidence that CAP led to the formation of two-adult households. At the end of five years, the proportion of families with two adults differed by less than half a percentage point in the treatment and control groups. What Was CAP s Administrative Cost? CAP entailed a modest increase in government expenditures for administering cash assistance programs. Over the five years, this amounted to about $237 per household in the treatment group, or about 7 percent of cash assistance administrative costs. The administrative cost that a family incurred over the five years depends on two factors: the number of months in which the family received AFDC benefits or CAP benefits, and the two programs costs of administering a case for a month. The average case in the control group received AFDC benefits for 44.3 of the 60 months, and received no cash assistance benefits in the remaining 15.7 months. The average AFDC administrative cost per case per month was about $81. Thus, the five-year total cost for the average control group family was $3,564.

15 14 Using Incentives in Welfare Reform The situation for the treatment group was more complicated, because the average family received AFDC benefits for 40.1 months, CAP benefits for 3.6 months, and no 13 cash assistance for 16.3 months. While treatment group members were receiving AFDC they incurred the same average AFDC cost as control group members. In addition, CAP case managers worked with these AFDC cases to interest them in CAP and to help them get the jobs and support orders that they needed to qualify for CAP. The cost of these activities, called the pre-enrollment cost of CAP, averaged about $6 for each month 14 that a treatment group case received AFDC benefits. If a family transferred from AFDC to CAP, it stopped incurring AFDC administrative cost and CAP pre-enrollment cost, but incurred a CAP under-care administrative cost of $79 per month. The net result was that administrative expenses for treatment group cases totaled $3,801 over the five years (see Table 2). This amounts to $237 more than the control group costs, an increase of about 7 percent. The additional administrative cost of $237 per treatment group household over the five years makes CAP a relatively low-investment approach to welfare reform. One cannot assume, however, that the investment level would be exactly the same in future CAP applications. Differing AFDC administrative cost levels, differing CAP rules or operating structures, or differing CAP participation rates might lead to a higher or lower investment level. Apart from its effect on administrative costs for cash assistance, CAP exerted a small indirect influence on the administrative costs of other programs, such as Child Support Enforcement, the Food Stamp Program, and Medicaid. To the extent that treatment group members participated in these programs for more or fewer months, their administrative costs were correspondingly higher or lower. As it turned out, treatment group costs were slightly higher for Child Support Enforcement, and slightly lower for food stamps and Medicaid. The net result was a small reduction in administrative costs for the combined programs, amounting to $21 per household over the five years.

16 Using Incentives in Welfare Reform 15 Table 2 Average Five-year Administrative Cost Per Treatment Group Family Number of Months Cost Was Incurred Average Cost per Month Total Cost a AFDC administrative cost CAP pre-enrollment cost 40.1 $81.13 $3, $5.63 $226 CAP under-care cost 3.6 $78.78 $286 Total five-year cost $3,801 a Costs are computed separately for each county and time period, and then brought together in a general average. Thus, multiplying the number of months shown in the first column by the overall average cost per case-month in the second column will not yield exactly the total shown here. How Did CAP Affect Government Spending? Over the five years, net government expenditures for the treatment group were lower than net expenditures for the control group. The budgetary gains to federal, state, and local government came from four sources: A savings of $969 in cash assistance payments (AFDC, CAP, and Home Relief benefits, net of child support collections retained by the government), which is not statistically significant; 15 A savings of $644 in food stamp benefit outlays, which is statistically significant; A savings of $417 in Medicaid reimbursements, which is statistically significant; Additional tax revenue of $552 (including federal and state income taxes and tax credits, state and local sales taxes, and employer- and employee-paid Social Security, 16 Medicare, and Unemployment Insurance taxes); and A small reduction ($21) in the combined administrative cost of Child Support Enforcement, food stamps, and Medicaid. 17 These savings total $2,603 per household over the five years. To achieve the savings, the government invested the $237 per household (in additional administrative costs for cash assistance programs over the five years) identified above. About 64 percent of the

17 16 Using Incentives in Welfare Reform savings accrued to the federal government, 14 percent to the state government, and 22 percent to local governments. In the six years following initial implementation, CAP was made available to increasingly larger portions of the AFDC caseload in the three experimental counties. Impacts were not measured for these additional cases, so any estimate is speculative. Nonetheless, it is reasonable to assume that CAP had about the same impact on these additional cases as on the original experimental sample, because the new cases were part of the same caseload, in the same counties, handled by the same CAP workers. Assuming similar patterns of impact, the total government savings from Fiscal Year 1990 through Fiscal Year 1995 in these three counties amounted to about $50 million. Almost two-thirds of this savings went to the federal government, which funds 100 percent of food stamp benefits and a substantial portion of welfare and Medicaid benefits. Local governments realized somewhat more savings than state government, largely because the state bore the entire non-federal share of CAP administrative costs. Why Did CAP Save the Government Money? How did CAP, which offered generous financial incentives, reduce rather than increase government expenditures? Part of the answer lies in the details of the incentive structure, which minimized windfalls while causing client responses to the CAP incentives to reduce government costs. Incentive formulas generally create the possibility of windfall benefits extra benefits to clients who do not alter their behavior from what it would have been without the incentive. The CAP formula creates this possibility only under

18 Using Incentives in Welfare Reform 17 $3,000 $2,500 $2,000 $1,500 $1,000 Savings in assistance and gains in taxes $2,603 Net savings per household $2,366 $500 $0 -$500 Figure 5 Cumulative Five-Year Government Savings Per Household in Sample very restrictive conditions: the client has to earn more that $350 per month, have support 18 orders for all children in the family, and go through the procedure of transferring from AFDC to CAP. Less than 3 percent of treatment group clients had the requisite earnings and support orders at the time they entered the sample. Even if all of them had transferred into CAP and received some windfall, the windfall would be very small when averaged over the entire caseload. Thus, if no clients had altered their behavior in response to the CAP incentive, government expenditures would have gone up, but probably not by very much. The second key aspect of the CAP formula is that responding to the incentive either reduces benefits or reduces the potential windfall. For example, any client who would not be employed in the absence of CAP, but responds to the incentive by gaining some earnings, receives 19 lower benefits. For the group who could experience a windfall clients who would earn more than $350 in the absence of CAP any response to the incentives reduces their benefit below the windfall level.

19 18 Using Incentives in Welfare Reform The CAP formula thus shares the increase in earnings between the client and the government. Because benefits are always reduced by an amount smaller than the amount of earnings, a client who increases her earnings also increases her total family income. If enough clients respond to CAP with a sufficient increase in earnings, the government s share of that increase exceeds the value of windfalls. By constraining the potential for windfalls and sharing the result of responses to the incentive, CAP led to government savings as well as improvements in family income. Why Do the Results Differ Across Counties? In all three experimental counties, the treatment group garnered greater earnings and received less public assistance (cash assistance and food stamps combined) than the control group, although the differences were not always statistically significant. CAP generated net government savings in all three counties. Within these broad patterns, however, the three counties results differ in ways that may hold some important lessons. Differences in implementation strategy, administrative effectiveness, and local conditions all contributed to differing CAP impacts. The Monroe program showed the greatest all-round success, with a strong CAP participation rate, the largest impact on earnings and support orders, the largest reduction in assistance payments, and the greatest net savings to government. CAP staff in Monroe seem to have focused most effectively on getting their clients to change their behaviors and circumstances. They actively recruited the harder cases that is, AFDC recipients who did not already have child support orders and earnings and worked both to motivate them and to help them qualify for CAP. As a result, larger proportions of CAP participants enrolled with newly-acquired jobs and support orders in Monroe than in the other two counties. The Niagara CAP had the highest CAP participation rate of all three counties, but had the lowest net savings to government. CAP s estimated impacts on most outcomes in Niagara were not statistically significant, which means that any interpretation of the costbenefit result is necessarily speculative. Nonetheless, several factors seem likely to have played a role. Before CAP began, AFDC recipients were already more likely to be employed and to have support orders in Niagara than in either of the other two counties. Thus, a substantial number of recipients were able to enroll in CAP with smaller changes in their behavior and circumstances than in Monroe. The Niagara treatment group had higher earnings than the control group, but the difference was not statistically significant and the percentage gain was limited by the fact that the Niagara control group had much higher average earnings than the control groups in Monroe or Suffolk. Moreover, the Niagara CAP program often encouraged AFDC recipients to enter education and training programs with an eye to enrolling in CAP when they had upgraded their employability. Perhaps as a result, the treatment group received assistance for somewhat more months than the

20 Using Incentives in Welfare Reform 19 control group during the first three years, with the trend reversing only in the last two years of the experiment (differences that are not statistically significant in either period). Suffolk was judged to have the weakest implementation of CAP, particularly in the first two years. The weak recruitment effort led to an enrollment rate of just 7 percent over the five years, compared to 20 percent in Monroe and 29 percent in Niagara. The families that did enroll in Suffolk had taken smaller steps than in the other counties: more already had jobs when they entered the experiment, and fewer got support orders between entering the experiment and enrolling in CAP. The treatment group had greater earnings and lower public assistance payments than the control group for the five years as a whole, but these patterns emerged only in the last two years and were not statistically significant. The Suffolk experience seems to demonstrate the need to reinforce the incentives in the CAP benefit formula with effective action by case managers. How Do the Results Compare Across Groups of Welfare Recipients? Overall, CAP generated a statistically significant increase in the five-year total earnings of the treatment group, and a significant reduction in five-year total public assistance payments. In order to determine whether those impacts tended to occur for particular types of welfare recipients, the analysis examined seven complementary pairs of subgroups, or 14 subgroups in all. This analysis showed that all subgroups experienced positive (though often not statistically significant) CAP impacts. Treatment group earnings exceeded control group earnings for all subgroups, by margins ranging from 9 to 39 percent. Public assistance payments savings of 3 to 6 percent occurred for nine of the fourteen groups, but three groups had essentially zero savings. 20 CAP s impacts were particularly impressive for three groups of welfare recipients in which there is strong policy interest: recipients who had their first child before age 20; individuals who had been on the welfare rolls for at least two years at the time of sample entry; and recipients with children less than three years old at the time of sample entry. The first two types of welfare cases have historically shown patterns of long-term dependency. The third type welfare recipients with very young children has often been exempted from programs aimed at increasing labor force participation. The three groups showed significant earnings impacts ranging from 24 to 39 percent, and all had above-average reductions in public assistance payments. It is also noteworthy that smaller impacts were found for welfare recipients who had recent employment experience or complete child support orders when they entered the

21 20 Using Incentives in Welfare Reform sample. This might be expected, given that these groups could qualify for CAP with fewer behavioral changes than other groups. Welfare recipients who had been on AFDC less than two years at sample entry are more likely to be short-term cases, who would leave welfare soon even without CAP. CAP did not generate as much behavioral change for these three groups as for others. The three groups therefore show more modest gains in earnings and little or no reduction in public assistance payments. The single parents whose prior situation made it easier for them to qualify for CAP those with recent work experience or all children covered by support orders had comparatively high participation rates but below-average impacts. There is evidence that some clients who did not participate may have been influenced by CAP. Some clients lacking support orders may have taken jobs in response to the CAP incentives, but left welfare before obtaining the orders that would have allowed them to enroll in CAP. How Stable Was the Employment of CAP Participants? Moving welfare recipients into stable employment is a major objective of CAP and most other welfare reform initiatives. Relatively little information exists, however, on the long-term employment patterns of welfare recipients especially after they leave welfare or how the welfare reform initiatives influence those patterns. The five-year scope of the CAP evaluation provides a window onto some aspects of those employment patterns. An analysis of the employment patterns of control group clients indicates that employment is a challenge for AFDC recipients. The pattern contains the following elements: About two-thirds of clients in the control group had some earned income during the five years. About half were employed at the end of the period. Among control group members who were employed at some point, the typical (median) client took almost three years after sample entry to become employed. Three-quarters of the employed clients worked 30 or more hours weekly, and the average wage was about $7.40 per hour. Between one-third and one-half of the clients had such fringe benefits as available health insurance, paid holidays, paid vacation, paid sick time, and retirement benefits. The typical employment spell lasted no more than two calendar quarters. After becoming unemployed, the typical client went five calendar quarters without earned income, regaining employment in the sixth quarter. The availability of CAP generally appears to have strengthened welfare recipients attachment to the labor market. Although many of the comparisons are only suggestive, treatment group members generally have somewhat more favorable patterns than the control group. Compared to the control group, treatment group members: were more likely to be working at a given point in time;

22 Using Incentives in Welfare Reform 21 worked about the same number of hours per week for about the same wage, but were more likely to have fringe benefits; and became employed slightly sooner, stayed employed slightly longer, and regained employment slightly more quickly. Finally, although clients who enroll in CAP are much more strongly attached to the labor market, even their experience underscores the challenge in working with the welfare population. The analysis cannot determine whether families that enrolled in CAP were more successful in employment because of CAP or whether families that were destined to be more successful chose CAP. In any event, even among this comparatively successful group: the typical client became employed more than six months after sample entry (in the third calendar quarter); wage and hours patterns were similar to those for the control group, but fringe benefits were considerably more common; the typical first employment spell lasted just three quarters; and after becoming unemployed, the typical client regained employment after two quarters. What Happens When People Leave CAP? CAP was designed to be a stepping stone for welfare recipients to use in order to leave the welfare rolls. Although much of CAP s impact on earnings and public assistance payments may occur while clients are still on welfare, as they move from welfare toward CAP, the program ultimately succeeds when clients are able to exit from cash assistance and avoid return. The analysis therefore examined the overall patterns of exit and return, focusing on the paths taken by CAP participants. One of the conclusions of this analysis is that CAP appears to reduce recidivism once recipients leave welfare. Comparing all treatment group members who exited cash assistance (whether through CAP or AFDC) to all control group exiters, treatment group exiters were less likely to return quickly. Among control group exiters, 40 percent received assistance again within two years. Only 33 percent of treatment group exiters returned within two years. Another finding is that welfare recipients who enrolled in CAP and then left CAP (and all cash assistance) most often had successful exits. Among this group: average earnings in the year following CAP exit were about $11,000; and 82 percent remained off welfare for at least one year, and 75 percent for two years or more.

23 22 Using Incentives in Welfare Reform Participants who left CAP to go off assistance showed strong pre-exit employment patterns. Compared to clients who transferred from CAP back to AFDC, this group: had somewhat stronger employment and education backgrounds when they entered the sample; built up to a higher earnings level before enrolling in CAP; stayed on CAP longer before exiting; saw more earnings growth while on CAP; and typically had a new job, raise, promotion, or increase in hours shortly before leaving CAP. Participants who left assistance from CAP and then stayed off assistance had especially strong employment and education backgrounds. Among those who exited CAP to go off assistance, most stayed off welfare for a year or more. Those clients who returned to the rolls within a year, however, were distinguished by less education and less employment experience at sample entry than the longer-term exiters. Participants who transferred from CAP back to AFDC had weaker employment backgrounds and experienced negative employment or health events. Compared to the clients who left CAP to go off cash assistance (regardless of whether they returned), this group: had less education and job experience at sample entry; achieved somewhat lower earnings levels when they enrolled in CAP (although still well above the minimum threshold); did not experience substantial earnings growth while on CAP; often experienced a job loss or cutback in hours (about half), although some quit voluntarily to enter education or training; often (about half) had a personal health problem, a pregnancy or childbirth, or a problem with a child s health shortly before leaving CAP; and had lower average earnings in their last month on CAP than their first, and much lower earnings in their first month back on AFDC. The findings presented above are more important for the details they provide about particular facets of CAP than for conclusions about the program s impacts. Taken together, however, they re-emphasize the importance of employment as a path off welfare and the potential for wide-ranging family improvements for those who find that path. The findings also show, however, that employment is a substantial challenge for the welfare population. CAP can help a wide variety of people move ahead, but employment remains a major challenge for many families even with the CAP incentive.