(Outlays, by fiscal year, in millions of dollars) 5-Year Estimate Date Total

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1 CONGRESSIONAL BUDGET OFFICE U.S. CONGRESS WASHINGTON, DC March 31, 1988 MEMORANDUM TO: FROM: Rikki Baum Jan Peskin, Richard Curley, Julie Isaacs and Alan Fairbank SUBJECT: Factors Underlying the Changed Cost Estimates of S The Congressional Budget Office (CBO) completed a preliminary estimate of the costs of S.15H, the Family Security Act of 1987, in July This estimate was completed without benefit of the final bill language. A revised estimate has just been completed, incorporating new CBO baseline spending and economic assumptions, later enactment dates, and other technical revisions. The new estimate is considerably higher, as shown in the table below. Over five years, total federal outlays are estimated to rise by $3.1 billion, compared to $2.3 billion in the earlier estimate. The remainder of this memo summarizes the reasons for the reestimates in the major provisions. Estimated Cost to the Federal Government of S.15H (Outlays, by fiscal year, in millions of dollars) 5-Year Estimate Date Total July 1987 March The estimates for Title I, which deals with provisions for the Child Support Enforcement (CSE) program, are lower over the five years, that is, estimated savings are higher. The earlier estimate showed five-year savings of $374 million, and the current estimate shows savings of $399 million. The major increase in savings is for the provision mandating immediate wage withholding. Current estimated savings of the immediate wage withholding provision are $155 million over five years, compared to savings of $105 million in the previous estimate. These previous savings were based on a 5 percent annual increase in collections. New information from Wisconsin indicates that the percentage increase in collections

2 will rise over the first few years of implementation. The current estimate assumes that the increase in collections on new or modified orders will rise from 5 percent of collections in the first year to 15 percent of collections in the third year. Partially offsetting these increased savings are reduced savings for mandating the use of child support guidelines. Savings are lower because the number of states already using guidelines has grown from about 33 percent to 50 percent. For Title II, which deals with the JOBS program, estimated costs are sharply higher: an estimated $1175 million over five years compared to $6l4 million in the earlier estimate. Three major factors account for the bulk of the change in estimated costs: increased spending on work programs under current law by the states, especially by California; a faster assumed phase-in of states into the new work program; and changes in estimated costs and savings per work program participant. These factors are discussed, in turn, below. The starting point for the CBO estimates of the JOBS program is estimated current-law spending by states on AFDC work and training programs. The estimating methodology assumes that states would respond to the reduced state match rate in the bill by plowing one-half of their savings (from the reduced match) back into work programs. The higher is spending under current law, the greater are state savings given a change in the match rate; the greater state savings are, the more will be plowed back into work programs, that is, the more will total spending on work programs increase. Estimated current-law spending on work programs is shown in the table below. From the earlier estimate to the current estimate, spending increased by as much as 51 percent (in 1990) and as little as 10 percent (in 1992). Estimated Current-Law Spending (Federal and State) on AFDC Work Programs a/ (By fiscal year, in millions of dollars) Estimate Date July 1987 ^ n.a. March Increase n.a. a./ Spending includes WIN, spending matched by the federal government under the IV-A program, and spending on AFDC work programs not currently matched by the federal government.

3 This estimated increase in spending on work programs is due almost entirely to California's spending on their new GAIN work program. California spending in any month accounts for no less than 80 percent of the estimated increase in spending estimates between last July and this March, and often accounts for more than 100 percent of the increase. In California's fiscal year , the state is estimating spending of $408 million on GAIN; even this spending is only about three-quarters of the cost of full funding because the GAIN budget was cut. The primary reason for the state's increase in its estimated spending is that many more AFDC recipients are being put into remedial education programs than had been expected. In , spending on remedial education accounts for about 42 percent of the GAIN budget. After 1990, the state expects spending to decline as fewer GAIN participants would be in the expensive remedial education component. This accounts for the decline in estimated current-law spending after 1990 that is shown in the table above. This estimated increase in current-law spending accounts for virtually all of the estimated increased costs of the work program. Also, because a year has passed and the estimated enactment date (of 10/1/88) is almost a year later, costs rise naturally because current-law spending is projected to increase considerably from 1988 to 1989 and in later years, as shown in the table above. Moreover, because there is more lead time for states to understand the legislation, the CBO estimate assumes that more states would implement the new JOBS program in 1989 and 1990, prior to mandatory implementation in fiscal year 1991, and implement it earlier in each of the fiscal years. In the current estimate, CBO assumes that 12.5 percent of potential spending would be covered on average over the year under the new JOBS program in 1989, and 67 percent in In the July 1987 estimate, CBO assumed that 6.7 percent would be covered in the first year and 37 percent in the second year. The final major change was a revision in the estimates of spending per participant and welfare savings per participant, which are based on findings of the Manpower Demonstration Research Corporation (MDRC). Last year, CBO's estimates were based on findings from all the available state studies (except West Virginia, whose findings were thought not to apply to other states). Recently, MDRC released findings for another state Illinois and findings for several of the earlier states that included longer periods of study. Using these new findings, CBO revised its estimated costs and savings per participant. Costs per participant were reduced considerably from the July 1987 estimate to the March 1988 estimate for example, from $1950 to $1390 in Illinois spent only minimal amounts per participant, pulling the average of the five states down sharply. This reestimate does not affect gross spending, which is determined by states' responses to the change in the match rate, but it does increase the estimated number of additional participants in the work program and estimated welfare savings, which are based in part on the number of

4 new work participants. Accounting for the latest findings on welfare savings resulted in slightly higher estimated savings, in part because of a lower rate of decay of the savings over time. The table below shows estimates of additional participants in work programs and families off of AFDC as a result of the S work program. Estimated Effects Of S Work Program (By fiscal year, in thousands) 5-Year Total Number of Additional Participants in Work Programs a/ Number of Families Off of AFDC as a Result of Work Program a/ a/ These estimates represent effects of S that is, work program participants and families off of AFDC are in addition to current-law levels. Federal outlays for Title III, which provides for child care and Medicaid assistance to those who leave AFDC because of earnings or hours of work, have been increased somewhat. The July 1987 estimate was $715 million over five years while the current estimate is $875 million. The costs of transitional child care increased by $185 million between the two estimates. Half of this increase is due to clarification of the effect of the $160 cap. CBO now assumes that the $160 maximum payment is in addition to any copayment paid by the family; under the House-passed bill and in the July 1987 estimate, the maximum payment was assumed to be reduced by the amount of any copayments. One-fourth of the increase is merely a shift in costs, from Title II to Title III, for transitional care for "graduates" of employment and training programs. The remaining child care increases are due to several technical revisions. Partially offsetting this increase is a reduction in estimated spending on the Medicaid transition. This reduction reflects the inclusion in the estimate of the effects of charging recipients premiums. In Title IV, which mandates the AFDC-Unemployed Parent (AFDC-UP) program in all states among other provisions, estimated costs have also risen. The July 1987 estimate was $1201 million over five years while the current estimate is $1370 million. Higher costs are primarily for mandating the AFDC-UP program. Costs for this program are estimated using the Urban Institute's

5 Transfer Income Maintenance (TRIM) model, which is based on the Current Population Survey of the Bureau of the Census. The latest estimates are based on TRIM for income year a year later than the July 1987 CBO estimate. This later version is also apparently an improved model from the earlier version we used last year. The July 1987 estimate showed 90,000 new families participating in AFDC; the latest estimate shows 105,000. Also, a year's delay in implementation adds to costs because AFDC benefits per family are higher and, even more importantly, Medicaid costs are higher. A second factor in the higher estimates for this Title of the bill is inclusion of costs for allowing states to count education and training in partial satisfaction of the quarters of work requirement for eligibility for AFDC-UP. Costs have dropped slightly for the Title VI demonstration projects from $124 million over five years in the July 1987 estimate to $73 million in the latest estimate. The drop reflects a combination of changes in the bill language and the use of lower spend-out rates for authorized amounts. ESTIMATED COSTS OF H.R CBO is now working on a reestimate of the costs of H.R This bill's costs will also increase considerably from previous cost estimates for H.R. 1720, for the same reasons discussed above.