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State & Local News Vol. 20, No. 1, Fall 1996
Washington's Labyrinthine WaysBy Otto J. HetzelOtto J. Hetzel is a professor of Law at Wayne State University and also practices law in Washington, D.C., with the firm of Pepper, Hamilton & Scheetz. Last Minute Congressional Activity in Week Before Conventions. Congress geared up for this fall's elections in a frenzy of last minute activity before the August recess. The 104th Congress worked out a number of measures before the break for political conventions by enacting bills: providing workers changing employment with continuing health care (to take effect next year); raising the minimum wage by $0.90 per hour (next year) while providing numerous tax breaks for small businesses; authorizing defense department expenditures and funds for military construction; providing funding for the District of Columbia and the Department of Agriculture; protecting the quality of drinking water; and approving historic changes in the welfare system that transfer much authority to states and local governments. As one commentator quipped: "Congress got more enacted in the week before the conventions than the entire term!" This action gave a boost for incumbent Republicans by showing accomplishemnts to talk about in their bids for re-election. On the other hand, it eliminated a number of potential issues that might have provided Republican challenger Bob Dole with the basis for attacks on President Clinton. When Congress returns after Labor Day, the big question will be whether the twelve appropriation bills for the executive branch now pending will be enacted, or will government operate as it did last year on continuing appropriations after Congress adjourns in October. A Dramatic Reversal of Sixty Years of Bipartisan Federal Domestic Policy. On August 20, 1996, President Clinton signed legislation ending the federal commitment to a safety net for the poor. Federal support for welfare will be achieved through block grants to states incorporating federal standards limiting support to five years in a family's lifetime. This means children will be affected by their parents' status, preventing in most cases further payments when their parents received maximum benefits. H.R. 3734, "The Personal Responsibility and Work Opportunity Act," using formula grants to states, will cut almost $60 billion from current expenditures to the poor by the year 2002, primarily though reductions in expenditures for food stamps and denial of benefits to legal immigrants. It requires adults to begin working within two years of receiving aid. States would need to have at least 25 percent of welfare recipients working in fiscal year 1997 and 50 percent by 2002. President Clinton previously vetoed two earlier Republican efforts to impose restrictions on welfare. In the first instance, as part of a budget reconciliation bill, the inclusion of cuts in Medicare and Medicaid in the bill were cited for his veto. In the second, he justified his veto on the basis it did little to move people from welfare to work and made arbitrary cuts. Once Republicans removed the Medicaid measures, both the House and Senate passed the bill in July and a conference committee ironed out the differences by early August. The President announced August 31 he would sign the bill, allowing Democrats up for election to support the measure.
The Essential Elements of Ending Welfare as We Have Known It, as Reported by
Congressional Quarterly (Congressional Summaries Were Unavailable): The federal government to provide $16.4 billion annually through fiscal year 2001 with states receiving current AFDC and related program amounts for either 1995, 1994, or the average of 1992-94, whichever is higher. Access to supplemental federal funds of : $800 million over four years starting in 1998 for states with growing populations and low welfare benefits per recipient; $2 billion over five years starting in 1997 for matching grants to states with high unemployment or rapidly growing food stamp roles; $1.7 billion over five years starting in 1997 for a revolving loan fund carrying interest that would need to be repaid in three years; and $1 billion over five years beginning in 1999 as a bonus for most successful states in placing recipients into employment. Starting in 1998, a competition among states is encouraged by making an additional 5 percent incentive grant (to a maximum of $25 million) available to up to five states that reduced recipients' out-of-wedlock births by 1 percent over 1995 levels, and 10 percent for a 2 percent reduction. Abortions would not count in determining a state's "illegitimacy ratio." States would have to spend at least 75 percent of its funds previously spent on AFDC and related programs to receive their full share of block grant funds; those that did not obtain employment for the required percentages of recipients would have to spend at least 80 percent and would lose an equivalent amount of federal funds for their shortfalls. Adults receiving benefits would be required to begin working at least twenty hours a week within two years, unless states exempted a parent with a child under age one. The recipient could only receive this exemption for twelve months even if not consecutive. By 2000, recipients would have to work at least thirty hours. States could allow a parent with a child under six to work twenty hours a week, but two-parent families would be required to work thirty-five hours a week. States would be required to have 25 percent of recipients working by 1997 and 50 percent by 2002. States that fail to meet these work standards would have their funds reduced by 5 percent the first year and 2 percent each subsequent year, up to a maximum of 21 percent. Federal funds could not be used for adults who had received welfare for more than five years, although state funds could be provided at that point. States can exempt up to 20 percent of recipients and impose even shorter benefit periods. No funds could be used for adults who do not work after two years. Adults who do not cooperate in seeking child support enforcement or in establishing paternity would lose 25 percent of their benefits, unless the state decided to eliminate it entirely. Conviction of a felony for possessing, using, or distributing illegal drugs would result in denial of cash assistance and food stamps unless a state opted out by enacting legislation. States are given discretion to: deny assistance to children born to recipients; deny assistance to unwed parents under age eighteen, unless they live with an adult and attend school; and limit benefits to new residents for twelve months to levels received in their former state. States may utilize $50 million annually for five years to teach abstinence to control unwanted births. States would have to continue to offer Medicaid coverage for one year to recipients who no longer qualified for welfare benefits because of increased earnings or those who would have been eligible for AFDC. States that previously received waivers of federal laws and regulations to conduct experimental programs could continue them until the waiver expired, generally from three to five years. Some forty-two states were anticipated to take advantage of this grandfather clause exempting them from many of the federal requirements which become applicable under the Act. A number of them asked for and were granted last minute waivers before the Act was signed, including D.C. which was granted a ten-year waiver. About 300,000 disabled children (22 percent of those eligible) would no longer qualify for Supplemental Security Income (SSI) funds unless they had a medically proven physical or mental disability which results in marked and severe functional limitations, expected to cause death or last more than twelve months, a more difficult standard to meet than that currently applicable. Financial incentives are provided to state and local prisons to report inmates fraudulently receiving SSI. Enforcement of child support would be substantially increased by requiring states to create a central case registry to track child support orders created or modified after October 1998 that would be shared with a federal case registry to facilitate exchange of information with other states. States would be obligated to force employers to send information on "new hires" and direct businesses to withhold amounts of employees who owe child support. Support amounts received would immediately affect welfare eligibility and benefits. States would be empowered to suspend driver's licenses, professional licenses, occupational licenses, and recreational licenses of those who owed past due child support. Other than disaster relief and emergency medical care, both legal non-immigrants and illegal aliens would be denied federal benefits. Legal immigrants would be ineligible for SSI or food stamps until they became citizens or worked in the United States for ten years. States could deny them federal welfare, Medicaid, and social service block grant funds. Only veterans, refugees, or those granted asylum would be exempt from these restrictions. Financial resources of immigrant sponsors would be considered in determining eligibility for immigrants for most federally funded benefits, essentially making sponsors financially responsible for those they sponsor until they became citizens or after working for ten years. The existing Child Care and Development block grant would incorporate other separate programs, with federal funding set at $1.1 billion for 1996, increasing to $2.7 billion in 2002, with an additional $1 billion in discretionary funds available to states. At least 70 percent of the funds are to be spent to help recipients attempting to leave welfare or those at risk of needing it. Food stamp benefits would be available to all meeting eligibility requirements and would be inflation linked. Benefits would be slightly reduced to the level required to purchase food for minimal nutrition and by limiting deductions from income used to establish benefits to $134 a month without indexing it to inflation. Federal energy assistance would also be counted as income. The fair market value of a vehicle to be counted as an asset would be raised to $4,650, but would be frozen at that level and the housing deduction would be capped at $300 a month by 2001. A recipient who failed to comply with work requirements would be denied food stamps and penalties are increased for fraud and abuse in obtaining food stamps. Able-bodied recipients between eighteen and fifty without dependents would have to work twenty hours a week or participate in a work program, could only receive stamps for three months in a three-year period, with an additional three months available if they were laid off. Federal funds for food stamp-related employment and training programs would rise from $79 million in 1997 to $90 million in 2002. States could coordinate their food stamp program with other welfare benefits and establish a single set of work requirements. Wage subsidies would be available to employers who hire recipients by converting benefits to wage supplements. The Social Services Block Grant providing funds for child care is reduced by 15 percent. It could be used by states to provide vouchers for children whose parents exceed the five year time limit on benefits. The Earned Income Tax Credit providing tax relief for low-income workers was scaled back by counting additional sources of income, such as capital gains, to disqualify a worker or by excluding certain losses that reduced income allowing workers to qualify. An Initial Assessment of the Welfare Changes. It is apparent from the detailed nature of the federal requirements listed above that the devolution of responsibility to the states does not mean that federal restrictions will no longer apply. In fact, mistakes in providing benefits will result in sanctions to states resulting in their need to repay misspent funds from nonfederal sources in addition to reductions of funding for failure to achieve work status for recipients. As can be seen, continuing federal restrictions are still often complex, involving prescribed, detailed requirements. It would appear doubtful that what some refer to as a congressional morality campaign inherent in the Act will be effective without extensive further federal oversight of these requirements, in itself a costly proposition. The freedom from federal rules and oversight sought by states was not realized as members imposed their own biases. Incentive grants now available for states that implement federal objectives, including cost savings in certain benefit levels, such as for reducing illegitimate births and for putting welfare recipients to work, may create competitions for the most restrictive approach. A danger is that differences in benefit levels may influence mobility patterns, imposing greater burdens on some states as compared with others. The Act also limits federal expenditures meaning that states and cities will have to pick up any shortfall if support is to be provided those in need. It is unlikely these other levels of government would be able to provide the necessary funds. The problems is most acute regarding legal immigrants. States will have only five months in which to determine whether they are willing to fill that gap. It is also likely that a "Technical Corrections" bill will be needed early in the new session after the next Congress is seated to handle problems created by the last minute nature of the compromise achieved. The President has indicated that he wants to overturn the levels of cuts in benefits under food stamps and the denial of benefits to legal immigrants. The Urban Institute has estimated that the measure is likely to throw more than 2.6 million, including 1.1 million children, into poverty. The weakest aspect of the welfare changes is the expectation that significant numbers of new jobs will be created to provide employment to those with inadequate education and training. The burden will fall on states and cities. In keeping with that need, President Clinton announced in his speech accepting his nomination a proposed federal $3.5 billion inner city jobs program for welfare recipients. Federal Security Fraud Cases More Difficult to Establish After Congress Overrides a Clinton Veto. Congress has only overridden the President's veto once, on a heavily lobbied bill reducing damage exposure for firms accused in securities fraud cases. The President, by announcing his opposition only at the last minute after many Democrats in Congress had already announced their support and would not change, contributed to his only veto defeat. He opposed the measure because the bill made it extremely difficult to establish a violation by requiring plaintiffs to allege facts at the time of filing, prior to discovery, sufficient to demonstrate a clear intent to defraud, a stiffer test than Federal Rule of Civil Procedure 9's requirement for pleading fraud. Support for the bill benefited from public discontent with large verdicts obtained by lawyers instead of the class plaintiffs and by allegations that frivolous lawsuits were being brought. The latter is controlled, however, more than adequately under Federal Rule of Civil Procedure 11. The new Act reverses recent amendments to Rule 11 giving more flexibility, creating two standards, and requiring judges to impose mandatory sanctions in security fraud lawsuits. The measure was strongly supported by accountants, who have been exposed to extremely high damage claims and settlements as a result of charges their audits of the savings and loan industry were inadequate, and by high technology companies, who have encountered damage claims based on failure to achieve promised results. The law will make it more difficult to sue accountants for "aiding and abetting" security law violations, the source of substantial judgments against some accounting firms. The basis for damages is also more limited. State law was not directly affected, and may still provide grounds for action. New Middle-Class Benefits $200 Lower Closing Costs for FHA Financed First-Time Home Buyers, Tax Credits for College Tuition. Generating comments from Republicans that the savings were "chump change," President Clinton announced another middle-class benefit that in this case will only cost the federal government $20 million annually to aid up to 100,000 families. Through an 11 percent reduction in mortgage insurance premiums for first-time homebuyers who take a class on homeownership, closing costs have been reduced an additional $200 for home purchasers obtaining their first house. Streamlining of agency procedures including increased returns on foreclosed properties already had achieved a reduction in closing costs of almost $1,000, from $4,400 in 1994 to $3,400, directly attributed to FHA mortgage insurance premiums. Homeownership has increased 3.1 percent during Clinton's Administration. The action followed up on Clinton's announcement of a proposal for a new $1,500 per child tax credit to help finance the first two years of college for families with incomes below $100,000. Reverberations of the balanced budget debate permeated the GOP responses to the announcement of these middle-class benefits, with contentions that mortgage rate increases can be attributed to the President's failure to accept their budget reductions, wiping out any advantages of reduced government closing costs. GAO Urges Privatization of FNMA (Fannie Mac) and FHLMC (Freddie Mac) But HUD Supports Their Current Status. The General Accounting Office (GAO) has issue d a report that suggests Congress consider abandoning support for those federally chartered Government Sponsored Enterprises (GSEs), effectively fully privatizing them. Doing so, some commentators warn, could trigger increased interest rates caused by elimination of the implicit federal guarantee that supports the agencies' secondary market operation that has worked to increase the supply of mortgage financing. GAO estimates that privatizing them would deprive the two agencies of about $2.6 billion in special federal tax benefits they now receive. FNMA plays a critical role in standardizing mortgage instruments and setting underwriting criteria for borrowers. Adherence to their standards qualifies mortgages for the secondary market through purchase and resale by FNMA. The GAO, however, raised the specter of another federal bailout such as that required for the S&L industry, since FNMA's and FHLMC's capital only covers some 1 percent of their guaranteed mortgage funds. An alternative perspective would be a pretty effective use of leverage to ensure that adequate funds are available for mortgages at relatively affordable rates. In a congressionally mandated study, HUD opposed privatization saying it would undermine the agencies' contribution to expansion of mortgage lending to low- and moderate-income families. The Treasury Department noted that lower borrowing costs available because of the federal role are worth about $4 billion to borrowers and $2 billion to shareholders of the GSEs. The Federal Housing Enterprise Oversight Office at HUD is planning for potential problems at FNMA and FHLMC, so that the quasi-government enterprises would bear the cost of financial problems that might develop in the future from interest rate increases caused by the higher inflation rates, in excess of 6 percent that has been used to evaluate the stability of these organizations. The organizations have homeowners, which include a million low- and moderate-income families, about $10 billion annually in lower loan interest rates. The activities of the GSEs reduce risks of borrowers, increase the rate of homeownership, even up potential regional disparities in loan rates, reduce potential declines in home values, and substitute for what would otherwise likely be a need for government risk and involvement in housing finance, according the FHLMC chair testifying before a House subcommittee. The success of the U.S. secondary market operations in housing finance has become a model of privatization used internationally. While success breeds challenges, some memories are short. It was only within the last twenty years that FNMA was finally put on a solid basis, an achievement that earned its top management considerable compensation for doing so. Since then, FNMA has continued to be a robust performer, using its implicit federal guarantees effectively to create a market for its packages of mortgages that generate a secondary market for mortgage financing and to attract considerable investment capital to their securitized mortgages. First Empowerment, Then Homeownership Zones. HUD introduced a Homeownership Zone program to help subsidize construction in blighted areas, committing $100 million to the effort. Cities had until September 17 to submit funding applications, but must start construction within sixty days after award. Successful cities must demonstrate land availability, local financial resource commitments, and infrastructure improvements. HUD previously designated zones in Baltimore, Cleveland, and New York. These efforts are consistent with Harvard's Joint Center for Housing Studies analysis that while homeownership is at 65 percent, its highest level in twenty years, the boom is in the suburbs, not the cities. Although 1.7 million new homeowners were added last year, cities have the potential of becoming a dumping ground for the least advantaged people in U.S. society. The low-income renters left behind when city dwellers move to the suburbs, can't afford to buy homes. Allocating resources fairly to these two forms of tenure can be tricky.
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