The Department of Health and Human Services runs a vast array of health and nonhealth subsidy programs. Outside of Medicare, Medicaid, and TANF, the department spends about $125 billion a year on more than 400 different programs.

This essay examines four HHS state and local subsidy programs aimed at the low-income population: Head Start, the Child Care Fund, the Social Services Block Grant, and Low-Income Home Energy Assistance. These programs are intensely bureaucratic and susceptible to fraud and abuse. There is also little evidence that the programs generate much of a return for the large taxpayer resources invested in them. For example, a recent authoritative study found that Head Start offers no lasting advantages to the children who take part in the program.¹

There are no economic or constitutional reasons why the federal government should be involved in these four programs and the other state and local welfare activities of the HHS. Congress should end HHS state and local aid programs, and individual state governments should decide for themselves what taxpayer support, if any, is appropriate for these sorts of activities.

Head Start

Head Start was established in 1965, and it currently spends about $8 billion a year on early childhood development services to low-income children and their families. The program funds various educational and health care benefits.

About 900,000 children are enrolled in Head Start, and annual spending is almost $9,000 per child. Eligibility is generally limited to children in families at or below the poverty line. However, children in the foster care system and children in families that collect Temporary Assistance for Needy Families or Supplemental Security Income are automatically eligible.

In 2007, eligibility was expanded to allow grantee organizations to fill up to 35 percent of their slots with children from families with incomes between 100 and 130 percent of the official poverty line. Prior to this change, only 10 percent of the slots could be filled with children above the poverty line.

Head Start funds are distributed to local governments and private-sector grantees. Unless granted a waiver, grantees must contribute a 20 percent funding match. Grantees can use up to 15 percent of a program's total costs for administration, and they retain substantial flexibility on how money is spent. There are over 1,600 Head Start grantees.

The formula for allocating Head Start funds is very complex. Each state receives an initial allocation based on the amount it received the prior year.² Between 2.5 percent and 3.0 percent of total funding is used for training and technical assistance from HHS. A complex formula then allocates remaining funds to provide a cost-of-living adjustment. If there are funds remaining after that, 40 percent are used for quality improvement purposes, 45 percent for expansion of programs, and 15 percent for funding State Advisory Councils.

Convoluted funding formulas in grant programs generate bureaucracy and encourage interest groups and politicians to battle to get a greater share. Federal aid allocations often reflect political pull, not relative need across different communities. Thus, a disadvantage of federal funding of social activities is that local governments and private charities are much better able to weigh the costs and benefits of aid programs when they are raising their own funds locally.  

The groups that receive Head Start subsidies are often wasteful managers, and some groups blatantly cheat federal taxpayers. In 2000, the Government Accountability Office found that 76 percent of Head Start grantees reviewed were not in compliance with financial management standards. In a subsequent review, more than half remained out of compliance. In 2005, the GAO reported that HHS still couldn't adequately identify financial management weaknesses of Head Start grantees.³

In 2008, the GAO reported that HHS still had not undertaken a comprehensive assessment of Head Start's risks, and said that it had made "little progress" in ensuring that the data it collects from grantees are reliable.⁴ A perusal of inspector general audits of grantees finds ongoing management problems.⁵

In 2007, the HHS inspector general's office found that 5 percent of Head Start slots were funded but not even filled, which it said "equals Federal dollars that are inefficiently used."⁶ Only 11 percent of grantees reported enrollment levels that matched actual enrollment as determined by the inspector general. For example, an Ohio state audit found that a Head Start program received $7.5 million for children it didn't serve. A previous audit of the program found that it had wrongly received $3.8 million.⁷

A series of HHS inspector general audits in 2005 found excessive compensation was paid to Head Start grantee executives at three different programs.⁸ A recent Atlanta Journal-Constitution investigation found that Head Start programs in Georgia and across the country are spending federal stimulus dollars on raises for their employees, some as high as 8.5 percent.⁹

News stories have revealed outright fraud among Head Start recipient groups. In Maryland, the Head Start director was arrested on charges that she stole $335,777, and in South Dakota a woman was prosecuted on charges that she embezzled $185,000 from a Head Start program.¹⁰

The most important shortcoming with Head Start is that it is simply not effective. Head Start is supposed to prepare children for kindergarten and give them a better chance at succeeding later in life. However, the evidence accumulated over the years suggests that Head Start fails at its mission.

In 1985, HHS conducted a meta-analysis of prior Head Start research. The study found: "In the long run, cognitive and socio-emotional test scores of former Head Start students do not remain superior to those of disadvantaged children who did not attend Head Start."¹¹ In 2000, the GAO acknowledged that there is no "conclusive evidence on whether children having school readiness skills stemmed from being in Head Start."¹²

In 2010, HHS released a long-anticipated study of Head Start's effectiveness, which is the most rigorous analysis to date.¹³ The program is supposed to give disadvantaged children a "head start" in life. However, the study found almost no advantages to children in kindergarten and grade one from having gone through Head Start, compared to children who had not.¹⁴

Of the 112 measurements in the new HHS study—which covered areas such as academics, socio-emotional development, and health—only a handful showed any statistically significant benefit to participants of Head Start.¹⁵ In addition, most measured benefits disappeared once more rigorous statistical methods were applied. In other words, there was virtually no benefit to children of having attended Head Start.       

After 45 years and $166 billion in spending, it's remarkable that taxpayers are still funding Head Start even though it isn't providing any sustained benefits to participants.¹⁶ The government's own research proves that this Great Society program from the 1960s hasn't helped disadvantaged children.

Child Care Fund

The Child Care and Development Fund (CCDF) consists of the Child Care and Development Block Grant and the Child Care Entitlement to States. These state aid programs are used to subsidize child care expenses for low-income working families with children under age 13.

The block grant program was created in 1990. Then the "entitlement" part of the program was added by the 1996 welfare reform law, which combined three child care programs under the old Aid to Families with Dependent Children into a single block grant. The 1996 law applied the block grant's rules to the new entitlement program.

In 2010, spending on the combined CCDF program is $6.4 billion—$3.4 billion for the discretionary block grant and $3 billion for the entitlement. HHS has found that more than 10 percent of CCDF dollars are lost to improper payments of various types, such as fraud and abuse.¹⁷

Block grant funds are distributed to the states according to a formula based on each state's share of children under age five, the state's share of children receiving subsidized lunches, and state per capita income.

The distribution of entitlement funds is more complicated. Each state receives a "guaranteed" amount equal to what they would have received from the old AFDC programs in 1994 or 1995, or the average from 1992 to 1994, whichever is greater. The remainder is allocated according to each state's share of children under the age of 13.

To receive a portion of the remainder, states have to meet matching and "maintenance of effort" requirements, meaning that they have to spend a lot of state taxpayer money on the program. The states must spend the amount of their guaranteed funds plus 100 percent of what they spent in 1994 or 1995 for AFDC, whichever is higher. States also have to provide matching funds at the Medicaid matching rate. Additionally, the states are allowed to transfer up to 30 percent of their TANF block grant funds to CCDF. 

Eligibility is limited to families at or below 85 percent of state median income, but the states are allowed to maintain a lower threshold. The average monthly adjusted number of children in CCDF was 1.6 million in 2008, and spending was about $4,000 per child.¹⁸

However, the cost per child of CCDF is much higher when the state spending share is included. In 2007, the federal government's share was $6.9 billion. When state funding is included, the total is $10.2 billion, or about $6,000 per child.¹⁹

As always, federal funds come with various federal regulatory mandates, such as requiring the states to set child care provider payment rates that are in line with what nonsubsidized parents are charged. HHS also imposes extensive bureaucratic paperwork on the states. The states are not supposed to use more than five percent of federal funds for administration, but a loophole allows for costs the states consider to be an "integral part of service delivery" to be excluded.

The GAO and HHS inspector general's offices appear to have done no work examining how CCDF funds are actually being spent because oversight is largely left to the states. However, the GAO has reported that HHS doesn't do a sufficient job of overseeing state management of the program.²⁰ The result is likely significant waste and abuse in the program.

In 2009, Michigan's state auditor found $200 million in questionable CCDF spending, and noted that it was the fourth audit in a row that had found problems.²¹ An investigation by the Milwaukee Sentinel Journal found that the state overpaid day care providers by at least $13.7 million.²² Millions of dollars were spent on bogus child care that was never delivered. In 2008 an audit of child care contracts awarded to New York City providers between 1999 and 2006 found that of $2.9 million in CCDF funding, $1.6 million was misspent.²³

A recent state audit of Colorado's Child Care Assistance Program, which utilizes a mixture of CCDF, TANF, and Social Services Block Grant money, found shoddy state oversight and questionable spending by care providers, such as hosting parties.²⁴ In another instance of abuse, a provider paid for two months rent of a staff member's apartment.

Social Services Block Grant

The Social Services Block Grant was created in 1981 and has been funded at about $1.7 billion annually in recent years. The states have broad authority on how they spend the funds, but they mainly spent it on child care, health services, employment services, and other social services.

There are no federal eligibility requirements to receive SSBG-funded services. States can transfer up to 10 percent of their TANF block grants to SSBG, but eligibility for these funds is limited to families at or below 200 percent of the federal poverty level. SSBG funding is allocated to the states on the basis of population.

President George W. Bush's last budget proposed eliminating the program because it hadn't demonstrated any positive results, was duplicative of other federal programs, and the states weren't spending the money effectively.²⁵ Recent audits back up the Bush administration's position. A state audit of Michigan's SSBG funds found almost $14 million in questionable spending.²⁶ A Nebraska state audit of fifteen claims found that thirteen were paid at excessive rates and/or did not have adequate documentation to support the payment was proper.²⁷

Low-Income Home Energy Assistance

The Low-Income Home Energy Assistance program (LIHEAP) was created in 1981 and provides $5 billion annually in block grants to the states. The states spent 50 percent on heating assistance, 4 percent on cooling assistance, 18 percent on crisis assistance, 10 percent on weatherization projects, and the remainder on other activities and administration.²⁸

The total number of households receiving LIHEAP aid isn't calculated by HHS, but there are estimates for each type of aid. In recent years, about 5 million households received heating assistance, about 500,000 households received cooling assistance, about 1.6 million households received crisis assistance, and about 125,000 households received weatherization assistance.²⁹ Those figures have likely increased with the recent spending increases in the 2009 economic stimulus bill, but there is a substantial lag in official reporting for the program.

Federal rules limit eligibility to households at or below 150 percent of the national poverty line or 60 percent of state medium income, whichever is higher, although recent legislation has extended the latter to 75 percent.³⁰ States can set lower limits, but must cover households under 110 percent of the poverty level. States can also expand eligibility to households receiving various other welfare benefits. 

In 2010, $4.5 billion of the funding was directed to the states through a complicated formula, while the remainder was allocated to particular states at the HHS secretary's discretion. Here's a brief description of the formula to get a sense of the bureaucratic complexity. The original LIHEAP formula was largely based on each state's home heating needs, but did not take into consideration updated population and energy figures. In 1984, a new formula was created that allocated money to the states based on each state's energy costs for low-income households relative to the national average. The new formula also used updated data. However, two "hold harmless" provisions were added to protect states from losing money by switching to the new formula.

If regular LIHEAP appropriations are under $1.975 billion, the old formula is used. If the appropriation is between $1.975 billion and $2.25 billion, the new formula is used. However, no state can receive less funding than it would have received under the original formula's distribution method for 1984, assuming a hypothetical $1.975 billion appropriation. Those states that gain a higher percentage allotment under the new formula then have their share reduced to bring up other states to the hold harmless level. 

If the appropriation is more than $2.25 billion, a hold harmless rate kicks in. States that would receive less than 1 percent of a $2.25 billion or more appropriation are allocated money using the rate that would have been used at a hypothetical $2.14 billion appropriation. And again, no state can receive less funding than it would have received under the original formula's distribution rate for 1984, assuming a hypothetical $1.975 billion appropriation.

Like most government program formulas, LIHEAP's is subject to further political tinkering by Congress. For instance, the 2010 appropriations bill containing LIHEAP funding required HHS to allocate $3.7 billion of the $4.5 billion in formula block grants according to each state's 1984 share. The rest of the allocation required more complicated calculations by HHS. 

The complicated allocation process is one reason why LIHEAP should be abolished. It makes no sense for the federal government to take money from taxpayers who live in the states and then return it to state governments through a convoluted mechanism that encourages the states to politically compete with each other. Besides, why should Florida taxpayers subsidize the heating costs of people who choose to live in cold Massachusetts?

The federal government has subjected LIHEAP to little scrutiny. A search of the HHS inspector general's online audit database reveals nothing. In 2005, the Government Accountability Office acknowledged that oversight of LIHEAP spending is largely left to the states.³¹

State oversight appears to be limited. In Indiana, 24 nonprofit "community action agencies" manage the program at the recipient level.³² The state inspects each agency once a year, but there's no independent auditing. Nor is the state agency in charge of administering LIHEAP subject to any independent performance auditing. The state submits a plan to the federal government every three years, but the federal government hasn't examined how the state administers its LIHEAP program in almost a decade.³³

California's auditor's office recently looked at the state's Department of Community Services and Development (CPD), which is in charge of the state's LIHEAP program, and found various sorts of mismanagement.³⁴ It found, for example, that the local agencies the CPD contracts with to provide LIHEAP often don't obtain documentation of applicants' monthly income or citizenship status to substantiate their eligibility.

Multiple layers of bureaucracy and lackluster oversight make LIHEAP easy to abuse. In 2007, Pennsylvania's auditor general reported that the state Department of Public Welfare's poor management left the state's LIHEAP program ripe for fraud and abuse. The DPW ignored the auditor general's recommendations, and two years later 18 state and local workers in Philadelphia were charged with stealing $500,000 in LIHEAP funds.³⁵

In neighboring New Jersey, the administrator of the state's energy assistance program was indicted in 2009 for stealing $25,000 from LIHEAP. At the same time, the owner of a New Jersey energy company pled guilty to defrauding the program of $400,000. The owner would pay LIHEAP recipients an amount less than the value of their benefit checks. He would then submit the LIHEAP checks and collect the difference.³⁶

Providing for the energy needs of the less fortunate is a task best left to private charity. Private charities are better able to target assistance, and can do so without the waste that comes with federal programs passing money through multiple levels of bureaucracy. Federal and state governments can help by reducing the many regulations and taxes on the energy industry that increase consumer costs.

Five Reasons to End HHS Subsidies

The following are five reasons why the federal government should terminate the HHS programs examined here and other HHS state aid and welfare programs. State and local governments, or preferably private sector charities, are much better positioned to aid truly needy individuals in a more cost-effective manner.

1. Federalism. Under the Constitution, the federal government was assigned specific limited powers and most government functions were left to the states. The Framers reinforced this decentralized structure with the addition of the Constitution's Tenth Amendment: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." Providing welfare or social services to individuals, despite the good intentions of policymakers, is not a constitutional role of the federal government.

Practically, federal funding of state and local activities results in multiple levels of wasteful bureaucracy and poor program oversight. Funding for welfare programs originates at the federal level, goes through state and local governments, and then to nonprofit groups and the ultimate recipients. As the money flows through each level, a portion is lost to administrative overhead. Each government and organization involved consumes program funding with proposal writing, funding allocation issues, reviews, reporting, regulatory compliance, litigation, and many other bureaucratic activities.

2. Fraud and Abuse. Multiple levels of bureaucracy create many opportunities for people to take advantage of HHS welfare and subsidy programs. Because most of the money for these programs comes from Washington, state and local officials and nonprofit groups have little incentive to assure funds are properly spent. Also, state and local governments and private groups may have little incentive to do vigorous oversight because any problems found would reflect poorly on them.

Responsibility for these programs is muddied because each program has multiple stakeholders. When programs fail, each organization involved has an incentive to blame the other stakeholders. Also, citizens have less incentive to maintain vigilance over how their taxpayer dollars are being spent when the funds come from Washington because federal spending may seem like a costless gift to their local community. 

3. The Scramble for Dollars. An unavoidable problem when the federal government extends itself into local activities, such as welfare, is that federal policymakers usually act on the basis of political and parochial incentives. The distribution methods of all the more than 800 federal aid programs for the states are a battleground for members of Congress to try and grab more for their districts. States with politicians who hold sway over particular programs can obtain a disproportionate share of taxpayer money.

Seemingly "free" federal money also creates a scramble by state and local officials to grab as many dollars as they can. State and local officials engage in wasteful activities, such as hiring federal lobbyists, to gain advantage. Moreover, for programs with an unlimited federal match, such as Medicaid, state governments have an incentive to continually expand program benefits to gain increased federal aid.  

4. Impact on Society. Government welfare programs are intended to help those people who are less fortunate. However, they encourage dependency and discourage self-sufficiency. They can encourage out-of-wedlock births and undermine incentives to work. All the while, federal welfare programs have failed to eliminate poverty as politicians have promised for decades. Instead, welfare has engendered social pathologies that can spread from generation to generation.

Perhaps most troubling are the negative attitudes toward productive behaviors that can develop among those on welfare. Studies have found that the poor on welfare do not have a strong sense that they need to take charge of their own lives or to find work and become self-sufficient.³⁷ Indeed, they often have a feeling that the government has an obligation to provide for them.

5. Private Charity Is Superior. Government welfare cannot provide the same flexibility and diverse approaches as private charities. Private charities have a better record of actually delivering aid to recipients because they do not have as much administrative overhead, inefficiency, and waste as government programs. A lot of the funding on federal and state social welfare programs never reaches recipients because it is consumed in paperwork and improper spending. And government aid often goes to people who don't really need it. A final advantage of private charity is that it is much more likely to be targeted to short-term emergency assistance, not long-term dependency. Private charity provides a safety net, not a way of life.