Rolling Out 'Cash for Clunkers'

Car Dealers Set Up Hotlines, Web Sites but Fret That Strict Rules Will Hurt Trade-Ins

By The Wall Street Journal

Auto dealers are starting to ramp up advertising built around the government's "cash for clunkers" program, even as they are growing more concerned that the incentives won't provide enough of a spark to revive U.S. auto sales.

Restrictions on eligibility combined with delays in launching the program -- which promises rebates as high as $4,500 -- have quashed hopes that the U.S. will see the same sort of car-shopping craze experienced by countries such as Germany and Brazil that implemented similar plans.

Cash-for-clunkers, formally known as the Car Allowance Rebate System, will provide about $1 billion in federal funds as incentive money. Eligible owners of gas guzzlers will receive a credit if they turn them in and buy or lease a new, more fuel-efficient vehicle.

The program was approved June 1, but final details on eligibility have yet to be released. That information is expected "on or around" July 24, according to the program's Web site, www.cars.gov.

Dealers are gearing up with online and newspaper ads inviting potential buyers to stop by and see if they are eligible. Some dealers have set up special Web sites. But the lag between passage of the measure by Congress last month and implementation has cooled consumer sentiment, dealers across the country say.

Preliminary rules saying clunkers must be less than 25 years old and get 18 miles per gallon or less in combined city/highway mileage also have hurt.

"We like the idea behind the program; however, the eligibility could be a little too strict and may keep some of my people away," said Alan Helfman, vice president of Houston's River Oaks Chrysler-Jeep.

The program might boost sales by 175,000 vehicles in 2009, said IHS Global Insight analyst Rebecca Lindland. That isn't much help given the hole the industry is in. U.S. auto sales ran at an annualized rate of 9.69 million vehicles in the first six months of the year, down from 13.69 million in the same months of 2008.

"And these will be sales that are pulled ahead and not new demand," Ms. Lindland said. "We don't see that many people willing to trade in to take on new debt."

Ford Motor Co. and General Motors Co. have rolled out Web sites dedicated to answering questions. Ford has also established a 1-800 hotline. "We have seen 300,000 people go to the Ford.com site to check their eligibility," said Jim Farley, Ford's marketing chief. "We are seeing customers at least coming in and talking to dealers about it."

Hyundai Motor Corp. dealers are already starting to offer discounts based on the expected rebates, funded by loans from Hyundai that cover the difference until the program officially starts.

The National Automobile Dealers Association is encouraging dealers not to make any offers until the final details of the program are known so they don't put their own money at risk.

The clunkers program will run through Nov. 1 or until the funds are exhausted. A similar program in Germany drew more than one million applications for vouchers. That program, at $6.5 billion, is larger than the U.S. version.

Blue Cross Grants Additional $6 Million To MHA

Story from Crain's Detroit Business

Blue Cross Blue Shield of Michigan has decided to provide a second $6 million grant to the Michigan Health and Hospital Association for research to improve health care quality and patient safety, and to reduce costs.

The Blues made an initial $6 million grant in 2004.

The funding will go to MHA’s Keystone Center for Patient Safety and Quality.

“The MHA Keystone Center projects have already delivered a phenomenal return in improving safety and quality,” said Blue Cross CEO Dan Loepp in a statement.

Most of Michigan’s 144 hospitals have participated in the center’s projects – that include reducing hospital-acquired infections, improving care for mothers and newborns and increasing patient flow in emergency departments.

The Center's projects include reducing hospital-acquired infections, improving care for mothers and newborns and increasing patient flow in emergency departments.

For example, improving quality in hospital intensive care units the past four years have saved 1,800 lives, cut 129,000 hospital days and saved $247 million in unnecessary costs, Blue Cross said.

Hospitals also have saved more than $10 million by reducing urinary tract infections acquired from hospital catheters.

Spencer Johnson, MHA president, said patient lives have been saved by following best practices discovered through the research.

“The Michigan hospitals that participate in the MHA Keystone Center programs have achieved significant, measurable patient safety improvements – errors have been reduced and lives have been saved,” said Johnson in a statement.

Spartan Stores To Highlight 2,400 Michigan Products

Story from the Detroit News

Grand Rapids, Mich. -- Spartan Stores Inc. is launching a campaign aimed at promoting Michigan pride.

The Grand Rapids-based supermarket chain's Michigan's Best campaign will highlight more than 2,400 products in its stores that are grown or produced in the state. The promotion starts Sunday.

"There has been quite a lot of buzz about buying local and buying Michigan," said Alan Hartline, vice president of merchandising. "We are always trying to position our products to be relevant to customers."

Signs will identify Michigan products throughout Spartan's D&W Fresh Market, Family Fare, Felpausch, Glen's, Glen's Fresh Market and VG's stores in the state, The Grand Rapids Press reported.

Hartline estimates that about 10 percent of products sold in Spartan-owned stores have a Michigan connection. For Spartan-brand products, about 20 percent of sales are Michigan products.

In recent years, some Michigan grocers have emphasized homegrown and organic fruit and vegetables. Spartan also has invited Michigan companies to give product demonstrations throughout the summer.

The retailer has been a leader in highlighting Michigan brands over the years, said Bruce Kratt, director of sales and marketing for Hudsonville Ice Cream, which employs 22 people in Holland.

"It's great for companies like ours," Kratt said.

GM Sheds The Corporate Jets

Story from the Wall Street Journal

GM, as part of its restructuring in bankruptcy, is looking to rid itself of its leases on seven corporate jets and its hangar at Detroit Metropolitan Airport, according to a motion filed in court.

The company is asking a judge to let it terminate the leases because it says it doesn’t plan to sell them to the New GM and that “the Debtors have determined that rejecting the Leases and surrendering possession of the property to the relevant lessor is in the best interests of their estates.”

Five of the jets are medium-range Gulfstream G-IVs, leased from AVN Air LLC. Two are longer-range Gulfstream G-Vs, leased from Suntrust Corp.

Lawmakers criticized the CEOs of GM, Ford, and Chrysler when the trio flew to Washington on separate private jets — as Auto Tracker first reported in November — to ask for government support for the auto industry. On a second trip, the executives drove to the capital from Detroit.

Among the leases GM is seeking to terminate is one for the G-IV with the tail number N5116 that was spotted by ABC News at Washington’s Dulles airport during the testimony of then- CEO Rick Wagoner in Congress.

After last fall’s public relations debacle, GM said it was returning two of its seven planes to the leasing company, which it declined to name at the time. It said it had returned two others in September.

GM Employees Get A Letter From The CEO

Story from the Wall Street Journal

Full text of GM CEO Fritz Henderson's letter to employees on the auto maker's bankruptcy filing:

June 1, 2009

GM Employees:

Today marks a defining moment in the history of General Motors. This morning, we announced an agreement with U.S. Treasury and Canadian and Ontario governments – which along with the recent agreements with the UAW and CAW unions, and sacrifices by our salaried employees and -- will allow us to form a leaner, more customer-focused, more cost-competitive company -- a "New GM" built upon the strongest parts of our business, with far less debt, lower operating costs and the ability to generate sustained and winning bottom-line performance.

To implement these agreements and launch the New GM, it was necessary to enter a court-supervised process, which we did earlier this morning with the full support of the U.S. and Canadian governments. While we preferred other paths to our goal, what is most important is our destination and getting there fast. The court process we're pursuing gives us powerful tools to accelerate and complete the job of reinventing GM. It also provides strong safeguards to our customers and our business between now and the time the New GM is launched as an independent company, which we expect will be in about 60 to 90 days.

As you know, the actions we've taken to create a New GM include some very difficult steps. Today, we're identifying the 14 manufacturing plants that will be impacted by our accelerated plan to improve our capacity utilization, as called for in our April 27 viability plan. These facilities include our Pontiac and Wilmington assembly plants, our Grand Rapids, Indianapolis, and Mansfield Metal stamping plants and our Livonia Engine, Flint North Components, Willow Run, Parma Components and Fredericksburg Components and Massena Castings powertrain plants. Our Orion and Spring Hill assembly plants will be placed in "standby capacity" status, along with the Pontiac Metal stamping plant. In addition, Janesville Assembly plant's status has been changed from closed to standby capacity. And, our Boston, Jacksonville, and Columbus SPO facilities will cease operations by December 31, 2009. In line with our structural cost reductions and the reinvention of our company, we're announcing plans to further reduce our North American salaried employment by 5,100 this year, including 4,000 in the United States. After completing these reductions, we will have reduced North American employment by 7,900 – or 22 percent this year.

GM will remain open for business during this period. All employees will be paid in the normal course and work as members of the New GM team. The only exception is the amount of non-qualified pension for some executive retirees. We also will reduce some retiree benefits for salaried retirees (those retired now and those who will retire in the future) and non-UAW retirees (those retired now and those who will retire in the future). We are continuing to determine how these changes will be made and we will communicate to the affected employees and retirees as soon as decisions are made. We intend to address this matter as quickly as we can.

Our warranty, service and customer support activities will continue uninterrupted, with U.S. government guarantees. New products and advanced-technology launches will continue on schedule, and all GM facilities will operate on the same basis they did yesterday, with no changes to the scheduled downtime calendar.

I've attached the news release we issued announcing these steps. Please read it carefully, but I want to share a few thoughts about today's news. I encourage you to share them with family, friends and others with a stake in GM's future:

* We're on a proven path. The process we're using to launch the New GM is an established and effective approach. While we expect that some parties will register objections during the court-supervised process, we are well prepared and confident that we will achieve our goals.
* We're committed to our April 27th viability plan. The plan we described in April, along with some additional initiatives, is New GM's plan.
* We remain a vital part of the global auto industry. Thanks to the difficult work we have done in recent years, GM has world-class assets that are highly valuable to consumers, stakeholders and the economy. We have developed a line-up of award-winning vehicles and a pipeline of exciting new products that customers want. We have substantial investments in important green technologies. Our smaller, stronger dealer network will raise the standards for customer service. And, we will remain a global company, with a tremendous work force.
* We're here to stay, and we will succeed by taking care of our customers. We have endured trying times together. The pain has been shouldered by many, and our April 27th viability plan asks for even more from us. But make no mistake – today's actions are designed to reinvent GM for sustained success. From here we move on, and we move up. New GM can and will win, and we will do it by putting our customers first.

We understand that you will have many questions throughout this transition process. Further information is available on Socrates or at GM.com/restructuring. Both will be updated often as new information becomes available. I also encourage you to visit GMreinvention.com and share it with others who have an interest in GM's future.

We also recognize that the further changes necessary to complete GM's reinvention must come from within the company. With that thought in mind, I'll post an Employee Blog later today with some of my thoughts about what we need to change at GM, and how we'll make them happen. I look forward to your feedback.

Along with our leadership team and Board of Directors, I am consistently inspired by your resilience and resolve. We know you will continue to rise to the occasion. Thank you for everything you have done and will do for GM.

Fritz

GM Press Release About 'New GM'

As Published in the Wall Street Journal
Here is the statement released Monday by GM in the wake of its Chapter 11 filing.

GM ANNOUNCES AGREEMENT WITH U.S. TREASURY AND CANADIAN GOVERNMENTS PROVIDING FAST TRACK TO COMPETITIVE FUTURE FOR ‘NEW GM’ NEW GM, BUILT FROM COMPANY’S STRONGEST OPERATIONS, EXPECTED TO LAUNCH IN 60-90 DAYS UNDER NEW OWNERSHIP GM FILES VOLUNTARY CHAPTER 11 TO IMPLEMENT ‘363′ SALE AGREEMENT GM IS OPEN FOR BUSINESS IN THE U.S. AND WORLDWIDE, HONORING ALL CUSTOMER COMMITMENTS

Warranty, service and customer support continue uninterrupted, backed by the U.S. and Canadian governments Essential suppliers to be paid in the normal course Employees to be paid in the normal course Operations outside U.S. not included in court filing

DETROIT, June 1, 2009 - General Motors Corp. (NYSE: GM) today announced that it has reached agreements with the U.S. Treasury and the governments of Canada and Ontario to accelerate its reinvention and create a leaner, stronger “New GM” positioned for a profitable, self-sustaining and competitive future.

Pending approvals, the New GM is expected to launch in about 60 to 90 days as a separate and independent company from the current GM (”GM”), with two distinct advantages: it will be built from only GM’s best brands and operations, and it will be supported by a stronger balance sheet due to a significantly lower debt burden and operating cost structure than before. The New GM will incorporate the terms of GM’s recent agreements with the United Auto Workers (UAW) and Canadian Auto Workers (CAW) unions and will be led by GM’s current management team.

The New GM will execute the key elements of its April 27 viability plan, along with additional initiatives, to achieve winning financial results by putting customers first, concentrating on adding to the company’s line of award-winning cars and trucks through four core brands and continuing to invest in green, energy-saving technologies.

Under its plan, GM will sell substantially all of its global assets to the New GM. To implement the sale agreement, GM and three domestic subsidiaries have filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York, and the sale is subject to the approval of the Court. Because GM’s sale of assets to the New GM already has the support of the U.S. Treasury, the UAW and a substantial portion of GM’s unsecured bondholders, GM expects the sale to be approved and consummated expeditiously.

GM has asked the Court to approve a number of steps to protect current and new GM customers, ensure that its operations will continue uninterrupted during the court-supervised process, and provide for a smooth transition to the New GM.

GM dealers will continue to service GM vehicles and honor GM warranties, and U.S. and Canadian government guarantees of manufacturers’ warranties are designed to reassure consumers.

GM will use its cash-on-hand and a new Debtor-in-Possession (DIP) financing of approximately $33 billion to: ensure an uninterrupted supply of goods and services and provide for other cash requirements prior to closing of the asset sale; fund liabilities to secured lenders; and provide contingency funding to handle any potential unexpected needs. Furthermore, in conjunction with the sale, the U.S. Treasury and the Canadian and Ontario governments will provide funds to administer the wind down of the remaining assets and the closing of the chapter 11 cases.

GM employees worldwide will become part of the New GM.

“Today marks a defining moment in the reinvention of GM as a leaner, more customer-focused, and more cost-competitive company that, above all, can quickly generate winning bottom line results,” said Fritz Henderson, GM president and CEO. “The economic crisis has caused enormous disruption in the auto industry, but with it has come the opportunity for us to reinvent our business. We are going to do it once and do it right. The court-supervised process we are pursuing provides us with powerful tools to accelerate and complete our reinvention, as well as strong safeguards for our customers and our business. We are focused on the job at hand, for the benefit of our customers, employees, dealers, suppliers, retirees, taxpayers, investors and other stakeholders.

“We recognize the sacrifices that so many have been asked to make as we have worked to reinvent GM and the automobile,” said Henderson. “GM deeply appreciates the support and the demonstration of confidence in our future by President Obama, the Presidential Task Force on Autos, the Canadian and Ontario governments, American and Canadian taxpayers, the unsecured bondholders who are supporting the proposed sale transaction, the UAW and CAW and their leadership, and the men and women of GM, including our retirees. You have enabled us to carry out this vital transformation for the good of GM, our customers and the economy, and we are working to validate your trust each day.

“From day one, the New GM will be well-positioned to capitalize on the award-winning vehicles we have developed and launched during the past few years, and on our investments in exciting new technologies like the Chevy Volt, so that we can build and return value to our customers and to the millions who will have a stake in our success. The New GM will play a critical role in the future of the automobile, and assure that the U.S. has a strong stake in this rapidly changing global manufacturing industry,” Henderson said.

Business operations continue globally without interruption

GM’s North American manufacturing operations continues to monitor production output to make sure it aligns with market demand, and currently intends to ramp up manufacturing operations as market demand improves during the latter half of the year.

None of GM’s operations outside of the U.S. are included in the U.S. court filings or court-supervised process, and these filings have no direct legal impact on GM’s plans and operations outside the U.S. GM confirmed that all business operations are continuing without interruption in its Europe; Latin America, Africa and the Middle East; and Asia Pacific regions.

“Worldwide, GM dealers are open for business, offering competitive financing options on our award-winning vehicles, continuing to honor our industry-leading warranty coverage, and providing outstanding service,” said Henderson. “Furthermore, the U.S. Treasury and the Canadian governments have issued a strong vote of confidence by backing GM’s vehicle warranties.”

GM has filed various “first day” motions with the Court to ensure the company’s continued ability to conduct normal business operations. Upon Court approval, GM will be expressly authorized, among other things, to:

Honor all obligations to customers and continue customer programs, including warranties, without interruption
Respect our operating and financing agreements with GMAC, supporting continued wholesale financing for dealers and retail financing for customers
Pay dealers’ open accounts and continue warranty and incentive programs
Pay essential suppliers and logistics providers for goods and services provided before and after the company’s court filings
Continue pay and benefits for employees and retirees; however, the amount of non-qualified pension for some executive retirees may be affected.

The New GM

GM’s agreements with the U.S. Treasury, the Canadian and Ontario governments and the UAW and CAW, in addition to the support of a substantial portion of GM’s unsecured bondholders, will enable the New GM to be a leaner, faster and more customer-focused enterprise, consistent with the vision, goals and plans of GM’s enhanced operating plan announced April 27.

The New GM will:

• Focus on four core brands in the U.S. - Chevrolet, Cadillac, Buick and GMC - with fewer nameplates and a more competitive level of marketing support per brand
• Effectively close the competitive gap in active worker labor costs compared with transplant auto manufacturers
• More efficiently utilize U.S. capacity while increasing over time the percentage of U.S. sales manufactured domestically
• Feature lower structural costs enabling its North American region to break even (on an adjusted EBIT basis) at a U.S. total industry volume of approximately 10 million vehicles. This rate is substantially below the 15 to 17 million annual vehicle sales rates recorded from 1995 through 2007
• Achieve its lower structural costs in part by further reducing 2009 salaried employment in North America from its year-end total of 35,100 to approximately 27,200, and continuing to improve its balance sheet by reducing retiree benefits for salaried retirees and non-UAW hourly retirees
• Provide a higher level of customer service through a more focused U.S. network of approximately 3,600 dealers
• Continue and increase its investment and leadership in fuel economy and advanced propulsion technologies

Capital Structure of the New GM

A critical element of GM’s reinvention is to achieve a significantly stronger and healthier balance sheet. On March 31, 2009, GM reported consolidated debt of $54.4 billion, along with additional liabilities, including an estimated $20 billion obligation to the UAW VEBA.

Under GM’s agreements with the U.S. Treasury, the Canadian and Ontario governments, and the UAW and CAW, and with the support of a substantial portion of GM’s unsecured bondholders, upon closing of GM’s sale of assets to the New GM, the New GM’s capital structure will be comprised of:

Approximately $17 billion in total consolidated debt, including:

• $6.7 billion of debt owed to the U.S. Treasury
• $1.3 billion of debt owed to the Canadian and Ontario governments
• $2.5 billion of notes issued to the new Voluntary Employee Beneficiary Association (New VEBA)
• Approximately $6.8 billion of other, primarily international debt, but excluding Europe
• $9 billion of perpetual preferred stock with a 9 percent annual dividend, payable quarterly in cash, $2.1 billion of which will be issued to the U.S. Treasury, $0.4 billion of which will be issued to the Canadian and Ontario governments and $6.5 billion of which will be issued to the New VEBA

Common equity, 60.8 percent of which will be owned by the U.S. Treasury, 11.7 percent of which will be owned by the Canadian and Ontario governments, 17.5 percent of which will be owned by the New VEBA, and 10 percent of which has been reserved for GM for the benefit of the unsecured bondholders and other unsecured creditors of GM
Warrants granted to the New VEBA to acquire newly issued shares in the New GM equal to 2.5 percent of its outstanding common equity.

Warrants granted to GM at closing to acquire newly issued shares in the New GM equal to 15 percent of its outstanding common equity, with various exercise prices and expirations
Other than the $8 billion of debt owed to the U.S. Treasury and the Canadian and Ontario governments by the New GM, all amounts owed by GM or the New GM to the U.S. Treasury and Canadian and Ontario governments would be equitized in exchange for the New GM securities described above, and no other debt will be owed by GM to the U.S. Treasury and the Canadian and Ontario governments.

GM Europe Restructuring

GM announced separately today, GM Europe has an agreement for €1.5 billion of bridge financing from the German government and a Memorandum of Understanding to partner with Magna International Inc. Under the agreement, the Opel/Vauxhall assets have been pooled under Adam Opel GmbH, with the majority of the shares of Adam Opel GmbH being put into an independent trust (the balance to remain with General Motors), while final negotiations with Magna proceed. Negotiations to close the agreement should take several weeks. Additional details will be available athttp://media.gm.com/eur/gm/en/.

New products and technologies on track

The New GM, with its strong financial base and best-in-class dealer network, will support a portfolio of award-winning vehicles, including the Chevy Malibu (2008 North American Car of the Year and J.D. Power and Associates’ segment leader in its 2008 Initial Quality Survey), Cadillac CTS (Motor Trend Car of the Year) and its Buick brand (tied for 1st place in J.D. Power and Associates’ 2009 Vehicle Dependability Study). The New GM will have a number of key vehicle launches in 2009 and 2010, including:

• Chevrolet Camaro, a dramatic, moderately priced sport coupe with highway fuel economy of up to 29 mpg
• An all-new Buick LaCrosse premium midsize sedan
• The luxury midsize Cadillac SRX crossover and CTS Sport Wagon
• The Chevy Equinox and GMC Terrain, midsize crossovers with class-leading highway fuel economy of 32 mpg
• The Chevy Cruze, GM’s new global compact car
• The revolutionary Chevy Volt, an extended-range electric vehicle that can travel up to 40 miles on battery power alone with the extended-range capability of more than 300 total miles.

“Our products are our future, and our lineup of new cars and crossovers are a great foundation for success,” said Henderson. “The New GM is here to stay, and our brands position us to compete well in profitable segments with vehicles that are second-to-none.”

GM also reaffirmed its commitment to improve the fuel efficiency of its vehicle fleet, meet or exceed new federal fuel economy and emissions regulations, and push ahead with advanced propulsion technology. GM will launch the Chevrolet Volt extended range electric vehicle in 2010, expects to have 14 hybrid models in production by 2012, and will have 65 percent of vehicles alternative-fuel capable by 2014.

“The New GM will become a long-term global leader in the development of fuel-efficient and advanced-technology vehicles,” said Henderson. “In doing so, the New GM will contribute to the development of advanced engineering and manufacturing capabilities in the United States, which are critical to the future of the U.S. economy.”

GM’s primary bankruptcy counsel is Weil, Gotshal & Manges LLP. GM is also represented by Jenner & Block LLP and Honigman Miller Schwartz and Cohn LLP as counsels. Cravath, Swaine, & Moore LLP is providing legal advice to the Independent Directors of GM. GM’s restructuring advisor is AP Services LLP and its financial advisors are Morgan Stanley, Evercore Partners and the Blackstone Group LLP.

More information about GM’s chapter 11 cases is available at www.GM.com/restructuring.

Court filings and claims information are available at www.GMcourtdocs.com.

As Unemployment Runs Out, Welfare Numbers Rise

Story from the Wall Street Journal

Welfare rolls, which were slow to rise and actually fell in many states early in the recession, now are climbing across the country for the first time since President Bill Clinton signed legislation pledging "to end welfare as we know it" more than a decade ago.

Twenty-three of the 30 largest states, which account for more than 88% of the nation's total population, see welfare caseloads above year-ago levels, according to a survey conducted by The Wall Street Journal and the National Conference of State Legislatures. As more people run out of unemployment compensation, many are turning to welfare as a stopgap.

The biggest increases are in states with some of the worst jobless rates. Oregon's count was up 27% in May from a year earlier; South Carolina's climbed 23% and California's 10% between March 2009 and March 2008. A few big states that had seen declining welfare caseloads just a few months ago now are seeing increases: New York is up 1.2%, Illinois 3% and Wisconsin 3.9%. Welfare rolls in a few big states, Michigan and New Jersey among them, still are declining.

The recent rise in welfare families across the country is a sign that the welfare system is expanding at a time of added need, assuaging fears of some critics of Mr. Clinton's welfare overhaul who said the truly needy would be turned away.

"To me it's good news," says Ron Haskins of the Brookings Institution, who helped draft the 1996 welfare-overhaul law as a Republican congressional staff member. "This is exactly what should happen."

Welfare cases peaked at above five million in 1995 and declined sharply after the 1996 law put time limits on benefits and emphasized moving recipients from welfare to work. The time limits vary by state, but the federally mandated maximum is five years with some exceptions; after that, benefits end.

The cash-assistance program, called Temporary Assistance for Needy Families (TANF), was created by the 1996 law and replaced previous welfare and jobs-training programs. Funded partly by the federal government and partly by the states, it primarily assists women who have children and no job, or a very low-paying one. The number of families on welfare had been falling steadily and, nine months into the recession, stood at 1.6 million in September 2008, the most recent date for which national tallies are available.

'First Real Test'

"This is the first real test," said Liz Schott, a welfare analyst at the Center on Budget and Policy Priorities, a liberal Washington think tank. "We always said, how is it going to perform? How is TANF going to perform in an economic downturn?"

One clue, she says, can be found in a different measure. Although the TANF program seems to be accommodating increased need, it is doing so at a slower rate than another government initiative: the food-stamp program. The number of food-stamp recipients has risen in every state and was 19% higher in March than a year ago, a much bigger increase than the number of welfare cases.

Food-stamp eligibility is significantly easier than the criteria for receiving welfare, so food-stamp assistance tends to rise first. The food-stamp program covers a much larger pool of people who have trouble making ends meet but make more money than the allowable limits under TANF.

In general, a family of four must have a monthly income of less than $2,297 to qualify for food stamps. Welfare, on the other hand, is designed as a last resort.

The average monthly welfare benefit in 2006, which reflects the most current data collected by the government, was $372.

Antoinette Tatum has been receiving food stamps since September when she and her 4-year-old daughter moved to Kensington, Md. When her car transmission failed, Ms. Tatum couldn't commute to her job in Baltimore, about 45 minutes away by car, so she quit. Unable to find a full-time job, Ms. Tatum did temporary work but found that the more she earned, the fewer government benefits she received; ultimately she couldn't make ends meet.

"The government, they help the extremes. But people in between have the hardest time," said Ms. Tatum, 28. "You don't make enough money to get by but you make too much to get help." She turned to welfare, and expects to begin getting checks at the end of this month. She is considering staying on welfare and going to college instead of seeking another low-wage job.

The recession is straining many state welfare programs. State budget woes often mean more cases without more employees. And the demand for cash assistance is squeezing funds for job-training programs targeted both at the unemployed with little work experience and unemployed professionals with extensive work experience.

In South Carolina, for example, the vast majority of welfare funding is being directed to the cash-assistance program, leaving little to actually help people find jobs and get off welfare. "When we really are talking about how to put people back to work or get them retrained, with the budget problems our state is having, I really worry," says Sue Berkowitz, the director of the South Carolina Appleseed Legal Justice Center, which advocates for low-income people.

Stimulus Grants

The federal government's fiscal stimulus includes $5 billion for states where more families receive welfare or spending increases on employment subsidies or short-term emergency assistance. That provision sparked concerns from the Heritage Foundation and other conservative groups that President Barack Obama was undoing the provisions of the 1996 law intended to encourage states to get people off welfare and onto payrolls.

So far, only California and Ohio have received stimulus grants, but 38 other states and territories said they plan to apply, said Jeffrey Kelley, spokesman for the Department of Health and Human Services' Administration for Children and Families.

The lag in the increase in welfare cases during the worst recession in a generation is curious to some some scholars. "In many respects, the mystery that had been operating until now had been how can there be such a rapid increase in unemployment and long-term unemployment and not show up in the welfare [system]?" says Mark H. Greenberg, director of Georgetown University's Center on Poverty, Inequality and Public Policy.

The extension of unemployment benefits by Congress -- for as long as 59 weeks in some states -- may be one reason.

"To some extent unemployment [compensation] is doing what we hoped it would do, which is being the first safety net for unemployed workers," says Don Winstead, the deputy secretary of Florida's Department of Children and Families. Without those extensions, he added, the number of families on welfare in Florida would have risen even more than it has: up 14% in June versus a year ago.

Another cause of the delay may be that welfare is targeted at women and children, and this recession has been hardest on men. The lag in the increase in welfare cases may simply show that it took longer for the recession to hurt women than men, says Mr. Haskins of the Brookings Institution.

Despite the deep recession, a few big states still have declining welfare rolls.

In Michigan, for example, welfare caseloads were down 4.8% in April from a year ago even though the number of residents receiving food stamps was up 13% in March to more than 1.4 million people.

Some advocacy groups for the poor complain that strict front-end requirements -- which force welfare recipients to look for work in a state with a 14% unemployment rate before even meeting with a caseworker -- deter many from seeking help.

A further explanation is that income limits for welfare eligibility are set so low, and haven't been adjusted for so long, that having a low-wage part-time job can disqualify an applicant. In New Jersey, a family of three earning more than $636 a month is ineligible. "These are the people who really will fall through the cracks because they're not eligible for any help," says Donna Gapas, who oversees the welfare program in Hunterdon County, N.J.