The decision to use $1.3 million in Mississippi’s federal welfare dollars to fund a boot camp-style fitness program in 2018 didn’t occur entirely off the books or in secret. 

It was allegedly part of a state-sanctioned initiative that exploited the social safety net — a national trend that federal officials are trying to reverse through several policy changes it recently proposed.

Auditors later deemed expenditures on the exercise program unlawful, lumping it within a sprawling welfare fraud scheme to which seven people have pleaded guilty, and the state has demanded the money returned. But at the time, Mississippi and federal officials were all on board, according to the fitness instructor Paul Lacoste.

In fact, Lacoste recalls that before he received his contract for welfare funds, the state agency director John Davis, his boss then-Gov. Phil Bryant, and federal officials were at the table and supported the idea. Davis has pleaded guilty to several felonies and potentially faces years in prison, Lacoste has not been charged criminally but he is facing civil litigation, and Bryant is not facing criminal or civil charges.

The federal grant that supplied the funds, Temporary Assistance for Needy Families or TANF, is a work and family stabilization program, not a health-related program.

Leaders may have theoretically justified the purchase by arguing that helping low-income people get fit would help them enter or maintain their employment. In other words, a healthy population equals a strong workforce. It may be a stretch, but it’s arguably the kind of mental leap states have made since welfare reform in the 1990’s in order to spend federal welfare funds on virtually anything but cash assistance to needy families.

But it’s unclear if that’s how leaders justified the fitness classes or if that explanation would even fly. Mississippi didn’t necessarily have to explain their logic because the federal government didn’t require it. The U.S. Department of Health and Human Services, which administers the program, exercises no authority to scrutinize state spending or determine whether the uses actually align with the program’s intended purposes.

Enter the Mississippi welfare scandal, where state officials used politically-connected nonprofits and dubious legal loopholes to funnel welfare money to the construction of a volleyball stadium, a pharmaceutical startup company, a wrestling ministry, and countless other questionable programs.

Under U.S. President Joe Biden, the U.S. Department of Health and Human Services is attempting to clarify what kinds of programs states can support with TANF funds. The rules say that states may no longer be able to use the grant to support afterschool programs, college scholarships for recent high school graduates from middle-class families, or child welfare investigations — all things Mississippi currently does within its TANF program.

“It would be premature for DHS to comment on a proposed rule,” a spokesperson for Mississippi Department of Human Services said in an emailed statement to Mississippi Today. “ACF (the Office of Family Assistance at the U.S. Department of Human Services) has only issued a notice of a proposed rule. There could be changes before a final rule is adopted.”

HHS similarly said it “cannot speculate on the application of a rule that is a proposed rule and has not yet been finalized” as it reviews more than 7,000 public comments on the proposal.

If it takes effect as proposed in coming months, the federal government will also finally have the leeway to determine, after the state makes an expenditure, if purchases were “reasonably calculated,” meaning a “reasonable person” would find that it accomplished one of the goals of the TANF program.

If state and federal officials disagree, the state must provide evidence or academic research to justify their spending — something the federal government has never before required.

The notice of proposed rule changes, released in October, acknowledges that states have been spending federal public assistance funds “on a wide range of benefits and services, including some with tenuous connections to a TANF purpose.”

The notice comes on the heels of Mississippi’s scandal, including Mississippi Today’s Pulitzer Prize-winning reporting on the subject, which helped place a national spotlight on the failings of the program.

“I think this is HHS right now realizing, because of Mississippi, ‘We don’t have clarity on our enforcement authority as an agency to determine when costs are unallowable,’” said Matt Williams, director of research for the Mississippi Low-Income Child Care Initiative. “They’re trying to introduce reason. They’re acknowledging that states can justify so much that has no connection to getting resources in the hands of families below poverty. … Because of that flexibility in those four purposes, they need some kind of mechanism to say back to the states, ‘Hey, this is wrong. This does not pass muster.’”

When Congress replaced the nation’s former welfare entitlement program Aid to Families with Dependent Children in 1996 with TANF, a block grant, it gave states broad flexibility to spend the funds on four vague purposes. Those are: 

• Provide assistance to needy families so children can be cared for in their home;
• Reduce the dependence of needy parents by promoting job preparation, work and marriage;
• Prevent out-of-wedlock pregnancies;
• Encourage two-parent families.

“Among the purposes, you do not see the purpose being to reduce poverty, which has been a shocking omission,” said Heather Hahn, a national TANF expert with the Urban Institute. “But it was a highly political change, and earlier versions had not passed and this one did.”

The ability of states to create their own welfare programs is central to the law; removing that flexibility would require an act of Congress.

Hahn told Mississippi Today she thinks HHS is “still really walking a fine line between flexibility and accountability.”

Authors of “The Injustice of Place: Uncovering the Legacy of Poverty in America,” released in August, explain that the federal government did more than just authorize states to spend the money however they wanted. By placing tough restrictions on administering the monthly welfare check to poor families, and virtually no limitations around the spending on ancillary programs, it actually incentivized states to direct the funding elsewhere. The federal government allotted states the same amount of money no matter how many needy families they served.

“To spend the funds to help needy families, the states must navigate myriad rules and reporting requirements. But to use the money for other purposes, they need only justify that the expense is relevant to one of the core purposes of the program,” write the authors and national poverty researchers Luke Shaefer, Kathryn Edin and Timothy Nelson. “These criteria leave a lot of wiggle room, to say the least. Mississippi, a state that ranks among the most corrupt by any measure, took that wiggle room to the extreme.”

Much of the scrutiny around Mississippi’s spending relates to a state rule that allows non-cash TANF programs to serve families who earn up to 350% of the federal poverty line — about $87,000 for a family of three — meaning the funds benefitted many middle-class families.

The new federal rules would require states to define “needy” as families earning under 200% of the federal poverty line. But this new requirement would only apply to cash assistance — which Mississippi already caps far below the poverty line — and workforce training and support programs. 

According to the four TANF purposes, the federal government does not require that programs related to pregnancy and parenthood be reserved for the needy.

States have been using the TANF program to support college scholarships for adults without children, many from middle class families, under the argument that they reduce out-of-wedlock pregnancy. The federal agency specified that this would not likely meet the “reasonable person standard.” 

In its most recent reports, Mississippi counts more than $15 million in state spending on college scholarships as part of its required state match to draw down federal TANF funds. The state labels this expenditure under the goal of ending the dependency of needy parents on government benefits — though the recipients are most often neither parents nor needy. Mississippi Today’s ongoing investigation into the welfare program found in 2019 that 40% of those scholarships went to middle-class families, and the vast majority were traditional students between the ages of 17 and 24.

The rules also say that states will likely no longer be able to use TANF to fund after school programs, which received a total of $925 million nationally in 2021. Most recently, Mississippi was spending about $13 million in TANF funds on these services annually. 

For years, Mississippi has used TANF funds to plug budget holes at the Mississippi Department of Child Protection Services, the agency that investigates child abuse and neglect and conducts family separations — the antithesis of the TANF program. The payments were interagency transfers, hidden from public view. But recently, MDHS entered a TANF subgrant agreement with MDCPS, which spelled out for the first time what the funds were actually meant to support.

Under that agreement, MDHS supplies MDCPS nearly $30 million, primarily to pay for social workers who investigate child abuse and neglect reports, as well as in-home family preservation services and the child abuse hotline. HHS said states will likely no longer be allowed to use TANF funds for child welfare investigations.

As written, the rule also aims to prevent states from using TANF funds to support crisis pregnancy centers – a policy that Republican lawmakers, including Sen. Cindy Hyde-Smith, have decried. Mississippi does not, however, currently use TANF dollars for these programs.

Through these new rules, the federal welfare agency appears to encourage — but not require — states to revert back to providing poor families with monthly payments.

“More than 27 years after the establishment of TANF, state programs have shifted away from a focus on direct cash and employment assistance,” reads the federal notice. “Although states are permitted under the statute to determine how much funding to expend on cash assistance, we remind states that there is a large body of research that shows that cash assistance is a critically important tool for reducing family and child poverty.”

Currently, states spend 23% of TANF funds nationally on direct cash assistance. They spend the rest on things like child care and head start (23%), workforce training (8%), child welfare (6%), Earned Income Tax Credits (6%), out-of-wedlock pregnancy prevention (1%) and fatherhood and two-parent family formation and maintenance programs (0.4%). (Compared to less than half a percent nationally, Mississippi spends 25% of its welfare funds on fatherhood programs).

But there’s no federal data of individual expenditures under those spending categories. The federal government doesn’t require state welfare agencies to provide actual documentation detailing this spending.

The only tool HHS has to hold states accountable for these purchases is an annual audit, which states must have conducted each year. In Mississippi, the entity that performs that audit is the State Auditor, an elected politician.

Mississippi’s auditor found repeated deficiencies in MDHS spending controls that went unaddressed for years. The reports may only test a fraction of purchases each year, and they occur retroactively, meaning by the time HHS learns about potential misspending, the money is already gone.

Even under the new requirements for a TANF program to be “reasonably calculated,” the federal government wouldn’t have prior approval. The analysis and enforcement would still happen retroactively, experts said.

“I think HHS is trying to be as strong as they can within their statutory authority to hold states’ feet to the fire and require actual evidence,” Williams said.

But what Williams said might actually happen in practice is that states like Mississippi will be in a constant back-and-forth bureaucratic corrective action plan with the federal government. A state that made unallowable purchases could face a future reduction of their federal TANF grant, which it would be required to make up with state funds, but Williams questions how the federal government would enforce that.

Williams said there are more impactful policy changes that may require action by Congress, such as requiring states to spend a certain percentage of their TANF grant on assistance — not just cash, but other direct supports like child care — or ease eligibility requirements so that more families would qualify for assistance.

Currently, a family of three in Mississippi must earn under 25% of the federal poverty line, about $457 a month, to be eligible for cash assistance. In 2022, the state only spent about 5% of its annual grant on these monthly payments to poor families — about $4.3 million out of $86.5 million. However, this is up from $3.5 million, or about 4%, in 2021.

Just 211 adults in Mississippi receive the aid. 

The state’s largest current TANF subgrant, a $5 million subgrant with Canopy Children’s Solutions, is for a program under the state’s “Parenthood Initiative” called LINK, which is supposed to help families “navigate the difficulties of locating and accessing basic needs, educating families on how to access these resources on their own, educating and promoting healthy family values and building resilience and self-sufficiency to ensure long term permanency.”

States are allowed to transfer up to 30% of their TANF grant to the low-income child care voucher program. While Mississippi had chosen not to do this for the past several years, MDHS Director Bob Anderson recently told state lawmakers the agency had decided to begin making this transfer.

Williams is hopeful the new regulations signal a step toward “acknowledging that states have too much flexibility, and that that flexibility has eviscerated the social safety net as we know it.”

But many questions remain in Mississippi. For example, auditors and lawyers have come to different conclusions about what, exactly, was wrong about Lacoste’s welfare-funded boot camp program.

While Lacoste represented to the public that his fitness classes were part of a partnership with MDHS and Families First for Mississippi — the initiative to which the state outsourced its TANF program — he did not set any requirements for participants to be low-income, according to audits.

Lawyers hired by the state to file civil charges argue that Lacoste and his organization Victory Sports Foundation must return the funds because his program did not achieve a lawful TANF purpose.

But neither of the audits on which the lawsuit was based appeared to actually analyze whether fitness and nutrition services would fit within the TANF purposes.

The audit report by the State Auditor’s Office, conducted on behalf of the federal government, said the payments to Victory Sports violated federal law, not because fitness classes are inherently unaligned with a TANF goal, but primarily because the program was not reserved for the needy.

Forensic auditors hired by the state said the payments were improper for neither of those reasons, but because they were made under undue influence by then MDHS director Davis.

Officials from the U.S. Department of Human Services have not made any public statements to clear this up, providing a canned response to Mississippi Today for this story.

So would an exercise program meet the new “reasonable person” standard?

“No,” Williams said, before pausing and then clarifying, “Whose definition of ‘reasonable’?”

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