Over the years, amendments to the law, court decisions, and federal regulations have formally reaffirmed the states' autonomy in deciding AFDC benefit levels. In particular, the 1967 amendments to the Social Security Act affirmed the right of states to set benefit maximums and to apply ''ratable reductions" in order to set benefits lower than the standard of need. The 1967 amendments included a provision to require states to update their need standard to reflect cost-of-living increases since the standard was adopted; however, states were not required to pay benefits consistent with these increases (for an account of the results of this provision, see Rabin, 1970).

Although the states have very wide latitude in setting their need standard and benefit levels, federal regulations have always been more specific about the resource side of the ledger for determining AFDC eligibility and benefits (see U.S. House of Representatives, 1994:327-331; Solomon and Neisner, 1993). Currently, to receive AFDC payments, a family must pass two income tests. First, the family's gross income cannot be higher than 185 percent of the state's need standard and the family's net or countable income must not exceed 100 percent of the need standard or payment standard, whichever is lower.14

Standard Setting in the 1970s

In 1980, Urban Systems Research & Engineering, Inc. (USR&E) completed a study for the Social Security Administration of AFDC standard setting practices, which included a survey of all 50 states and the District of Columbia and case studies of 11 states. USR&E was critical of state practices with regard to standard setting. In part, this criticism stemmed from the viewpoint expressed in the USR&E study that a standard must be "normative" or "absolute," in the sense that an expert standard of need should be developed for each budget component—independent of expenditure patterns—and then priced out. But as we discuss throughout this report, there are other types of poverty or need standards that merit serious consideration, with advantages and disadvantages. However, USR&E seems justifiably to have concluded that relatively few states in the 1970s were following good standard setting practices, in the sense that they developed their need standard as the result of a well-documented, carefully worked-out process or periodically reviewed their standard to determine whether it should be updated or redefined.

USR&E classified the methods originally used by the states to derive their need standard; see Table 8-2.

Market Basket Pricing Studies "The market basket approach, which involves the specification and pricing of every component of need, is the traditional method for conceiving and measuring absolute need, and historically it


See Appendix D for details on changes to these percentages over time and on other provisions of AFDC with regard to countable income and assets.

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