secyrpt.htm

REPORT TO THE

HOUSE OF REPRESENTATIVES

COMMITTEE ON WAYS AND MEANS

AND THE

SENATE COMMITTEE ON FINANCE:

CHILD SUPPORT ENFORCEMENT

INCENTIVE FUNDING

February, 1997

INTRODUCTION

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) requires the Secretary of Health and Human Services (HHS), in consultation with State directors of IV-D programs, to recommend to Congress a new incentive funding system for the State child support enforcement programs which is to be based on program performance.

In order to consult with State IV-D directors, an Incentive Funding Work Group was formed consisting of 15 State and local IV-D directors and 11 Federal staff representatives from the U.S. Department of Health and Human Services. The Work Group held a series of meetings and worked over a period of three months to come up with the recommendations for the new incentive funding system. State representatives on the Work Group also consulted with State IV-D programs not represented directly on the Work Grou p. The recommendations of the Work Group represent a consensus (although, not necessarily, unanimous agreement) on the new incentive funding system. The report of the Incentive Funding Work Group is attached hereto. The Secretary of Health and Human Services fully endorses the incentive formula set forth in the Incentive Funding Work Group Report, recognizing that Work Group consensus depends on adoption of all Work Group recommendations. This report of the Secretary of Health and Human Services makes r ecommendations to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate based upon the report of that Work Group and addresses the need for further work in areas beyond the scope of the Work Group's charter.

The Work Group's Report includes recommendations with respect to other aspects of program funding, beyond incentives, for example, a recommendation that the level of Federal financial participation in State program expenditures remain at 66 percent. Because further work may be needed on broader program funding issues, we are sending the Work Group recommendations forward for consideration by the Congress, recognizing the importance of consensus and endorsing the Work Group's recommendations with respect to the incentive formula itself, while reserving judgment on those aspects of the recommendations that address broader program funding issues. We are committed to working with the Congress on broader funding issues arising from the changing nature of the relationship between the TANF and child support programs under welfare reform. Bifurcation choices made by States could impact the source of incentive payments, i.e., the Federal share of collections. We are committed to working with the Governors and t he Congress to identify approaches that will ensure that States do not use the flexibility provided to retain Federal dollars in State coffers. Within 90 days of the submission of this report, the Administration will propose a legislative solution to this funding problem.

SUMMARY OF RECOMMENDATIONS

149 Measures. The incentive system for State child support programs should measure State performance in five areas: establishment of paternities, establishment of child support orders, collections on current child support due, collection on past child support due (arrears), and cost effectiveness.

149 Standards. The incentive system should provide additional monetary payments to States based upon State performance for each of the five measures. The amount of incentive for a particular measure should be based upon established standards of performance.

149 Collection Base. The amount of potential incentive payments available to each individual State should be based upon a percentage of its own State collections - its "collection base." The collection base should include collections in both Temporary Assistance to Needy Families (TANF) cases and non-TANF cases. However, collections in TANF cases and former TANF cases should be given more weight.

149 Phase In. The new incentive system should be phased in over a one year period beginning in fiscal year 2000.

149 Reinvestment. Incentive payments received by a State should be reinvested in the State child support program.

149 Maintain FFP. The Work Group recommends that the Federal Financial Participation (FFP) rate for State program expenditures should remain at 66 percent. As discussed above, further work on larger program funding issues is needed before commitment to the current level of Federal funding of program costs.

149 Review Mechanism. The new incentive system should be reviewed on a periodic basis to ensure that it continues to reward program goals.

BACKGROUND

Under Section 458 of Title IV-D of the Social Security Act, States are currently paid as an incentive a minimum of six percent of their AFDC collections and six percent of their nonAFDC collections. There is also the potential to earn up to 10% of collections based on the State's cost effectiveness. However, the total amount of nonAFDC incentives is capped at 115% of the AFDC incentive.

This current incentive system has been criticized because it is focused on only one aspect of the IV-D program. The incentives are paid based only on a State's cost effectiveness and all States receive a base rate regardless of performance. Most child support experts believe that this incentive system has no real incentive effect because all States receive the minimum six percent of incentives. This incentive system also does not reward states for other important aspects of child support enforcement, such as paternity establishment.

Over the past decade, a number of commissions and organizations have recommended the adoption of a new performance based incentive system. In 1988 Congress authorized the creation of the U.S. Commission on Interstate Child Support to make recommendations to Congress on improving the child support program. When the Interstate Commission issued its report in August, 1992 it called for a study of the federal funding formula and a change of the incentive structure to one based upon performance. Other nati onal organizations, including the National Conference of State Legislatures, the American Public Welfare Association, the National Governor's Association, and several national advocacy organizations have also recommended the adoption of a new performance based incentive system.

In June, 1993 President Clinton established a Working Group on Welfare, Family Support, and Independence to come up with a welfare plan, including child support enforcement reform. The plan, detailed in the proposed Work and Responsibility Act of 1994, would have required the Secretary of Health and Human Services (HHS) to set performance standards for State IV-D programs and reward states with high performance. Other major child support enforcement bills introduced in 1994, 1995, and 1996 by both Repu blican and Democratic members of Congress included similar provisions.

As a result, section 341 of the PRWORA requested the Secretary to consult with IV-D directors and recommend changes: The law states:

149The Secretary of Health and Human Services, in consultation with State directors of child support enforcement programs shall develop a new incentive funding system, in a revenue neutral manner;

149The new system shall provide additional payments to any State based on such State's performance under such a program; and

149The Secretary shall report to Congress on the new system by March 1, 1997.

The Incentive Funding Work Group was formed in October, 1996 consisting of 15 State and local IV-D directors or their representatives and 11 Federal staff representatives from the U.S. Department of Health and Human Services. This collaborative approach drew upon the partnership forged during the Federal Office of Child Support Enforcement's pilot of the Government Performance and Results Act (GPRA). Earlier efforts of this State-Federal partnership produced a five-year national Strategic Plan for the child support enforcement program and a set of outcome measures to indicate the program's success in achieving the goals and objectives of the Strategic Plan. Using the same collaboration and consensus-building approach, the joint Work Group effort between State and Federal partners built its recommendations for a new incentive funding system on the foundation of the national Strategic Plan.

PERFORMANCE MEASURES AND STANDARDS

The new incentive system measures State performance in five areas: establishment of paternities, establishment of child support orders, collections on current child support due, collection on past child support due (arrears), and cost effectiveness. There was a consensus among the Work Group members that these are the five most important measures in determining the success of the child support enforcement program. These five measures are nearly identical to the measures proposed in the major welfare bi lls introduced in the past few years, including the Work and Responsibility Act of 1994 and the Personal Responsibility Act of 1996. The specific equations for each of these five measures were developed by the Incentive Funding Work Group relying, in large part, upon the national Strategic Plan. Thus, these measures reflect a widespread consensus among child support professionals regarding the major factors we ought to be measuring to determine success of the child support program.

The new incentive system provides rewards to States for effective paternity establishment programs. This is not intended to weaken the provisions of PRWORA that penalize States that do not improve their performance in paternity establishment. The incentive for paternity establishment assures that resources are put into the child support program based on State performance, while the penalty taken against the TANF grant assures State compliance with the paternity establishment requirements of PRWORA.

The new incentive system should provide additional monetary payments to States based upon State performance for each of the five measures. The amount of incentive for a particular measure is based upon established standards of performance. The Work Group sought to create standards that rewarded both high performing States for maintaining and improving on their success and encouraged poor performing States to improve their results. Accordingly, the Work Group considered both past performance and trends and data estimates for the future in establishing the performance standards. The performance standards adopted reflect three objectives: (1) incentives should increase as performance improves; (2) states performing at the very highest level that we can reasonable expect should receive the maximum incentive for that performance measure; and (3) there should be a minimum threshold of performance for each measure except that States below the threshold showing very significant improvement in performance shou ld be rewarded with some incentive.

For each standard, there is an upper threshold for the program to achieve, most often set at 80 percent (and 5.00 for the cost effectiveness ratio). Any State that achieves this performance level, or any level above this, is entitled to the full incentive for that measure. The reasons for using an 80 percent standard include a recognition that there are factors which will make achievement of a perfect 100% score, whether for establishing paternity or collecting on current support, impossible. There was consensus that 80% is a level that states can realistically strive to achieve. For example, in some wage withholding cases, because of the peculiarities of the calendar and payments cycles, payments may be attributed to arrearages. In the last formula, where there is no upper limit, the maximum incentive is achievable at a cost/effectiveness ratio above 5.0 (i.e, $5 of child support is collected for each $1 spent to collect it).

At the lower end of the scale in each case, there is a minimum level below which performance would not be rewarded. These lower limits were set by examining current performance data. However, if a State can demonstrate a substantial improvement over the prior year's performance, that improvement would entitle the State to some incentive funding, though never more than half of the maximum incentive possible. (The cost effectiveness measure is the exception to this rule.) As a result, thos e states with lower performance levels will at least receive some incentive provided that the program is moving sufficiently quickly in the right direction.

The upper and lower thresholds for performance are based on analysis of State performance data and projections. The work group recommended that, in the future the formula be reviewed and adjusted, if necessary. Should actual experience demonstrate, for example, that the majority of States easily achieve the highest performance standard in a particular measure, then the formula should be reevaluated to see that it rewards improvement.

A brief description of the measures follows. The equations and standards are included in the workgroup report.

PATERNITY ESTABLISHMENT

The measure for paternity establishment is identical to that included by Congress in the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 for purposes of paternity establishment penalties.

CASES WITH SUPPORT ORDERS

Establishing an order to pay child support is a critical first step to collecting support for families. This measure shows how much of a IV-D agency's caseload is capable of being enforced and how well the agency is keeping up with case backloads and intake.

COLLECTIONS ON CURRENT SUPPORT

The third measure focuses on the proportion of current support due that is collected on IV-D cases. It gets to the heart of the program: regular and dependable support payments to families.

COLLECTIONS ON ARREARS

This measure focuses on how well States are doing at collecting some amount of money on those cases having an arrearage. The measures specifically counts paying cases, and not total arrears dollars collected, because States have very different methods of handling certain aspects of arrears cases, such as their ability to write off bad debt or debt which is almost certainly "uncollectible."

COST EFFECTIVENESS

The final measure assesses the total dollars collected in the child support program for each dollar expended. Currently, cost effectiveness is the only measure on which States are being judged.

WEIGHTING AND COST NEUTRALITY

Each State will earn five scores based on performance on each of the five measures. However, there was a strong feeling among members of the Work Group that the measures were not of equal importance and should not carry an equal weight. Therefore, the decision was reached to count the first three measures (paternity establishment, order establishment and collections on current support) slightly more heavily than the last two (collections on arrears and cost effectiveness). For each of the first three m easures, a 100% score earns 1% of the "collection base" as defined below. Lower scores earn a percentage of the 1%. The last two measures are worth at a maximum .75% of the collection base. Lower scores, again, earn a lower proportion of this .75%.

Added together, the three measures at 1% and two measures at .75% equal 4.5% of the collection base. Cost neutrality mandates that a new incentive formula will not cost more than the current formula. Allotting a possible total of 4.5% of the collection base keeps the new formula cost neutral. Preliminary estimates of incentive funding payments under the recommended formula are within the range of Congressional Budget Office projections under current law. The statute requires the new system to be cost neutral. Since welfare reform made substantial changes to both the TANF and child support programs, these changes and their interaction must be considered in determining cost neutrality. Therefore, during the legislative process, if subsequent cost estimates show that the formula is not cost neutral, adjustments up or down can be made to the 4.5 percent to assure cost neutrality. For example, if new estimates show a decrease in the Federal share of collections due to separate State programs and legislat ion is not enacted to protect the Federal share, an adjustment may need to be made. In addition, the behavioral effects of paying incentives on never-assistance cases, if any, may have to be considered in making cost-neutrality adjustments to the formula.

Since the spending effects of the new system are untried, it is important that the new system include a provision to ensure that aggregate incentive payments are what they would have been under the old system, even if baseline projections are inaccurate. HHS will work with the Office of Management and Budget and its State partners to develop an automatic adjustment mechanism to ensure cost neutrality against the old system for five years following the implementation of the new system.

At the end of five years, HHS will report to the Congress on its experience with the new incentive system. The report will include HHS' assessment of the new incentive system's effects on State performance on paternity and order establishment, current and overdue support collections on TANF and nonTANF caseloads, and cost effectiveness. HHS will also report to the Congress on the past and potential spending effects of the new incentivesystem. At this time, the Administration will recommend to C ongress whether any modifications to the incentive system are necessary, such as the continuation of an automatic adjustment mechanism to control incentive expenditures.

THE COLLECTION BASE

The current incentive system is based on a percentage of total TANF collections plus non-TANF collections capped at 115% of TANF collections. Collections for incentive purposes include those made on behalf of other States. There are several problems that States are experiencing with the current formula which will be exacerbated in the future. First, those States for whom a large percentage of the caseload is non-TANF are effectively being penalized because they cannot count all of their non-TANF colle ctions. This may not have been a problem when the cap was first established, but as States are successfully moving people off of assistance, the effect of the cap is aggravated. Additionally, it is possible that the number of assistance cases will decrease over time as the implementation of welfare reform moves people toward self-sufficiency. The result of this success would be a smaller and smaller number of incentive dollars available to the States. A related result of capping the non-TANF collections is that States have less incentive to work non-TANF cases once the State has reached the cap. The Work Group felt that States ought to be rewarded and encouraged to work all cases. Therefore the incentive base ought to include all non-TANF collections without a cap as well as allowing States to count interstate collections.

The Work Group also felt that it was especially important to ensure that states continued to have strong incentives to work TANF cases and former TANF cases. Collection of child support for these groups is especially important to assist TANF recipients to leave welfare and to help them achieve self sufficiency so that they do not return to welfare. Since collection in TANF and former TANF cases is generally more difficult than in non-TANF cases, and non-TANF collections are rising at a faster ra te, it is sensible to provide a heavier emphasis on collection in TANF and former TANF cases. In addition, collections in TANF cases provides direct savings to the state and federal governments. Therefore the Work Group recommends adding collections made on former TANF cases to collections made on TANF cases and doubling these collections in the formula to give them extra emphasis. This has the added benefit of mitigating the impact of the change from the current incentive system with its cap on the non- TANF collections so that the potential collection base would be more equitable to states. The formula recommended is therefore:

2(TANF$ + former TANF$) + non-TANF$* = collection base

*nonTANF does not include former TANF

PHASE IN

By definition, some states will lose incentives by changing to a new incentive funding formula that is both performance based and cost neutral. To mitigate the loss, the Work Group recommended that the formula be phased in. To accomplish this, for fiscal year 2000, a State would earn half of what it would have earned under the old formula and half of what it earns under the new calculation. In fiscal year 2001, the new formula would be fully implemented. The extra year will provide those States affec ted to absorb reduced revenue while improving performance.

REINVESTMENT OF INCENTIVES IN CHILD SUPPORT PROGRAM

Currently, incentives earned by the State child support programs do not have to be reinvested in State programs. The result is that money that comes from the Federal investment in the child support program can end up being used for other purposes. The Work Group strongly recommended that States be required to reinvest federal dollars into the child support enforcement program. This would ensure continued improvement, adequate resources, and the maintenance of high performance levels.

FEDERAL FINANCIAL PARTICIPATION

Currently, the Federal government pays 66% of the administrative cost of the child support program. As a result of both Federal and State efforts over the past four years, child support collections and paternity establishment has reached record levels. Yet, we still have a long way to go to improve the program to where it should ultimately be. The PRWORA requires that States implement many changes to improve the operations of their programs. The Work Group believes strongly that continued funding at the present level is critical to ensure that states have the necessary staff and resources to meet the new requirements and challenges. However, before endorsement of this funding level, we intend to follow through on our commitment to discussions on the broader program funding issues which arise under State flexibility under the TANF program.

REVIEW MECHANISM

There were two major difficulties that faced the Work Group in developing an incentive funding formula for the future. First, the Work Group recognized that it was making a recommendation for a formula that would not be put into effect until FY 2000. With thepassage of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, the child support enforcement program is likely to change dramatically in the next few years. The effects on TANF and non-TANF caseloads are uncertain. This li mits the reliability of the data upon which the recommendations of the Work Group are based. Therefore, the child support program's results and effects of the new incentive system should be reviewed periodically. Limited discretion should be granted to the Secretary, to make appropriate changes, in consultation with the States, based on the program's actual results and effects every three to five years.

NEXT STEPS

We recognize that Work Group consensus depends on adoption of all their recommendations. We fully endorse the elements of the formula itself. However, the Work Group included recommendations with respect to other aspects of program funding. Because further work is needed on broader program funding issues, we are sending the Report forward with a commitment to working with the Congress on broader funding issues arising from the changing nature of the relationship between the TANF and child support progr ams under welfare reform.

In addition, bifurcation choices made by States could impact any incentive funding formula. The Federal share of collections will continue as the source of incentive payments. Depending on how States structure Temporary Assistance to Needy Families programs, the Federal share of collections could be reduced, threatening the source of incentive payments. Currently, the Federal share of collections for FY 1996 is approximately $1.297 billion, of which $409 million is paid to States in incentives. We will work with the Governors and the Congress to identify approaches that will ensure that States do not use the flexibility provided to retain Federal dollars in State coffers. Within 90 days of the submission of this report, the Administration will propose a legislative solution to this funding problem.

Finally, the work group recognized that the predictive ability of data and cost estimates is limited given current data and the impact of such factors as future demographic trends and PRWORA. Additional Federal and State efforts are critical before FY 2000 to ensure States produce reliable data upon which incentive funding will be based. The need to preserve the flexibility to adjust the formula in future years, based on actual results of the changing world under PRWORA, is built into the proposal. Fl exibility is also needed to consider different or additional measures, such as one that looks at how child support collections avoid costs in other public benefit programs.

CONCLUSION

This report of the Secretary of Health and Human Services to the Congress recommends a new incentive funding formula for the child support enforcement program that recognizes a range of critical services. The recommended incentive funding formula, developed in partnership with States, rewards performance and is cost neutral. This formula will, in tandem with the strong child support provisions of PRWORA, greatly improve the support provided to America's children into the 21st century. We will work with Congress during the legislative process to enact a new incentive funding formula. The forwarding of this Report and its recommendations recognizes the need to keep the momentum needed to ensure the success of the child support program while emphasizing that further work needs to be done to address additional issues in the context of the changing texture of State TANF and child support programs. We have begun, and will work quickly with the Congress and Governors, to resolve those related issues.

Attachment: Incentive Funding Workgroup Report to the

Secretary of Health and Human Services