[Federal Register: April 12, 1999 (Volume 64, Number 69)]
[Rules and Regulations]
[Page 17819-17868]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12ap99-25]

[[pp. 17819-17868]] Temporary Assistance for Needy Families Program (TANF)

[[Page 17819]]

other excepted qualified aliens consist of veterans, members of the
military on active duty, and their spouses and unmarried dependent
children, as well as permanent residents who have earned forty
qualifying quarters. Like Federal TANF benefits, these groups are
eligible to receive State public benefits under TANF without the time
limit described above.
    In light of sections 411 and 412 of PRWORA, we have concluded that,
if a State uses segregated State TANF funds or separate State program
funds to provide State or local public benefits, it may only claim for
MOE purposes the qualified expenditures made with respect to eligible
family members who are qualified aliens, nonimmigrants under the
Immigration and Nationality Act, aliens paroled into this country under
section 212(d)(5) of such Act for less than one year, and illegal
aliens if the State enacted a law after August 22, 1996, that
affirmatively provides for eligibility to receive specifically
authorized State or local public benefits.
    A State may claim the expenditures for illegal aliens for MOE
purposes only if the law in question is broad enough to encompass TANF
eligibility. The only avenue for claiming expenditures for illegal
aliens in the definition of eligible families in section
409(a)(7)(B)(i)(IV) is under the criteria of families eligible for
assistance under TANF. Once a State affirms that illegal aliens are
eligible for TANF assistance, then the State may provide a State or
local public benefit as part of TANF or a separate State program. For
example, if the State's law only authorizes for child care to be
provided to illegal aliens through a non-TANF program (e.g., CCDF), it
could not claim any such expenditures as MOE. However, if its law
authorizes child care provided through TANF for illegal immigrants, it
may claim such expenditures as MOE. Or, if it provides such a service
to illegal aliens through a separate State program and not the TANF
program, but the illegal aliens are eligible for both, it may claim
those expenditures as MOE.
    A State may claim qualified expenditures for the individuals
described in the prior two paragraphs for MOE purposes because these
are the aliens who are either eligible for TANF benefits or lawfully
present in this country and eligible for TANF assistance, but for the
application of title IV of PRWORA. If a State decides to restrict alien
eligibility for State public benefits, then it may only claim MOE for
qualified segregated TANF expenditures or qualified separate State
program expenditures made with respect to the excepted qualified aliens
mentioned in section 412.
    Two limited circumstances exist in which it may be possible for a
State to help all aliens. These circumstances apply regardless of
funding source, i.e., whether a State uses Federal TANF, State TANF, or
separate State program funds. These circumstances derive from section
401(b) and (c) and section 411(b) and (c) of PRWORA, which describe
alien eligibility for Federal public benefits and State or local public
benefits, respectively.
    First, both sections 401(b) and 411(b) of PRWORA affirm that States
may provide certain noncash Federal or State and local public benefits
to any alien. Such benefits are those necessary for the protection of
life or safety and include those specified by the Attorney General in a
notice dated August 23, 1996 (AG Order No. 2049-96, 61 FR 45985
available on line at /news/welfare/wr/
830fdreg.htm). In the notice, the Attorney General specified the kinds
of noncash government-funded community programs, services, or
assistance that are necessary for protection of life or safety and for
which all aliens continue to be eligible. However, for all aliens to be
eligible, sections 401(b)(1)(D) and 411(b)(4) both state that neither
the government-funded programs, services, or assistance provided, nor
the cost of such assistance, may be conditioned on the individual
recipient's income or resources. While such service may meet one of the
purposes of TANF and may be provided as part of TANF or a separate
State program, a State may claim toward MOE only qualified expenditures
with respect to eligible (needy) families. Therefore, to claim any
expenditures that meet the Attorney General's specifications for life
and safety, a State must have a sound methodology that enables it to
identify and claim only the portion of total qualified expenditures for
benefits that it has provided to eligible families.
    Second, section 401(c) defines a Federal public benefit and section
411(c) defines a State or local public benefit. Both sections use the
same definition. The August 4, 1998, Federal Register notice that
identified TANF as a Federal public benefit expressly states that not
``all benefits or services provided by these programs are `Federal
public benefits' and require verification.'' Because sections 401(c)
and 411(c) use the same wording to define a public benefit, we believe
this statement may also apply to benefits provided with segregated
State TANF funds and separate State program funds. When a benefit is
not a Federal or State or local public benefit, a State is not
statutorily bound to restrict eligibility to certain aliens and can
provide that benefit to all aliens.
    The August 4, 1998 Federal Register ``Notice with Comment Period''
includes some general discussion about discerning whether a benefit
should or should not be considered a Federal public benefit. We suggest
this same discussion may be valuable to States in interpreting, per
section 411(c), the specific services that a State would or would not
consider a State or local public benefit under TANF or through a
separate State or local program. If a particular benefit or service
under the State's TANF program or separate State or local program is
not a public benefit, then the State may claim qualified expenditures
with respect to any alien family member who is ``eligible for TANF
assistance.''
    In addition we proposed that States may be able to count as MOE
expenditures, funds transferred to Tribal grantees to assist families
eligible under an approved Tribal TANF plan. However, if the
eligibility criteria under the Tribal TANF program are broader than
under the State's TANF plan, then all expenditures of State funds
within the Tribal TANF program might not count as MOE. Only
expenditures used to assist an ``eligible family'' under the State
program count. States must ensure that State funds are expended on
behalf of families eligible under the State's income and resource
standards.
(c) Types of Activities
    Section 409(a)(7)(B)(i)(I)(aa)-(ee) specifies that State
expenditures on eligible families for the following types of assistance
are ``qualified expenditures'' for basic MOE purposes:
    <bullet> Cash assistance (see subsequent discussion on this);
    <bullet> Child care assistance (see the discussion at Sec. 263.3);
    <bullet> Education activities designed to increase self-
sufficiency, job training, and work (note the specific exception at
Sec. 263.4);
    <bullet> Any other use of funds allowable under section 404(a)(1)
(see subsequent discussion on this); and
    <bullet> Associated administrative costs (subject to a 15-percent
cap, as discussed in Sec. 263.0 and subsequently).
    It is important to remember that the activities mentioned above
count toward a State's basic MOE requirement if they are reasonably
calculated to accomplish a purpose of the program. This restriction
follows from the language at section 409(a)(7)(B)(I)(ee) of the Act
authorizing as MOE, ``any other

[[Page 17820]]

use of funds allowable under section 404(a)(1).'' Section 404(a)(1) of
the Act refers to activities that are reasonably calculated to meet a
purpose of the TANF program. The use of the word ``other'' infers that
the activities listed above (ee), i.e., (aa)-(dd) must also be
reasonably calculated to accomplish a purpose of the program. Hence,
not only must expenditures of funds pursuant to (ee) be reasonably
calculated to accomplish a TANF purpose, so must State expenditures
pursuant to (aa)-(dd): cash assistance, child care assistance,
educational activities, and administrative costs (discussed in detail
further on).
    We mentioned in the NPRM that expenditures for ``assistance'' for
MOE purposes may take the form of cash, certificates, vouchers, or
other forms of disbursement, as determined by the State. MOE
expenditures may also be for ongoing, short-term, or nonrecurrent
benefits. The definition of assistance at Sec. 260.31 (Sec. 270.30 of
the NPRM) does not limit the nature of State-funded aid provided to
eligible families under TANF or separate State programs that can count
as MOE. The authorization as MOE of ``any other use of funds allowable
under section 404(a)(1)'' indicates that Congress intended all types of
benefits provided to families under TANF under section 404(a)(1) of the
Act should count as MOE. These can include ``nonassistance'' benefits
such as nonrecurrent, short-term benefits.
    Thus, State expenditures with respect to eligible families for
activities such as pre-pregnancy family planning services, teen
parenting programs, youth and family counseling or support services,
job training or employment services, or forms of crisis assistance that
meet the purposes of the program under section 404(a)(1) may also count
toward meeting a State's MOE requirement. However, such expenditures
are subject to other limitations and restrictions under Secs. 263.5 and
263.6 (Secs. 273.5 and 273.6 of the NPRM).
    In the NPRM, we also addressed additional limitations and
restrictions. We included some specific case situations that came to
our attention and invited comment on these and other examples of aid
for eligible families that States believed could qualify.
(1) Cash Assistance
    This category includes cash payments, including electronic benefit
transfers, to meet basic needs; assistance with work-related
transportation costs; clothing allowances; and any child support
collected on behalf of an eligible child that the State passes through
to the eligible family.
    The preamble in the proposed rule pointed out that section 5506(b)
of Pub. L. 105-33 amended section 409(a)(7)(B)(i)(I)(aa) of the Act to
specifically allow assigned child support collected by the State and
distributed to the family to count toward a State's basic MOE so long
as the amount is disregarded in determining the family's eligibility
for and amount of TANF assistance. However, we neglected to point out
that section 5506(b) also provided that the assigned child support
distributed to the family must come from the State's share of the
amount collected. The law specifically refers to the amount collected
and distributed to the family under section 457(a)(1)(B). Section
457(a)(1)(B) provides that the State may retain or distribute to the
family its share of the support amount so collected. Thus, more
accurately, section 409(a)(7)(B)(i)(I)(aa) expressly allows the State's
share of assigned child support amount collected on behalf of the
family and distributed to the family to count toward a State's basic
MOE, provided that the State disregards the amount sent to the family
in determining the family's eligibility and amount of TANF assistance.
We have clarified this point in the final rule.
    Cash assistance also includes State expenditures on behalf of
eligible families as part of a State's refundable Earned Income Tax
Credit (EITC) program. Under a State EITC program, we determined that
only expenditures, i.e., the refundable portion of EITC payments
actually paid to eligible families, may count as MOE. Also, if the
State had an EITC program in FY 1995, it may count the total amount of
the refundable portion of the EITC actually paid to eligible families
only to the extent that this amount exceeds the total amount of the
refundable portion of the EITC actually paid in FY 1995 (see
Sec. 263.5).
(2) Any Other Use of Funds Allowable Under Section 404(a)(1)
    Section 404(a)(1) provides that TANF funds may be used ``in any
manner that is reasonably calculated to accomplish the purpose of the
TANF program, including to provide low income households with
assistance in meeting home heating and cooling costs.'' In Sec. 260.20
(Sec. 270.20 of the NPRM), we list the statutory purposes of the TANF
program.
(3) Medical and Substance Abuse Services
    The statute does not prohibit the expenditure of State MOE funds on
medical expenditures. Therefore, States may count expenditures of their
own funds to provide treatment services to individuals seeking to
overcome drug and/or alcohol abuse when these services assist in
accomplishing the purposes of the program. This policy would also
comport with both the Administration's support for drug rehabilitation
services and the congressional call for State flexibility in the
operation of welfare programs.
    We reminded States that such expenditures must be consistent with
the purposes of the program and made to, or on behalf of, eligible
families. We also reminded States that section 408(a)(6) bars the use
of Federal TANF funds for medical services. Therefore, States using MOE
funds to provide medical treatment services may not commingle State and
Federal TANF funds. In addition, any State expenditures on medical
services that are used to obtain Federal matching funds under the
Medicaid program would not count as MOE. (Refer to the discussion under
Sec. 263.6.) Finally, State expenditures on medical and substance abuse
services may only count as MOE subject to the ``new spending''
limitations set forth in Sec. 263.5.
(4) Juvenile Justice
    State funds used to pay the costs of benefits or services provided
to children in the juvenile justice system and previously matched under
the EA program do not count toward MOE. More specifically, as juvenile
justice services do not meet any of the purposes of the TANF program,
they are not an allowable use of funds under section 404(a)(1).
    While some States may expend their Federal TANF funds for this
purpose, under section 404(a)(2), the definition of ``qualified State
expenditures,'' for MOE purposes, does not include the reference to
section 404(a)(2). Therefore, we have concluded that Congress did not
intend to automatically qualify all previously authorized IV-A
expenditures as MOE. States that expend Federal TANF funds for this
purpose, under section 404(a)(2), must not commingle State funds with
Federal TANF funds if they wish the State funds to count as MOE.
(5) State ``Rainy Day'' Funds
    Some States inquired whether State funds allocated or set aside
during a fiscal year as a ``rainy day'' fund, to act as a hedge against
any economic downturn, could count as MOE. While we understand State
intent, these allocations or set-asides are not expenditures. States
must actually expend funds on behalf of eligible

[[Page 17821]]

families during the fiscal year for the money to count toward the
State's MOE for that fiscal year. (However, under section 404(e),
States may reserve Federal TANF funds from any fiscal year for use in
any other fiscal year.)
(6) Administrative Costs
    Administrative expenditures may count toward a State's MOE, but
only to the extent that they do not exceed 15 percent of the total
amount of qualified State expenditures for the fiscal year. This
limitation is the same as the limit for Federal TANF administrative
expenditures. Therefore, we proposed that the State apply the same
definition of administrative costs for MOE purposes as for Federal TANF
funds.
    Section 404(b)(2) states that expenditures of Federal TANF funds
with respect to information technology and computerization needed for
tracking or monitoring activities are not subject to the 15-percent
TANF limit. We are providing the same flexibility with respect to the
administrative cost cap on MOE expenditures. Thus, the rules do not
include information technology and computerization expenditures under
the administrative cost cap; they allow such expenditures to count
toward meeting a State's MOE requirement, without being limited by the
15-percent cap on administrative expenditures.
Comments and Responses
Summary
    We received numerous comments on Sec. 273.2 of the proposed rule.
Many of the comments focused on the definition of eligible family. One
commenter praised our broad interpretation of the term ``eligible
family.'' Others indicated that it may not be broad enough. Numerous
commenters requested clarification of the definition.
    We also received comments regarding some of the examples of
qualified expenditures mentioned in the proposed rule as well as a few
comments on other examples of aid for eligible families that commenters
believe could qualify. Although we received only a few specific
comments regarding the 15-percent cap on administrative MOE
expenditures, we received a substantial number of comments on various
aspects of the proposed definition of administrative costs. Since this
definition applies to the State as well as the Federal cap on
administrative expenditures, we refer you to the beginning of this
subpart, at Sec. 263.0, for a fuller discussion of the various issues
raised and conclusions reached regarding the final definition of
administrative costs.
    Finally, a couple of the comments concerned the cash management
principles governing the draw-down of Federal TANF funds because the
draw-down of Federal TANF funds is tied to MOE expenditures.
    After carefully considering the comments, we made some
clarifications and a few changes to the final rule. We will address the
comments following the order of the NPRM preamble.
(a) Qualified State Expenditures
    Comment: One commenter noted that States have raised a number of
questions regarding application of the Cash Management Improvement Act
(CMIA) to the TANF program and MOE funds. The commenter recommended
incorporating the guidance currently being developed jointly by the
Financial Management Service (FMS) of the U.S. Department of Treasury
and ACF in the final rule, as appropriate.
    Another commenter recommended clarifying the final rule to specify
that States may draw down Federal TANF funds without being required to
show that they met their MOE requirement by the end of the year. The
commenter wrote that our rules impose a de facto match requirement that
is burdensome on States and could cause cash flow problems.
    Response: The guidance the commenter is referring to has not yet
been completed. We intend to release it as a separate issuance once it
is completed. In the meantime, CMIA Policy Statement Number 19, dated
June 1, 1997, and issued by FMS provides general cash management
guidelines for States in drawing down their Federal TANF funds.
    Federal TANF funds are subject to the Cash Management Improvement
Act and the grant regulations at 45 CFR 92.20(b)(7). These rules
restrict the draw-down of Federal funds. The CMIA Policy Statement
Number 19 requires that States must expend a proportionate share of MOE
funds for any period the State draws down Federal TANF funds. Thus, we
have not made the recommended clarification.
    The MOE requirement is not a de facto match requirement. However,
it is similar to a matching requirement in one respect. It is a cost-
sharing requirement, as Congress recognized that State financial
participation is essential for the success of welfare reform.
    To allow a State to expend Federal TANF funds first, then later
spend State funds to fulfill the basic MOE requirement, would convey to
the State a benefit (interest income) that was not authorized by the
legislation establishing TANF. PRWORA did not provide for the TANF
block grant allocations plus interest. The recommended action would
also be in violation of 31 U.S.C. 6503(c)(1), which governs
intergovernmental financing and the U.S. Treasury-State (cash
management) Agreements signed by each State and Territory.
    Although States must meet their basic MOE level for a fiscal year
by the end of that fiscal year, the guidance in CMIA Policy Statement
Number 19 does not restrict a State's ability to draw down its full
TANF grant. Once a State meets its basic MOE requirement, the State may
draw down its remaining TANF funds without contributing additional MOE
funds. However, the draw-down of Federal TANF funds must be for
immediate cash needs. Under no circumstances may a State draw down
funds that are not needed for a specific program expenditure.
(b) Eligible Families
    In addition to comments as discussed below, we corrected an
incomplete citation in Sec. 273.2(c) of the NPRM. This paragraph
addressed the circumstances under which expenditures on families that
had exceeded the Federal time limit would count as MOE. It should have
cited paragraphs (b)(1), (b)(2), and (b)(3)--thus indicating that the
families receiving assistance had eligible alien status, included a
child living with an adult relative, and were needy under the financial
criteria in the TANF plan. However, it failed to include the reference
for this third provision. In the final rule, we corrected this
language.
    Comment: A few commenters argued that we should leave the
definition of ``eligible family'' to each State. One commenter said
that the proposed definition attempts to usurp the State's authority to
define eligible family; another indicated that Congress was silent on
this topic.
    Response: We do not agree that Congress was silent on the topic of
``eligible families.'' In fact, this issue is addressed in the
Conference Report (H.R. Rep. No. 725. 104th Cong., 2d sess., at 56, p.
296). In pertinent part, the conferees agreed that ``qualified
expenditures that count toward the * * * spending requirement are all
State-funded expenditures under all State programs that provide any of
the following assistance to families eligible for family assistance
benefits (TANF). * * *'' More importantly, section 409(a)(7)(B)(i)(I)
of Act provides that qualified expenditures count if made with respect
to eligible families. Section

[[Page 17822]]

409(a)(7)(B)(iv) defines eligible families in pertinent part as
``families eligible for assistance under the State program funded under
this part,'' i.e., under TANF.
    Because we must enforce a penalty if a State fails to meet the
basic MOE requirement, we must specify the standards for that penalty.
The term ``eligible families'' is a critical part of those standards.
In this way, States may know which expenditures may count and avert a
penalty.
    Comment: Several commenters expressed concern that the proposed
rule does not allow expenditures to be counted toward the basic MOE
requirement if made for lawfully residing aliens who are not included
in the definition of ``qualified alien,'' such as certain persons
residing under color of law (PRUCOL). The commenters pointed out that
section 5506(d) of the Balanced Budget Act of 1997 (Pub. L. 105-33)
amended the welfare reform law to allow States to count towards MOE
funds spent on ``families of aliens lawfully present in the United
States that would be eligible for such assistance but for the
application of title IV.''
    Response: We agree that the Balanced Budget Act made this change
and mentioned it in the preamble to the NPRM. Also, the proposed
regulation recognized that MOE expenditures could be used to help
certain eligible nonqualified alien family members (nonimmigrants under
the Immigration and Nationality Act and aliens paroled into the U.S.
for less than one year). However, as previously mentioned, we did not
accurately analyze the significance of this statutory language
(defining ``eligible families'' for MOE claiming purposes relative to
the extant provisions of title IV of PRWORA). Refer to the earlier
extensive discussion regarding the noncitizens for whom the State may
claim MOE expenditures.
    Comment: Several commenters questioned the proposed rule at
Sec. 273.2(b)(2), which required that a child live with a custodial
parent or other adult caretaker relative. One commenter noted that the
Balanced Budget Act of 1997 eliminated the relationship requirement
under 408(a)(1) of the Act. The commenters believed the statutory
definition of eligible families under section 409(a)(7)(B)(i)(IV) and
even the proposed rule permitted them to assist children who do not
live with a custodial parent or other adult caretaker relative (e.g.,
children in foster care and juvenile justice situations). For example,
expenditures associated with helping a child who lives in an
alternative living arrangement had been permissible under the former
Emergency Assistance program and therefore should count toward the
basic MOE requirement. Another commenter believed the proposed rules
were too narrow and recommended modifying the rules to permit qualified
State expenditures for such children to count toward the basic MOE
requirement.
    Response: We do not agree that the Balanced Budget Act did away
with the relationship requirement. We do not believe that Congress
intended to eliminate the relationship requirement for either State MOE
dollars or Federal TANF funds. Section 5505(a) of the Balanced Budget
Act of 1997 expressly indicates that section 408(a)(1) was amended to
eliminate redundant language. Previously, both sections 408(a)(10) (the
home residence requirement) and 408(a)(1) (the minor child requirement)
explicitly stated that Federal TANF funds could only be expended on a
family that includes a child residing with a parent or other caretaker
relative. The Balanced Budget Act removed the redundant phrase from
408(a)(1) and added a cross-reference to 408(a)(10), where the phrase
remains intact.
    Section 409(a)(7)(B)(i)(IV) defines eligible families, in pertinent
part, as ``families eligible for assistance under the State program
funded under this part.'' The State program funded under this part is
the TANF program, whether funded with the Federal grant and/or State
funds. The criteria with respect to TANF assistance include the
provisions under section 408, and specifically the provision just
discussed under 408(a)(1). Under section 408(a)(1), no family is
eligible for TANF assistance unless the family includes a minor child
who resides with the parent or other caretaker relative. Therefore, we
believe there is a direct correlation between sections 408(a)(1) and
409(a)(7)(B)(i)(IV).
    We conclude that the intent of section 409(a)(7)(B)(i)(IV) is that
the family include a child residing with a parent or other caretaker
relative. A State may still choose to aid the ``child-only'' cases that
exclude the adult(s) from the case. Nevertheless, that child must be
residing with a parent or other caretaker relative. Qualified State
expenditures under all programs (TANF or separate State programs) may
count toward basic MOE if made with respect to eligible families who
meet the above criteria and are for one of the categories of activities
listed under 409(a)(7)(B)(i)(I). As we indicated in the proposed rule,
not all expenditures for services that had been previously authorized
under the former AFDC, EA, or JOBS programs qualify for MOE purposes.
In particular, there are services (e.g., juvenile justice situations)
that do not meet any of the purposes of the TANF program. Rather, such
former EA services generally fall under section 404(a)(2), not
404(a)(1). Therefore, the expenditures do not qualify.
    Comment: A few commenters requested that we revise the language at
Sec. 273.2(b)(2) of the proposed rule to permit the provision of
assistance to minors who are temporarily absent from the home, similar
to the time periods given in section 408(a)(10)(A).
    Response: As we explained above, an ``eligible family'' is defined,
in part, as one in which there is a child residing with a parent or
other caretaker relative. Thus, the child's home is that of the parent
or other caretaker relative. However, as with TANF, under section
408(a)(10), we expected that States would establish policies that
define a reasonable period of temporary absence of the minor from the
home for MOE purposes. Otherwise, qualified expenditures to provide
services or assistance to the child once he or she left the home would
no longer count toward basic MOE.
    During the temporary period, the child is considered to be residing
with the parent or other caretaker relative. Therefore, State may
continue to help the eligible family through expenditures that are
reasonably calculated to accomplish a purpose of the program, including
some expenditures for the temporarily absent child (except as noted
later in this discussion). As we previously mentioned, all qualified
expenditures must be reasonably calculated to accomplish a purpose of
the program.
    For example, family preservation services, such as parenting
training or counseling, and some forms of transitional assistance,
could help ensure that parents may care for their children in their own
home (purpose 1). In contrast, it is unlikely that expenditures on
child care services would be reasonably calculated to accomplish that
purpose (or any of the other TANF purposes) if the only child in the
eligible family is temporarily absent from the home.
    Sometimes the child is temporarily absent from the home because he
or she has been placed in the care of a correctional facility, juvenile
residential facility, group home, protective care, foster care, other
facility or other nonrelative care arrangement. Since the child is
deemed to be residing with his or her parent or other caretaker
relative during the temporary period, expenditures reasonably designed
to

[[Page 17823]]

accomplish the purpose of the program, including continuation of cash
assistance, would count toward MOE. However, expenditures for
residential care as well as assessment or rehabilitative services,
including services provided to children in the juvenile justice system,
do not meet any of the purposes of the TANF program and would not count
toward basic MOE. The principal purpose for placement is to protect the
child or to protect society because of the child's behavior, not to
care for the child in his or her own home (purpose 1). Since the focus
is to address the child's needs, expenditures to care for the child in
these living situations does not end the dependence of needy parents on
government benefits by promoting job preparation, work and marriage
(purpose 2). The remaining two purposes do not even remotely relate to
this situation.
    It is important to note that this interpretation does not preclude
a State from providing foster care or other protective care assistance
for the child. However, these expenditures do not count toward the
State's basic MOE requirement because they are not reasonably
calculated to accomplish a purpose of the program.
    It would be reasonable for States to use the time frames given
under section 408(a)(10) to define ``temporary'' and to develop a
corresponding MOE policy. (Section 408(a)(10) automatically applies
when a State uses commingled State funds to provide TANF assistance.)
The child must return to the home by the end of the temporary period
established by the State. Otherwise, the child no longer resides with
the parent or other caretaker relative. If the child is the only
eligible minor in the eligible family, then services or assistance for
the eligible family would no longer count toward the basic MOE
requirement, if the child does not return after the temporary absence.
    We do not believe it is reasonable to determine that a child is
temporarily absent from the home if the child has been adjudicated or
otherwise determined to require placement out of the home for longer
than the State's established temporary period. In these situations, the
absence is for a significant period, and expenditures for the child do
not count as qualified once the child has left the home. Further, the
child is not deemed to be residing with his or her parent or other
caretaker relative. If the child is the only child in the family, then
qualified expenditures to provide services or assistance to the family
would no longer count toward basic MOE once the child left the home.
    Comment: The NPRM indicated that a State is free to define who is a
member of a family for TANF and MOE purposes and can choose to assist
other family members such as noncustodial parents. Several commenters
requested clarification regarding the effect of including the
noncustodial parent or others as a member of the eligible family (e.g.,
applicability of sanctions). The commenters asked whether
``assistance'' provided to a noncustodial parent counts against the
family for purposes of the time limit; whether a State can provide
assistance or services to a noncustodial parent without providing
assistance to the rest of the family; and whether a State must include
the noncustodial parent as a family member. One advocacy group also
asked whether a State could provide assistance to other relatives not
living in the home; define a family to include more distant relatives
not in the home; or even include nonrelatives not living in the home. A
community organization felt that the potential addition of noncustodial
parents or others not historically included within the family should
not be totally discretionary with the State. The commenter recommended
regulatory restrictions such as not providing assistance to a
noncustodial parent when the custodial parent is not assisted. Another
community organization requested that we spell out the full
ramifications of States providing assistance outside the traditional
``AFDC household'' so that States will be aware of the consequences of
their decisions.
    Response: A number of commenters appeared to have interpreted our
statement that States could include the noncustodial parent as part of
the family to mean that any persons outside of the home may be a member
of the eligible family. However, we did not intend for other relatives
or nonrelatives not living in the home to be included as members of the
eligible family. Only if a child is eligible in the home in which such
other individuals live may the State choose to include them as part of
that eligible family.
    At minimum, an eligible family must consist of a minor child who
resides with a parent or other caretaker relative (or consist of a
pregnant individual). Beyond this minimum configuration, States may add
other household members to comprise the eligible family. Thus, we
expected that a State would configure a family from the individuals
living in the home.
    The only exception to this rule is the noncustodial parent. As the
child's parent, a State may choose to include the noncustodial parent
as a member of the child's eligible family. It also may choose not to.
Further, a State may choose the circumstances under which a
noncustodial parent would be a member of the child's eligible family.
We leave this to State discretion and have included a minimal
definition of noncustodial parent at Sec. 260.30.
    However, it is important to remember that an adult may receive TANF
assistance only as part of a TANF family. This means that an adult,
including a noncustodial parent, cannot apply for or receive TANF
assistance independent of the child and custodial parent or caretaker
relative, if applicable. Once the State determines the family is
eligible, it is up to the State to determine the most appropriate
assistance and nonassistance benefits to provide to family members.
    Similarly, expenditures for adults only count for basic MOE
purposes if the adult is part of a TANF or TANF-eligible family (i.e.,
a family that would be eligible for TANF assistance, but whose family
members are not necessarily receiving it). And, as with TANF, the State
determines the appropriate benefits to provide the eligible family.
    As a member of the child's eligible family, a State could provide a
noncustodial parent with benefits or services that could further the
family's ability to attain economic self-support and self-sufficiency.
Congress clearly supported this notion. For example, in section 101 of
PRWORA, Congress stated that promotion of responsible fatherhood and
motherhood is integral to the well-being of children. In section 407(h)
of the Act, Congress expressed support for requiring noncustodial,
nonsupporting parents under the age of 18 to fulfill community work
obligations and attend appropriate parenting or money management
classes after school. A provision in section 466(a) of the Act permits
a State to issue an order, or to request that a court issue an order,
requiring an individual owing past-due child support to participate in
work activities, as defined in section 407(d) of the Act.
    In our NPRM discussion of individual regulatory provisions, we also
suggested that States examine the various sections of this rule where
the term family is used. We understood that States needed to realize
the other effects, in terms of the TANF requirements, of adding other
persons to the eligible family. Applicability of any or all the TANF
requirements depends on whether a family member is receiving TANF
``assistance'' as defined in Sec. 260.31.
    Applicability of a TANF requirement also depends on the person(s)

[[Page 17824]]

mentioned in a particular requirement. The TANF requirements use
various terms, such as ``adult or minor child head-of-household,''
``adult,'' ``teen parent,'' ``family member,'' ``individual,'' ``parent
or other caretaker relative,'' or ``single custodial parent'' when
referring to family members. The effect of a requirement may vary
depending on the status of the person(s) receiving assistance. Each
requirement must be examined to determine the effect of the status of
family members on its applicability or on the amount of assistance paid
(e.g., in sanction cases).
    For example, the calculation of the work participation rates under
section 407(b) of the Act consists of the number of families receiving
assistance under the State program funded under this part that include
an adult or a minor child head-of-household who engaged in work for the
month (the numerator), divided by the number of families receiving TANF
assistance during the month that include an adult or a minor head-of-
household minus the number of families that are subject to a penalty
for refusing to work in that month--except if a family has been
sanctioned for more three of the last 12 months (the denominator). For
this requirement, once a TANF eligible family includes an adult who
receives some form of TANF ``assistance,'' the family is included in
the calculation of the work participation rate, and the adult may be
required to participate in work activities. An ``adult'' eligible
family member receiving TANF assistance could be the custodial parent
or other adult caretaker relative, a noncustodial parent, or any other
adult household member as determined by the State.
    Furthermore, section 407(e) of the Act requires the State to reduce
or terminate the family's TANF assistance if an individual in the
family refuses to engage in required work. ``Individual'' eligible
family members could include the noncustodial parent or other members
of the eligible family. Yet, the child care exception applies only if
the individual refusing is a single custodial parent caring for a child
under age six.
    Applicability of a requirement can also depend on the context of
the funding. The term ``under the State program funded under this
part'' used in the above provisions, as well as the terms ``under the
program'' and ``under the program funded under this part,'' all mean
the State's TANF program, whether funded with Federal or State funds.
Applicability of a TANF provision also depends on whether the State
funds under the TANF program to provide assistance to the family member
are commingled with, or segregated from, Federal grant funds. We
mentioned earlier in this discussion that a State could expend State
funds for MOE purposes in different ways. In terms of the TANF program,
State expenditures may be commingled with, or segregated from, Federal
grant funds. Provisions in the statute that use any of the above-
mentioned terms apply to Federal or State-funded (whether commingled or
segregated) assistance received under the TANF program, as depicted in
the above examples.
    In addition, under section 408(a)(3) and title IV-D of the Act, a
family may not receive TANF assistance unless an assignment of support
rights has been executed on the child's behalf. The assignment would
also include the right to spousal support in the case of a custodial
parent who receives TANF assistance. However, as discussed in the
preamble to Sec. 260.31, if the noncustodial parent also receives TANF
assistance as a family member, the assistance provided to the
noncustodial parent will not be considered ``assistance'' for purposes
of the collection and distribution of assigned child support under
title IV-D of the Act.
    Provisions that only use the term ``grant'' or ``amounts
attributable to funds provided by the Federal government'' (e.g., the
five-year time limit, and expenditures for medical services) refer only
to assistance provided using Federal TANF funds. They do not apply to
State-funded TANF assistance unless the assistance comes from
commingled funds. If a family member receives assistance from
commingled State funds, then rules that would otherwise only pertain to
the use of Federal grant funds apply.
    However, as discussed at Sec. 264.1, after further analysis, we
have interpreted the five-year limit to only apply when the adult
family member is the head-of-household or the spouse of the head-of-
household and receiving assistance. Thus, if the noncustodial parent
(i.e., the parent living in another household) receives TANF assistance
as an eligible family member, that receipt impacts the family's
lifetime limit only if he or she is the spouse of the head-of-
household. We believe this situation will occur rarely, if ever. The
months that any other adult eligible family member who is not the head-
of-household or the spouse of the head-of-household receives TANF
assistance would not count toward the family's lifetime limit.
    A State may also aid eligible family members by providing various
services under the TANF program that do not constitute ``assistance.''
If so, the TANF requirements explained above do not apply. Services
that are not assistance (e.g., counseling, job readiness, employment
placement or post-employment services) may be provided to any eligible
family member, e.g., the noncustodial parent.
    For basic MOE purposes, expenditures must be with respect to an
individual who is a member of an eligible family. An eligible family
member may also receive ``nonassistance'' or ``assistance'' through a
separate State program. The requirements applicable to ``assistance''
received under the TANF program do not apply to separate State programs
or to ``nonassistance'' provided to members of an eligible family.
    Comment: The definition of eligible families prohibits States from
counting for MOE purposes expenditures made for pregnancy prevention
services to childless individuals.
    Response: Such expenditures would count toward meeting the basic
MOE requirement only if the childless individual is a member of an
eligible family, e.g., an eligible teen family member. Section
409(a)(7)(B)(i)(I) expressly provides that only qualified expenditures
made with respect to members of eligible families count. Thus, we have
not changed the final rule. However, Federal TANF funds may be used for
this purpose to provide ``nonassistance'' per section 401(a)(3) of the
Act.
    Comment: Numerous commenters requested clarification of
Sec. 273.2(b)(3) of the NPRM which required that an eligible family
must be financially eligible according to the TANF income and resource
standards established by the State under its TANF plan. The commenters
indicated that a uniform or single income/resource standard is
inappropriate as it would restrict States' ability to provide families
with services such as transitional assistance, e.g., child care,
transportation, ongoing case management, education and training, or
diversion services for families who need one-time or short-term help to
prevent the need for traditional TANF cash assistance. A few commenters
noted that a State's child care program may have its own income and
resource limits. Another commenter indicated that the lack of
flexibility may prevent certain transfers to tribal TANF programs from
counting toward basic MOE. Therefore, commenters asked us to clarify
the rules to allow for different standards of need for different types
of services. They wanted a definition broad enough to cover families
such as those who are transitioning off TANF, those who are at risk of
receiving TANF, and those served through separate State

[[Page 17825]]

programs. Finally, another commenter asked us to de-link MOE and TANF
eligibility.
    Response: The proposed rule at Sec. 273.2(b)(3) provided that an
eligible family must be financially eligible according to the TANF
income and resource standards established by the State under its TANF
plan. It appears that commenters interpreted our use of the plural
term, ``standards,'' to mean that the elements used to determine
financial eligibility (income and resources) constituted a single set
of criteria for all the services that a State would provide. This was
not our intention. We used the term ``standards'' in the event a State
wanted to have multiple financial requirements based on the different
services that it wished to provide or the scope of families it wished
to aid.
    States have the flexibility to decide the particular income and
resource requirements that they will use to determine whether a family
is financially eligible to receive a service, a package of services, or
all of the services provided with State basic MOE funds. Thus, both
income and resource requirements may vary, as determined by the State.
For example, a State could establish different financial criteria for
families no longer receiving TANF cash assistance in order that family
members may receive transitional services. Or, a State may want to
establish standards for providing short-term or nonrecurrent assistance
to families in order to prevent the need for ongoing TANF assistance.
    Section 409(a)(7)(B)(IV) of the Act indicates that an eligible
family is a family who is or would be eligible (as provided in this
section) for assistance under the State program funded under this part.
The State's TANF program is the State program funded under this part.
Thus, there is a statutory link between MOE and the State's TANF
program. However, that link merely requires that an eligible family is
or would be eligible for TANF assistance. It does not require that
eligible family members must necessarily receive TANF cash assistance
or any other benefit or services through the TANF program. Section
407(a)(7)(B)(i)(I) of the Act permits the State to help eligible family
members through activities in ``all programs,'' i.e., TANF and separate
State programs.
    Comment: Some commenters mentioned that States should be able to
use basic MOE funds to create programs with definitions of need that
may not assess income and assets at all. They argued that section
409(a)(7) allows a State to claim basic MOE spending with respect to
eligible families for any use of funds that are reasonably calculated
to accomplish the purpose of the TANF program. Providing assistance to
needy families is mentioned in only two of the four purposes of the
program under section 401(a) of the Act. Thus, the term ``eligible
families'' should include a broader population of families, not just
those who are needy families. Two commenters, including one national
organization, also noted that the TANF purposes do not require that
spending has to be made to, or on behalf of, an eligible family. For
example, preventing and reducing the incidence of out-of-wedlock
pregnancies and encouraging the formation and maintenance of two-parent
families could involve the development of materials, pamphlets,
videotapes, and counseling activities directed at teen pregnancy
prevention and other pregnancy prevention initiatives. Such
expenditures benefit all TANF eligible families but do not necessarily
benefit any one family in particular.
    Response: As we explained in the above response, the statute
defines MOE expenditures as those made ``with respect to eligible
families.'' Thus, it clearly links MOE expenditures to eligible
families. An eligible family is a family who is or would be eligible
for assistance under the State's TANF program. A family may not receive
``assistance'' under the State's TANF program unless the family is
needy. We interpreted the term ``needy'' for TANF and MOE purposes to
mean financial deprivation, i.e., lacking adequate income and
resources. We continue to believe this is the most appropriate
interpretation and decline to expand the scope of the definition of
needy. Hence, for basic MOE purposes, eligible families are those who
are financially eligible according to the State's applicable income and
resource criteria.
    States may establish different income and resource criteria to
cover the scope of needy eligible families they wish to serve or the
various services or activities they want to provide. States are free to
design programs involving MOE activities, including those mentioned by
the commenter, to reach as broad a population as they choose. However,
only that part of the total expenditures made on behalf of eligible
families who meet the State's applicable financial eligibility criteria
counts toward a State's basic MOE.
    We would like to point out that Federal TANF funds may also be used
to pay for ``nonassistance'' activities (such as those described above)
that meet the purposes of the program as given in section 401(a)(1)-(4)
of the Act and Sec. 260.20. Federal TANF funds may also be used for
activities that benefit non-needy families in some cases, e.g.,
activities that meet the purpose of either section 401(a)(3) or (a)(4)
of the Act. In this respect, there may be more flexibility in the
expenditures that are allowable uses of Federal funds than those that
are allowable for MOE purposes. This is because federally funded
services or benefits do not necessitate a determination of financial
eligibility (need) if they do not meet the definition of assistance.
Thus, States may use Federal TANF funds (in accordance with section 404
of the Act) to provide ``nonassistance'' services or benefits to
eligible individuals who meet the State's other, nonfinancial,
objective criteria for the delivery of such benefits.
    Comment: Some commenters asked whether a State must make use of
resource standards, noting that there is no statutory requirement to do
so. Other commenters noted that the definition of ``needy'' may or may
not include an asset test. For various benefits, a State may just
establish income criteria to determine the families who are eligible
for the benefit. One national organization also indicated that some
States are considering eliminating resource standards.
    Response: Title IV-A of the Act setting forth the TANF program does
not address income or resource requirements (except under section
408(f) with respect to deeming an alien's sponsor's income and
resources). Rather, it uses the term ``needy.'' Although we interpreted
``needy'' to mean financial deprivation, i.e., lacking adequate income
and resources, we also recognize that some State programs may just
involve an income test. Therefore, we are not requiring States to have
resource requirements. We have clarified this point in the final rule
under Sec. 263.2(b)(3) by stating that a family must be financially
eligible according to the appropriate TANF income and resource (when
applicable) requirements established by the State and contained in its
TANF plan. (We discuss eligibility criteria in the TANF plan further in
response to other comments in this section.) In this way, States not
only decide the scope of families they want to serve, but also the
families most in need of particular programs or services.
    Comment: One commenter noted that, with respect to resources, a
State's standard may address cash assets only. Two commenters indicated
concern that an asset limit that does not allow a family to own a
serviceable and reliable vehicle to get to work or services is

[[Page 17826]]

extremely counterproductive to moving people to work.
    Response: It is the State's responsibility to specify income and/or
resource limits. States define resources and determine which resources
are considered, e.g., whether both liquid and nonliquid resources must
be considered and the dollar limit(s) for each type of resource. For
example, many States have already eased restrictions that prevented
AFDC recipients from owning cars. Some States are increasing the
excluded value or discounting entirely the value of a motor vehicle in
determining TANF eligibility. We agree that such actions can promote
job preparation and work.
    Comment: A few commenters, including two advocacy groups,
recommended that we establish a ceiling on the income standards used by
a State to ensure that basic MOE expenditures are appropriately
targeted to help families most in need.
    Response: The proposed rules were silent on this issue. However, we
do not think it is appropriate for us to establish a ceiling in the
final rule. TANF leaves this responsibility to the States. We hope that
States will establish reasonable income standards to ensure that
expenditures are targeted to families most in need.
    While Congress did not explicitly provide for an income cap under
TANF, we believe that Congress was very interested in the ways States
are targeting their resources to help families most in need find work
and move toward self-sufficiency. For example, section 404(d)(3)(B) of
the Act requires that TANF funds transferred to title XX programs must
be used only for programs and services to children or their families
whose income is less than 200 percent of the income official poverty
line (as defined by the Office of Management and Budget) applicable to
a family of the size involved. Thus, we re-emphasize our hope that
States will target their resources in ways that help needy families and
support the goals of the program.
    In Sec. 265.9(c), we discuss the required information on MOE
programs that States must submit annually. For example, States must
report the eligibility criteria for the families served under each MOE
program/activity. This information will help us to know the scope of
families served in the various MOE programs. At some future date,
depending on how MOE programs evolve, we may want to look at addressing
MOE-related issues through legislative or regulatory proposals.
    Comment: Two commenters asked what the applicable standard is for
purposes of basic MOE calculations if a State applies different income
standards to different forms of assistance.
    Response: For purposes of counting MOE expenditures, qualified
expenditures under all State or local programs consist of expenditures
claimed with respect to eligible families (or eligible family members)
who met the financial criteria (income and resource requirements, when
applicable) corresponding to the particular activity (i.e., service or
assistance provided) as described in the State plan.
    It is also important to note that the TANF compliance supplement
issued by OMB for auditors will include the basic MOE requirement. In
addition, States may be subject to other audits or reviews from time to
time. Therefore, States must be able to support their MOE expenditures
with adequate documentation.
    Comment: One commenter recommended that we replace the term
``eligible families'' with ``TANF-related families'' to give States
flexibility to help families become self-sufficient. Another commenter
recommended that we define ``eligible families'' to include persons
eligible for any benefit that could be made to a family with TANF funds
in the State program, i.e., any expenditure that could be made under
section 404(a)(1) or (2) of the Act with respect to a family. Thus, a
State could use its own funds to pay for benefits that it would
otherwise have paid with Federal TANF grant funds.
    Response: ``Eligible families'' is the term used in the statute.
Therefore, we believe this is the appropriate term to use in the rules.
As we explained earlier, States are free to establish different income
and resource (when applicable) criteria to match the scope of families
it wishes to serve and type of services it wants to provide. In the
TANF program and in separate State programs, States have the
flexibility to offer a range of services that they think will help
eligible families attain and maintain self-sufficiency. However, for
basic MOE purposes, States cannot necessarily use their own funds in
the same ways as Federal TANF funds. To count toward basic MOE,
expenditures of State funds must be made with respect to eligible
families. The expenditures, whether under or separate from the TANF
program, must provide the family or family members with services that
``qualify,'' i.e., fit any of the activities listed under section
409(a)(7)(B)(i)(I) of the Act. This provision would not include
expenditures under section 404(a)(2) of the Act. (We address
expenditures under section 404(a)(2) later in this discussion.)
    Comment: A few commenters asked whether States needed to include
the income and resource requirements in the State's TANF plan. One of
the commenters recommended that State plans clearly define and
delineate all their programs so that there is a clear understanding of
who is eligible, what services and benefits are available, and the TANF
requirements and other provisions that apply to recipients of
assistance. In addition, States should notify recipients in TANF
programs (funded with either Federal or State funds) regarding their
options and responsibilities, and the consequences of their choices.
They also believed we should require States to develop MOE plans in
advance of making expenditures and that States should file such plans
with HHS and publish them in the State.
    Response: We agree with the comments that it is appropriate for
States to specify in their TANF plans the financial eligibility
criteria (income and resources, when applicable) associated with all
State or local programs for which MOE expenditures are claimed
(including State funds that are commingled, segregated or separated
from Federal TANF funds). Section 402(a)(1(A)(i) of the Act requires
that the TANF plan outline how the State intends to provide assistance
to needy families with (or expecting) children, and provide parents
with job preparation, work, and support services to enable them to
leave the program and become self-sufficient. Section 402(a)(1)(B)(iii)
requires that the TANF plan indicate the objective criteria for
delivery of benefits, the determination of eligibility, fair and
equitable treatment, and opportunity for appeal of adverse actions.
Neither section makes any distinction between Federal or State-funded
assistance, service, or benefits. Since States can use either Federal
or State funds to provide assistance, services, or benefits, we believe
that the State's TANF plan is the appropriate place to indicate this
information for both TANF and MOE expenditures.
    If there is more than one activity within a program and the
financial eligibility criteria differ per activity, the State must also
indicate each different set of criteria in the TANF plan. For example,
a State uses State funds in its transitional services program that
consists of transportation and child care benefits. If the financial
eligibility criteria are different for the two benefits, the State must
indicate the financial eligibility criteria for each benefit.

[[Page 17827]]

    In addition, although we do not require it, we believe that the
plan is the most appropriate place for States to provide a brief
description of each MOE program benefit provided to eligible families
or eligible family members, as well as any other particular eligibility
criteria tied to receiving the specific benefit (e.g., must be
participating in the State's work experience component to receive a
particular benefit). In Sec. 265.9(c), we discuss the required
information that States must submit annually. One of the required items
includes naming each of the State's MOE programs and describing the
major activities provided to eligible families under each such MOE
program. To the extent this information is in the State's TANF plan,
the annual reporting requirement may be met by referencing the plan.
    In summary, the following information must be in the State's plan
in order for us to deem the plan submission complete: (1) The financial
eligibility criteria with respect to eligible families that are
associated with the State's TANF program and all State or local MOE
programs; and (2) a brief description of the corresponding program
benefit provided to eligible families or eligible family members, if
the State has used MOE funds (either commingled or segregated) to
provide the benefit. It would also be helpful for States to include a
brief description of the corresponding program benefit provided through
separate State MOE funds. However, the information is not required in
order to deem the State's plan submission complete.
    We maintain a copy of each State's TANF plan, as well as any
updates to the plan. As the Balanced Budget Act clarified, States need
to update their plans, as appropriate, to reflect new or revised
financial or programmatic requirements as a result of changes in State
law or State policies. The plan is an important vehicle for ensuring
public awareness of the various ways States are helping eligible
families attain and maintain self-sufficiency.
    Comment: A few commenters believed we should hold States
accountable for complying with their plans for services and benefits
under TANF (funded with either Federal or State funds) and penalize
them if they fail to do so.
    Response: The basic MOE penalty applies if a State fails to meet
the basic MOE annual spending requirement with respect to eligible
families as provided in this subpart. However, neither that penalty nor
any other penalty provides authority for us to penalize a State for
failure to carry out any part of its TANF plan.
    We believe that States are committed to expending their funds in
ways that best assist eligible families attain work and self-
sufficiency. States have a very real stake in the success of welfare
reform. States also recognize that they are ultimately accountable for
their expenditure claims. States are audited annually or biennially and
compliance with the basic MOE provisions is part of the audit.
    Following publication of the rules, we will update the compliance
supplement to give auditors detailed information about how to assess
State reports on their MOE expenditures.
    As part of their review, we will refer them to the information
supplied in the TANF Financial Report and the supplemental information
on MOE programs and MOE expenditures provided annually under
Sec. 265.9(c). This supplemental material provides information about
the scope of eligible families served with MOE funds and the ways in
which States expend their MOE funds to help eligible families.
    In the compliance supplement, we will suggest auditing procedures
that include reviews of all the MOE reports and an examination of
issues such as the following: (1) Were all MOE expenditures reported
for the fiscal year actually made during that fiscal year; (2) has the
State adequately documented that reported MOE expenditures went to
eligible families; (3) were the methodologies the State used to
estimate the portion of program expenditures going to eligible families
sound; (4) were all the reported expenditures consistent with the
purposes of TANF; (5) were any expenditures made in violation of the
prohibitions in Sec. 263.6; (6) where applicable, did all expenditures
meet the ``new spending test'' (e.g., for every such program, did the
State properly identify whether the program existed in 1995 and only
count expenditures above the total State expenditures in 1995); (7)
were administrative costs within the 15-percent cap; and (8) were the
expenditures consistent with the cost principles set forth in OMB
Circular A-87.
    We will use the results of the audits, together with our own
analysis of the TANF Financial Report and the annual report, to
identify situations where a State might be liable for an MOE penalty.
For example, the fourth quarter TANF Financial Report would identify
any State that reported MOE expenditures below the minimum 80-percent
(or 75-percent) standard for the year. Either the TANF Financial Report
or the annual report might identify types of expenditures that could be
inconsistent with one or more of the requirements for ``qualified State
expenditures.'' We might also undertake additional State reviews based
on complaints that arise or requests from Congress.
    Comment: A few commenters expressed concern regarding the
eligibility determination process for different types of services or
assistance. The commenters contend that the method of determining
eligibility could vary depending on the service. For example, the
method for determining a family's eligibility for diversion services
may be more abbreviated than the process used to determine eligibility
for ongoing TANF cash assistance. One commenter recommended that the
regulations require an application for all State-funded benefits and
verification that the family is actually eligible before any basic MOE
expenditures may count.
    Response: States decide the method(s) for determining whether the
family consists of at least one child living with a parent or other
caretaker relative and is financially eligible according to the
appropriate income and resource (when applicable) criteria established
by the State. As we mentioned in the above response, section
402(a)(1)(B)(ii) requires States to indicate in their plan the
objective criteria for the delivery of benefits and the determination
of eligibility. Nothing in this provision precludes a State from having
different methods of determining eligibility for different types of
services. However, we would note that 45 CFR 92.42 requires States to
keep records to document claims and that States should, therefore, have
and keep adequate records on eligibility.
    Nevertheless, we remind States to pay attention to the TANF
provisions that apply with respect to State-funded TANF assistance
(i.e., to the use of commingled or segregated funds). States risk
potential penalties if they violate certain TANF provisions. For
example, section 408(a)(4) imposes a penalty on a State if the State's
TANF program fails to participate in the Income and Eligibility
Verification System (IEVS). The IEVS provision helps to improve the
accuracy of eligibility determinations for applicants and recipients of
TANF assistance.
    States have an inherent interest in ensuring the integrity of their
expenditures. Should a State learn of any material deficiency in its
method for determining eligibility, we anticipate that the State would
rectify it immediately, so that funds for services

[[Page 17828]]

are properly benefitting members of eligible families.
(c) Types of Activities
    Comment: Several commenters recommended rewording Sec. 273.2(d) of
the proposed rule to avoid confusion regarding the applicability of
``assistance'' as defined under Sec. 260.31 for basic MOE purposes.
Commenters noted that States have the flexibility to count expenditures
with respect to eligible families whether or not the expenditures meet
the definition of assistance.
    Response: As we explained earlier in this discussion, we believe
that States may help eligible family members through an array of
services that fall within the broad categories of activities listed in
section 409(a)(7(B)(i)(I), including services that would not fall
within the definition of assistance at Sec. 260.31, such as
nonrecurrent, short-term assistance. To clarify this point, we have
reworded Sec. 263.2(d) of the final rule and included similar language
at Sec. 260.31(c)(1).
(1) Cash Assistance
    Comment: A few commenters requested clarification of the amount of
State Earned Income Tax Credit (EITC) that can count toward the basic
MOE requirement. One commenter noted that a State's EITC expenditures
should count toward the basic MOE requirement even if none of the
credit was ``actually sent'' to an eligible family member. For example,
some States have ``nonrefundable'' EITC programs. Under a
``nonrefundable program,'' the EITC serves to reduce the family's State
income tax bill. However, the State does not pay the family any EITC
remaining if the credit amount is larger than a family's State income
tax bill. Another commenter asked whether we intended the entire cash
payment actually received by the eligible family to count toward basic
MOE, even if a portion of the payment consists of a State income tax
refund.
    Response: We have addressed this issue extensively in the preamble
for the new Sec. 260.33. An EITC program can help to relieve the State
income tax liability for working poor families by decreasing the
family's State income tax liability. The family's tax liability is the
amount of taxes owed prior to any adjustment for credits or payments.
EITC can also supplement a family's income--if the credit amount
exceeds the family's State income tax liability and the State pays the
family the remainder (i.e., it refunds the credit amount remaining).
Such a refund is equivalent to cash assistance and may count as a
qualified expenditure because it is reasonably calculated to meet a
purpose of the TANF program.
    State income taxes represent revenue to the State. Credits that
offset a family's State income tax obligation provide tax relief to the
family while reducing the State's revenue. A reduction in taxes, or
revenue foregone, is not an expenditure. Therefore, only the EITC
amount that exceeds a family's State income tax liability prior to
application of the EITC is an expenditure. It may count for basic MOE
purposes if the excess amount is actually paid out (refunded) to the
eligible individual. Section 409(a)(7) of the Act stipulates that only
``expenditures'' with respect to eligible families that provide a
benefit or service that is reasonably calculated to meet a purpose of
the TANF program count toward a State's basic MOE. Thus, if a State
does not disburse or pay out any excess EITC remaining, there is no
expenditure.
    States must determine the amount of any excess EITC paid to a
family in a fiscal year by reconciling the family's State income tax
obligation for the year against the total EITC amount for which the
family qualifies. Any excess EITC amount actually paid to the family
may count toward the State's basic MOE. In this regard, any EITC that a
worker receives in advance through his or her paycheck may only serve
to offset the family's tax liability. Advance EITC would have to be
reconciled at the end of the year, in the same manner as the lump-sum
EITC credit, to determine the portion, if any, that exceeded the tax
liability.
    For example, a wage earner qualifies for a $200 earned income tax
credit. His or her family has a $75 State income tax liability for the
tax year. When reconciling at the end of the year, the first $75 of the
credit is used to reduce the eligible family's State income tax
liability to zero. This part of the calculation represents revenue
foregone to the State and does not constitute an expenditure. If the
State also elects to refund (pay out) the remaining $125 in EITC, then
the $125 actually sent to the eligible family is a qualified
expenditure and counts toward the State's basic MOE.
    The same principles apply in the case of a worker who is otherwise
due a State income tax refund. For example, suppose the wage earner
qualifies for an earned income tax credit of $200. Assume further that
the family has a $75 State income tax liability. Yet, through
withholding, the wage earner paid a total of $150 in State income taxes
throughout the year. After reconciliation at the end of the income tax
year, the State owes the worker $150 from withheld State income taxes
and $125 in excess EITC. If the State pays out the EITC owed and sends
it to the family as part of a refund check in the amount of $275, only
the EITC portion, or $125, counts toward the State's basic MOE.
    Comment: One commenter asked to what extent other tax credits such
as a dependent care credit, credit to purchase a car seat or health
insurance, tax forgiveness credit, sales tax credit, and property tax
credit count toward a State's basic MOE requirement. The commenter also
asked to what extent, if any, other tax relief provisions such as
personal or dependent exemptions or the standard or other forms of
deductions count toward a State's basic MOE requirement.
    Response: Tax provisions that only serve to provide a family with
relief from State taxes, such as income taxes, property taxes, or sales
taxes, represent a loss of revenue to the State, not expenditures to
provide a benefit or service to eligible families. For example,
exemptions and deductions are generally subtracted from total taxable
income, serving only to reduce the amount of income subject to income
tax. Therefore, such exemptions and deductions would not constitute an
expenditure for the purposes of section 409(a)(7) of the Act.
Similarly, tax credits that rebate, refund, or return to a family a
portion of the State's tax revenue (e.g., property, sales, or income
taxes paid by families to the State) would not count toward the State's
basic MOE requirement. Such credits serve only to offset a particular
tax (e.g., a State property tax credit that refunds a portion of
property taxes paid). A reduction in tax burden is not an expenditure.
There has been no direct outlay of State funds to provide a service or
benefit to eligible families.
    However, credits that go beyond tax relief and are paid to the
eligible family would count toward a State's basic MOE requirement if
the expenditure is reasonably calculated to meet a purpose of the TANF
program. For example, like the earned income credit, a child care or
dependent care credit is subtracted from the family's income tax
obligation. The portion of the credit that exceeds the income tax
liability and is paid to the family may count toward the State's basic
MOE requirement. Should the family qualify for more than one refundable
credit (e.g., an earned income credit and a dependent care credit),
then the amount by which the total combined value of the allowable
credits exceeds the family's State income tax liability may count for
basic MOE purposes.

[[Page 17829]]

    It is important to note that while States may describe elements of
their tax provisions, such as exemptions or deductions, as
``expenditures,'' the provision may not actually be an expenditure.
Similarly, States may differ in their methods of providing certain
credits. For example, a sales tax or property tax credit may be claimed
through the State's income tax system or through a separate process.
Neither of these factors is material to determining whether some or all
of the value of a credit, exemption, or deduction can count for basic
MOE purposes. Accordingly, we urge States to carefully examine any tax
initiative to determine whether it only serves to provide tax relief.
If so, the money does not count for MOE purposes, even if a portion of
the tax revenue is refunded or rebated to the eligible family as ``cash
assistance.'' However, actual expenditures such as some refundable tax
credits may count for MOE purposes if the portion of the credit that
exceeds the family's income tax liability is sent to the eligible
family and the refund is reasonably calculated to accomplish a purpose
of the program. Should a State wish to consult with us on these
matters, we are available for technical assistance.
    Comment: Several commenters noted that lack of transportation to
training, job interviews, jobs, child care, or other services that
accomplish the purpose of the program represents one of the most
significant barriers to individuals attaining and maintaining
employment. There are frequently no public or private transportation
services in rural areas, so the traditional approach of tokens or
vouchers is inadequate. Transportation is also problematic in urban
areas due to the mismatch of job and transit destination sites and
traditional commuter services times and routes.
    Commenters generally recommended that we give States sufficient
flexibility to respond to individual travel needs by allowing a broad
range of activities as MOE. Examples of suggested allowable
transportation activities included brokerage and coordination pilot
programs, initiation of services that increase access for TANF
recipients to new development or redevelopment employment sites,
subsidization of new transit services either directly or in combination
with other Federal or State sources, sharing in the cost of extending
existing public transportation services, and developing necessary
transportation infrastructure. One commenter added that we should tie
transportation development costs for basic MOE to coordination
mechanisms among human services agencies, State departments of
transportation, and private transportation providers.
    One national organization commented that, if public transit
providers must use the cost allocation method, our rules would be
unduly restrictive and could impede the ability of States to provide
cost-effective services. The commenter suggested classifying such
services as contracted services for TANF clients to be paid for by TANF
agencies, with any non-TANF riders considered incidental. Another
commenter recommended adding a section under this subpart to address
when transportation-related expenditures count for basic MOE purposes.
    Two commenters referred to the WtW program by suggesting that
qualified transportation expenditures for basic MOE purposes should
include transportation services provided through the State's WtW
program and by clarifying that States could use TANF funds to support
transportation services consistent with the WtW block grant program.
    Response: We agree that transportation is a critical element in
helping eligible individuals find and keep jobs. President Clinton
recognized the importance of this issue in his 1998 State of the Union
address. To help individuals on welfare get to work, he proposed an
Access to Jobs initiative in the transportation reauthorization bill.
Congress approved this proposal as the Job Access and Reverse Commute
grant program in the Transportation Equity Act for the 21st Century
(TEA-21), enacted in June 1998.
    On May 4, 1998, we issued written guidance jointly with the
Departments of Transportation and Labor on some of the ways in which
States could use TANF and WtW funds to break down the transportation
barriers for eligible individuals (Temporary Assistance for Needy
Families Program Policy Announcement TANF-ACF-PA-98-2). Most of the
examples could also serve as examples for the use of basic MOE funds.
We updated this guidance to incorporate the provisions of TEA-21 in
TANF-ACF-PA-98-5, dated December 23, 1998. We anticipate issuing
additional guidance on the use of funds shortly after publication.
    We do not think that it is necessary to add specific regulations to
address transportation expenditures.
    Transportation expenditures with respect to eligible families count
as basic MOE if they meet all the requirements under section 409(a)(7)
of the Act and this subpart. For example, under section
409(a)(7)(B)(i)(I)(aa) of the Act, transportation expenditures count if
they are a form of cash assistance that is reasonably calculated to
accomplish a purpose of the program (e.g., reimbursement for mileage,
gas, public transit fare, auto repairs/insurance, or a basic cash
allowance for transportation needs to go to or from work or training).
Also, under section 409(a)(7)(B)(i)(I)(ee) of the Act, other types of
transportation expenditures count if they reasonably accomplish a
purpose of the TANF program, such as promoting job preparation and
work. A broad range of transportation activities are possible within
this category. We included some examples of such activities in the
joint guidance cited above. However, we remind States that applicable
TANF rules apply to State-funded transportation assistance (as defined
in Sec. 260.31) provided under the TANF program. (We discussed the
implications of State-funded assistance in an earlier response.)
    We also remind States that only qualified transportation
expenditures with respect to eligible families count toward the basic
MOE requirement. Congress clearly did not intend to include
expenditures for the public at large. Thus, it is improper to claim as
basic MOE general expenditures required to carry out other
responsibilities of a State or local government and benefitting the
public at large. However, a State could contract with a public or
private transit agency for transportation services for eligible family
members. Under such a contracting arrangement, a transit company could
serve noneligible individuals so long as the State does not claim as
State MOE the funds used to pay for, or subsidize, use by these
noneligible individuals.
    A State could also claim as MOE those start-up, program, and
administrative costs that are attributable to eligible family members
under a State or local transportation initiative (e.g., to broker
transportation services) that is consistent with TANF goals, but
targeted to a larger low-income population or more broadly to a low-
income area.
    States must allocate costs when State or local programs or agencies
share costs, e.g., the TANF agency shares the use of vans or buses with
a senior citizen program or shares in the purchase of transportation
services.
    We know that many States and locales have already made tremendous
strides toward breaking down the transportation barriers faced by
eligible family members. However, we also know that Federal TANF and
State MOE funds are insufficient to overcome all transportation
deficiencies. The recently

[[Page 17830]]

passed Job Access and Reverse Commute grant programs will give States
additional flexibility in developing and providing transportation
services.
    The Job Access program provides competitive grants to assist States
and localities in developing flexible transportation services to
connect welfare recipients and other low-income persons to jobs and
other employment-related services. The Reverse Commute grant program is
for projects that will provide transportation services to suburban
employment centers from urban, rural, and other suburban locations for
all populations. The Mass Transit Account of the Highway Trust Fund and
the General Fund finance both programs. However, the amount of the
Federal grant under either program may not exceed 50 percent of the
total project's cost. The balance must be met locally. Thus, a 50/50
Federal/local match is required under both programs.
    In this regard, we remind States of the prohibition under section
409(a)(7)(B)(iv)(IV) of the Act and Sec. 263.6(c) of this subpart
stipulating that any State funds expended as a condition of receiving
Federal funds under other programs do not count toward the State's
basic MOE. Thus, any State funds used to meet the cost-sharing
requirements of the Job Access and Reverse Commute grants program do
not count for basic MOE purposes. However, in this case, Federal TANF
funds may be used to satisfy non-Federal match requirements of another
program (within specified monetary limits).
    In addition, section 409(a)(7)(B)(iv)(III) of the Act and the
regulatory text at Sec. 263.6(e) of this subpart expressly provide that
State funds expended to meet the WtW matching requirements do not count
toward a State's basic MOE. Thus, States may not double-count
expenditures to provide transportation services for individuals
participating in an allowable WtW employment activity.
    The statute is equally clear regarding expenditures for supportive
services, such as transportation, to help eligible family members who
are WtW participants. Section 403(a)(5)(C)(i)(VI) of the Act provides
that a State may use WtW funds to provide supportive services to
eligible participants only ``if such services are not otherwise
available.'' A State could use basic MOE funds to provide
transportation services consistent with the WtW block grant program
because the WtW and TANF programs share the same purposes. But, as
explained above, the expenditures do not count for basic MOE purposes
if the State also used these expenditures toward the required WtW match
under section 403(a)(5) of the Act.
(2) Any Other Use of Funds Allowable Under Section 404(a)(1)
    Comment: One commenter recommends that we allow States to claim
expenditures toward basic MOE that were formerly allowable under a
State's AFDC-EA program. Another commenter specifically asked whether
services paid under a housing assistance program qualify for basic MOE
purposes. The housing assistance component provides payment for rent,
security deposit, and utilities to prevent and/or end homelessness or
near homelessness. A third commenter asked whether expenditures for
micro-entrepreneurship development services qualify for basic MOE
purposes. The commenter believes this approach fosters employment
opportunities in rural areas through self-employment options.
    Response: Section 409(a)(7)(B)(i)(I)(ee) of the Act permits any
activity with respect to eligible families that is reasonably
calculated to accomplish the purpose of the TANF program to count for
basic MOE purposes. For example, one purpose of the program is to
provide assistance to needy families so that children may be cared for
in their own homes or in the homes of relatives. Thus, some (but not
all) emergency assistance and services with respect to eligible
families, which had been previously provided by a State under its AFDC-
EA program, would meet this purpose and could count for basic MOE
purposes. We believe that emergency housing assistance services could
meet this purpose as well. However, only the expenditures made with
respect to eligible families count for basic MOE purposes. (Refer to
Sec. 263.5 for discussion of the ``new spending'' limitation on certain
MOE program expenditures.)
    Another purpose of the program is to end the dependence of needy
parents on government by promoting job preparation, work, and marriage.
Micro-entrepreneurship services promote job preparation and work. In
this regard, a State may also deposit State funds into the eligible
family member's Individual Development Account (IDA) to help with
business capitalization. The funds count once toward the basic MOE
requirement--in the fiscal year in which the State deposits the money
into the eligible family member's IDA. The State could not use the IDA
balance carried forward to the next fiscal year to meet the basic MOE
requirement for the next fiscal year.
(3) Medical and Substance Abuse Services
    Comment: A number of commenters supported our clarification in the
preamble to allow States to use State funds to provide drug and alcohol
treatment services to eligible family members when these services
assist in accomplishing a purpose of the program. Nearly all the
commenters requested that we add the clarification to the final
regulation.
    One commenter found the need to separate medical from nonmedical
substance abuse treatment services problematic and unrealistic as both
types of services are lacking in rural areas. The commenter also noted
that child care and transportation costs related to these services
should also count toward a State's basic MOE. Another commenter
suggested that we provide guidance in the preamble to differentiate
medical from nonmedical alcohol and drug treatment services.
    Two other commenters felt that medical services in connection with
gaining and retaining unsubsidized employment (e.g., pre-employment
services that include physical examinations) should count toward the
basic MOE.
    Response: We agree that allowing expenditures with respect to an
eligible family member for nonmedical substance abuse treatment is an
important clarification and have added it to the final regulation.
    We did not intend to imply that substance abuse treatment must be
exclusively nonmedical in nature for the nonmedical services to count
for basic MOE purposes. We recognize that drug and alcohol abuse
treatment services may include medical as well as nonmedical
activities. However, if States wish to use commingled State TANF funds
for substance abuse treatment services, they have the responsibility to
develop policies that distinguish between expenditures for the
provision of medical services and nonmedical services. The policies
must reflect a reasonable interpretation of the statutory language.
    Section 408(a)(6) of the Act expressly excludes the use of Federal
TANF funds to provide medical services except for pre-pregnancy family
planning activities. The same prohibition applies to any commingled
State funds expended to treat an eligible family member for drug and
alcohol abuse. Commingled State funds used to provide nonmedical
services, such as substance abuse services, to an eligible family
member would count toward basic MOE if the service is reasonably

[[Page 17831]]

calculated to accomplish a purpose of the program, e.g., help the
individual prepare for work, find, or keep a job.
    The prohibition on medical expenditures does not apply to
segregated State TANF funds or separated State funds. Therefore, States
may count medical expenditures with respect to eligible family members
toward the basic MOE provided these expenditures are consistent with
the purposes of the program and are not matched by the Medicaid program
or otherwise prohibited under section 409(a)(7)(B)(iv) of the Act or
Sec. 263.6(b) and (c) of this subpart.
    We again remind States that the drug and alcohol abuse treatment
services with respect to eligible families must be consistent with the
purposes of the program to count toward the State's basic MOE
requirement. If so, then by extension, expenditures for other
supportive services such as transportation and child care that
facilitate the eligible family member's ability to access and complete
substance abuse treatment may also count for basic MOE purposes, if the
MOE requirements are met. (Refer to Sec. 263.3 for discussion of the
limitation on certain child care expenditures.)
    We agree that pre-employment services is an example of a qualified
activity because it accomplishes a purpose of the program. Therefore,
by extension, the associated medical expenditures would count toward
basic MOE if the State uses segregated or separated funds to pay for
the services.
(4) Juvenile Justice
    Comment: We received several comments regarding our discussion of
juvenile justice expenditures. Most of the commenters opposed our
conclusion that juvenile justice expenditures do not count for basic
MOE purposes because the expenditures do not meet any of the purposes
of the TANF program. However, the commenters did not specifically
explain how the purposes are met.
    Response: As we explained in detail earlier in our discussion,
juvenile justice expenditures do not count for basic MOE purposes. The
principal purpose of a child's placement in the juvenile justice system
is to protect society because of the child's behavior, not to care for
the child in his or her own home (purpose 1). Since the focus is to
address the child's needs, expenditures to care for the child in these
living situations does not serve to end the dependence of needy parents
on government benefits by promoting job preparation, work and marriage
(purpose 2). The remaining two purposes do not even remotely relate to
this situation. Thus, it is not an allowable use of funds under section
404(a)(1) of the Act.
    In some States, Federal TANF funds may support juvenile justice
programs pursuant to section 404(a)(2) of the Act. However, the basic
MOE requirement under section 409(a)(7) of the Act expressly does not
count expenditures for services or activities that only fall under
section 404(a)(2). Thus, it does not cover benefits and services for a
child removed from his or her home and receiving care in a correctional
facility or juvenile residential facility. States that were previously
authorized to cover the costs of children in the juvenile justice
system under their formerly approved AFDC-Emergency Assistance plans
would need to use Federal TANF funds for this purpose.
    Clearly, expenditures on eligible families for services that are
reasonably calculated to accomplish the purpose of the program do
qualify for basic MOE purposes. For example, a State may wish to
provide family preservation services so that an eligible child family
member may be cared for in his or her own home (purpose 1). Such
assistance could include family or individual counseling services or
parenting training to improve family functioning, referrals to outside
service providers who could help an ``at risk'' child or family
function better, and associated assessment and case management
activities.
(5) State ``Rainy Day'' Funds
    Comment: One commenter noted that States have a long history of
creating rainy day funds or special reserves to cover contingency
needs. States recognize the need to be fiscally prudent in the
anticipation of caseload increases, natural disasters, economic
declines, and increasing participation rates. But the commenter
believed the language in the proposed rule limits State flexibility to
use State funds for this purpose.
    Response: Section 409(a)(7)(A) and (B) of the Act stipulate that
only qualified expenditures made with respect to eligible families
count toward a State's basic MOE. Placing funds in a reserve or rainy
day fund does not represent an expenditure. While we agree that it may
be fiscally prudent to create a rainy day fund or a reserve, the money
in the fund does not count for basic MOE purposes until the fiscal year
in which the State actually expends funds on behalf of eligible
families in ways that meet the requirements of section 409(a)(7) of the
Act and this subpart.
(6) Administrative Costs
    Comment: Several commenters raised questions about how the
administrative cost cap was applied to MOE and separate State programs.
A few did not want a cap on the administrative costs of separate State
programs, believing that the PRWORA does not authorize us to cap those
administrative costs. Three commenters took exception to the
application of the 15-percent administrative cost cap to separate State
programs. The three commenters believe that such ``separate State
programs'' should be excluded from coverage of the definition.
    Response: We believe these comments are a result of confusion about
the proposed regulatory language. The MOE administrative cost cap is
not a limit on the administrative costs of separate State programs.
Rather, it is a limit on the amount of administrative costs that can
count as MOE. Section 409(a)(7)(B)(i)(I)(dd) clearly limits the amount
of administrative costs that can count as basic MOE. We have revised
the regulatory language at Sec. 263.2(a)(5) to clarify the distinction.
    We also noted an error in the proposed TANF reporting form and the
accompanying instructions that may have added to the confusion. The
instructions provided separate columns for reporting of expenditures
from MOE funds, one for State TANF expenditures and one for separate
State programs. It then indicated how administrative costs would be
determined ``for each of these columns.'' This language suggested that
there were two separate caps, when that is not the case. We have
corrected the instructions for the form.
    Comment: Two commenters indicated that administrative spending for
the TANF program would probably never involve a specific payment to, or
on behalf of, a specific eligible family. Yet this is a qualified
expenditure. Therefore, the commenter thought all types of spending
should qualify toward the basic MOE.
    Response: The different treatment of administrative costs is based
on statutory distinctions. According to section 409(a)(7)(B)(i)(I)(dd)
of the Act, administrative expenses under all programs means
``[A]dministrative costs in connection with the matters described in
items (aa), (bb), (cc), and (ee).'' Therefore, the statute includes as
MOE, administrative expenses if the expenditure relates to carrying out
another qualified activity that helps eligible families.
    Comment: One commenter observed that the definition of
administrative costs under Sec. 273.0(b) of the proposed

[[Page 17832]]

regulation applies to State MOE expenditures since the use of State MOE
funds have the same administrative cost cap as Federal TANF funds.
    Response: The commenter correctly noted that the definition of
administrative costs applies whether State funds or Federal TANF funds
are used to pay these costs.
    Comment: Two commenters supported our proposal to exempt State
expenditures used toward information technology and computerization
needed for tracking or monitoring as required by title IV-A. One
commenter noted that while section 409(a)(7)(B)(i)(I)(dd) of the Act
does not clearly state that this exemption applies, nevertheless,
States are facing massive systems needs as a result of welfare reform.
In addition, the exception for technology and computerization should
include costs for contracts to develop new programs; staff needed to
install and maintain additional systems; staff collating, in-putting
and analyzing required tracking and monitoring data; training costs for
new hardware and software; and preparing the reports and other
documents related to the tracking and monitoring mandates.
    Response: We have retained our proposal that the same exception
given under section 404(b)(2) with respect to costs related to
information technology and computerization needed for tracking and
monitoring apply to State-funded administrative costs in connection
with qualified expenditures.
    We addressed the treatment of computer-related costs in the
discussion of the definition of administrative costs at Sec. 263.0.
Refer to that section for a full discussion of issues raised regarding
information technology and computerization needed for tracking or
monitoring. Basically, this discussion affirms that certain systems
costs may be excluded in determining whether a State is within or
exceeded the 15-percent limitation placed on administrative
expenditures. It also provides guidance about the scope of that
exclusion.
    Comment: One commenter said that the cap on administrative costs
does not apply to additional State dollars that a State must expend if
assessed a penalty.
    Response: The commenter is correct. Section 409(a)(12) of the Act
requires a State to expend additional State funds under its TANF
program to replace any loss of Federal grant funds due to a penalty.
The 15-percent limit under section 404(b) applies only to Federal TANF
funds, and, thus, does not apply to the State replacement funds under
section 409(a)(12). Further, as the statute precludes the use of
replacement funds to meet the MOE requirement, they are not subject to
the MOE rules, including the MOE cap on administrative expenditures.
However, they must otherwise be allowable expenditures under the
State's TANF program.

Section 263.3--When Do Child Care Expenditures Count? (Sec. 273.3 of
the NPRM)

Overview
    In the NPRM preamble we explained that there were certain
restrictions on the child care expenditures that could count for basic
MOE purposes. First, only child care expenditures used to assist
eligible families under the State's TANF criteria count toward the
State's basic MOE. Under Sec. 263.2 (formerly Sec. 273.2), we indicated
that eligible families mean families that have a child living with a
parent or other adult caretaker relative (or consisting of a pregnant
woman) and are financially needy per the appropriate TANF income and
resource standards (when applicable) established by the State under its
TANF plan. Thus, not all State expenditures to provide child care
services would necessarily qualify for basic MOE purposes, particularly
if the eligibility criteria for the child care services are broader
than the State's TANF criteria, e.g., under the Child Care Development
Fund (CCDF).
    Second, section 409(a)(7)(B)(iv) of the Act establishes four
general restrictions on State expenditures. (These restrictions are
listed in Sec. 263.6.) Two of the restrictions, at subsections
409(a)(7)(B)(iv)(IV) and 409(a)(7)(B)(iv)(I), apply to child care
expenditures.
    Subsection 409(a)(7)(B)(iv)(IV) generally excludes any State funds
expended as a condition of receiving Federal funds under other Federal
programs from counting toward a State's basic MOE. Thus, Congress
prohibited ``double-counting.'' However, this subsection also provides
an exception to this restriction for child care expenditures (i.e., the
State's CCDF MOE and the State's share of matching funds). State child
care expenditures used to meet the child care MOE requirement or to
receive Federal matching funds under the CCDF may also count toward
meeting the State's basic MOE requirement if the expenditures are made
on behalf of members of an eligible family.
    The amount of State child care expenditures that may count for
basic MOE purposes is limited to the State's share of expenditures in
FY 1994 or FY 1995, whichever is greater, for the former title IV-A
child care programs, i.e., the AFDC/JOBS child care, transitional child
care, and At-Risk Child Care programs. This capped amount is the same
amount as the State's child care MOE amount, for purposes of qualifying
for child care matching funds.
    If a State has additional State child care expenditures, i.e.,
expenditures that have not been used toward meeting the child care MOE
requirement or to receive Federal matching funds under CCDF, these
expenditures may count toward the State's basic MOE, provided the
expenditures meet all other requirements and limitations set forth in
subpart A of this part. Subsection IV does not limit the amount of such
additional child care expenditures that may count for basic MOE
purposes.
    Subsection 409(a)(7)(B)(iv)(I) excludes any expenditures that come
from amounts made available by the Federal government. Therefore,
Federal TANF funds transferred from the TANF program to the Child Care
and Development Block Grant (also known as the Discretionary Fund of
the CCDF) would not count toward MOE. Neither would Federal TANF funds
directly received under CCDF (or any other program that allows for
child care).
Comments and Responses
    We received a number of comments on this section. Some commenters
found the information regarding expenditures that could count helpful,
especially since States are making significant investments in child
care. Others thought that the preamble was confusing because it did not
clearly distinguish between child care expenditures that are subject to
a dollar limit (and therefore would not count in the entirety toward
the basic MOE) and those that can count without limit. A few commenters
recommended that the final regulations at Sec. 263.3(a) (formerly
Sec. 273.3(a)) clearly explain which child care expenditures count
rather than merely cross-referencing the statutory provision.
    Several commenters expressed concern that the definition of
``eligible family'' deters States from counting child care expenditures
under the State's child care program for transitional and at-risk
families. We address this and other comments in the discussion below.
    Comment: Some commenters noted that the wording in this section
does not clearly explain which expenditures do and do not count toward
the State's basic MOE requirement. The commenters thought that we
should add a clarification to the final regulations.

[[Page 17833]]

    Response: States may receive an allocated amount of Federal
matching funds under the matching fund component of the CCDF. To
receive its share of these matching funds, the State must meet a
maintenance-of-effort (MOE) requirement. The child care MOE requirement
is a specific dollar amount that we calculated for each State based on
their FY 1994 or FY 1995 State child care expenditures under the title
IV-A child programs. Thus, under the CCDF matching fund, States must
expend State-only dollars that equal their child care MOE level and may
claim Federal matching funds (up to the allocated amount) for State
funds expended beyond the child care MOE level to provide CCDF-funded
child care services. A State may also count these State-funded child
care expenditures toward the State's basic (TANF) MOE as long as the
expenditures also meet the requirements under section 409(a)(7) of the
Act and this subpart. However, the amount that may be counted for basic
MOE purposes is limited to State's child care MOE amount. States should
note that while the basic MOE limit for double-counting child care
expenditures is the same amount as the child care MOE amount, this does
not mean that the State may use only child care MOE expenditures. For
example, if a State's annual child care MOE requirement is $5 million,
then the State may only count up to $5 million of its CCDF matching
fund expenditures toward its annual basic MOE requirement. The State
could claim the $5 million in child care expenditures from either
expenditures used to meet the State's child care MOE requirement or
expenditures used to receive CCDF Federal matching funds.
    It is not unusual for a State to expend in excess of the funds
needed to draw down CCDF funds to provide child care services. There is
no dollar limit on counting toward basic MOE State expenditures to
provide child care assistance that have not been used to meet the CCDF
matching fund requirements. We have clarified this policy in the
regulatory text. At the same time, we remind States of the ``new
spending'' provision at Sec. 263.5 that limits the amount of basic MOE
expenditures that may count in certain pre-existing basic MOE programs,
including certain child care programs.
    For pre-existing child care programs (current State or local
programs also operating in FY 1995) that were not AFDC-related
programs, States may only claim ``new spending'' toward the basic MOE
requirement--namely, qualified State expenditures in the current year
with respect to eligible families that exceed what the State spent on
that program in FY 1995. The AFDC-related child care programs included
the AFDC, At-Risk, and transitional child care programs. The ``new
spending'' provision does not apply to expenditures for child care
services that would have been an allowable expenditure under these
former title IV-A child care programs.
    Hence, in terms of a child care program subject to the ``new
spending'' provision, three requirements apply for the expenditure to
count as basic MOE. First, only the ``new'' expenditures, those in
excess of the FY 1995 program expenditures, potentially count. Second,
if the expenditures have been used to meet the child care MOE
requirement or to receive CCDF matching funds, the maximum amount of
excess expenditures that can be double-counted is limited to the
State's child care MOE amount. For those expenditures that have not
been used to meet the child care MOE requirement or to receive CCDF
matching funds, the excess may count as basic MOE, up to the actual
amount of expenditures made outside of the CCDF matching fund
requirement. Finally, if none of the expenditures in the child care
program have been used to meet the child care MOE requirement or to
receive CCDF matching funds, the total amount of the excess can be
counted toward basic MOE.
    Comment: Several commenters expressed concern that State
expenditures to provide child care services to families transitioning
off TANF assistance or at risk of becoming dependent on TANF assistance
do not count for basic MOE purposes because of the restricted
definition of eligible families. One commenter suggested that we amend
the regulation to recognize State programs geared to enabling low-
income families to maintain their jobs through the provision of child
care. The commenters contend that we should consider any family who is
financially needy according to the State's child care eligibility
criteria an eligible family for basic MOE purposes. Therefore, any
State spending on its child care program would count toward a State's
basic MOE requirement.
    Several other commenters concurred, writing that all of the State's
child care expenditures under the now repealed title IV-A child care
programs, which included expenditures for working families to
transition off the TANF assistance program or at risk of needing TANF
assistance, should count toward the basic MOE requirement, up to each
State's child care MOE amount. They noted that there is no statutory
requirement that an eligible family must actually receive TANF cash
assistance for child care expenditures to count for basic MOE purposes.
    Response: We refer you to the extensive discussion regarding the
definition of eligible family under Sec. 263.2 of this subpart. There,
we reaffirm that an eligible family must consist of child living with
his or her parent or other caretaker relative (or consist of a pregnant
woman). The family must also be financially needy according to the
appropriate income and resource (when applicable) criteria established
by the State and contained in its TANF plan. However, we also mention
that we never intended that States be locked into a single income and
resource standard, such as the one a State uses to determine whether a
family is financially eligible to receive TANF cash assistance. States
are free to establish different income and resource (when applicable)
criteria based on the range of families that it wishes to serve or type
of services it wants to provide. We also recognize that eligible family
members do not necessarily have to receive TANF cash assistance or any
other benefit or services through the TANF program.
    Thus, the rules would not preclude States from providing child care
benefits to help families who are transitioning off of TANF assistance
or at risk of needing TANF assistance or other low-income families. Nor
would they prevent a State from using the financial eligibility limits
for child care services and activities applicable to the use of CCDF
funds or the financial eligibility criteria applicable to a State's own
separately funded child care program.
    Comment: One commenter noted that the NPRM gives the impression
that we consider child care important for children up to the age of
six, but not for children age six or older. The commenter recommends
rulemaking on this issue.
    Response: We believe the commenter was referring to the proposed
rule at Sec. 271.15, which provided that a State could not reduce or
terminate assistance to a single custodial parent caring for a child
under age six for refusing to engage in required work, if the parent
demonstrates an inability to obtain needed child care. This provision,
found in Sec. 261.15 of the final rule, reflects the statutory
provision at 407(e)(2), which expressly limits the sanction exception
to a single custodial parent caring for a child under age six.
    This provision does not represent our perspective regarding the
importance of child care for children age six and over. We recognize
that child care is a critical

[[Page 17834]]

supportive service for families moving from welfare to work. However,
our authority to regulate in this area is limited to the State penalty
provision associated with this child care exception at Sec. 261.51 of
the final rule.
    Comment: One commenter indicated that the State agency may not know
if it needs to utilize any child care MOE expenditures to satisfy the
basic MOE requirement until the final quarter of the fiscal year.
    Response: The commenter may be reacting to the requirement to
report expenditures quarterly. Although the report is quarterly, the
expenditures reported are cumulative. The basic MOE spending
requirement is an annual requirement. Thus, the reported expenditures
could have occurred in the quarter represented by the report or any
prior quarter in the fiscal year.
    A State may choose to apply the child care expenditures that it
made to meet the CCDF matching fund requirement toward satisfying its
basic MOE requirement (up to the dollar limit). It is not a
requirement. The State may apply such expenditures toward its basic MOE
requirement anytime during the fiscal year.
    The commenter may also be pointing out a potential issue for States
that depend upon expenditures in other State and local programs for
meeting the basic MOE requirement. To the extent such other programs
are not under the control of the TANF agency, the TANF agency will need
to maintain strong communications with the other agencies operating
these programs in order to track and report expenditures, as well as to
ensure that the State will be in compliance with the basic MOE
requirement at the end of the year.

Section 263.4--When Do Educational Expenditures Count? (Sec. 273.4 of
the NPRM)

Overview
    Only expenditures on educational services or activities that a
State targets to eligible families to increase self-sufficiency, job
training, and work may count toward a State's MOE. The statute excludes
educational services or activities that are generally available,
including through the public education system. As the conferees
explained in H.R. Rep. No. 725, 104th Cong., 2d sess., p. 277, States
may not count as MOE ``any expenditure for public education in the
State other than expenditures for services or assistance to a member of
an eligible family that is not generally available to other persons.''
    Expenditures on special services that are targeted to ``eligible
families'' and are not generally available to other residents of the
State may count. These could include contracted educational services or
activities that provide special classes or expand the capacity of
existing programs, for example, to provide: targeted services for teen
parents in high schools or other settings; training in English as a
second language for eligible immigrants; remedial education to achieve
basic literacy; courses for high school equivalency (GED) certificates;
or pre-employment or job-readiness activities.
    We also note that expenditures on supportive services, such as
transportation, to assist a member of an eligible family in accessing
educational activities may also count toward a State's MOE, either as
cash assistance or another type of benefit or service consistent with
the purposes of the Act. (See Secs. 263.5 and 263.6 for other general
restrictions on these expenditures.)
Comments and Responses
    We did not receive many comments on this section. The comments that
we did receive focused on two areas: the requirement that the education
activities must not be generally available to other residents of the
State, and the use of the term ``targeted.'' We address these concerns
and others below.
    Comment: Two commenters thought the term ``targeted'' was
misleading and needed clarification. As written, qualified educational
expenditures could be ``targeted'' to eligible families, yet the
recipients of the services may be persons who are not members of
eligible families.
    Response: We agree. The statute clearly stipulates that only
services with respect to eligible families count toward the State's
basic MOE requirement. We have therefore reworded the regulation to say
that the services must be ``provided to'' eligible families.
    Comment: A number of commenters voiced concerns regarding the
meaning and operation of the exclusion of expenditures for educational
services that are generally available to other residents of the State.
One commenter noted there is no specific definition of services that
are generally available to the public. Some of the commenters believed
that States could be discouraged from using State MOE funds for
education. Providing educational services that are generally not
available to the public could result in operating segregated classes
for eligible families in order to have the expenditures count for basic
MOE purposes. In fact, the commenters noted that the examples of
educational activities for eligible families given in the NPRM are no
different than those provided by the public education system. Thus, the
provision essentially eliminates a State's ability to count educational
activities or services toward the basic MOE requirement whenever the
services are made available to other residents of the State. As one
commenter put it, ``[W]ho pays for the assistance is irrelevant, as is
whether anyone from the general public also has access. The proposed
rule limits States' ability to maximize its resources.''
    One commenter also raised concerns regarding the potential impact
that expenditures for educational services for eligible families will
have on current public education programs funded by the State. The
educational activities for basic MOE purposes may come at the expense
of similar education services and activities provided by the
traditional public education system.
    Another commenter asked whether the restriction applies to post-
secondary public institutions.
    Response: We modified the regulatory text to provide a little more
guidance. The modified language incorporates language from a similar
provision under title XX at section 2005(a)(6) of the Act. More
specifically, the title XX provision excludes expenditures for the
provision of any educational service that the State makes generally
available to its residents without cost and without regard to their
income. We thought this additional language was helpful and have added
it to the regulatory text. Under TANF and title XX, we believe Congress
intended to prohibit States from substituting program funds for
existing expenditures from general funds on the traditional, free
public education system. Thus, general fund expenditures for
traditional, free public education do not count toward the State's
basic MOE requirement.
    Accordingly, we do not think that the exclusion would cover post-
secondary educational or vocational programs in the State unless all
residents of the State may attend the post-secondary institution
without cost and without regard to their income.
    We do not think it is appropriate for us to define activities that
are not generally available to persons who are not members of an
eligible family. We defer to the States to decide appropriate
educational activities for MOE purposes, i.e., to increase job
training, self-sufficiency, and work.
    Basically, a State may use MOE funds to expand existing educational
services by contracting for additional services for eligible family
members or by funding brand new activities. States do not need to
segregate the activities, services, or

[[Page 17835]]

classes. They may even use the physical facilities of the public
education system. Other residents of the State may participate in the
funded activities so long as the State does not count, as MOE, funds
used to subsidize or pay for persons who are not members of an eligible
family. States may also count, as MOE, funds used to provide a service
for eligible families in a part of the State or locale where the
service does not exist.
    Similarly, States may count as MOE funds used to contract for, or
share in, the costs of providing educational activities on job sites
(e.g., ESL classes). In this particular situation, other employees at
the site who are not members of eligible families could attend the
classes. However, as previously mentioned, a State may not count, as
MOE, any funds used to subsidize or pay for persons who are not members
of an eligible family.
    In summary, a State may count, as MOE, funds used to pay costs
(e.g., fees or tuition) to enable an eligible family member to attend a
class or participate in an educational activity. Nonexcluded
educational expenditures with respect to eligible families count for
basic MOE purposes if the activities are designed to increase self-
sufficiency, job training, and work.
    We remind States to allocate costs that are associated with more
than one State or local program or agency properly.
    Comment: One commenter recommended that the State substantiate its
basic MOE expenditures by providing overall budget information on its
education services and programs, not just those provided to eligible
families. The State should also provide a comprehensive budget picture
of support for education activities and services for the entire
education agency responsible for TANF-related education services--thus,
reflecting any shifts in funds between the traditional, free education
programs in public schools and the TANF-related education services.
    Response: We do not believe it is necessary for the State to
regularly submit such information. However, States are subject to
audits annually or biennially pursuant to the Single Audit Act. The
audit includes a review of a State's compliance with MOE requirements.
Under 45 CFR 92.42, States are responsible to have a process designed
to achieve reliability of financial reporting and compliance with
applicable laws and regulations, including retention of background
documentation that validates such reports. The audit findings include
any questioned costs. We are informed of all audit findings.
    Other studies, or reviews by OIG or GAO, may be conducted. Such
reviews could cover processes, such as a State's budgetary process,
that are generally beyond the scope of an audit. Further, if
appropriate, for example, audits may also be conducted as a result of
requests by Congress or in response to complaints from individuals or
organizations.
    Finally, we have made changes to the reporting on MOE programs at
Sec. 265.9(c) that should provide a clearer picture of educational
activities being funded by MOE.
    Comment: One commenter indicated that using State funds to enhance
access to education for low-income families is an important way of
helping families out of poverty. At the same time, States are concerned
with the risk for penalties if they use separate State funding to
provide financial aid for low-income families. The commenter was
concerned that while the State may view education as an effective means
of advancing work rather than avoiding the work participation
requirement, we might view it as an inappropriate diversion.
    Another commenter questioned whether State-funded expenditures to
permit a member of an eligible family to obtain no more than the first
baccalaureate degree or one vocational education program certificate as
part of ``job skills training directly related to employment'' counts
for basic MOE purposes. These educational activities are only available
to students who meet other strict criteria established under State law
(which include a recent work history; enrollment in an accredited or
approved State university, community college, or other vocational
school or training program; and maintaining a cumulative grade point
average of at least a ``C'').
    Response: The inherent effect of any separate State program is that
the TANF requirements do not apply. In the NPRM, we expressed concern
that States might use separate programs to avoid the work requirements
or to avoid returning a share of their child support collections to the
Federal government. As a result, we proposed several measures to
counteract this possibility, including denying certain penalty relief
to States. In the final rule, we decided to eliminate the proposed link
between a State's decision to operate separate State programs and its
eligibility for penalty relief. However, we still intend to gather
information that will enable us to monitor the nature and scope of such
programs. Refer to the preamble, section entitled ``Separate State
Programs'' for a full discussion of this issue.
    We have been persuaded that States are using both separate State
programs and the TANF program to serve a variety of policy purposes
that do not seem to be designed to avoid TANF requirements. For
example, States are working to increase the economic viability of
families by providing financial aid for post-secondary education and
supporting other education and training activities on a selective
basis. Unless excluded, educational expenditures with respect to
eligible families count for basic MOE purposes if the activities are
designed to increase self-sufficiency, job training, and work. These
activities may be under the TANF program or apart from the TANF
program. In either case, we hope that State and local officials are
working with educators, post-secondary institutions, and the business
community to design appropriate opportunities for families consistent
with the goals of TANF.
    As a point of clarification, the list of work activities in section
407 of the Act (and Sec. 261.30 of these rules) determine what is
countable for the purpose of the State's work participation rates.
However, they do not limit the nature or type of educational or
training services the State may provide with Federal TANF or State MOE
funds.

Section 263.5--When Do Expenditures in State-Funded Programs Count?
(Sec. 273.5 of the NPRM)

Overview
    We explained in the NPRM that section 409(a)(7)(B)(i)(II)
establishes limits on the amount of expenditures that may count when
the MOE expenditures are for activities under separate State or local
programs. The heading for the provisions under this section indicates
that ``transfers from other State and local programs'' cannot count
toward a State's MOE. In the months following enactment, we received
numerous questions about this language.
    We do not believe that the language intended to convey a literal or
physical transfer of funds. Instead, we believe that Congress wanted to
prevent States from substituting existing expenditures in any pre-
existing outside programs for cash welfare and related assistance to
needy families and to prevent States from claiming such existing
expenditures as expenditures for MOE purposes.
    Therefore, section 409(a)(7)(B)(i)(II)(aa) provides that the money
spent under State or local

[[Page 17836]]

programs may count as MOE only to the extent that the expenditures
exceed the amount expended under such programs in the fiscal year most
recently ending before the date of enactment (August 22, 1996). Thus,
States may count only additional or ``new'' expenditures, i.e.,
expenditures above FY 1995 levels. Like some commenters, we call this
the ``new spending'' provision.
    Section 409(a)(7)(B)(i)(II)(bb) provides an alternative limitation.
We believe that this provision was intended as an exception to the
``new spending'' provision under (aa). Under provision (bb), State
expenditures under any State or local program during a fiscal year may
count toward a State's MOE to the extent that the State is entitled to
a payment under former section 403 as in effect before the date of
enactment with respect to the expenditures. We interpret this to mean
that State funds expended under State or local programs that had been
previously authorized and allowable under the former AFDC, EA, and JOBS
programs in effect as of August 21, 1996, may have all such
expenditures count toward the State's MOE. In other words, the limit
under (aa) does not apply to what would have formerly been expenditures
under the title IV-A program; there is no requirement that these
expenditures be additional or new expenditures, above FY 1995 levels.
Comments and Responses
    We did not receive many comments on this section. But some of the
comments that we did receive raised some important issues regarding the
concept of ``separate'' State or local programs, as well as the meaning
of the exception to the ``new spending'' provision. One commenter also
questioned the calculation process for determining any ``new spending''
for programs in which the ``new spending'' provision applies. A couple
of commenters also felt the proposed rule needed to be clarified. As a
result of some of these comments, we have made some clarifications in
the final rule, including revisions to reflect the statutory language
more directly regarding the treatment of current fiscal year
expenditures in any State or local program that also existed in FY
1995.
    Comment: One commenter observed that this section indicates that
expenditures made under separate State programs that had not previously
been authorized under the former AFDC/EA/JOBS programs cannot now count
toward maintenance of effort. The commenter objected to this provision.
For example, the AFDC-UP program has been repealed. Therefore, families
who previously received general assistance because a parent could not
meet the criteria under the AFDC-UP program, now become ``part of the
service equation.'' Therefore, the commenter suggested that all funds
now spent to support these families should count for basic MOE purposes
without limitation.
    Response: The example given clearly falls under the statutory
exception at section 409(a)(7)(B)(i)(II)(aa) of the Act. For programs
that were operating in 1995 and were not former AFDC-related programs,
States may only claim qualified expenditures with respect to eligible
families if their expenditures are in excess of what they spent on that
program in 1995. General assistance programs are not AFDC-related
programs. AFDC-related programs include the AFDC, EA, and JOBS
programs, as well as the IV-A child care programs (AFDC, At-Risk, and
transitional child care programs). Qualified expenditures during a
fiscal year to provide AFDC-related services (e.g., At-Risk Child Care
services) to eligible families may count without limitation.
    Comment: One commenter noted that for pre-existing programs (State
or local programs operating in FY 1995) that were not AFDC-related
programs, the State may only claim qualified State expenditures in the
current fiscal year that exceed what the State spent on that program in
FY 1995. Thus, State spending for State or local programs that are not
AFDC-related must be ``new spending.'' However, in many cases, States
will use both State MOE resources and Federal TANF funds to fund a
number of different programs. The ``new spending'' provision could
apply for these situations as well.
    Response: We agree with this observation. Section 409(a)(7)(B)(II)
of the Act excludes expenditures under ``any State or local program
during a fiscal year'' that do not exceed the amount expended under the
State or local program in FY 1995. Thus, the statute does not specify
that the ``new spending'' provision on qualified State expenditures
only applies to State programs that are currently separate from TANF.
Instead, the provision applies to ``any'' State or local program
existing in FY 1995 that did not have allowable expenditures under the
former AFDC, EA, JOBS, and IV-A child care programs (AFDC, At-Risk and
transitional child care programs). For example, a State or local
program that is now included under the TANF program or receiving TANF
and MOE resources could have existed separately from the State's former
AFDC-related programs in FY 1995. Therefore, we have decided to amend
the annual report to require that States report the information
proposed under Sec. 273.7(b) for all their State-funded MOE programs.
We refer you to Sec. 265.9 for a full discussion of all the comments
regarding the proposed annual addendum and the changes we have made in
the final rule.
    Comment: One commenter noted that State spending in a State At-Risk
Child Care program is an example of spending that was previously
authorized and allowable under former section 403. Therefore, the ``new
spending'' provision does not apply. Another commenter wondered whether
expenditures for which a State could not have received Federal matching
payments due to the At-Risk cap would also be exempt from the ``new
spending'' provision. For example, take the case of a State that has
run an At-Risk Child Care program for the working poor since FY 1995.
The State did not receive matching funds for all of its expenditures
for child care services under this program. Are the potentially
qualified expenditures above the former cap subject to the ``new
spending'' provision or exempt from this provision?
    Response: If the State's child care program for the working poor
was authorized and allowable under former section 402(i) under the Act,
then we believe the ``new spending'' provision would not apply to
qualified expenditures with respect to eligible families during a
fiscal year, for the reasons given below.
    Former section 402(i)(5) of the Act specified that amounts expended
by the State to provide child care to any at-risk low income family
would be matched. However, section 403(n) limited the amount of the
matching payments a State could receive. The issue is whether a State
can count all of its qualified expenditures with respect to eligible
families during a fiscal year, without limitation, because the
expenditures in FY 1995 were allowable, notwithstanding the cap.
    Section 409(a)(7(B)(II)(bb) of the Act uses the phrase ``is
entitled to a payment'' under former section 403 to indicate when the
``new spending'' provision does not apply. After considerable
deliberation on this issue, we concluded that Congress intended States
to be able to claim the State's portion of title IV-A welfare spending
toward basic MOE, based on the idea that MOE is a substitute for the
former matching arrangement. To carry out this intent, Congress needed
to define the former title IV-A welfare spending. They did this by
referring to

[[Page 17837]]

expenditures for which the State would be entitled to payment under
former 403 of the Act. This section authorized Federal matching
payments for allowable welfare expenditures. Thus, we believe that
Congress was looking for allowable welfare expenditures, not actual
payments to the States. This concept would include allowable
expenditures that were more than the State could receive in the form of
a matched payment. Therefore, we conclude that the new spending
provision does not apply to child care expenditures made by a State to
augment the Federal and State matching funds available in its At-Risk
Child Care program.
    However, we remind States of the dollar limitation discussed under
Sec. 263.3 of this subpart. Qualified child care expenditures used to
meet the requirements of the CCDF matching fund (i.e., as matching and
MOE amounts) may also count as basic MOE expenditures only up to the
State's child care MOE amount.
    Comment: One commenter raised questions about the appropriate
calculation for determining the amount of new spending for programs
subject to this provision. The commenter noted that it is not clear
from the statute if the intent of this provision is for States to only
count toward the MOE requirement additional spending that represents an
increase over FY 1995 spending levels on eligible families. If this is
the statutory intent, then the commenter recommends that we require a
State to document whether its spending above FY 1995 levels has served
eligible families and to report spending on eligible families in FY
1995. In cases where the State does not know the precise level of FY
1995 spending on eligible families, the regulations should permit
States to use a reasonable estimating methodology. If the State is
unable to determine or to estimate the amount of spending on eligible
families in FY 1995, then it would need to otherwise demonstrate that
it has targeted all of the increase in spending (relative to FY 1995
funding levels) toward eligible families.
    In addition, the commenter recommends that we require total FY 1995
State expenditures for all State or local programs subject to the new
spending provision, not just separate State programs as we proposed.
Thus, the commenter believed that we should require this information
for State or local programs funded with both TANF, as well as MOE
resources. We should also require total State spending in the same
State or local program for the current fiscal year. Otherwise, we will
be unable to determine whether claimed MOE expenditures meet the new
spending provision.
    Response: Although the commenter was responding to our proposal
under Sec. 273.7(b) to collect supplementary information on separate
State programs, we believe that this is the best place to address the
commenter's points because they speak to the calculation of additional
or new spending claimed for MOE purposes. However, we also refer you to
Sec. 265.9 for a fuller discussion of all the comments regarding the
proposed annual addendum and the changes we have made in the final rule
to the information States must report annually.
    We do not agree that it is either necessary or required in the
statute for a State to document or to report to us what it spent during
FY 1995 on eligible families in programs that are now subject to the
``new spending'' provision. The ``new spending'' provision under
section 409(a)(7)(B)(II)(aa) of the Act references current fiscal year
expenditures under any State or local program to the extent that ``the
expenditures exceed the amount expended under the State or local
program'' in FY 1995.
    This provision does not refer to eligible families in defining
``the amount expended'' in FY 1995; rather it refers generally to
expenditures. However, it does refer to eligible families in defining
qualified expenditures for the current fiscal year. As a result, we
conclude that States must calculate ``new'' or additional spending
under each State or local program subject to the ``new spending''
provision by comparing total qualified State expenditures with respect
to eligible families for the current fiscal year with total State
expenditures for the program in FY 1995. If total qualified State
expenditures with respect to eligible families for the current fiscal
year exceed total State expenditures in FY 1995 under the program, the
State may claim the excess for basic MOE purposes because the State
spent all those funds on eligible families. If total qualified State
expenditures with respect to eligible families for the current fiscal
year do not exceed total State expenditures in FY 1995 under the
program, the State may not claim any current fiscal year qualified
expenditures toward its basic MOE requirement.
    We agree with the commenter's suggestion that a State should report
total FY 1995 expenditures for each State or local MOE programs subject
to the ``new spending'' provision. We are also requiring total current
fiscal year expenditures for all State or local MOE programs. This
includes State or local MOE programs that are currently separate from
the State's TANF program, as well as MOE programs funded under TANF. We
are requiring this information because it will help provide context for
the reported expenditures on eligible families and give some indication
of their plausibility.

Section 263.6--What Kinds of Expenditures Do Not Count? (Sec. 273.6 of
the NPRM)

Overview
    As we previously discussed, expenditures under State programs (TANF
and separate State programs) do not count as MOE if they are not made
on behalf of eligible families.
    The statute also provides several general restrictions on MOE
expenditures. Pursuant to section 409(a)(7)(B)(iv), the following types
of expenditures do not count: (1) expenditures of funds that originated
with the Federal government; (2) State funds expended for the Medicaid
program under title XIX of the Act; (3) any State funds used to match
Federal WtW funds provided under section 403(a)(5) of the Act, as
amended by sections 5001(a) (1) and (2) of Pub. L. 105-33; and (4)
expenditures that States make as a condition of receiving Federal funds
under other programs. See discussion of Sec. 263.3 for additional
information.
    Section 5506(c) of Pub. L. 105-33 amended section 409(a)(7)(B)(i)
by adding another restriction under section 409(a)(7)(B)(i)(III).
Pursuant to section 409(a)(12), States must expend State funds equal to
the total reduction in the State's SFAG due to any penalties incurred.
Section 409(a)(7)(B)(i)(III) provides that such expenditures may not
count toward a State's basic MOE. (See Sec. 264.50.)
    TANF funds transferred to the Social Service Block Grant Program,
under title XX of the Act, or transferred to the Child Care and
Development Block Grant program (also known as the Discretionary Fund
within the Child Care and Development Fund), do not count toward
meeting a State's MOE requirement because of the first restriction
under 409(a)(7)(b)(iv), which prohibits funds that originated from the
Federal government from being used for MOE purposes.
    Finally, it is important to note that only State expenditures made
in the fiscal year for which TANF funds are awarded count toward
meeting the MOE requirement for that year. For example,

[[Page 17838]]

expenditures made in prior fiscal years or, in the case of FY 1997,
expenditures made prior to the date the State started its TANF program
do not count as basic MOE.
Comments and Responses
    We received few comments on this section, including a comment
concurring that this section accurately tracks statutory requirements.
Although no changes need to be made to the final rule as a result of
these comments, we are clarifying Sec. 263.6(b) of the final rule so
that the regulatory language aligns more closely with the statutory
prohibitions at section 409(a)(7), as amended.
    Specifically, the proposed rule at Sec. 273.6(b) provided that
State funds used to match Federal funds (or expenditures of State funds
that support claims for Federal matching funds), including State
expenditures under the Medicaid program, do not count toward a State's
basic MOE requirement. We have kept the part of this provision that
prohibits State funds expended for the Medicaid program under title XIX
from counting toward a State's basic MOE requirement. The rest of this
provision is included in Sec. 263.6(c).
    If it had remained part of paragraph (b), then it would have been
misleading and would have contradicted the exception under
Sec. 263.6(c). That exception permits State funds expended to meet the
requirements of the CCDF Matching fund to count (up to the State's
child care MOE level) toward the State's basic MOE requirement,
provided the State has met all other requirements of this subpart. The
requirements of the CCDF Matching Fund include an MOE requirement plus
additional State expenditures that would be matched with Federal funds,
up to the State's allocation. Based on the proposed wording under
paragraph (b) of this section, the additional child care expenditures
made by the State for purposes of receiving matching funds would not
have counted toward the State's basic MOE. Yet, we stated clearly under
paragraph (c) of this section and in the proposed Sec. 273.3(a) that
such child care expenditures could count (up to the amount of the
State's child care MOE level).
    We believe that the prohibition under revised Sec. 263.6(c) takes
in all requirements that a State must meet to receive Federal TANF
funds, whether it is an MOE requirement, expenditures to receive
Federal matching funds, or both. In addition, the Balanced Budget
Amendments (Pub. L. 105-33) amended section 409(a)(7)(B)(iv) by
replacing the prohibition under (III) ``any State funds which are used
to match Federal funds'' with the prohibition related to the receipt of
WtW funds--namely, ``any State funds which are used to match federal
funds provided under section 403(a)(5).'' We had not reflected this
change in the language at Sec. 273.6(b).
    We conclude that the language at section 409(a)(7)(B)(iv)(IV) of
the Act also prohibits the counting for basic MOE purposes of any State
funds expended to match Federal funds under other programs (or
expenditures of State funds that support claims for Federal matching
funds). Therefore, this language did not need to appear in
Sec. 263.6(b) because the regulatory provision at Sec. 263.6(c)
incorporates this prohibition. When we deleted the language from
Sec. 263.6(b), we also removed the apparent contradiction between
Sec. 263.6 (b) and (c) regarding State child care expenditures used to
meet the CCDF matching fund requirements.
    Comment: One commenter recommended allowing encumbrances as of
September 30th of a fiscal year, but paid in a subsequent period, to
count toward the State's basic MOE requirement.
    Response: We disagree with this recommendation. By statute, only
expenditures count toward a State's basic MOE requirement. An
obligation, or encumbrance, is not an expenditure until actually paid.
An expenditure counts toward the State's annual basic MOE requirement
for the fiscal year in which it is actually paid.
    Comment: One commenter believes that any expenditures made to
replace reductions in the SFAG as a result of penalties should count
toward the State's basic MOE requirement.
    Response: The statute at 409(a)(7)(B)(i)(III) expressly excludes
these additional State expenditures from counting toward the State's
basic MOE requirement.
    Comment: One commenter was concerned that States may infer that the
prohibition on counting any State funds used as a condition of
receiving Federal funds under another Federal program means that States
may not purchase bus passes for program participants or otherwise help
pay for their public transportation because, then, TANF resources are
going to public transit providers who use the money as a match for
their own Federal grants.
    Response: Section 409(a)(7)(B)(iv)(IV) of the Act and Sec. 263.6(c)
of the regulatory text prohibit counting for basic MOE purposes any
State funds that are expended as a condition of receiving Federal funds
from other programs (unless specifically authorized, e.g., the State
child care expenditures under the CCDF matching fund). For example,
this prohibition would apply to State funds expended to meet the cost-
sharing requirement of the recently passed Jobs Access transportation
grants program.
    However, the purchase of bus passes, in the context described by
the commenter, does not constitute an example of State funds spent in
order to receive other Federal funds. Rather, it represents an
alternative form of providing a transportation benefit for a TANF-
eligible family. As previously discussed, State funds used to purchase
bus passes that help an eligible family member go to or from work or
training would be an appropriate use of State MOE funds because this
activity promotes job preparation and work, a purpose of the TANF
program.

Section 273.7 of the NPRM

    Note: We moved the provisions that appeared in Sec. 273.7 of the
NPRM and have not issued a new Sec. 263.7. The information proposed
in Sec. 273.7(a) and the comments on this section appear under
Sec. 265.3. The information proposed in Sec. 273.7(b) and the
comments on this section appear under Sec. 265.9.

Section 263.8--What Happens If a State Fails To Meet the Basic MOE
Requirement? (Sec. 273.8 of the NPRM)

Overview
    Under section 409(a)(7)(A), if a State does not meet the basic MOE
requirement, we will reduce the amount of the SFAG payable for the
following fiscal year on a dollar-for-dollar basis.
    Section 5001(g) of Pub. L. 105-33 added another penalty to section
409(a) for a State that receives a WtW formula grant pursuant to
section 403(a)(5)(A) of the Act, but fails to meet the basic MOE
requirement for the fiscal year. Under section 409(a)(13) of the Act,
we must reduce the amount of the State's SFAG for the following fiscal
year by the amount of the WtW formula grant paid to the State if the
State fails to meet the basic MOE requirement.
Comments and Responses
    We received three comments on this section. One commenter observed
that this section tracks the statutory requirement. Two others
commented on the severity of the penalty amounts. We have made no
changes to this section.
    Comment: Two commenters felt that the penalties are too severe. One
commenter recommended deleting the provision that requires reducing the
State's SFAG by the amount of a State's WtW grant if the State fails to
meet its

[[Page 17839]]

basic MOE requirement for the fiscal year.
    Response: Although we agree that the penalties are very
significant, as we mentioned in the above discussion, the statute
expressly requires both reductions.

Section 263.9--May a State Avoid a Penalty for Failing To Meet the
Basic MOE Requirement Through Reasonable Cause or Corrective
Compliance? (Sec. 273.9 of the NPRM)

Overview
    Under section 409(b)(2), a State may not avoid a penalty for
failure to meet its basic MOE requirement based on reasonable cause. In
addition, section 5506(m) of Pub. L. 105-33 amended section 409(c)(4)
to provide that a State may not avoid the penalty through a corrective
compliance plan.
    Congress' decision not to provide for a reasonable cause exception
or corrective compliance in basic MOE penalty cases indicates that
Congress considered the MOE requirement crucial to meeting the work and
other objectives of the Act.
Comments and Responses
    We received three comments on this section. One commenter agreed
that this section tracked the statute. The other commenters basically
questioned the lack of reasonable cause and corrective compliance. We
have made no changes to this section.
    Comment: Two commenters thought that reasonable cause and the
corrective compliance process should be available to a State that
failed to meet its basic MOE requirement. One of the commenters
expressed concern that the regulations are silent with respect to an
appeal process.
    Response: As we mentioned in the above discussion, the statute
under sections 409(b)(2) and 409(c)(4) of the Act expressly provides
that reasonable cause and corrective compliance do not apply to the
basic MOE penalty provision. The State may appeal our decision to
impose a reduction on the SFAG payable to the Departmental Appeals
Board, in accordance with section 410 of the Act. Hence, the appeal
process described in Sec. 262.7 applies even if reasonable cause and
corrective compliance do not apply.

Subpart B--What Rules Apply to the Use of Federal TANF Funds?

Section 263.10--What Actions Would We Take Against a State if It Uses
Federal TANF Funds in Violation of the Act? (Sec. 273.10 of the NPRM)

Overview
    Section 409(a)(1) contains two penalties related to use of Federal
TANF funds (i.e., all Federal TANF funds under section 403) in
violation of TANF program requirements. The first is a penalty in the
amount of funds that a State uses improperly, as found under the Single
Audit Act. We would reduce the SFAG payable to the State for the
immediately succeeding fiscal year quarter by the amount misused.
    In addition, we would take a second penalty, equal to five percent
of the adjusted SFAG, if we find that a State has intentionally misused
funds. You can find criteria for ``intentional misuse'' at Sec. 263.12.
    For both of these penalties, States may request that we grant
reasonable cause and submit a corrective compliance plan for correcting
the violation.
    We received no comments on this section. However, we did revise the
regulatory text because we noticed that it did not closely track the
statutory language. The final rule language is clearer that the five-
percent penalty for intentional misuse of funds is in addition to the
misuse-of-funds penalty. Also, like the statute (at section
409(a)(1)(B)), the final rule puts the burden of proof regarding intent
on the State.

Section 263.11--What Uses of Federal TANF Funds Are Improper?
(Sec. 273.11 of the NPRM)

Overview
    The statute contains many prohibitions and restrictions on the use
of Federal TANF funds. In determining if funds have been used ``in
violation of this part,'' States should particularly note the
prohibitions in section 408 of the Act and section 115 of PRWORA. In
summary, these sections provide that States must not use Federal TANF
funds to provide assistance to:
    <bullet> A family with an adult who is a head-of-household or a
spouse of a head-of-household or with a minor head-of-household who has
received assistance funded with Federal TANF funds for more than 60
months (except for a family included in the 20-percent hardship
exemption);
    <bullet> A family without a minor child living with a parent or
adult caretaker relative (or a pregnant individual);
    <bullet> A family not assigning support rights;
    <bullet> An unmarried parent under 18, without a high school
diploma, who does not attend high school or equivalent training;
    <bullet> An unmarried parent under 18 not living in an adult-
supervised setting (unless covered by a statutory exception);
    <bullet> A fugitive felon and probation and parole violator;
    <bullet> A minor child absent from the home 45 days (or at State
option, 30-180 days);
    <bullet> For ten years, a person found to have fraudulently
misrepresented residence to obtain assistance; and
    <bullet> An individual convicted of certain drug-related offenses
unless the State has enacted a law to exempt such individuals from the
prohibition (refer to section 115 of PRWORA).
    Also, States must not use Federal TANF funds for medical services,
except for pre-pregnancy family planning services. (This prohibition
raised a number of concerns among States and advocates that are
discussed below.)
    Section 404 also limits the use of Federal TANF funds. More
specifically, section 404(a)(1) provides that TANF funds may only be
used ``* * * in any manner that is reasonably calculated to accomplish
the purpose of this part, including to provide low income households
with assistance in meeting home heating and cooling costs. * * *''
Thus, TANF funds cannot be used in a manner not reasonably calculated
to serve the purposes of the program.
    In determining if an activity may be funded with TANF funds under
this provision, you should refer to the purposes described in section
401 of the Act and reiterated at Sec. 260.20. Also, you should be aware
that the specific prohibitions or restrictions in the statute (e.g.,
the prohibitions in section 408) apply even if an activity seems
otherwise consistent with the purposes in section 404(a)(1).
    In addition, section 404(a)(2), as amended by section 5503 of Pub.
L. 105-33, permits Federal TANF funds to be used ``in any manner that
the State was authorized to use amounts received under part A or F, as
such parts were in effect on September 30, 1995 or (at the option of
the State) August 21, 1996.'' We interpret this provision to cover
activities that are not permissible under section 404(a)(1), but were
included in a State's approved State AFDC plan, JOBS plan, or
Supportive Services Plan as of September 30, 1995, or, at State option,
August 21, 1996. Examples of such activities are juvenile

[[Page 17840]]

justice and foster care activities that were included in many State
plans. Under this provision, only those States whose approved AFDC
State plans included juvenile justice activities as of September 30,
1995, or, at State option, August 21, 1996, may use Federal TANF funds
for those activities.
    Because of the detailed and specific legislative history associated
with the language at section 404(a)(2), indicating Congress's clear
intent to grandfather in juvenile justice costs as an allowable use of
Federal TANF funds, we would allow such use, notwithstanding the
specific prohibitions in section 408 of the Act (e.g., prohibiting the
expenditure of Federal TANF funds on assistance if a child is not
living with an adult relative).
    States should also note that if they exceed the 15-percent limit on
administrative costs under section 404(b), we will consider any amount
of funds exceeding that limit to be a misuse of funds. In the final
rule, we have modified the language in Secs. 263.11 and 263.13 to
clarify this position.
    Likewise, we would consider unauthorized or inappropriate transfers
of TANF funds to be a misuse of funds. We would consider any of the
following transfers to be inappropriate or unauthorized: transfers to
any program except the Child Care and Development Block Grant (also
known as the Discretionary Fund within the Child Care and Development
Fund) or the Social Services and Block Grant Program under title XX of
the Social Security Act; transfers to those two programs in excess of
the 30-percent cap; and transfers to SSBG in excess of the 10-percent
cap (or, beginning in FY 2001, in excess of the 4.25-percent cap). TANF
expenditures used to match Job Access funds are not considered
transfers.
    OMB Circulars A-102 and A-87 also include restrictions and
prohibitions that limit the use of Federal TANF funds.
    The Department previously promulgated A-102 (the common rule) in
its regulations at part 92 of title 45, ``Uniform Administrative
Requirements for Grants and Cooperative Agreements to State and Local
Governments.'' All provisions in part 92 are applicable to the TANF
program. TANF is not one of the Block Grant programs exempt from the
requirements of part 92, as OMB has not taken action to exempt it.
Rather, OMB has determined that TANF should be subject to part 92.
Section 417 was not meant to invalidate other general requirements that
Congress and Federal agencies, primarily OMB, have put in place to
assure that Federal grant funds are properly administered or to inhibit
Federal agencies from fulfilling their financial management
responsibilities in managing their programs. We believe that Congress
understood that TANF, like other Federal grant programs, was subject to
existing appropriations, statutory, and regulatory requirements
regarding the general administration of grants, notwithstanding section
417.
    By reference, part 92 also includes A-87, the ``Cost Principles for
State, Local and Indian Tribal Governments,'' the basic guidelines for
Federal awards. These guidelines provide, in part, that an allowable
cost must be necessary and reasonable for the proper and efficient
administration of a Federal grant program, and authorized or not
prohibited under State or local laws or regulations.
    A-87 also includes some specific prohibitions on the use of Federal
funds generally that apply to Federal TANF funds. For example, A-87
prohibits the use of Federal funds for alcoholic beverages, bad debts,
and the salaries and expenses of the Office of the Governor.
(a) Clarifications of Use of Federal TANF Funds--Substance Abuse
Services
    In our pre-NPRM consultations, we received several inquiries
regarding the use of Federal TANF funds for substance abuse treatment,
i.e., treatment for alcohol and drug abuse. In light of the prohibition
on the use of Federal TANF funds for ``medical services, except for
pre-pregnancy family planning activities,'' we held discussions with
other Federal agencies and learned that in many, but not all instances,
the treatment of alcohol and drug abuse involves not just ``medical
services,'' but other kinds of social and support services as well.
    Allowing States to use Federal TANF funds for substance abuse
treatment is programmatically sound and reasonably calculated to
achieve TANF goals since it may help clients make successful
transitions to work and provide for a stable home environment for TANF
children. Accordingly, our rules permit States to use Federal TANF
funds for drug and alcohol abuse treatment services to the extent that
such services are not medical. States will have to look at the range of
services offered and differentiate between those that are medical and
those that are not. In short, States may not use Federal TANF funds for
services that the State identifies as medical; they may only use
Federal TANF funds for services that are nonmedical.
(b) Clarification of the Use of Federal TANF Funds for Construction and
Purchase of Facilities
    The Comptroller General of the United States has prohibited the use
of Federal funds for the construction or purchase of facilities or
buildings unless there is explicit statutory authority permitting
Federal grant funds to be used for this purpose. Since the statute is
silent on this matter, States must not use Federal TANF funds for
construction or the purchase of facilities or buildings.
(c) Clarification of the Use of Federal TANF Funds as State Match for
Other Federal Grant Programs
    States may use Federal TANF funds under section 403(a) to match
other Federal grant programs only if authorized under the statute of
the grant program. Further, any funds so authorized are still subject
to the TANF program requirements and must be used in accordance with
the purposes of the TANF program and with these regulations.
(d) Clarification of the Use of Federal TANF Funds To Add to Program
Income
    We have received a number of inquiries about whether or not TANF
funds may be used to generate program income. An example of program
income is the income that a State earns if it sells another State a
training curricula that it has developed, in whole or mostly, with
Federal TANF funds.
    States may generate program income to defray costs of the program.
Under 45 CFR 92.25, there are several options for how to treat this
program income. To give States flexibility in their use of TANF funds,
States may add, to their TANF grant, program income that has been
earned by the State. States must use such program income for the
purposes of the TANF program and for allowable TANF activities. We will
not require States to report on the amount of program income earned,
but they must keep on file financial records on any program income
earned and the purposes for which it is used, in the event of an audit
or review.
(e) Clarification of the Use of Federal TANF Funds--Amounts Reserved
for Subsequent Years
    Section 404(e) of the Act, entitled ``Authority to Reserve Certain
Amounts for Assistance,'' allows States to reserve Federal TANF funds
that they receive ``for any fiscal year for the purpose of providing,
without fiscal year limitation, assistance under the State program
funded under this part.'' In the

[[Page 17841]]

NPRM preamble, we did not include a specific discussion of this
provision. However, we have added a preamble discussion in the final
rule because: (1) we have subsequently received questions about its
interpretation; (2) the penalty on misuse of Federal funds encompasses
this provision; and (3) the definition of assistance at Sec. 260.31 has
implications that States need to understand.
    After a careful reading of section 404(e), we have determined that
the statute limits a State's ability to spend reserved money in a
couple of very important ways. First, a State may expend reserved money
only on benefits that meet the definition of assistance at Sec. 260.31
or on the administrative costs directly associated with providing such
assistance. It may not expend reserved funds on benefits specifically
excluded from the definition of assistance or on activities generally
directed at serving the goals of the program, but outside the scope of
the definition of assistance. Secondly, a State may spend its reserved
funds only on assistance provided within its TANF program (i.e., ``the
State program funded under this part''). This latter limitation
precludes the State from transferring reserved funds to either the SSBG
or the Discretionary Fund of the CCDF. We believe the effect of these
limitations will not be too serious because States are still spending
such large portions of their funds on benefits that meet the definition
of assistance. However, to ensure themselves the maximum flexibility in
the use of their funds, States could spend down their reserved funds on
any expenditures on assistance and leave current-year funds available
to cover transfers and other activities.
Comments and Responses
    We received several comments on this section. A couple of
commenters expressed concerns about a State's ability to correct
information in their Financial Report, avoid penalties for minor
reporting errors, and present a case that they should not be penalized;
you can find a discussion of the issues in the preamble for Sec. 265.8.
A detailed discussion of the other comments on this section and our
responses follows. These comments resulted in a couple of minor changes
to the proposed policy.
    Comment: Most comments received on this section addressed the
prohibitions and restrictions on the use of Federal TANF funds. We
received some general support for our proposals and clarifications
(e.g., allowing for program income and clarifying that States could
expend Federal TANF fund on nonmedical substance abuse services). We
also received a number of individual comments seeking additional
clarification or more detail in the regulation about the allowability
of certain expenditures. Areas of concern to individual commenters were
medical costs, substance abuse, transportation, and juvenile justice
services.
    Response: We think it is very important that we lay out for States
our view of what would constitute a misuse of funds so that they will
be in the best possible position to avoid this penalty. Basically,
section 404(a)(1) provides that Federal TANF funds may be used ``* * *
in any manner reasonably calculated to accomplish the purpose of this
part. * * *'' However, section 408 of the Act and section 115 of PRWORA
provide that States must not use Federal TANF funds in specified
circumstances. In addition, section 404 limits the use of Federal TANF
funds. The prohibitions in sections 408 of the Act and 115(a)(1) of
PRWORA and the limitations in section 404 of the Act apply, even if an
activity seems otherwise consistent with the purpose of this section.
    Section 404(a)(2), as amended by section 5503 of Pub. L. 105-33,
permits Federal TANF funds to be used ``in any manner that the State
was authorized to use amounts received under part A or F, as such parts
were in effect on September 30, 1995 or (at the option of the State)
August 21, 1996.''
    Activities authorized under this subsection must have been in an
approved plan under part A or F to be an allowable expenditure of
Federal TANF funds.
    In response to commenters' concerns, we have added references to
sections 404 and 408 of the Act to the regulatory text. These are the
two most significant statutory references for TANF requirements that
were not specified in the proposed regulatory text.
    In general, we believe it is sufficient for our rules to provide
broad references to the statutory, regulatory, and policy provisions
that will apply under this penalty. In certain policy areas--including
administrative costs, the applicability of general grant administration
standards, and the allowability of previously authorized expenditures--
we believe that some clarification was needed, and our preamble and
regulations reflect that judgment. However, other statutory provisions
(e.g., much of section 408 of the Act and section 115(a)(1) of PRWORA)
are relatively straightforward, and we are not aware of significant
issues of interpretation that necessitate further regulation of these
provisions.
    In response to some of the specific concerns raised by commenters,
we point out the following:
    (1) The allowability of juvenile justice services depends upon what
was previously authorized under a State's plan. A Federal definition
would not be appropriate.
    (2) Because of the statutory prohibition on use of Federal TANF
funds for medical expenditures (except for pre-pregnancy planning), we
could not authorize employment-related medical expenditures or medical
services for substance abuse treatment under regulation.
    However, we have decided not to provide a definition of medical
services (and other key terms) in order to give States the maximum
flexibility to provide services needed by recipients--within the
constraints of the statute.
    (3) To the extent that we have not addressed a provision in this
final regulation, States may expend their Federal TANF funds under
their own reasonable interpretations of the statutory language, and
that is the standard that will apply in determining penalty liability.
    (4) In several respects, States have more flexibility in the use of
Federal TANF funds than State MOE funds. Two of these are: (1) on
benefits that were previously authorized; and (2) in certain
circumstances, on benefits that serve the goals of the program, but are
not attributable to individual needy (or eligible) families. For
example, if the expenditures are reasonably related to the purposes of
TANF (at Sec. 260.20) and do not constitute expenditures for
``assistance'' (and are otherwise allowable), a State could use Federal
TANF funds for transportation investments that reduce the dependence
and support the employment of needy parents, even if it cannot
associate all such expenditures with individual needy families.
Likewise, States may use Federal TANF funds for expenditures associated
with the third and fourth TANF goals (i.e., related to the formation
and maintenance of two-parent families and the prevention of out-of-
wedlock pregnancies) without associating such expenditures to
individual needy families. Thus, the statute and rules both provide
States with some of the spending flexibility that commenters were
seeking, with respect to transportation expenses, in particular, and
other types of activities.
    Comment: We received a few comments concerning our reference to
activities carried out under AFDC or JOBS. Commenters objected to our
conception that section 404(a)(2) covered only those prior program

[[Page 17842]]

expenditures that were included in a State's AFDC or JOBS plans. Also,
a couple of commenters wanted broad authority to spend funds on
emergency services for children, such as juvenile justice, even when
their State plans did not include specific references to such services.
    Response: Section 404(a)(2) provides that a State may use its
Federal TANF funds ``in any manner that the State was authorized to use
amounts received under part A or F * * *'' Although more than one
interpretation of this phrase is possible, we believe our
interpretation is the best for a number of legal and policy reasons.
First, the reference to ``the State'' in the statutory language is
consistent with looking at each State individually based on what was
specifically authorized for that State. Also, under prior law, costs
were authorized based on approved State plans. Second, our
interpretation is consistent with the view that section 404(a)(2) was
designed to ``grandfather in'' States whose prior programs allowed such
expenditures. Third, there were some questionable funding practices by
States under prior law, and we believe the best policy is to limit the
extent to which they are perpetuated.
    Thus, in order for a State to expend Federal TANF funds under the
authority of section 404(a)(2), the expenditures at issue must have
been specifically authorized under that State's AFDC or JOBS plan.
Section 404(a)(2) does not broadly authorize continued expenditures on
vaguely defined, or undefined, programs; it merely authorizes the use
of the TANF ``in a manner'' in which the State previously had the
authority to expend AFDC and JOBS funds. States only had authority to
expend AFDC and JOBS funds consistent with approved plans.
    Comment: We received several comments challenging the applicability
of 45 CFR part 92 and OMB Circulars A-87 and A-102 to the TANF program
and a few comments challenging the reference to section 115 of PRWORA.
Commenters cited section 417 of the Act and the reference in section
409(a)(1) to violations ``of this part'' as the basis for not applying
these provisions to the TANF program.
    Response: We disagree with these comments. With respect to the OMB
requirements, we believe that TANF, like other Federal grant programs,
is subject to Departmental grants administration regulations and OMB
circulars. The only time Federal grant programs would not be subject to
grant administration regulations or OMB circulars is when OMB exempts
them. OMB has not exempted the TANF program from these requirements;
thus, they apply to the TANF program.
    Section 417 does not prevent us from applying the part 92
regulations to TANF because the referenced requirements are not
developed to enforce substantive provisions under this part. Thus, our
approach to this issue is consistent with the approach taken in
Sec. 260.35 and discussed in the preamble section entitled ``Recipient
and Workplace Protections''; i.e., section 417 of the Act does not
limit the applicability of other Federal laws and rules.
    With respect to violations of section 115 of PRWORA, first, we are
clarifying that our intent is to cover only violations of section
115(a)(1) under the misuse penalty. Thus, we would focus on whether
States were expending Federal TANF funds on individuals who are
ineligible for such assistance under Federal law. We would not monitor
compliance with other provisions under section 115. To make this point
clear, we have changed the regulatory reference from ``section 115'' to
``section 115(a)(1).'' Secondly, we would point out that section 417
does not limit our ability to hold States accountable for complying
with section 115 of PRWORA. While we could, in theory, set up a
different enforcement mechanism, such as a disallowance system, to
cover violations of this provision, that would seem to be an
unnecessary administrative complication; the misuse penalty would have
a comparable financial effect and provides States with ample
opportunity to appeal.
    Comment: One commenter suggested a change in language to conform
more closely to what the statute reads. The change would substitute the
language of this section from ``reasonably related to the purposes of
TANF'' with ``reasonably calculated to accomplish the purposes of
TANF.''
    Response: We agree with the comment and have made the change.

Section 263.12--How Will We Determine if a State Intentionally Misused
Federal TANF Funds? (Sec. 273.12 of the NPRM)

Overview
    As we discussed in the proposed rule, in determining if a State has
intentionally misused funds, we will apply a ``reasonable person''
test; i.e., a State must demonstrate to our satisfaction that it spent
its TANF funds for purposes that a reasonable person would consider to
be within the purposes of the TANF program. We will also consider funds
to be intentionally misused if there is documentation, such as Federal
guidance or policy instructions, that precludes the use of funds for
such purposes, or if the State misuses the funds after receiving
notification from us that such use is not allowable.
Comments and Responses
    We received a few comments on this section. These comments resulted
in a minor change to the proposed rule as discussed below. We also made
some minor editorial changes to the regulatory text.
    Comment: We received a number of comments about the procedures that
applied to this penalty. Some commenters wanted the regulation to
mention explicitly that the corrective compliance and appeal processes
applied to the intentional misuse penalty. A few of these commenters
also stated that we should give States an opportunity to submit a
corrected financial report. One commenter further mentioned that States
need a reasonable period of time to act upon a notification of misuse.
    Response: Under the provisions of Secs. 262.4, 262.5, 262.6, and
262.7 of the final rules, States have the opportunity to appeal a
penalty based on the misuse or intentional misuse of funds. States have
60 days to submit a written response to our notification that we have
determined it is subject to a penalty. We believe that 60 days is a
reasonable period for a State to respond to a notification of misuse,
as it is the amount of time the statute gives for submitting a
corrective compliance plan and, under the audit process, a State should
receive advance warning that the notification is coming. During this
60-day period, the State has the opportunity to demonstrate that our
determination was incorrect or based on insufficient information. For
example, a State could argue that the action at issue occurred prior to
the effective date of final rules and was based on a reasonable
interpretation of the statute. A State could also submit a corrected
TANF Financial Report that helps demonstrate that all of its TANF
expenditures were appropriate and allowable. In addition, as
Sec. 263.10 indicates, a State could demonstrate that it had reasonable
cause for the misuse or intentional misuse of funds or provide us with
a corrective compliance plan.
    Comment: One commenter said that the misuse penalty should not
apply while the State is pursuing legal remedies.
    Response: We will not take an adverse action (i.e., reduce the
adjusted SFAG)

[[Page 17843]]

prior to completion of any administrative review by the Departmental
Grant Appeals Board (GAB). However, if the GAB sustains our penalty
decision, the State will owe interest from the date of our final
notification of an adverse action.
    Comment: One commenter objected to the presumption in the NPRM that
a State has misused funds until the State proves otherwise. The
commenter argued that the proposed rule shifts the burden of proof to
the States in proving a negative.
    Response: We disagree with the comment. A State will normally
receive notification that it has misused funds based on documented
findings of audits performed under the Single Audit Act. As States know
from prior experience, these audits utilize a variety of tools to
evaluate expenditures, including the statute and regulations and a
compliance supplement issued by OMB that focuses on certain areas of
concern. In addition, the audit findings reflect reliable information
taken from various sources, such as samples of case records and
operational assessments. We believe that these audits will give us an
objective appraisal of whether a misuse of funds has occurred.
    Thus, we believe that the initial ``burden'' of establishing misuse
of funds rests with the auditors rather than the State. Then, States
will have the opportunity both to review, analyze, and rebut the
findings via the standard audit resolution procedures and to seek
penalty relief through the reasonable cause and corrective compliance
processes.
    Comment: A few commenters raised issues pertaining to misuse due to
a failure to follow Federal guidance. One commenter mentioned that
Federal guidance must be in accordance with the TANF statute before
such guidance can be used to substantiate a claim of misuse. A second
commenter recognized that legitimate issues may arise over a difference
in interpretation of the statute. A third commenter argued that posting
Federal guidance to a web page does not constitute notice and that
States should be given adequate time to implement any changes
necessitated by the guidance.
    Response: We agree that Federal guidance must adhere to the
statute. Currently, all guidance that we issue is based on a careful
review of the statutory language and legislative history. We will
continue to follow this practice when preparing future guidance.
    We further recognize that a difference in the interpretation of a
statutory provision is possible. We do not intend to penalize States
pending resolution of such a difference. Under Sec. 262.4, a State has
the opportunity to demonstrate that our determination that the State is
subject to a penalty was incorrect. In short, a State may present
alternative interpretations of a statutory provision during the penalty
resolution process. Because we could withdraw a determination of misuse
based upon such a State presentation, we have changed Sec. 263.12(b)
and (c) to say that we ``may'' (rather than ``will'') consider funds to
be misused if: (1) there is Federal guidance or policy indicating that
TANF funds could not be used for a particular purpose; or (2) if the
State continues to use the funds in the same or similarly improper
manner after receiving notification of improper use.
    Regarding the comment about notice of Federal guidance, we intend
to rely on different methods for transmitting guidance to the States
and other interested parties. We presently post Federal guidance to our
web page and also mail it to all State TANF agencies and other
appropriate parties. We plan to continue this dual issuance process so
long as some State TANF agencies have limited Internet capabilities.
However, in the interest of reducing costs associated with the printing
and mailing of guidance materials, we intend to increase our reliance
on electronic modes of communication as State capabilities increase.
Also, we are sensitive to operational issues and, where possible, will
include implementation time frames in our guidance.
    Comment: A couple of commenters urged us to hold States accountable
for complying with their plans for services and benefits under TANF and
penalize States when they fail to do so.
    Response: We do not believe that we have the authority under the
statute to penalize States in these circumstances. The misuse of funds
penalty refers to violations ``of this part.'' It does not reference
expenditures made in violation of State plan provisions. Section 417 of
the Act limits our ability to enforce TANF. Therefore, we have not
included this recommendation in the final rule.

Section 263.13--Is There a Limit on the Amount of Federal TANF Funds a
State May Spend on Administrative Costs? (Sec. 273.13 of the NPRM)

Overview
    In the preamble for Sec. 263.0, we discuss most of the comments we
received on the administrative cost provisions in the rule. We decided
to consolidate the discussion in one place since most of the comments
related to both the Federal and the MOE cap. Therefore, we refer you to
that section for a discussion of a host of issues related to the
Federal cap.
    This section of the rule speaks specifically to how the Federal
administrative cost cap is determined. However, in reviewing the
comments, we realized that the proposed rule had not directly presented
the cap provision. To address this deficiency, we changed the title for
this section and added a new paragraph (a) to explain the Federal cap
provision. Paragraph (b) contains language from the NPRM on the
exclusion for systems costs, modified as discussed below.
    In paragraph (a), we also have added regulatory language advising
States that we would consider a violation of the Federal cap to be a
misuse of funds.
    In reviewing the comments on the systems exclusion, we noted that
proposed regulatory language in this section was not completely
consistent with the statutory language (i.e., the proposed regulation
said that the specified systems costs ``are not administrative costs
for this purpose''). In the final rule, we have revised the language to
conform more closely to the statute. Under the revised language, we
track the statutory language and provide that the Federal
administrative cost cap does not apply to ``Federal TANF expenditures
on information technology and computerization needed for tracking or
monitoring required by or under title IV-A of the Act.''
    The revised regulatory language also provides clarification of one
issue that was not directly addressed in the written comments, but
which has come up in the context of the WtW regulation and the proposed
rule on the bonus for reduction of out-of-wedlock births. By statute,
the Federal administrative cap applies to any grant made to the State
under section 403. It thus applies to WtW funds, out-of-wedlock
bonuses, high performance bonuses, supplemental grants, high
performance bonuses, and contingency funds.
    The WtW regulations address the cap as it pertains to any WtW funds
received by the State under section 403(a)(5). This final rule
addresses any other funds provided under section 403.
    The new language provides for a consolidated cap for all TANF funds
(i.e., funds provided under section 403 other than WtW funds under
section 403(a)(5)). Thus, it would limit the total amount of
expenditures that a State could spend on administrative costs from all
these separate funding provisions. We would not require that

[[Page 17844]]

the State meet a 15-percent cap for each of these multiple sources of
funds.
    While the statutory language would allow an alternative
interpretation of separate funding caps, there is no evidence that
Congress intended to create all these separate administrative cost
caps. Also, we do not think creation of a consolidated cap would
undermine the purpose of the provision, of limiting administrative
costs, and we do not believe the potential benefit of separate caps
would justify the additional administrative burden that States would
incur.

Subpart C--What Rules Apply to Individual Development Accounts?

Section 263.20--What Definitions Apply to Individual Development
Accounts (IDAs)? (Sec. 273.20 of the NPRM)

Overview
    Individual Development Accounts (IDAs) are similar to savings
accounts and enable recipients to save for ``big ticket'' items, such
as a home, or a college education or start a business. Money in an IDA
account would not affect a recipient's eligibility for TANF assistance.
    States may use IDAs as an incentive for recipients to find jobs and
to use their earned income to save for the future.
    Recipients can use IDAs as long-term investments, without losing
eligibility for TANF assistance in the early stages of becoming self-
sufficient.
    The NPRM defined an IDA as an account established by, or for, an
individual who is eligible for TANF assistance to allow the individual
to accumulate funds for specific purposes. It also defined a number of
other terms used applicable to IDAs.
Comments and Responses
    We received a few comments on the provisions in this section and
made some minor changes to the proposed regulations, as discussed
below.
    Comment: Several commenters said that we should clarify whether
individuals eligible for TANF assistance through segregated State funds
could be beneficiaries of the IDA program.
    Response: Under the definition in the NPRM, individuals who were
eligible for TANF assistance could participate in IDAs.
    The statute at section 404(h)(2)(A) provides that under a State
program, an IDA may be established by or for an ``individual eligible
for assistance under the State program operated under this part.'' This
latter phrase means that IDAs can cover individuals who are eligible
under the TANF program, regardless of the funding source. We have
revised the regulatory language at Sec. 263.20 so that it refers to
eligibility for the TANF program. Under the definitions at Sec. 260.30,
the TANF program includes all activities under the State program,
regardless of funding source.
    Comment: One commenter stated that Federal regulations ought to
expressly state that, under PRWORA, funds in an IDA are to be
disregarded for purposes of determining eligibility for, or amount of,
assistance under Federal means-tested programs (other than under the
Internal Revenue Code).
    Response: We agree that the regulations should clarify that States
must disregard IDA funds in determining eligibility and amount of
assistance for such Federal means-tested programs. Section 404(h)(4)
explicitly states that there should be no reduction in benefits. We
have revised the regulatory language at Sec. 263.20 to clarify this
point.
    Comment: One commenter explained how one State defined its IDA
programs under its welfare reform waiver more broadly than the NPRM and
suggested that we revise the regulation to allow for a broader range of
IDA strategies.
    Response: The statute is very specific in terms of how IDA funds
may be used. Accordingly, we have not changed the position taken in the
proposed rule. However, under section 415 of the Act, until a State's
welfare reform waivers expire, the State has latitude to continue its
waiver policies and operate its program more broadly than the statute
permits.

Section 263.21--May a State Use the TANF Grant To Fund IDAs?
(Sec. 273.21 of the NPRM)

Overview
    PRWORA gives States the option to fund an Individual Development
Account Program. Thus, States have the option to fund IDAs with TANF
funds for individuals who are eligible for TANF assistance.
    We received one comment on the provisions in this section and made
some minor changes to the proposed regulation, as discussed below.
Comment and Response
    Comment: One commenter said that the NPRM does not clearly express
that IDA is an optional program that the States may choose to implement
within limits permitted by Federal law.
    Response: We agree that the IDA provision is an optional program,
which is subject to State rules within the limits permitted by Federal
regulations and statute. We have revised the regulatory language at
Sec. 263.2 to clarify this point. Also, consistent with the statutory
language at section 403(a)(5)(C)(v), we have specified that WtW funds
may also be used to fund these IDAs.

Section 263.22--Are There Any Restrictions on IDA Funds? (Sec. 273.22
of the NPRM)

Overview
    IDAs are similar to savings accounts and enable recipients to save
earned income for certain specified, significant items. IDAs contain
special restrictions on who can match recipient contributions.
    The NPRM required that: (1) a recipient deposit only earned income
into an IDA; (2) recipient's contributions to an IDA may be matched by
a qualified entity; and (3) recipients may spend IDA funds only to
purchase a home, pay for a college education, or start a business.
Comments and Responses
    We received a few comments on the provisions in this section and
made some minor changes to the proposed regulation, as discussed below.
    Comment: Several commenters expressed that the NPRM was more
restrictive than the statutory language on the source of matching funds
and thereby unduly limited possible matching funds to an IDA account.
    Response: The language in the proposed rule was inadvertently
narrower than the statutory provision. We have changed the regulation
at Sec. 263.22 so it now comports with the statutory language. Under
the final rule, ``matching funds may be provided by or through a
qualified entity.''
    Comment: One commenter stated that we should allow TANF recipients
to withdraw money from IDAs for training expenses, as well as for post-
secondary purposes.
    Response: The statute is very specific in terms of how IDA funds
may be used. Only post-secondary education expenses at an eligible
institution are permissible. While expenses for certain vocational
education or training activities would be allowable, expenses for job
training that is not at the post-secondary level or at an eligible
institution would not be. Accordingly, we have not changed the proposed
rule.

[[Page 17845]]

Section 263.23--How Does a State Prevent a Recipient From Using the IDA
Account for Unqualified Purposes? (Sec. 273.23 of the NPRM)

Overview
    Money in an IDA account does not affect a recipient's eligibility
for TANF assistance. Withdrawals from the IDA must be paid directly to
a college or university, a bank, savings and loan institution, an
individual selling a home, or a special account (if the recipient is
starting a business).
    Section 404(h)(2)(D) authorizes the Secretary to establish
regulations to ensure that individuals do not withdraw funds held in an
IDA except for one or more of the above qualified purposes.
    In our research, we found that several States had established IDAs
under their welfare reform demonstration projects and subsequently
transferred those provisions to their TANF programs. Each State had
designed its own procedures for preventing withdrawals or penalizing
recipients who withdrew funds from their IDAs for unauthorized
purposes. For example, several States count a withdrawal for a
nonqualified purpose as earned income in the month of withdrawal unless
the funds were already counted as earned income. Other States count
such withdrawals against a family's resource limit. Still another State
calculates a period of ineligibility using a complex formula.
    With this in mind, we did not feel that it was necessary to be
overly prescriptive in mandating how States would ensure that
individuals do not make unauthorized withdrawals from IDA accounts.
Thus, we give States broad flexibility to establish procedures that
ensure that only qualified withdrawals are made.
    In addition, section 404(h)(5)(D) gives the Secretary the authority
to determine whether or not a business contravenes law or public
policy. We have decided that we should base our determination on the
business's compliance with State law or policies. Thus, our rules give
States maximum flexibility in setting up these programs, while assuring
that a business established by a needy family meets State requirements.
Comments and Responses
    We received a few comments in support of the provisions in this
section, as discussed below. These comments did not result in any
change to the proposed policy or rule.
    Comment: A few commenters supported the entire section on IDAs,
noting that the Secretary exercised her discretion to give States
maximum flexibility in designing and administering these programs.
    Response: We appreciate the commenters' support for our approach.
The intent of the proposed rule was to allow States the latitude that
they needed to administer an effective IDA program and develop
innovative approaches for moving recipients from dependency to self-
sufficiency.

IX. Part 264--Other Accountability Provisions (Part 274 of the
NPRM)

    Note: We have moved the content of Sec. 274.20 of the NPRM,
entitled ``What happens if a State sanctions a single parent of a
child under six who cannot get needed child care?'' to part 261. You
can find a discussion of the comments related to this provision at
Secs. 261.15, 261.56 and 261.57.

Section 264.0--What Definitions Apply to This Part? (Sec. 274.0 of the
NPRM)

    This section cross-references the general TANF regulatory
definitions established under part 260.
    We received no comments on this section. However, we decided to add
definitions for ``countable State expenditures,'' ``Food Stamp
trigger'' and ``unemployment trigger,'' which relate to the discussion
of the Contingency Fund in subpart B, in order to make subpart B easier
to understand. We also added a definition of ``FAG,'' which is used in
the discussion of the spending levels of the Territories in subpart C.
Finally, we moved this section out of subpart A, as it was in the NPRM,
so that it is clear that the definitions apply to this entire part.

Subpart A--What Specific Rules Apply for Other Program Penalties?

Section 264.1--What Restrictions Apply to the Length of Time Federal
TANF Assistance May Be Provided? (Sec. 274.1 of the NPRM)

    Under the former AFDC program, families could receive assistance as
long as necessary, if they continued to meet program eligibility rules.
Under the TANF program, Congress established a maximum length of time
for which a family may receive assistance funded by Federal TANF funds.
    Section 408(a)(7) stipulates that States may not use Federal TANF
funds to provide assistance to a family that includes an adult who has
received assistance for more than five years. We will calculate the
five-year limit on Federal funding as a cumulative total of 60 months.
    The legislative history for PRWORA clarifies the meaning of adult
in section 408(a)(7)(A). States are to count only months for which an
adult received assistance as the head-of-household or as the spouse of
the head-of-household. (H.R. Rep. No. 725, 104th Cong., 2d sess., p.
288.) Generally, when a parent or other adult caretaker relative of a
minor child applies for and receives federally funded assistance under
the State's TANF program on behalf of himself or herself and his or her
family, Federal funding of that assistance may not last longer than
five years. States must disregard any months when an adult receives
assistance when he or she is not the head-of-household or is not the
spouse of the head-of-household.
    Any month when a pregnant minor or minor parent received assistance
as the head-of-household or married to the head-of-household counts
toward the five-year limit. However, section 408(a)(7)(B) clarifies
that the State must disregard any month for which assistance has been
provided to an individual who is a minor child who is not the head of a
household or married to the head of a household.
    The five-year limitation on Federal funding also disregards any
months that an adult receives assistance while living in Indian country
(as defined by section 1151 of title 18, United States Code) or in an
Alaska Native Village where at least 50 percent of the adults are not
employed (see Sec. 264.1(b)(1)(ii)).
    Subsection 408(a)(7)(G) provides for special treatment of
assistance provided to a family with Welfare-to-Work grant funds
(formula or competitive) under the time-limit provision. First, months
for which a family receives cash assistance funded with Welfare-to-Work
grant funds (under section 403(a)(5) of the Act) do count towards the
five-year limit; however, months for which a family receives only WtW
noncash assistance do not count towards the five-year limit.
    Second, families may receive assistance (cash or noncash) funded
with WtW grant funds even though they are precluded from receiving
other TANF assistance because of the five-year limit.
    Some families may receive assistance from Federal TANF funds for
more than five years based on hardship or if the family includes an
individual who has been battered or subjected to extreme cruelty as
defined in section 408(a)(7)(C)(iii).
    Under section 408(a)(7)(C), the average monthly number of such
families may not exceed 20 percent of the State's average monthly
caseload during either that fiscal year or the immediately preceding
fiscal year, whichever the State elects. We will not make a
determination of whether a State has exceeded the cap until any
families in the TANF program have received at

[[Page 17846]]

least 60 cumulative months of federally funded assistance.
    Since the purpose of the provision is to provide an extension to
the 60-month limit, it applies after that limit is reached. We believe
that this approach is the most straightforward and comports with
Congressional intent that TANF assistance be provided on a temporary
basis while a family becomes self-sufficient. Thus, Federal support
would cease once a head-of-household or spouse of the head-of-household
in the family has been assisted for 60 total months with Federal TANF
funds unless the State chooses at that time to include the family in
its 20-percent exception. However, the State may elect to use State
funds to continue paying eligible families.
    The five-year time limit applies to Federal funding; it does not
set an upper bound on the amount of time a State could provide
assistance to an individual family with State funds. Further, States
are free to impose shorter time limits on the receipt of assistance
under their programs. They are also free to allow receipt for longer
periods if the assistance is paid from State funds or if the family
meets the criteria the State has chosen for extension and fits with the
20-percent limit.
    In the NPRM preamble to this section, we clarified the relationship
between domestic violence waivers of the time limit permitted under the
Family Violence Option at section 402(a)(7) and the limit on the
exceptions to the Federal time limit at section 408(a)(7)(C)(ii). The
key issue was whether the 20-percent limit on hardship exceptions
included families of domestic violence victims.
    Section 402(a)(7)(B) expressly refers to section 408(a)(7)(C)(iii)
in applying the meaning of the term ``domestic violence'' to the Family
Violence Option at section 402(a)(7)(A). Section 408(a)(7)(C)(iii)
defines ``battered'' or ``subjected to extreme cruelty'' for purposes
of describing families who may qualify for a hardship exemption at
section 408(a)(7)(C)(i), and section 408(a)(7)(C)(ii) specifies a 20-
percent limit on the exceptions to the time limit due to hardship.
Based on the statutory language, we concluded that the number of
families waived from the five-year time limit per section 402(a)(7)
fell within the 20-percent ceiling established under section
408(a)(7)(C)(ii). However, we allowed a State to claim ``reasonable
cause'' when its failure to meet the five-year limit could be
attributed to its provision of federally recognized good cause domestic
violence waivers. In the final rule, we have moved the provisions on
domestic violence to a new subpart B of part 260. You can find our
preamble discussion of these provisions and the comments on our
proposed rules in the earlier discussion entitled ``Treatment of
Domestic Violence Victims.''
    As previously discussed, section 408(a)(7)(D) provides an exemption
to the time limit on receipt of federally funded TANF assistance for
families living in Indian country or in an Alaskan Native village. The
months that a family, which includes an adult, lives in Indian country
or in an Alaskan Native village, where at least 50 percent of the
adults are not employed, do not count when determining whether the
adult has received federally funded assistance for 60 cumulative
months. In accordance with section 408(a)(7)(D), the percentage of
adults who are not employed in a month will be determined by the State
using the most reliable data available for the month, or for a period
including the month.
    In the earlier preamble discussion entitled ``Waivers,'' we discuss
the impact of waivers granted under section 1115 of the Act on the
five-year time limit. You will find the regulatory provisions in a new
subpart C of part 260.
    We received a number of comments on this section. We made some
revisions to the regulations as noted in our responses to the comments
below. We also amended the regulations to reflect the position that
only months for which an adult received assistance as the head-of-
household or as the spouse of the head-of-household count toward the
five-year time limit.
    Comment: A couple of commenters expressed their opposition to all
time limits, and one commenter stated that the time limits will cause
families to suffer.
    Response: The time limit is an important aspect of welfare reform.
It is meant to ensure that States and recipients place a clear priority
on work, responsibility, and self-sufficiency. However, in a time-
limited program, States must make sure that they offer adequate
services so that families can successfully move from welfare to work.
    Comment: A commenter asked whether the State should count towards
the time limit any months when the adult is ineligible, but the rest of
the family receives assistance.
    Response: The only months that count toward the time limit are
months when a family member who is the head-of-household or the spouse
of the head-of-household receives assistance. Thus, for example, if the
family is comprised of a mother and her infant, and the mother is not
receiving TANF assistance because she is receiving SSI or because she
is an ineligible alien, the months when only her child receives TANF
assistance do not count toward the time limit.
    Comment: Some commenters asked how the time limit applies when
children receive assistance, but the caretaker relative does not.
    Response: Assuming that, in this situation, the head-of-household
and the spouse of the head-of-household are not receiving TANF
assistance, the months when the children receive assistance do not
count toward the time limit.
    Comment: A few commenters asked whether months count toward the
time limit when a family is subject to a full-family sanction.
    Response: Any months when the State imposes a full-family sanction,
and no one in the family is receiving TANF assistance, do not count
towards the Federal time limit. Only months for which an adult or minor
head-of-household or spouse of the head-of-household receive assistance
count. However, if it wishes to, a State may count such months towards
its State time limit.
    Comment: Another commenter asked whether months count toward the
time limit when one member of a family is sanctioned.
    Response: If an adult is sanctioned, and no one who is the head-of-
household or the spouse of the head-of-household is receiving TANF
assistance, the Federal time limit does not apply. However, if the
head-of-household or the spouse of the head-of-household continues to
receive assistance while another individual is being sanctioned or the
effect of the sanction is to reduce benefits to the family as a whole
without denying assistance to any individual member of the family, the
Federal time limit does apply.
    If the State wishes to count the months when a sanction applies to
a family, it may count such months toward its State time limit even if
it cannot count them towards the Federal time limit.
    Comment: A commenter asked how the time limit applies when a family
begins to receive assistance mid-month or if the State provides
assistance semi-monthly.
    Response: Whenever a family receives any TANF assistance for a
month, whether it covers a whole month's worth of assistance or is a
partial payment, that month counts toward the Federal time limit unless
the exceptions in Sec. 264.1(b) apply.
    Comment: Another commenter stated that we should inform a State if
its

[[Page 17847]]

policies are improper or will lead to a penalty.
    Response: When a State submits its TANF State plan, we review it to
determine whether the plan is complete. We also identify potential
problem areas and share our comments with the State. Thus, the more
detail a State submits in its plan, the more feedback the State will
receive on its policies and procedures. At the same time, we advise the
State that our finding that the TANF plan is complete does not
constitute our endorsement of State policies.
    Comment: A commenter asked whether receipt of TANF assistance by a
noncustodial parent would affect the custodial parent and the children.
    Response: In order for an individual to receive TANF assistance as
a noncustodial parent, a State must consider that parent to be a member
of the family. Only the months for which a parent receives TANF
assistance as the head-of-household or the spouse of the head-of-
household count toward the time limit. As defined at Sec. 260.30, a
noncustodial parent cannot be the head-of-household, since he or she
does not live in the same household as the child. Therefore, the months
a noncustodial parent receives assistance would not count unless he or
she is the spouse of the head of the household.
    We note that an individual can have more than one status and the
above answer applies only to an individual receiving assistance as a
noncustodial parent. An individual who is the noncustodial parent of
one TANF child, could also be the custodial parent of another TANF
child or the head-of-household for another TANF case; if he or she
receives assistance as part of such a second family, it would count
towards that second family's time limit.
    Comment: A commenter asked us to clarify when receipt of TANF
assistance by a pregnant teen or a teen parent would count toward the
five-year time limit.
    Response: The months count when a pregnant teen or teen parent
receives TANF assistance while he or she is the head-of-household or
the spouse of the head-of-household.
    Comment: Another commenter argued that the statute does not provide
the authority for us to impose time limits on a minor head-of-household
or minor spouse of a head-of-household who is not pregnant and is not a
parent.
    Response: The commenter is correct. The months for which a minor
head-of-household or minor spouse of a head-of-household who is not
pregnant and is not a parent receives TANF assistance do not count
toward the time limit.
    Comment: Commenters asked us to clarify when assistance provided
under the Welfare-to-Work program counts toward the Federal time limit.
One commenter expressed the opinion that WtW should not count. Another
commenter asked us to define WtW cash and noncash assistance.
    Response: Under the statute, noncash assistance provided under WtW
never counts toward the Federal 60-month time limit. Months for which
WtW cash assistance is received do count if the assistance is received
by a member of the TANF family who is the head-of-household or the
spouse of the head-of-household. However, individuals who have received
60 months of assistance may continue to receive WtW assistance and
other benefits.
    Because of the interest in this issue, we have included a
definition of WtW cash assistance at a new Sec. 260.31. See the
preamble for that section for additional discussion of that definition.
    As previously discussed, the policies on counting WtW and TANF
assistance apply to noncustodial parents. Receipt of WtW cash
assistance or TANF assistance by a noncustodial parent, in his or her
status as a noncustodial parent, does not count against the time limit
unless he or she is the spouse of the head-of-household. If the
noncustodial parent is the spouse of the head-of-household and is
included by the State in its definition of a TANF family, such parent's
receipt of WtW cash assistance or TANF assistance does count against
the time limit. However, if the noncustodial parent is not included in
the State's definition of a TANF family (e.g., he is receiving
assistance as part of another family), his receipt of WtW cash
assistance does not count towards the Federal TANF time limit for the
family composed of the custodial parent and their children in common.
    Comment: A commenter asked whether months when assistance is
received under a Tribal TANF program count toward the Federal five-year
time limit.
    Response: Months for which a family received assistance under an
approved Tribal Family Assistance Plan count toward the five-year time
limit under both State and Tribal TANF programs. Under the provisions
of section 408(a)(7), the five-year limit applies to TANF assistance
provided with Federal TANF funds under part A of title IV of the Act.
This includes assistance provided by Tribal TANF programs. However,
there is an exception under Sec. 264.1(b)(1)(ii) for months when an
adult lived in Indian country or Native Alaskan Village with high
unemployment.
    Comment: A commenter asked whether the clock stops while an
individual is in drug treatment so that she will be job ready.
    Response: The clock does not stop. The clock stops only because of
the factors listed in Sec. 264.1(b).
    Comment: Another commenter asked whether a State can exempt from
the time limit a family with old or disabled parents or caretakers.
    Response: A family cannot be exempted from the time limit on this
basis. Months when a family receives assistance can be disregarded only
according to the factors listed in Sec. 264.1(b). However, once the
family has received assistance for 60 months, the State can continue to
provide assistance on the basis of hardship. The State can also choose
to provide assistance with State-only funds.
    Comment: A number of commenters were opposed to our provisions that
attempted to restrict a State from excluding families from the time
limit by including child-only cases in its definition of family and
diverting families to separate State programs. The commenters also
opposed our proposal to require States to report on the number of
families excluded.
    Response: We agree that we should not limit a State's ability to
determine which families they will serve under TANF and that we should
not assume that a State is attempting to circumvent the statute.
Accordingly, we have removed these provisions from the final rules. We
also removed the requirement for separate reporting of child-only
cases. You can find additional discussion on this issue in the earlier
preamble discussion entitled ``Child-Only Cases.''
    Comment: While one commenter agreed with our position in the NPRM,
a number of commenters argued that States should be able to stop the
clock for hardship or domestic violence, or because individuals in the
family are unable to participate in work activities before the family
has received assistance for 60 months.
    Response: We do not believe that the statute envisions stopping the
clock for hardship or for any reasons other than those listed in
Sec. 264.1(b). Section 408(a)(7)(C) of the Act exempts families from
being terminated from TANF assistance once they reach the 60-month
limit; it does not exempt them from accruing months toward the limit.
The statute permits States to continue to provide assistance to
families beyond the 60-month limit based on hardship or because a
family member has been

[[Page 17848]]

subjected to battery or extreme cruelty. However, as we discussed in
the preamble section entitled ``Treatment of Domestic Violence
Victims,'' we have revised the final rules to recognize a broader array
of good cause domestic violence waivers to extend the time limit in
determining whether a State that exceeds the 20-percent limitation will
receive penalty relief. Accordingly, States may be able to extend the
time limits for additional families, including victims of domestic
violence.
    Comment: A commenter asked how the 20-percent hardship extension
applies when a State has a shorter time limit than 60 months.
    Response: A State with a shorter time limit can establish its own
policies for extending assistance under its State time limit. The State
can extend assistance beyond its (shorter) time limit based on hardship
or for other reasons. However, if a State extends its time limit and
continues to provide assistance to a family, the additional months
count toward the Federal time limit as they ordinarily would.
    Comment: Some commenters expressed the view that our provisions for
how States' section 1115 waivers affect the time limit are confusing
and improper.
    Response: We have made some minor adjustments to these provisions.
Please refer to subpart C of part 260 and the earlier preamble
discussion entitled ``Waivers.''

Section 264.2--What Happens if a State Does Not Comply with the Five-
Year Limit? (Sec. 274.2 of the NPRM)

    Congress created the penalty under section 409(a)(9) to ensure that
States comply with the five-year restriction on the receipt of
federally funded TANF assistance. If we determine that a State has not
complied with the five-year time limit during a fiscal year, then we
will reduce the SFAG payable for the immediately succeeding fiscal year
by five percent of the adjusted SFAG.
    Five years is the maximum period of time permitted under the
statute for families to receive federally funded TANF assistance.
Therefore, the penalty under this section does not apply if the State
exceeds any shorter time limits on the receipt of federally funded
assistance that it may choose to impose. It also does not apply to any
time limits on receipt of State-funded assistance or the receipt of
noncash WtW assistance.
    In defining the requirement, section 409(a)(9) refers to section
408(a)(7). This latter section identifies the circumstances under which
assistance may be provided for longer than five years. It provides
exceptions to the time-limit requirement for minors, hardship, or
families living in Indian country or in an Alaskan Native village with
adult unemployment above 50 percent. Therefore, we will take into
account the exceptions described under paragraphs (B), (C), or (D) of
section 408(a)(7) when deciding whether the State complied with the
five-year time limitation. We will use the information required to be
reported in part 265 to learn whether a State is complying with the
five-year time restriction on the receipt of federally funded
assistance.
    We do not intend to hold States immediately accountable for knowing
about and verifying all months of assistance received in other States,
since we are aware that, in general, States' data processing systems
are not currently capable of accomplishing interstate tracking of the
number of months an individual has received TANF assistance.
    We received a few comments on this section, as discussed below. We
made only one minor editorial change to the regulations. This change
clarifies that, if a State failed to comply with the time-limit
requirements, in order to avoid a penalty, it must demonstrate to our
satisfaction that it had reasonable cause, or it must correct or
discontinue the violation under the provisions of an approved
corrective compliance plan.
    Comment: A couple of commenters asked for guidance on how States
should count months when a family received assistance in another State.
Other commenters asked us to regulate that States will not be held
accountable for knowing about a family's receipt of TANF assistance in
another State.
    Response: Each State must keep track of the number of months it
provides TANF assistance that count towards the Federal time limit. As
part of its application process, a State should ask a family whether it
has lived in any other States. If the family has, the new State should
contact the other State(s) to find out whether the family received
assistance that counts toward the Federal time limit. We expect a State
to do its best to gather this information, but will not hold the State
accountable if its information about what happened in another State is
not accurate, as long as the State has made a good faith effort to
gather complete and accurate information. We have decided not to
include this specific guidance in the regulations because our
expectations for State accountability will change over time as
technology improves and the State's ability to do interstate tracking
of families increases.
    Comment: A commenter asked whether a State with a State time limit
that is shorter than the Federal time limit would be penalized if it
fails to meet the requirements of its State time limit.
    Response: The penalty at Sec. 262.1(a)(9) only applies if the State
fails to meet the Federal five-year time limit.

Section 264.3--How Can a State Avoid a Penalty for Failure to Comply
With the Five-Year Limit? (Sec. 274.3 of the NPRM)

    In Sec. 262.5, we include general circumstances under which we may
find reasonable cause to waive potential penalties. We also will
consider an additional factor in determining whether there is
reasonable cause for failure to meet the five-year limit. The
additional factor relates to a State's implementation of the Family
Violence Option and its provision of temporary waivers of time limits,
when necessary, for victims of domestic violence.
    We will grant a State reasonable cause for failing to meet the 60-
month time limit, if it adequately demonstrates that it has exceeded
the 20-percent limitation on exceptions because it granted individuals
federally recognized good cause domestic violence waivers pursuant to
subpart B of part 260. To qualify for reasonable cause based on this
factor, a State would have to show that, if families with such waivers
were disregarded, the number of families that received assistance did
not exceed 20 percent. A State must substantiate its case for all
claims of reasonable cause.
    You can find additional discussion of our domestic violence
policies in the preamble section entitled ``Treatment of Domestic
Violence Victims.''
    We received a number of comments on this section and made changes
to the regulations, as discussed below.
    Comment: Several commenters asked us to permit States to claim
reasonable cause based on additional factors, such as the State's good
faith effort to comply with the time limit, a hard-to-serve population,
high unemployment or other adverse economic conditions, and other
factors that are beyond the control of the State.
    Response: As we discussed in the preamble to Sec. 262.5, we believe
it is sounder policy to encourage a State to correct problems and find
solutions than to excuse a State's inability to meet the statutory
requirements. Accordingly, we are not adding reasonable cause factors
that we will consider if a State fails to meet the time-limit
requirement of the statute. (However, we have revised the language at
Sec. 262.5 to allow more discretion to grant reasonable cause when a
State faces special, unforeseen circumstances.)

[[Page 17849]]

    Comment: A number of commenters also argued that we should not link
the reasonable cause factor for federally recognized good cause
domestic violence waivers to the victim's ability to work and that
other changes should be made to the provision.
    Response: We have addressed these comments in subpart B of part 260
and the preamble discussion entitled ``Treatment of Domestic Violence
Victims.''

Section 264.10--Must States Do Computer Matching of Data Records Under
IEVS To Verify Recipient Information? (Sec. 274.10 of the NPRM)

    Congress originally established the Income and Eligibility
Verification System (IEVS) in 1984 under section 1137 of the Act.
PRWORA created a penalty at section 409(a)(4), requiring the reduction
of a State's SFAG for the immediately succeeding fiscal year by up to
two percent if a State is not participating in IEVS.
    The IEVS provision was intended to improve the accuracy of
eligibility determinations and grant computations for the public
assistance programs (AFDC, Medicaid, Food Stamp and SSI). It achieves
this goal by expanding access to, and exchanges of, available computer
files to verify client-reported earned and unearned income.
Specifically, it makes the following files available to the State
public assistance agencies: (1) IRS unearned income; (2) State Wage
Information Collection Agencies (SWICA) employer quarterly reports of
income and unemployment insurance benefit payments; (3) IRS earned
income maintained by the Social Security Administration (SSA); and (4)
with the passage of the Immigration Control and Reform Act of 1986,
immigration status information maintained by the Immigration and
Naturalization Service (INS).
    Currently, regulations at Secs. 205.51 through 205.62 and the
statute at section 1137(d) describe what is meant by ``participating *
* * in the income and eligibility verification system required by
section 1137.'' The regulation at Sec. 205.60(a) requires each State to
maintain statistics on its use of IEVS. In general, ``participation''
means that a State agency submits electronic requests to IRS, SWICA,
SSA and INS for information listed in the preceding paragraph, for all
TANF applicants and recipients. IRS, SWICA, SSA and INS provide the
State agencies with an electronic response regarding the information
requested. The frequency of the request and the timeliness of the
response is a function of the data processing systems design of the
responding agency. The State agency worker compares the information in
the response to determine the accuracy of client reporting of case
circumstances.
    We received comments from two parties, which did not result in any
changes to the regulation. However, we did make a change based on our
internal review. INS has stated its view that Federal departments are
no longer authorized to grant waivers to States to exempt certain
programs from verifying alien eligibility through the SAVE system. (See
63 FR 41662, August 4, 1998.) Therefore, we removed the parenthetical
in the proposed rule at paragraph (a)(4) referencing such waivers.
    One of the commenters expressed the view that the proposed rule is
consistent with the TANF statutory provisions. We discuss the other
comments and our responses below.
    Comment: A commenter argued that requiring data matches for all
TANF applicants and recipients is not cost effective and should not be
performed.
    Response: The statute at section 1137 and the implementing
regulations at Secs. 205.51 through 205.62 provide that the State must
request data matches for the entire TANF caseload.
    Comment: The commenter asked whether we would permit targeting
procedures for data matches based on cost effectiveness.
    Response: States may use targeting procedures that govern the use
of data matches. Paragraph 1137(a)(4)(C) of the Act states, ``The use
of such information shall be targeted to those uses that are most
likely to be productive in identifying and preventing ineligibility and
incorrect payments, and no State shall be required to use such
information to verify the eligibility for all recipients.'' The
implementing regulation at Sec. 205.56(a)(1) continues to permit States
to exclude categories of information from a follow-up review. States
perform reviews after the data matches and compare information obtained
from the match with the case record to determine if it affects an
applicant's or recipient's eligibility or the amount of payment.
    Comment: The commenter also expressed disagreement with the
definition of participation for ``all TANF applicants and recipients''
(e.g., naturalized citizens do not require a match with INS).
    Response: We recognize that States are not required to perform a
data match with the Immigration and Naturalization Service (INS) for
naturalized citizens. The data match with INS is only required for
alien applicants and recipients.

Section 264.11--How Much Is the Penalty for Not Participating in IEVS?
(Sec. 274.11 of the NPRM)

    Since IEVS has been in existence for more than 12 years, we believe
that States have had sufficient time to become full participants in
IEVS. Therefore, we will impose the maximum two-percent penalty upon
all findings that a State is not participating in IEVS.
    We will use an audit pursuant to the Single Audit Act as the
primary means of monitoring a State's IEVS participation. We will also
use statistics maintained by the State, as required by Sec. 205.60(a),
as another source of information and may conduct additional Federal
reviews or audits as needed.
    We received few comments on this section. We discuss the comments
and our responses below. We made no changes to the regulations.
    Comment: A few commenters expressed concern that we were not clear
in the proposed rule about how we will determine a State's
nonparticipation in IEVS and the amount of the penalty. Another
commenter argued that the amount of the penalty in proposed regulation
needs to be amended to comport with the provisions of the Act.
    Response: We will determine a State's nonparticipation in IEVS by
an audit pursuant to the Single Audit Act. Specific auditing procedures
for evaluating participation in IEVS are included in the Compliance
Supplement to OMB Circular A-133. Anyone interested in the auditing
procedures should review the Compliance Supplement for further
information.
    Since the statute allows us to regulate a penalty of ``not more
than 2 percent,'' we could establish a penalty of less than two
percent. However, we feel that a penalty of two percent is appropriate
given that IEVS has been in effect for over 12 years and States have
had ample time to come into compliance.
    Comment: Some commenters suggested that we should impose a reduced
penalty of less than two percent if the failure to operate IEVS was
inadvertent, isolated, or of a technical nature. A few commenters
indicated that the proposed rule is consistent with the TANF statutory
requirements.
    Response: If a State fails to meet the IEVS requirements, it may
claim reasonable cause and/or submit a corrective compliance plan under
part 262. Under these provisions, a State might be able to demonstrate
that we should forgive or reduce its penalty under the types of
situations mentioned by the commenters.

[[Page 17850]]

Section 264.30--What Procedures Exist to Ensure Cooperation With Child
Support Enforcement Requirements? (Sec. 274.30 of the NPRM)

    One of TANF's purposes is to provide assistance to needy families
so that children may be cared for in their own homes or the homes of
relatives. Another is to end the dependence of needy parents on
government benefits by promoting job preparation, work, marriage, and
parental responsibility. A third is to prevent and reduce the incidence
of out-of-wedlock pregnancies and to encourage the formation and
maintenance of two-parent families. Child support enforcement provides
an important means of achieving all of these goals.
    The law has long recognized that paternity establishment is an
important first step toward self-sufficiency in cases where a child is
born out of wedlock. The earlier paternity is established, the sooner
the child may have a relationship with the father and access to child
support, the father's medical benefits, information on his medical
history, and other benefits resulting from paternity establishment.
Establishment of paternity may also help establish entitlement to other
financial benefits, including Social Security benefits, pension
benefits, veterans' benefits, and rights of inheritance. Accordingly,
establishing paternity and obtaining child support from the
noncustodial parent are critical components of achieving independence.
    To ensure that a legal relationship protecting the interests of the
children is established quickly and in accordance with State law, the
TANF (IV-A) agency must refer all appropriate individuals in the family
to the Child Support Enforcement (IV-D) agency for paternity
establishment and/or services needed to establish, modify, and enforce
a child support order. Referred individuals must cooperate in
establishing paternity and in establishing, modifying or enforcing a
support order for a child.
    The IV-D agency determines whether the individual is cooperating
with the State as required. If the IV-D agency determines that an
individual has not cooperated, and the individual does not qualify for
any good cause or other exception established by the State, the IV-D
agency will notify the IV-A agency promptly. The IV-A agency must then
take appropriate action.
    In cases of noncooperation, the IV-A agency must either deduct from
the assistance an amount no less than 25 percent of the amount of the
assistance that otherwise would be provided or deny the family
assistance under the TANF program.
    We received a few comments on the provisions in this section and
made some modest changes to the regulations, as discussed below.
    Comment: Several commenters suggested that we clarify agency
responsibilities for making the good cause determination. They stated
that the proposed preamble and regulation did not make it clear that
the statute provides States with a choice about whether the TANF (IV-A)
or IV-D agency determines good cause. One State recommended that the
final regulations allow for IV-D agencies to negotiate with IV-A TANF
agencies to determine good cause for noncompliance.
    Response: We agree that States have discretion in this area. As
provided in section 454(29)(A) of the Act, the title IV-A, IV-D or XIX
(Medicaid) agency may determine whether the individual has good cause
for not cooperating in establishing paternity or fulfilling any other
cooperation requirement. The selection of the responsible agency is at
the option of the State IV-D agency. We have revised the regulatory
language at Sec. 264.30(b) to clarify this point. We have also revised
the language in Sec. 264.30(b) to explicitly recognize that victims of
domestic violence could receive waivers of child support cooperation
requirements if a State has adopted the Family Violence Option.
    Comment: Many commenters expressed concern that the use of the term
``appropriate individual,'' used to indicate who must cooperate,
suggests that Federal law requires cooperation by nonparents. They
suggested that we modify the provision to clarify that Federal law
mandates cooperation only with respect to parents who apply for TANF
assistance for their own children.
    Response: We agree with the commenters that Federal law does not
require cooperation by other individuals. However, the language in the
proposed rule recognized that it might be appropriate to require
cooperation by other caretakers who have access to information that
could be used to establish paternity or obtain child support on behalf
of the child. Since we believe States should have some discretion to
require cooperation in these cases, we have chosen to leave the term
``appropriate individuals'' in the regulation. At the same time, we
would point out that other individuals would not ordinarily have the
same level of information about the absent parent as a parent would.
Thus, we would expect States to develop procedures that recognize this
difference and apply a different standard in determining cooperation by
nonparents.
    Comment: One commenter suggested that it was unnecessary to include
the language ``for whom paternity has not been established'' in either
the preamble or the regulation since even if paternity was previously
established, the IV-D agency must carry out child support enforcement
activities, such as enforcing and modifying child support orders for
children whose paternity has already been established.
    Response: We disagree. Section 409(a)(5) specifically mentions
cooperation in establishing paternity. We would note that the language
in Sec. 264.30(a) covers the other situations mentioned by the
commenter, especially where it says ``* * * or for whom a child support
order needs to be established, modified or enforced. * * *''
    Comment: Several commenters recommended that we mandate a set of
notice and procedural requirements for cooperation that States would
need to include in their systems. One commenter suggested that we
should not allow a State to impose sanctions unless there is
verification that the agency has met its duty of notifying recipients.
Others felt that: (1) The notices should inform TANF applicants and
recipients about the cooperation requirement and the good cause and
other exceptions; (2) there should be a mechanism by which an
individual who has been referred to the IV-D agency for child support
services can make a claim for an exemption from the cooperation
requirement if it appears that one is needed; (3) there should be an
interface between the IV-A and IV-D agencies when the State has set up
a system in which the IV-A agency makes the ``good cause''
determinations and the IV-D agency makes cooperation decisions; and (4)
an individual should be informed about a noncooperation decision and
how to appeal such a decision.
    Response: The statute does not give us the authority to require
specific notice and procedural criteria from States. However, as the
cooperation requirement is not new, States already have administrative
processes in place that support fair and equitable treatment of
individuals, including notices of certain requirements under this
section. States are required to submit State plans that describe
individual State program operations and requirements. Child Support is
one of the plans required.

[[Page 17851]]

Section 264.31--What Happens if a State Does Not Comply With the IV-D
Sanction Requirement? (Sec. 274.31 of the NPRM)

    In accordance with section 409(a)(5), we will impose a penalty of
up to five percent of the adjusted SFAG if the IV-A agency fails to
enforce penalties requested by the IV-D agency against individuals who
fail to cooperate without good cause. We will monitor State adherence
to this requirement primarily through the single audit process.
    Although States had been required to establish paternity and
enforce other child support provisions for several years, and States
already had systems and procedures in place for dealing with these
requirements, the division of responsibility between the IV-A and IV-D
agencies changed slightly under PRWORA.
    We decided to increase the amount of the penalty gradually in order
to give States the opportunity to make procedural adjustments before
they are subject to the impact of the maximum penalty. We will impose a
penalty of one percent for the first violation and two percent for the
second. However, since this is not an entirely new requirement, we will
apply the maximum penalty of five percent for the State's third, and
any subsequent, violation of this provision.
    We received two comments specifically addressing the provisions in
this section. As a result, we made some minor changes to the
regulations, as discussed below.
    Comment: One commenter suggested that individuals who receive
waivers from the child support cooperation requirements pursuant to the
Family Violence Option (FVO) should also be exempt from sanction and
should not be considered in determining the need for a penalty under
this subsection.
    Response: Although a separate section of the Act authorizes waivers
under the FVO for victims of domestic violence, the purpose of these
waivers and the regular good cause exceptions from child support
cooperation are similar, i.e., to protect families that face special
risks from inappropriate requirements and sanctions. We encourage
States to establish an administratively efficient process to coordinate
these two determinations. Coordinating them should help States minimize
duplication of effort, avoid confusion and jurisdictional problems, and
treat families in similar circumstances consistently. (See Sec. 260.57
for additional discussion of FVO waivers and sanction policies.)
    Comment: One commenter suggested we add a further criterion to
specify that we will not penalize a State if the violations were de
minimus.
    Response: We believe that the reasonable cause criterion at
Sec. 262.5(a)(3) adequately covers such situations.

Section 264.40--What Happens if a State Does Not Repay a Federal Loan?
(Sec. 274.40 of the NPRM)

    Section 406 permits States to borrow funds to operate their TANF
programs. In general, States must use these loan funds for the same
purposes as other Federal TANF funds. However, the statute also
specifically provides that States may use such loans for welfare anti-
fraud activities and for the provision of assistance to Indian families
that have moved from the service area of an Indian Tribe operating a
Tribal TANF program.
    States have three years to repay loans and must pay interest on any
loans received. Our Office of Administration has issued an Action
Transmittal, OFA-TANF-98-2, dated February 3, 1998, notifying States of
the application process and the information needed for the application.
    Section 409(a)(6) establishes a penalty for States that do not
repay loans provided under section 406. If the State fails to repay its
loan in accordance with its agreement with ACF, we will reduce the
adjusted SFAG for the immediately succeeding fiscal year by the
outstanding loan amount, plus any interest owed.
    Sections 409(b)(2) and 409(c)(3) provide that States cannot avoid
this penalty either through reasonable cause or corrective compliance.
    We received no comments on the provisions in this section.
Therefore, the final rule incorporates the proposed policy.

Section 264.50--What Happens if, in a Fiscal Year, a State Does Not
Expend, With Its Own Funds, an Amount Equal to the Reduction to the
Adjusted SFAG Resulting From a Penalty? (Sec. 274.50 of the NPRM)

    Section 409(a)(12) requires States to expend, under the TANF
program, an amount equal to the reduction made to its adjusted SFAG as
a result of one or more of the TANF penalties. Thus, States must
maintain a level of TANF spending that is equivalent to the funding
provided through the SFAG, even if we reduced their Federal funding as
a result of penalties. If a State fails to expend its own funds to pay
for State TANF expenditures in an amount equal to the reduction made to
its adjusted SFAG for a penalty under Sec. 262.1, we will reduce the
State's SFAG for the next fiscal year by an amount equal to not more
than two percent of its adjusted SFAG, plus the amount that the State
should have expended (reduced for any portion of the required amount
actually expended by the State in the fiscal year).
    As discussed in Sec. 262.3, we will monitor closely a State's
efforts to replace the reduced SFAG with its own expenditures. A State
must not diminish its investment in its TANF program as a result of
actions violative of the TANF requirements. Therefore, if a State fails
to make any expenditures in the TANF program to compensate for penalty
reductions, we will penalize the State in the maximum amount, i.e., two
percent of the adjusted SFAG plus the amount it was required to expend.
We will reduce the penalty based on the percentage of any expenditures
that the State does make.
    For example, a State was required to replace an SFAG reduction of
$1,000,000, but its increase in expenditures equalled only $400,000.
Since it failed to repay $600,000, its penalty would be equal to two
percent of the adjusted SFAG times 60 percent (because $600,000 is 60
percent of $1,000,000), plus the $600,000 that it failed to expend as
required.
    States should note that if they do not expend State-only funds as
required, the effect will be that the amounts to be deducted from the
SFAG will compound yearly, as the penalty for failure to replace SFAG
funds with State expenditures also applies to the penalty at
Sec. 262.1(a)(12). We believe that this is appropriate because full
resources must be available to ensure that the goals of the TANF
program are met.
    Pursuant to section 409(a)(12), State expenditures that are used to
replace reductions to the SFAG as the result of TANF penalties must be
expenditures made under the State TANF program, not under ``separate
State programs.'' Further, as noted in Sec. 263.6, regarding the limits
on MOE expenditures, State expenditures made to replace reductions to
the SFAG as a result of penalties do not count as basic MOE
expenditures.
    In addition, the statute provides that the reasonable cause and
corrective compliance plan provisions do not apply to the penalty for
failure to replace SFAG reductions.
    We received a few comments on this section. These comments resulted
in changes, as discussed below.
    Comment: A commenter asked if a State's replacement of funds must
occur in the quarter following the imposition

[[Page 17852]]

of the penalty or in the next fiscal year. The commenter preferred
replacement during the next fiscal year because of differences in State
appropriation cycles. Another commenter suggested that the proposed
rule did not comport with the language of the statute.
    Response: We agree with the comments. We have revised the
regulatory language at Sec. 264.50 to reflect the sequence of penalty
actions as contained in the statute at section 409(a)(12). When we
withhold Federal TANF funds during a fiscal year, the State must
replace them with State funds during the subsequent fiscal year. If the
State fails to replace the funds during the subsequent year, then we
can withhold an additional penalty during the year that follows the
subsequent year. The starting point for this sequence of actions is the
fiscal year in which we impose a penalty by reducing the adjusted SFAG.
    Comment: A commenter recommended that we allow reasonable cause and
corrective compliance when a State fails to expend its own funds to
replace a reduction in the adjusted SFAG caused by other penalties.
    Response: The statute prohibits reasonable cause or corrective
compliance when a State fails to replace the reduction to its SFAG due
to the imposition of other penalties.
    Comment: One commenter suggested that we should allow States to
expend the replacement funds on State-only programs that serve the TANF
population.
    Response: Section 409(a)(12) explicitly refers to ``the State
programs funded under this part,'' which means the TANF program
established under title IV-A of the Act. Separate State programs,
funded exclusively with State funds, are not part of the State TANF
program funded under title IV-A of the Act.

Subpart B--What Are the Requirements for the Contingency Fund?

    In addition to the TANF funding they receive under section 403(a)
of the Act, States may receive funding from the Contingency Fund under
section 403(b). This fund was created in response to concerns related
to the use of block grant funding for TANF and the end of entitlement
and open-ended Federal funding of welfare assistance that existed under
the AFDC program. The purpose of the Contingency Fund is to make
additional Federal TANF funds available to States, at their request,
for periods when unfavorable economic conditions threaten their ability
to operate their TANF programs. The Fund was established to create a
pool of Federal TANF funds that could be provided to needy States with
economic problems.
    We received several comments on the Contingency Fund sections of
the NPRM. Most of the commenters asked us to make the preamble and
regulations more consistent and less confusing, and to provide further
clarification of the provisions. As a result, we have revised all of
subpart B, restructured the sections, and amended our discussion of the
provisions. Also, we have changed many of the section headings to make
them clearer and to eliminate duplication. Whenever possible, we
reference the sections that we used in the NPRM to make it easier for
the reader. We hope that we have succeeded in making improvements and
that the Contingency Fund provisions are now easier to understand.
However, we have not made substantive changes to the underlying
policies or procedures of this subpart because the proposed regulatory
provisions closely followed the statute.
    In addition to the changes we made in response to comments, we
eliminated a discussion on ``Meeting FY 1997 MOE Requirements'' that
was included at the end of the preamble to subpart B of part 274 of the
NPRM. We believe that it is no longer necessary to include this
specific discussion about the handling of the Contingency Fund in FY
1997.
    This final rule also differs from the NPRM in that we added
information about the overall adjustment of the Contingency Fund, and
the additional remittances of contingency funds that will be due from
States, that are required by the Adoption and Safe Families Act of
1997, which was enacted just as the NPRM was about to be published.

Section 264.70--What Makes a State Eligible To Receive a Provisional
Payment of Contingency Funds? (New Section)

    As noted in the definitions at Sec. 260.30, the term ``Contingency
Fund'' refers to the Federal TANF funds that a State may receive under
section 403(b). It does not refer to any required State expenditures.
    To receive a provisional payment of contingency funds, a State must
qualify as a needy State for one or more months in a fiscal year. A
needy State may request contingency funds in accord with the process
delineated in program instruction TANF-ACF-PI-97-8, dated October 27,
1997. This program instruction provides guidance to States on the
requirements for receiving contingency funds and instructions for
applying for these funds.
    A State is a ``needy State'' if it meets either the ``unemployment
trigger'' or the ``Food Stamp trigger'' for an ``eligible month.''
    To be eligible for contingency funds under the unemployment
trigger, the State's average unemployment rate for the most recent
three-month period must be at least 6.5 percent and at least equal to
110 percent of the State's unemployment rate for the corresponding
three-month period in either of the two preceding calendar years.
    To be eligible for contingency funds under the Food Stamp trigger,
a State's monthly average of individuals participating in the Food
Stamp program (as of the last day of each month) for the most recent
three-month period must exceed its monthly average of individuals in
the corresponding three-month period in the Food Stamp caseload for FY
1994 or FY 1995 by at least ten percent, assuming that the immigrant
provisions under title IV and the Food Stamp provisions under title
VIII of PRWORA had been in effect in those years.
    The statute defines an eligible month as a month in a two-month
period that begins with any month for which the State is determined to
be a needy State. Once a State becomes a needy State for any given
month (by meeting either the unemployment or Food Stamp triggers) and
elects to receive contingency funds, it will receive a provisional
payment for a two-month period. Based on the statutory definition of an
eligible month, a determination that a State is a needy State for a
month makes that State eligible to receive a provisional payment of
contingency funds for two consecutive months, at the State's option.
    Territories and Tribal TANF grantees are not eligible to
participate in the Contingency Fund. Section 403(a)(7) provides that
only the 50 States and the District of Columbia are eligible.

Section 264.71--What Determines the Amount of the Provisional Payment
of Contingency Funds That Will Be Made to a State? (New Section)

    The amount of contingency funds paid to a State is considered to be
provisional because the actual amount that the State is eligible to
receive is not determined when the payment is made, but, rather, after
the fiscal year ends. As we discuss in Sec. 264.73, a State that
received contingency funds must complete an annual reconciliation to
determine whether it must remit some or all of the contingency funds it
received.

[[Page 17853]]

    For each month of the fiscal year that it meets the eligibility
criteria in Sec. 264.70, a State may receive up to \1/12\th of 20
percent of its annual SFAG allocation. The actual amount of funds that
a State may realize from the Contingency Fund will vary, depending on
the level of State expenditures, the number of months that it is
eligible, and the total number of States receiving contingency funds.
States eligible in one month may automatically receive a payment for
the following month.
    We will provide contingency funds to each State that requests them,
in the order in which we receive the requests, until the available
appropriated funds are exhausted.

Section 264.72--What Requirements Are Imposed on a State if It Receives
Contingency Funds? (New Section)

    In order to be eligible for contingency funds, a State must make
expenditures in its TANF program, from State funds, at the required
Contingency Fund MOE level. The required Contingency Fund MOE level is
100 percent of the State's historic State expenditures for FY 1994.
    To keep any of the contingency funds it received, a State must
exceed the Contingency Fund MOE level requirement. A State may keep
only the amount of contingency funds that match, at the applicable
Federal Medical Assistance Percentage (FMAP) rate, countable State
expenditures, as defined in Sec. 264.0, that are in excess of the
required Contingency Fund MOE level, reduced by the proportionate
remittance required by the Adoption and Safe Families Act of 1997.
Because of the reconciliation formula, it is possible that a State may
not be able to keep any of the contingency funds it received. Please
refer to the discussion of Sec. 264.73 on the annual reconciliation for
more information.
    You should note that the Contingency Fund MOE requirement is
different from the basic MOE requirement. An obvious difference is that
the basic MOE requirement is 80 percent (or 75 percent if a State meets
its participation rates) of historic State expenditures, while the
Contingency Fund MOE requirement is 100 percent of historic State
expenditures. Another difference is that, in determining the
Contingency Fund MOE level, expenditures for child care must be
excluded. Finally, expenditures in separate State programs also must be
excluded in determining countable expenditures.
    This means that States cannot meet the Contingency Fund MOE
requirement merely by increasing State expenditures by 20 (or 25)
percent. The calculations for determining compliance with the basic MOE
requirements and for determining eligibility for the Contingency Fund
are different. For example, Contingency Fund MOE expenditures must be
expenditures within TANF. Expenditures made under separate State
programs do not count for this purpose. However, most MOE expenditures
that a State makes within its TANF program for eligible families may
count as both Contingency Fund MOE expenditures and as basic MOE
expenditures.
    As we discuss in Sec. 264.73, each State that receives contingency
funds is required to complete an annual reconciliation to determine
what portion of the contingency funds it may retain and what portion it
must remit.
    The statute provides that a State need not remit contingency funds
until one year after it has failed to meet either the Food Stamp
trigger or the unemployment trigger for three consecutive months. Thus,
a State may retain these funds for at least 14 months after it receives
them. (However, the period of time between the annual reconciliation
and the remittance date may be shorter.)
    For example, if a State fails to meet either trigger for the months
of July, August, and September, 1997, it has until September 30, 1998,
to remit the funds. The State must include its annual reconciliation
for contingency funds received in FY 1997 in its fourth quarter
Financial Report for FY 1997, due November 14, 1997.
    In general, contingency funds may be used for the same purposes as
other Federal TANF funds. However, contingency funds are available only
for qualifying expenditures made in the fiscal year in which the State
receives the funds. States may not use funds received in a given fiscal
year for expenditures made in either the subsequent fiscal year or a
prior fiscal year. Unlike TANF funds under section 403(a), contingency
funds are not available until expended.
    Since contingency funds are Federal TANF funds, they are generally
subject to the same requirements as other Federal TANF funds. For
example, a State cannot use contingency funds to pay a family if the
family has already received Federal assistance for 60 months, unless
the family has received an exception under Sec. 264.1. (See the
discussion in Sec. 263.21 on ``Misuse of Federal TANF Funds'' for
additional information.)
    However, unlike the TANF funds that they receive under section
403(a), States cannot transfer contingency funds (provided under
section 403(b)) to the Child Care and Development Block Grant Program
(also known as the Discretionary Fund of the Child Care and Development
Fund) and/or the Social Services Block Grant Program under title XX of
the Act. Section 404(d) of the Act permits the transfer of funds
received pursuant to section 403(a) only.

Section 264.73--What Is an Annual Reconciliation? (New Section)

    The purpose of the annual reconciliation is to determine the amount
of contingency funds that a State is permitted to retain for a fiscal
year. The annual reconciliation involves computing the amount by which
the State's countable State expenditures exceeds the State's required
Contingency Fund MOE level, as contingency funds match only these
excess expenditures. If the countable expenditures exceed the required
Contingency Fund MOE level, then the State may be entitled to all or a
portion of the contingency funds paid to it. However, even if its
countable expenditures exceed its required Contingency Fund MOE level,
it is possible that the provisions of the Adoption and Safe Families
Act of 1997, amending section 403(b)(6), will have a major impact on
the amount of contingency funds that a State is permitted to retain. In
fact, it may prevent a State from retaining any contingency funds.
    Each State that received contingency funds is required to perform
certain calculations to accomplish the annual reconciliation. First, it
must determine whether it met its required Contingency Fund MOE level.
If it did not, it must remit all of the contingency funds it received.
    If it met its Contingency Fund MOE requirement, the State must also
perform the following steps to determine how much of the contingency
funds it is permitted to retain:
    (1) Calculate the sum of the amount of the qualifying State
expenditures plus the amount of contingency funds that the State
expended, minus its required Contingency Fund MOE level.
    (2) Multiply the amount arrived at in step (1) by the State's FMAP
rate applicable for the fiscal year in which contingency funds were
awarded.
    (3) Multiply the amount arrived at in step (2) by 1/12 times the
number of months during the fiscal year for which the State received
contingency funds.
    (4) Compare the amount arrived at in step (3) with the amount of
contingency funds paid to the State during the fiscal year, and
determine the lesser amount.
    (5) From the amount arrived at in step (4), subtract the State's
proportionate

[[Page 17854]]

remittance for the overall adjustment of the Contingency Fund, as
required by the Adoption and Safe Families Act of 1997.
    The Adoption and Safe Families Act of 1997 reduced the Contingency
Fund appropriation over the four-year period from FY 1998 through FY
2001. All States receiving contingency funds in these years must remit
additional funds in order to share in the adjustment proportionately.
The remittance amounts of all States drawing from the Contingency Fund
will be increased by proportional shares totaling $2 million in FY
1998, $9 million in FY 1999, $16 million in FY 2000, and $13 million in
FY 2001. Thus, the fewer the number of States receiving contingency
funds, the higher each proportionate share of the adjustment will be,
and the more each State will have to remit. ACF will determine the
amount of each State's proportionate remittance and will provide this
information to the State for it to use in its annual reconciliation
calculations.
    A State should also note that if it was eligible for, and received,
contingency funds for fewer than 12 months during the fiscal year, the
effective Federal matching rate for contingency funds will be less than
its FMAP rate for the fiscal year. The effective rate is lower because
the statute creates a reconciliation step that reduces the total
Federal matching by 1/12 times the number of eligible months in the
year.
    Below we provide an example for FY 1998 that requires the
remittance of funds. Assume the following information:
    A State received a provisional payment of $2.5 million in
contingency funds for six months of eligibility in the fiscal year. Its
qualifying State expenditures were $102.5 million, its expenditure of
contingency funds was $2.5 million, and its child care expenditures
were $2 million. The required expenditure of State funds to meet the
100-percent MOE level is $95 million ($100 million minus $5 million for
historic child care expenditures). The State's FMAP is 50 percent. This
is the only State that received contingency funds in fiscal year 1998.
    Based on the information provided, we see that the State met its
required Contingency Fund MOE level.
    To continue with the annual reconciliation, we use the steps
outlined above.
    (1) $102.5 million, plus $2.5 million, minus $2 million, minus $95
million, equals $8 million. (The State's qualifying State expenditures,
plus its expenditure of contingency funds, minus its child care
expenditures, minus its required Contingency Fund MOE level.)
    (2) $8 million, times 50 percent, equals $4 million. (The result of
step (1) multiplied by the State's FMAP rate.)
    (3) $4 million, times \1/12\, times 6, equals $2 million. (The
result of step (2) multiplied by \1/12\ times the number of months the
State received funding for the Contingency Fund.)
    (4) The lesser amount of $2 million, compared to $2.5 million, is
$2 million. (The lesser of the result of step (3) compared to the
amount of contingency funds the State received.)
    Were it not for the requirements of the Adoption and Safe Families
Act of 1997, the State would have been eligible to retain $2 million in
contingency funds and would have been required to remit $500,000.
However, we are required to increase the amount the State must remit,
which we accomplish in step (5).
    (5) $2 million, minus $2 million, equals zero. (The overall
adjustment required from all States that received contingency funds for
FY 1998 is $2 million. Since only one State received contingency funds,
its proportionate offset is 100 percent of $2 million. Thus, the
State's remittance is increased by $2 million, and the State can retain
no contingency funds. Under the assumptions we presented, the State is
required to remit its entire $2.5 million provisional payment of
contingency funds.)
    The example above illustrates a case where the State had to remit
the entire amount of the $2.5 million provisional payment of
contingency funds it received even though it made expenditures above
the required Contingency Fund MOE level. If additional States had drawn
contingency funds for the fiscal year, this State's proportional
remittance would have been smaller, and the State would have been able
to retain some of the contingency funds it received.
    We will not consider a State's use of contingency funds, which
later must be returned under the reconciliation formula, to be an
improper use of funds, and, if the State meets its Contingency Fund MOE
requirement, we will not assess that penalty.

Section 264.74--How Will We Determine the Contingency Fund MOE Level
for the Annual Reconciliation? (Sec. 274.71 of the NPRM)

    For the Contingency Fund, historic State expenditures for FY 1994,
the base MOE level, include the State's share of AFDC benefit payments,
administration, FAMIS, EA, and JOBS expenditures. They do not include
the State's share of AFDC/JOBS, Transitional and At-Risk child care
expenditures. States must meet 100 percent of this MOE level.
    We said we would use the same data sources and date, i.e., April
28, 1995, to determine each State's historic State exependitures as we
used to determine the basic MOE requirement. However, we would exclude
the State share of child care expenditures for FY 1994.
    We will reduce the required MOE level for the Contingency Fund if a
Tribe within the State receives a Tribal Family Assistance Grant under
section 412. The last paragraph of section 409(a)(7)(B)(iii) provides
for this reduction. For the basic MOE requirement, we will reduce the
State's basic MOE level by the same percentage as we reduce a State's
annual SFAG allocation for Tribal Family Assistance Grants in the State
for a fiscal year. For example, if a State's SFAG amount is $1,000 and
Tribes receive $100 of that amount, we would reduce the State's basic
MOE requirement by ten percent. If the same State also receives
contingency funds in that fiscal year, we would also reduce the
Contingency Fund MOE level by ten percent.

Section 264.75--For the Annual Reconciliation, What Are Qualifying
State Expenditures? (Sec. 274.72 of the NPRM)

    Section 403(b)(6)(B)(ii)(I) provides that State expenditures
counted toward the Contingency Fund MOE may only include expenditures
made under the State program funded under this part. Thus, the State
expenditures that the State makes to meet the required Contingency Fund
MOE level include the expenditure of State funds within TANF only; they
do not include expenditures made under separate State programs. In
addition, under this section of the statute a State may not use
expenditures for child care to meet the Contingency Fund MOE
requirement or to qualify the State to retain any of the contingency
funds it received. Thus, we have noted the exception for child care in
item 3 below. (This exception appears in paragraph (b) of the
regulatory text.)
    In the NPRM, we referred to sections of part 273 to define
qualifying State expenditures for the Contingency Fund. In these final
regulations, we have eliminated references to the basic MOE sections;
we believe they were confusing because there were a number of
differences in the expenditures that are permitted to be included in
calculating the basic MOE and the Contingency Fund MOE.
    Nevertheless, we retain some of the proposed policies. More
specifically, qualifying State expenditures, for

[[Page 17855]]

Contingency Fund MOE purposes, are expenditures, with respect to
eligible families, of State funds made in the State TANF program for
the following:
    (1) Cash assistance, including assigned child support collected by
the State, distributed to the family, and disregarded in determining
eligibility for, and amount of the TANF assistance payment;
    (2) Educational activities designed to increase self-sufficiency,
job training, and work, excluding any expenditure for public education
in the State except expenditures involving the provision of services or
assistance to an eligible family that are not generally available to
persons who are not members of an eligible family;
    (3) Any other services allowable under section 404(a)(1) of the Act
and consistent with the goals at Sec. 260.20 of this chapter (except
child care); and
    (4) Administrative costs in connection with the provision of the
benefits and services listed in paragraphs (a)(1) through (a)(3), but
only to the extent consistent with the administrative cost cap for MOE
expenditures at Sec. 263.2(a)(5).
    Further, in Sec. 260.31(c)(1), we have added a reference to this
subpart. This revised language clarifies that, like basic MOE,
Contingency Fund MOE may be expended on benefits and services that do
not meet the definition of assistance.
    In item 4 above, regarding the limits on administrative costs, we
have modified the preamble and regulatory language to avoid the
creation of a third administrative cost cap. Under the statute and the
rules, we already provide for a 15-percent cap on the portion of
Federal grant funds and State basic MOE expenditures that go to
administrative costs. If we said that Contingency Fund MOE expenditures
were subject to a similar administrative cost cap, States and we would
then have three administrative cost caps to track.
    In general, we believe the basic MOE requirements should apply to
Contingency Fund MOE expenditures. However, in our minds, this view did
not justify the creation of a third administrative cost cap, especially
because of the substantial overlap between the Contingency Fund MOE
expenditures and basic MOE expenditures. Rather, under these rules, we
require that State expenditures on administrative costs, for
Contingency Fund MOE purposes, must be consistent with the basic MOE
administrative cost cap. In other words, in making MOE expenditures for
Contingency Fund purposes, States must take care not to spend excess
amounts on administrative costs. Their expenditures on administrative
costs must be at a level that enables their compliance with the
existing 15-percent cap in the basic MOE provisions.

Section 264.76--What Action Will We Take if a State Fails To Remit
Funds After Failing To Meet Its Required Contingency Fund MOE Level?
(Sec. 274.75 of the NPRM)

    PRWORA established a penalty at section 409(a)(10) that provides
that, if a State does not meet the Contingency Fund MOE requirement and
remit funds as required, we must reduce the State's SFAG payable for
the next fiscal year by the amount of funds that the State has not
remitted. The statute prohibits us from waiving or reducing this
penalty based on reasonable cause or corrective compliance. However,
the State may appeal our decision to reduce the State's SFAG pursuant
to the regulations at Sec. 262.7.

Section 264.77--How Will We Determine if a State Has Met Its
Contingency Fund Expenditure Requirements? (Sec. 274.76 of the NPRM)

    ACF has created a TANF Financial Report, the ACF-196. States will
use the ACF-196 to report their use of Federal TANF funds, including
contingency funds. We will use this report to verify the State's annual
reconciliation after the end of the fiscal year. We will review it to
ensure that expenditures reported are consistent with the statute and
these rules. Please see the discussion of part 265 for additional
information.

Subpart C--What Rules Pertain Specifically to the Spending Levels of
the Territories?

    In the preamble to the NPRM, we noted that section 103(b) of PRWORA
amended section 1108. Section 1108 establishes a funding ceiling for
Guam, the Virgin Islands, American Samoa and Puerto Rico. Prior to
PRWORA, the following programs authorized in the Act were subject to
this ceiling: AFDC and EA under title IV-A; Transitional and At-Risk
Child Care programs under title IV-A; the adult assistance programs
under titles I, X, XIV, and XVI; and the Foster Care, Adoption
Assistance, and Independent Living programs under title IV-E. The
ceiling excluded funding for the JOBS program, which also covered AFDC/
JOBS child care.
    Under the amendments in PRWORA, the funding ceiling at section 1108
applies to the TANF program under title IV-A, the adult programs, and
title IV-E programs. Section 1108(b) provides a separate appropriation
for a Matching Grant, which is also subject to a ceiling. The Matching
Grant is not a new program; rather it is a new funding mechanism that
Territories can use for expenditures under the TANF and title IV-E
programs.
    Prior to PRWORA we had not regulated the provisions of section
1108. However, in light of this new MOE requirement within section
1108, we thought that we needed to regulate to clarify the requirements
and the consequences if a Territory failed to meet the new section 1108
requirements. We have authority to issue rules on this provision under
section 1102, which permits us to regulate where necessary for the
proper and efficient administration of the program, but not
inconsistent with the Act. (The limit at section 417 does not apply to
this section of the Act.) In addition, we prepared a program
instruction for the Territories to provide additional guidance on
receiving funds under section 1108.
    In February 1997, we provided to the Territories: (1) Their FAG
annual allocations; (2) their basic MOE levels under section 409(a)(7);
(3) their Matching Grant MOE levels; (4) their section 1108(e) MOE
levels (which were created by PRWORA and were subsequently eliminated
by Pub. L. 105-33); and (5) a detailed explanation of the methodology
and expenditures we used to determine each of these amounts.

Section 264.80--If a Territory Receives a Matching Grant, What Funds
Must It Expend? (Sec. 274.80 of the NPRM)

    Section 1108(b) provides that Matching Grant funds are available:
(1) To cover 75 percent of a Territory's expenditures for the TANF
program and the Foster Care, Adoption Assistance and Independent Living
programs under title IV-E of the Act; and (2) for transfer to the
Social Services Block Grant program under title XX of the Act or the
Child Care and Development Grant (CCDBG) program (also known as the
Discretionary Fund of the Child Care and Development Fund) pursuant to
section 404(d) of the Act, as amended by PRWORA and Pub. L. 105-33.
However, Matching Grant funds used for these purposes must exceed the
sum of: (1) The amount of the FAG without regard to the penalties at
section 409; and (2) the total amount expended by the Territories
during FY 1995 pursuant to parts A and F of title IV (as so in effect),
other than for child care.
    Under the first requirement, the Territory must spend an amount up
to its Family Assistance Grant annual allocation using Federal TANF or
Federal title IV-E funds or funds of its own for TANF or title IV-E
programs.

[[Page 17856]]

    The second requirement establishes an MOE requirement at 100
percent of historic expenditures, based on the Territory's FY 1995
expenditures. This second requirement is separate from the basic MOE
requirement and is applicable only if a Territory requests and receives
a Matching Grant. Historic expenditures include 100 percent of State
expenditures made for the AFDC program (including administrative costs
and FAMIS), EA, and the JOBS program. Territorial expenditures made to
meet this requirement include Territorial, not Federal, expenditures
made under the TANF program or title IV-E programs.
    Territorial expenditures can only be counted once to meet the FAG
amount requirement, the MOE requirement, or the matching requirement.
In other words, any given expenditure cannot be counted more than once
to meet these three different expenditure requirements. We believe this
policy is appropriate because our interpretation of the statute is that
Congress intended that the provisions on spending up to the FAG amount,
meeting the MOE requirement, and meeting the matching requirement be
separate requirements.
    Comment: One commenter pointed out that this section of the rule
would more closely correspond to section 1108(b)(1)(B)(i) of the Act if
we added the phrase ``without regard to any penalties applied in
accordance with section 409'' to the regulation. Another commenter
suggested that we needed to clarify what the historic expenditures were
for the Territories.
    Response: As suggested, we have added the phrase about disregarding
penalties to the regulations. We also have added an explanation to the
preamble that the historic expenditures for the Territories are the
amounts spent above their Federal funding for the AFDC and EA programs
up to, but not exceeding, the 25-percent Territorial match, plus the
amount of matching funds spent for the JOBS program.

Section 264.81--What Expenditures Qualify for Territories To Meet the
Matching Grant MOE Requirement? (Sec. 274.81 of the NPRM)

    As stated in the NPRM, for the basic MOE, section 409(a)(7)
includes specific provisions on what States and Territories may count
as ``qualified State expenditures'' (i.e., expenditures that may count
towards the basic MOE requirement).
    However, the statute provides little guidance on what expenditures
a Territory may count toward its Matching Grant MOE for IV-A
expenditures. Because the Matching Grant is intended to be used for the
TANF program, we decided to apply many of the basic MOE requirements in
part 263, subpart A, to the Matching Grant MOE. These sections are:
Sec. 263.2 (What kinds of State expenditures count toward meeting a
State's annual spending requirement?); Sec. 263.3 (When do child care
expenditures count?); Sec. 263.4 (When do educational expenditures
count?); and Sec. 263.6 (What kinds of expenditures do not count?).
Section 263.5 (When do expenditures in separate State programs count?)
does not apply because section 1108(b)(1)(B)(ii) requires that the
matching Grant MOE expenditures must be expenditures under the TANF
program. Thus, expenditures to meet the Matching Grant MOE requirement
may not be expenditures made under separate State programs. (Because
Territories do not receive Matching Child Care funds, the limit on
child care expenditures in Sec. 263.3 does not apply.)
    Also, Territorial expenditures made in accordance with Federal IV-E
program requirements may count toward this MOE requirement. These
include the State share of IV-E expenditures and expenditures funded
with the State's own funds that meet Federal title IV-E program
requirements.
    The Territories may count expenditures made pursuant to the
regulations at 45 CFR parts 1355 and 1356 for the Foster Care and
Adoption Assistance programs and section 477 of the Act for the
Independent Living program.
    Territories may also count toward their Matching Grant MOE
requirement expenditures made under the TANF program that meet the
basic MOE requirement.
    We received no comments on this section and made no changes to the
regulation.

Section 264.82--What Expenditures Qualify for Meeting the Matching
Grant FAG Amount Requirement? (Sec. 274.82 of the NPRM)

    The statute intends that expenditures made to meet this requirement
must be TANF or title IV-E expenditures. For TANF expenditures, the
Territories may count allowable expenditures of Federal TANF funds to
meet this requirement. They may count amounts that they have
transferred from TANF to title XX and the Discretionary Fund in
accordance with section 404(d). (See Sec. 263.11, which describes the
proper uses of Federal TANF funds.) Also, a Territory may count its own
expenditures under the TANF program, for this purpose. Because IV-A
expenditures made with the Territories' own funds must be for the TANF
program, it is reasonable that we apply the MOE requirements applicable
for the Matching Grant to this FAG amount requirement.
    For IV-E expenditures, as with the Matching Grant MOE, expenditures
made in accordance with Federal IV-E program requirements may count
toward this MOE requirement. These include the Federal share and the
Territories' share of IV-E expenditures and expenditures funded with
the Territories' own funds that meet Federal IV-E program requirements.
    We received no comments on this section and made no changes to the
regulation.

Section 264.83--How Will We Know if a Territory Failed To Meet the
Matching Grant Funding Requirements at Sec. 264.80? (Sec. 274.83 of the
NPRM)

    We are developing a separate Territorial Financial Report for the
Territories. We will require this report to be filed quarterly and to
cover all programs subject to the section 1108 caps. This report will
cover basic MOE and Matching Grant MOE requirements. For the Matching
Grant, Territories must report expenditures claimed under title IV-E
and IV-A and the total expenditures (including Federal) they make to
meet the requirement that they spend up to their Family Assistance
Grant annual allocations.
    We would not require Territories to file the TANF Financial Report;
however, they must report comparable information on the Territorial
Financial Report. Furthermore, if one of the Territories fails to file
the Territorial Financial Report or to include certain information in
that report, we would treat it like a State that fails to file its TANF
Financial Report and make it subject to the penalty for failure to
report at Sec. 262.1(a)(3).
    We received no comments on this section and made no changes to the
regulation.

Section 264.84--What Will We Do if a Territory Fails To Meet the
Matching Grant Funding Requirements at Sec. 264.80? (Sec. 274.84 of the
NPRM)

    The statute does not address the consequences for a Territory if it
fails to meet the Matching Grant MOE and the FAG amount requirements.
The proposed and final rules provide that we would disallow the entire
amount of a fiscal year's Matching Grant if the Territory fails to meet
either requirement. This is because the statute provides that the
Matching Grant funds are only allowable if a Territory meets both
requirements. Thus, if a Territory does not meet either one or both of
the requirements, it must return the funds

[[Page 17857]]

to us. We will get the funds back by taking a disallowance action.
    A disallowance represents a debt to the Federal government.
Therefore, we will apply our existing regulations at 45 CFR part 30.
Once we issue a disallowance notice, we can require a Territory to pay
interest on the unpaid amount.
    We received no comments on this section and made no changes to the
regulation.

Section 264.85--What Rights of Appeal Are Available to the Territories?
(Sec. 274.85 of the NPRM)

    The Territory may appeal a disallowance decision in accordance with
45 CFR part 16. As these are not penalties, the reasonable cause and
corrective compliance provisions of section 409 do not apply. Section
410, covering the appeals process in TANF, also does not apply.
    We received no comments on this section and made no changes to the
regulation.

X. Part 265--Data Collection and Reporting Requirements (Part 275
of the NPRM)

A. Background

    The TANF block grant legislation reflects a new emphasis on program
information, measurement, and performance. This final rule specifies
the data collection and reporting requirements that serve as the major
mechanism to measure State accomplishment and performance.
    We received many comments in response to the NPRM concerning the
nature and scope of the data collection and reporting requirements.
    In the preamble to the NPRM, we addressed two major purposes of
data collection: to determine the success of the TANF program in
meeting the purposes of the Act and to assure accountability under the
Act. We also emphasized that it was critical to collect data that were
comparable across States and over time and that would enable us to
calculate participation rates.
    We based the proposed reporting requirements primarily on section
411 of the Act (Data Collection and Reporting). We proposed quarterly
reporting of both disaggregated and aggregated data on TANF recipients
and some others in the household. We proposed similar reports of data
on closed cases and on participants in separate State programs. We also
proposed a quarterly financial report (with an annual addendum) and an
annual program and performance report. Also included in this section of
the NPRM were proposed provisions on reporting penalties, due dates,
sampling, and electronic filing.
    To enable the public to comment with full understanding of the
reporting requirements, the NPRM included eleven appendices that
contained the specific data elements, instructions for filing the
information, sampling specifications, and the statutory reference for
each data element. In the preamble, we also called readers' attention
to the proposed data elements that were not specified in the statute,
including break-outs of statutory requirements.

B. Overall Summary of Comments

    While most commenters agreed on the need for data collection and
reporting, States (including Governors, State legislators, State
executive branch agencies, and national agencies representing State
interests) expressed strong views that the proposed TANF data
collection requirements were excessive. Other commenters did not
generally share this view.
    There was broader agreement among all commenters, however, that the
proposed reporting requirements on separate State programs were
excessive.
    Several national, legal, and local advocacy organizations; private
individuals; and Federal agencies strongly supported the data
collection proposals as appropriate for tracking the effects of welfare
reform and made recommendations for additional elements that they
believed should be added. Likewise, other national organizations,
States, and local public and private entities offered alternative
recommendations. These recommendations included additional MOE
expenditure data; expanded and more specific case closure data;
information on applications approved, denied, and voluntarily
withdrawn; and data to track longer term outcomes of recipients.
    Many commenters provided detailed analysis and review of the NPRM,
including the regulatory text, the preamble language, and the specific
content of the Appendices.
    The overwhelming majority of States objected to the increase in the
number of data elements (in comparison to the number of elements in the
Emergency TANF Data Report); claimed that we had underestimated the
administrative burden and cost of collecting and reporting these data;
and asserted that we lacked statutory authority for these expanded
reporting requirements. They particularly objected to reporting on
participants in separate State programs, the information on closed
cases, and the annual program and performance report. (As discussed
later, we believe that the objections to the case closure data were due
largely to a misunderstanding of our expectations. In the final rule,
we clarify that we are only requiring data for the month of closure,
not longer tracking of former recipients.)
    Almost all comments on the reporting requirements for the separate
State programs found them to be excessively burdensome, contrary to the
intent of the legislation, and inappropriate for some types of MOE
programs. Commenters believed that such reporting requirements would
limit the involvement of community-based organizations in the delivery
of program services and have a chilling effect on State flexibility and
the development of future innovative programs.
    States were also concerned about sample sizes, sampling
requirements, and the standards for ``complete and accurate'' reports
that we proposed to apply in relation to the reporting penalty. A very
few States reported an inability to report many of the specific data
elements proposed in the NPRM based on long-standing problems in
developing their information systems (although all States are reporting
the data required in the Emergency TANF Data Report). Also, some States
reported continuing problems in submitting standardized reports due to
the autonomy of local jurisdictions.

C. Summary of Departmental Response

    We continue to be committed to gathering information that is
critically important in measuring the success of the TANF program and
meeting the statutory requirements for program accountability.
    We have seriously considered all comments and concerns of
commenters in making changes to this rule. We appreciate the
partnership approach many commenters demonstrated in developing their
comments and the careful analysis evident in the extensive and detailed
comments we received. These comments led to numerous refinements in the
requirements that should help reduce burden, while maintaining the
integrity and value of critical data.
    In preparing this final rule, we have worked to ensure that our
rules support the creativity and commitment that States and communities
have shown in supporting families and moving them to work. As a result,
we have accepted many of the recommendations to eliminate or reduce the
burden of reporting, and we have made several substantive changes in
this part. We

[[Page 17858]]

have also modified or expanded a very limited number of data elements.
    We address the specific changes in detail in the section-by-section
discussion below. Briefly, however, we have:
    (1) Provided a phase-in period for the implementation of the data
collection and other requirements; in the interim, the Emergency TANF
Data Report (ETDR) will remain in effect (Sec. 260.40);
    (2) Reduced the total number of data elements in the TANF Data
Report from 178 to 124 and in the SSP-MOE Data Report from 160 to 108.
    (3) Retained the definition of ``family'' for reporting on the TANF
and the separate State programs, but made reporting of some data
elements optional for certain members of the family (Secs. 265.2 and
265.3(e));
    (4) In section one of the TANF Data Report, reduced the number of
and modified some data elements (disaggregated data on TANF recipients,
Appendix A) (Sec. 265.3(b));
    (5) In section two of the TANF Data Report, reduced the number of
data elements; to address a misreading of the NPRM, clarified that we
do not expect States to track closed cases, but only to report data on
the last month of assistance; and modified the data element on reasons
for case closure to include additional break-out items (disaggregated
data on closed cases, Appendix B) (Sec. 265.3(b));
    (6) In section three of the TANF Data Report, reduced the number of
data elements (aggregate data, Appendix C) (Sec. 265.3(b));
    (7) Changed the name of the TANF-MOE Data Report to the SSP-MOE
Data Report to reflect the specific focus of the data collection in
this report and reduced the number of data elements to be reported
(Appendices E through G). Also, as the result of the revised definition
of assistance, reduced the types of separate State programs covered by
the SSP-MOE Data Report (265.3(d));
    (8) In the TANF Financial Report, significantly revised the ACF-196
(the financial reporting form) by adding several categories of
expenditures to reflect our new definition of assistance and modified
the instructions to clarify reporting on expenditure data.
    (9) Dropped the provision that required disaggregated and
aggregated reporting on separate State programs as a condition for
penalty reduction (Sec. 265.3(d));
    (10) Clarified that States have considerable flexibility in
designing their sampling plans (Sec. 265.5);
    (11) Consolidated the annual reporting requirements on program
definitions and State MOE program(s), as proposed in the Addendum to
the fourth quarter TANF Financial Report, in a new Annual Report and
added a number of new reporting requirements on State activities under
the Family Violence Option, State diversion programs, and other program
characteristics (Sec. 265.9);
    (12) Eliminated, as separate reports, the annual program and
performance report, intended to gather additional information for the
Secretary's report to Congress and the fourth quarter Addendum to the
TANF Financial Report; and
    (13) Clarified our policies on issues such as reporting on
noncustodial parents and penalty relief for less than perfect
(``complete and accurate'') reporting (Secs. 265.3(f), 265.7, and
265.8).

D. Section-by-Section Summary of and Response to Comments

Cross-Cutting Issues
    Before we discuss the comments associated with specific sections of
the regulatory text or the Appendices, we want to respond to three
cross-cutting issues.
(a) Phase-in/Transition Period
    Comment: More than 36 States and other commenters recommended a
phase-in period to meet the reporting requirements. Commenters cited
the administrative burden and the time needed to carry out the complex
processes involved, e.g., making changes to State information systems,
training staff, and synthesizing and reporting data with acceptable
levels of confidence. States also saw this task made more difficult in
the context of the need to make their systems Year 2000 (Y2K)
compliant.
    Response: We agree with the need for a phase-in period and have
made the effective date of these and other requirements October 1,
1999. We believe this date gives States an adequate time period for
implementation, in view of the reduced reporting burden and reduced
number of data elements in the final rule, our positive experience with
States in resolving initial data layout and transmission problems, and
the fact that the States have 90 days after the end of the quarter to
submit the data without risk of a penalty.
    Regarding the Y2K compliance issues, we have taken a number of
actions to raise awareness of the problem and respond to questions from
human service providers. For example, we have established an Internet
e-mail address and phone line and a Y2K web page. We have also
distributed information packages to more than 7,000 human service
providers and representative organizations, and we have added a
reasonable cause criterion related to Y2K compliance. This new
criterion provides penalty relief to a State if it can clearly
demonstrate that addressing Y2K issues prevented it from meeting the
reporting requirements for the first two quarters and it reports the
first two quarters of data by June 30, 2000.
    In addition, we encourage States to consider the use of sampling as
a viable option while resolving such issues. There are advantages and
disadvantages to sampling, as detailed in our response to comments
later in this discussion.
    In the interim, the Emergency TANF Data Report (ETDR) will remain
in effect. The last ETDR will be due November 14, 1999. States will
begin reporting data under this final rule beginning with the first
quarter of FY 2000. The first TANF Data and Financial Reports under
these new requirements are due February 14, 2000. See further
discussion regarding the effective date of these rules in the preamble
section relating to Sec. 260.40.
(b) Extent of Reporting Requirements
    As we developed the reporting requirements for the NPRM, we were
conscious of the importance of data for program management purposes as
well as for meeting statutory requirements. At the same time, we also
were conscious of our direct authority to regulate on data collection
and of those sections of the Act that provided the legal basis for the
NPRM.
    Section 417 provides that the Federal government may not ``regulate
the conduct of the States under this part, or enforce any provision of
this part, except to the extent expressly provided in this part.'' We
believed at that time, and still believe, that this language provides
authority to regulate what States must report in light of section
411(a)(7) of the Act. This section provides that,

the Secretary shall prescribe such regulations as may be necessary
to define the data elements with respect to which reports are
required by this subsection * * *

    We believed at that time, and continue to believe, that section
411(a)(7) clearly gives the Department authority to create and define
data elements to administer the law.
    We were conscious of other responsibilities as well. Not only must
we collect the information specified in section 411 of the Act, but the
information must be comparable and reliable in order to make decisions
implementing other provisions of the

[[Page 17859]]

law, e.g., calculating the work participation rates, implementing
penalties, ranking States, and reporting to Congress. We cannot perform
these functions without adequate information. Unless the reported data
meet certain standards, we cannot adequately meet our responsibilities
under the law. Since States are the primary repository and only
realistic source of this information, we must rely on them to supply
the information we need.
    Comment: Despite the inclusion in the NPRM of the Statutory
Reference Tables, which provided the specific statutory citation or
basis for each data element, and our explicit preamble discussion of,
and rationale for, the few data elements not in the statute, there were
a number of comments alleging that we lacked statutory authority to
impose data collection requirements, even for the TANF recipient
population. As evidence of their position, commenters pointed to the
number of data elements in the ETDR (68) compared to the number of
elements in Appendices A-C of the NPRM (178). They variously asserted
that:
    (1) We had statutory authority to collect only the 16 to 18 data
elements in section 411(a)(1)(A);
    (2) We had authority to collect only the data elements in the ETDR;
    (3) We had no authority to add, define, or further specify or
break-out the data elements in section 411(a)(1)(A); and
    (4) It was not within our authority to collect data based on
sections 409 (penalties), 413 (annual rankings of States), or 411(b)
(reports to Congress).
    Many commenters urged us to limit our data collection to the
elements in the ETDR.
    Some commenters did not identify the specific data elements of
concern or the basis for their objection. Also, some did not
distinguish between those data to which the reporting penalty applied
and other data.
    Some commenters rejected collection of any data that would be used
for research and evaluation purposes and argued that the increased
reporting requirements were due to the collection of information the
Department thought it would be ``interesting to know.'' As an
alternative, a few commenters recommended that we develop all reporting
requirements using a collaborative approach that would identify outcome
measures and performance indicators from which the data elements would
then be derived.
    Regarding the proposed annual program and performance report, many
commenters stated that we had merely shifted to States the
responsibility for preparing reports to Congress. They suggested that
we obtain data needed for these reports by means of a national sample
or other mechanism.
    A number of commenters presented objections to the proposed data
collection based on specific administrative and/or programmatic
concerns. The data collection that raised the most concerns was the
proposed reporting of data on closed cases and on participants in
separate State MOE programs. Commenters said that the proposals on MOE
reporting illustrated the distrust that States found throughout the
NPRM and viewed it as an attempt to control State programs.
    Response: We generally disagree with the comments indicating we
lack authority to impose the proposed data collection requirements. The
statute authorizes the Secretary to define the data elements and to
specify the data elements needed to determine work participation rates.
It also specifies that these definitions and data elements be
established under regulations. Therefore, we were not able to include
them in the ETDR. The additional data elements that go beyond the ETDR
reflect our explicit rulemaking authority under section 411(a)(7) of
the Act and the authority implicit in sections 409, 411(b), and 413 of
the Act. We continue to believe that States are the primary source of
the data needed for the report to Congress.
    The ETDR collects only that information that was clearly specified
in the statute. By necessity, it contains a streamlines list of data
elements that we can use in the interim period until final regulations
are in effect. It is not sufficient as a long-term data collection
instrument. For example, it does not provide clear uniform definitions
of data elements and does not include some critical elements, e.g., the
social security number.
    In developing the final rule, we have re-doubled our efforts to
reduce unnecessary reporting burdens on the States and have carefully
reviewed the justification for, and value of, each data element that we
had proposed. Based on that review, and in response to the comments we
received, we have eliminated or streamlined many data elements in the
Appendices published with this final rule. See the chart below and a
further description of the changes we have made in the section-by-
section discussion of Sec. 265.3. We believe this reduced set of data
represents a reasonable balance between the requirements for data, our
statutory authority, and the burden placed on States in providing this
information.

                                   Total Number of Data Elements--Data Reports
----------------------------------------------------------------------------------------------------------------
                              Type of report                                   ETDR         NPRM      Final rule
----------------------------------------------------------------------------------------------------------------
TANF Data Report: Disaggregated data on TANF recipients..................           55          106           76
TANF Data Report: Disaggregated data on closed cases.....................            6           53           30
TANF Data Report: Aggregated data........................................            7           19           18
                                                                          --------------------------------------
    Subtotal.............................................................           68          178          124
----------------------------------------------------------------------------------------------------------------
SSP-MOE Data Report: Disaggregated data on recipients....................  ...........           96           69
SSP-MOE Data Report: Disaggregated data on closed cases..................  ...........           49           27
SSP-MOE Data Report: Aggregated data.....................................  ...........           15           12
                                                                          --------------------------------------
    Subtotal.............................................................  ...........          160          108
                                                                          --------------------------------------
        Total............................................................           68          338          232
----------------------------------------------------------------------------------------------------------------
Note: States must report on these data elements for all persons receiving assistance. Some data elements are
  optional for other persons in the family.


[[Page 17860]]

(c) Publishing the Appendices As a Part of the Rule
    Comment: We received two types of comments on this issue. A few
commenters urged us to publish the specific data elements as a part of
the final rule and to codify them as a part of the Code of Federal
Regulations (CFR). This approach, they believed, would help ensure that
States would not only have early access to the requirements but, once
they were codified, the requirements would be less subject to change,
given the time it takes to revise Federal rules.
    Other commenters urged us to publish the data elements in the
Federal Register at the same time we published the final rule for the
purpose of advance notice to the States of the specific data
requirements, but they did not recommend that they be a part of the
final rule in the CFR.
    Response: We agree with the importance of giving States early
access to the specific data elements and have published seven
appendices, including all data elements and instructions, in today's
Federal Register along with the final rule.
    It was never our intention, however, that these data collection
requirements become a part of the rule itself or be codified in the
CFR. We believe data collection needs may change over time, in part
because the program is a dynamic one and because Congress may modify
the reporting requirements. Therefore, we would want to be able to
respond to those changes as quickly as possible. Since changes in
reporting requirements require Paperwork Reduction Act (PRA) approval,
the public is guaranteed an opportunity to comment on any future
changes to the TANF Data and Financial Reports as a part of the PRA
review process.
Section-by-Section Discussion

Section 265.1--What Does This Part Cover? (Sec. 275.1 of the NPRM)

    This section of the NPRM provided a summary of the contents of this
part. We received no substantive comments on this section apart from
the general objection to the scope and content of the data collection
requirements as a whole.
    However, we have made two changes in this section. First, we have
deleted paragraph (b)(4) of this section to reflect the elimination of
the annual program and performance report. Second, to prevent a
misunderstanding that a major purpose of these data collection
requirements is research, we have deleted the word ``research'' in
paragraph (a) from the term ``section 413 (research and rankings).'' We
had included it in the NPRM to fully describe the content of section
413 of the Act. However, we believe it is misleading to reference
``research'' in this context because our research agenda relies, for
the most part, on other sources of information.

Section 265.2--What Definitions Apply to This Part? (Sec. 275.2 of the
NPRM)

    This section of the NPRM proposed a definition of ``TANF family''
for reporting purposes only and made the definition applicable to both
TANF and MOE programs. Our rationale for proposing a definition for
reporting purposes was the critical importance of developing comparable
data across States, given the fact that, under the TANF statute, a
State may develop and use its own definition of ``eligible family'' for
program purposes.
    In the NPRM, we proposed that information be collected and reported
on all persons receiving TANF assistance plus, for any minor child
receiving assistance, information on any parent(s) or caretaker
relative(s) and minor siblings in the household. We also proposed that
information be reported on any person whose income and resources would
be counted in determining eligibility for, or the amount of,
assistance.
    In the preamble to the NPRM, we explained the importance of
information on these persons in understanding the effects of TANF on
families, the variability among State caseloads, the circumstances that
exist in no-parent families, and the paths by which families avoid
dependence.
    Comments: Two national advocacy organizations supported this
proposal. One commented that ``HHS has appropriately defined ``family''
for purposes of data collection requirements to ensure that differences
in States' definitions of the assistance unit do not make cross-state
comparisons difficult.'' Although commenting on the overall TANF
reporting requirements, another national organization found them
reasonable and within our authority; it urged that they not be
``watered down.''
    On the other hand, many commenters objected to this definition.
Commenters expressed particular objection to our proposal to collect
information on persons outside the assistance unit or persons not
affected by work participation or time-limit requirements. Some
commenters asserted that the definition exceeded our statutory
authority; others found it intrusive and in conflict with a State's
prerogative to define the TANF family. Some States questioned their own
legal authority to collect data on nonrecipients and were concerned
about possible ethical considerations. Others objected on the grounds
of administrative burden, i.e., that such data were not now being
collected on these persons, and it would be both costly and burdensome
to set up ``a duplicate reporting system'' or require a ``massive
modification'' to their present reporting system. One State commented
that it appeared this proposal was for evaluation purposes only and
claimed that States should not be required to use scarce resources for
this purpose.
    Some commenters made specific recommendations that conflicted with
those of other commenters, as follows:
    (1) Allow States to report data based on each State's definition of
TANF family;
    (2) Limit reporting to persons for whom assistance is provided;
    (3) Limit reporting to persons receiving assistance, parents,
caretaker relatives and minor siblings, but do not collect data on
persons whose income or resources are considered in determining
eligibility;
    (4) Collect information on persons receiving assistance and persons
whose income or resources are counted in determining eligibility, but
do not collect information on parents, caretaker relatives, or minor
siblings; or
    (5) Collect only very limited information on persons not receiving
assistance, e.g., information on their relation to the TANF recipient,
but no personal data.
    Response: We considered these comments carefully in attempting to
see how to reduce the reporting burden on States while ensuring that we
obtain the necessary and comparable data to meet the requirements of
the Act. We have taken the following actions in response to commenter
objections:
    First, we retain the definition of ``family'' as proposed in the
NPRM. For editorial purposes, we have dropped the word ``TANF'' from
the proposed term ``TANF family'' in this definition as the term
``family'' is applicable to both the TANF and the separate State
programs. However, we are continuing to use the terms ``TANF family''
and ``State MOE family'' in the respective Data Reports, for clarity.
    We responded earlier in this section of the preamble to comments
that we exceeded our statutory authority in proposing these data
collection requirements, including the definition of ``family'' used
for reporting purposes. We do not agree that, in creating this
definition, we have interfered with a State's prerogative to define
``family'' for program purposes. As we explained in

[[Page 17861]]

the preamble to the NPRM, the statute uses various terms to define
persons receiving benefits and services under the TANF program, e.g.,
eligible families, families receiving assistance, and recipients.
Unlike the AFDC program, there are no persons who must be served under
TANF. Therefore, each State will establish its own definition of
``eligible family.'' These definitions will not be comparable across
States, however, and comparable data are necessary to carry out the
accountability provisions and other objectives of the Act, e.g.,
calculating work participation rates.
    Second, within the definition of family, we retain all the
categories of persons for which we proposed to collect information in
the NPRM. However, in response to the various recommendations for
elimination or reduction in data collection for these categories of
individuals, we have reduced the overall number of data elements and
made the reporting of some data elements for certain categories of
persons optional. (The State must report all data elements on all
persons receiving assistance.) In addition, with the change in the
definition of assistance, the burden associated with this reporting may
be reduced because it will not generally apply to programs that have
traditionally fallen outside the welfare reporting system.
    Again, as we explained in the preamble to the NPRM, we believe that
information on these additional categories of persons is critical to
understanding the effects of TANF on families. For example, we need
information on the parents and caretaker relatives (i.e., any adult
relatives living in the household and caring for minor children, but
not themselves receiving assistance) to understand the circumstances
that exist in child-only cases. We need information on minor siblings
to understand the impact of ``family cap'' provisions. We also need
information on other persons whose income or resources are considered
in order to understand the paths by which families avoid dependency. We
believe that we have addressed commenters' recommendations for reduced
reporting by making many of the data elements optional for these
categories of families.
    We have added paragraph (e) to Sec. 265.3 to reflect this decision
on reporting for other individuals. The Instructions to each Data
Report indicate which data elements are optional for which category of
person(s).
    Comment: In the NPRM, we had proposed that information on the
noncustodial parent (NCP) be reported as a part of a family receiving
TANF assistance since, under the statute, States may serve NCPs only on
that basis. We received a number of comments objecting to, or
requesting clarification of, these reporting requirements.
    Some States agreed that data should be collected on NCPs; others
argued that we lacked statutory authority for this proposal. Some
commenters objected to considering NCPs as a part of an assistance unit
on the grounds that it complicates both data collection and the State's
definition of ``eligible family.''
    They asked for clarification of whether reporting information on
the NCP meant that the NCP was a member of the TANF-eligible family and
if the reporting requirements meant that the family then became a two-
parent family. They also asked for clarification of how reporting on
NCPs would affect the family for the purpose of meeting work
participation or time-limit requirements.
    Some States recommended that information on the NCP be reported
separately (not as a part of a TANF family); others recommended that we
require only an annual aggregated report, e.g., a report containing the
number of NCPs who received assistance and the amount of funds expended
annually on their assistance.
    Response: We believe some clarification of this proposal is needed.
    First, regarding the matter of our legal authority, our
interpretation of the statute is that TANF ``assistance'' may be
provided only to ``eligible families.'' Therefore, States may provide
assistance to NCPs only when they are a member of an eligible family.
In other words, in order to receive assistance or MOE funded services,
the NCP must be associated with an eligible family. We also have the
authority to define ``family'' for reporting purposes pursuant to
section 411(a)(7) of the Act.
    Second, we have added a definition of a NCP in Sec. 260.30. This
definition clarifies that the NCP is a parent of a minor child
receiving assistance who lives in the State and who does not live in
the same household as the child. We adopted this definition based on
section 411(a)(4) of the Act, which requires reporting on NCPs ``living
in the State'' and to distinguish the NCP from a parent who is living
in the household.
    If an NCP is related to children in more than one TANF family, the
State may decide for which ``eligible family'' the NCP data will be
reported. A State should not report information on the NCP in relation
to more than one family.
    Third, we have provided further clarification regarding NCPs by
adding a new paragraph (f) in Sec. 265.3 to specify the three
circumstances when a State must report information on a NCP:
    <bullet> If the NCP is receiving assistance as defined in
Sec. 260.31;
    <bullet> If the NCP is participating in work activities as defined
in section 407(d) of the Act; or
    <bullet> If the NCP has been designated by the State as a member of
a family receiving TANF assistance.
    See Sec. 265.3 for further discussion of this provision.
    Finally, we discuss the questions regarding how the NCP is counted
for work participation rate and time-limit requirements in Secs. 261.24
(work participation) and 264.1 (time limits).

Section 265.3--What Reports Must the State File on a Quarterly Basis?
(Sec. 275.3 of the NPRM)

    In the NPRM, we proposed the specific data collection and reporting
requirements for the TANF program and, under certain circumstances, the
TANF-MOE (separate State MOE) programs. We proposed a quarterly TANF
Data Report, a quarterly TANF-MOE Data Report, and a quarterly TANF
Financial Report, or, as applicable, a Territorial Financial Report. We
also proposed an annual addendum to the fourth quarter TANF Financial
Report that would collect information on the TANF program, such as the
State's definition of work activities, and descriptive information on
the State's MOE program(s) (by cross-reference to Sec. 273.7).
    The NPRM included 11 data-related Appendices. Six of the Appendices
contained all of the proposed disaggregated and aggregated data
elements and the instructions for filing these data. The proposed
reporting requirements applied to families receiving State-funded
assistance and families no longer receiving such assistance in both
TANF and separate State programs. The other Appendices contained the
TANF Financial Report and instructions, sampling specifications, and
three statutory reference tables.
    As noted in the earlier discussion of comments on the extent of the
reporting requirements, we received a mixed reaction to the proposed
data collection requirements. A number of commenters supported our
general approach and recommended the addition of new data elements,
including, for example, requiring States to match participant data with
Unemployment Insurance (UI) data in order to obtain better information
on persons no longer receiving assistance. Many States and commenters
representing State interests,

[[Page 17862]]

however, objected to a large number of the proposed requirements.
    Commenters frequently provided extensive and detailed comments,
including charts and tables as attachments to their letters commenting,
in a parallel manner, on each of the data elements in the Appendices.
We found these comments, particularly those raising programmatic or
administrative concerns, very helpful.
Summary of Changes Made in This Section of the Final Rule
    We have made several substantive changes in this section of rule
and in the data elements in the appropriate Appendices. In making our
decisions, we followed the general principles noted earlier, i.e., to
collect the information required by statute; to carry out our
responsibilities under the statute to assure accountability and measure
success; and to obtain data that are comparable across States and over
time.
    First, we carefully considered each data element in each data
collection instrument. Where possible, we have eliminated, reduced the
number of, or simplified the data elements or the break-outs within the
data elements. In a few instances, we have modified the data collection
instrument to expand a data element. (See the revised TANF Data Report
and the SSP-MOE Data Report in Appendices A through C and E through G.)
We discuss some of the specific changes and deletions below.
    Second, we eliminated the requirement for an Addendum to the fourth
quarter TANF Financial Report, but moved the content of the proposed
Addendum, in paragraph (c)(2) and (c)(3), to Sec. 265.9--the annual
reporting requirements.
    Third, we accepted commenters' recommendations to revise our
approach to and reduce the burden of the TANF-MOE (now the SSP-MOE)
Data Report. We have:
    <bullet> Reduced the types of separate State programs covered by
that report (This was an indirect effect of the changes to the
definition of assistance, at Sec. 260.31);
    <bullet> Retained the requirement for reporting both disaggregated
and aggregate data on recipients of assistance under separate State
programs under certain circumstances, but have reduced the number of
data elements that must be reported;
    <bullet> Deleted the provision that would have denied a State
consideration for a reduction in the penalty for failing to meet the
work participation requirements unless data on separate State programs
was submitted; and
    <bullet> Reduced the SSP-MOE data a State must file if it wishes to
receive a high performance bonus (by eliminating the requirement to
submit section two of the SSP-MOE Data Report, on closed cases). See
Sec. 265.3(d)(1).
    Fourth, based on the general principles above, we have determined
that a State has the option to NOT report some data elements for some
individuals in the family. We specify these optional data elements in
the instructions to the TANF Data Report and the SSP-MOE Data Report.
We have added a new paragraph (e) to Sec. 265.3 to reflect this
provision.
    Fifth, we added new paragraph (f) to specify the three
circumstances when a State must report on a NCP. The three
circumstances are:
    <bullet> When the NCP receives assistance as defined in
Sec. 260.31;
    <bullet> When the NCP participates in work activities, as defined
in section 407(d) of the Act, that are funded with Federal TANF funds
or State MOE funds; this would include work activities that fall under
the definition of ``assistance'' and those that do not; or
    <bullet> When the State has designated the NCP as a member of a
family receiving assistance.
    This latter circumstance addresses those States that wish to
consider the NCP a member of a family receiving assistance in order to
assist the NCP by providing services or other activities that do not
meet the definition of assistance in Sec. 260.31 or the definition of
work activities in Sec. 261.30. We have included a requirement for
reporting on these NCPs in order to obtain data for policy, oversight,
and other purposes.
    Where a State counts the NCP in calculating the work participation
rate, it should reflect its treatment of the family in its coding of
three data elements: ``Type of Family for Work Participation Rate
Purposes, Work Participation Status, and Work Activities.'' We have
added an element in the data instrument to capture such information
about NCPs.
Specific Changes Made in the Data Reports
    The following changes are subject to review and approval under the
Paperwork Reduction Act.
    (a) TANF Data Report--Section One--Disaggregated Data on Families
Receiving Assistance (Appendix A)
    (1) We reduced the number of data elements that must be reported
from 106 in the NPRM to 76 in the final rule. Some of the deleted data
elements include:
    <bullet> Four data elements related to child care--Amount of Child
Care Disregard, Type of Child Care, Total Monthly Cost of Child Care,
and Total Monthly Hours of Child Care Provided During the Reporting
Month; and
    <bullet> Five types of Assistance Provided--Education, Employment
Services, Work Subsidies, Other Supportive Services, and Contributions
to an Individual Development Account.
    Regarding the deleted data elements on child care, in the NPRM, we
proposed to collect information required by the Child Care and
Development Block Grant Program (CCDBG). Upon further analysis of that
statute, we find that the data that must be collected and reported are
aggregate data on the number of child care disregards funded by type of
child care service provider. Thus, we have made the revised collection
of this information a part of the annual report in Sec. 265.9(b)(4).
    (2) We further reduced the reporting burden by revising several
data elements. For example, in the data element on Sanctions, we
deleted the proposed requirement for expenditure data and, in the final
rule, ask for a yes/no response. We also collapsed data elements such
as the Number of Months Countable Toward Federal Time Limits.
    (3) We clarified the definition of ``new applicant'' and clarified
reporting on waivers and noncustodial parents.
    (4) We provided flexibility in permitting States to report some
data elements based either on the reporting month or on the budget
month. However, we require the State to be consistent in reporting
these data.
    In developing the NPRM, we proposed that all data elements be
reported based on the ``reporting month.''
    However, based on a considerable number of comments and a review of
the variation in State practice and State data collection and
processing systems, we concluded that, in some cases, information on
the budget month would be a good proxy for information on the reporting
month. Therefore, the final rule provides that States may report
information on five data elements based on either the reporting month
or the budget month.
    We made this change for data elements that are relatively stable,
e.g., amount of Food Stamp assistance and that otherwise might not be
reflected in the State data systems. We believe that, as long as States
report these data consistently over time, this flexibility in reporting
will not compromise the usefulness of the information. We are
continuing to require that seven data elements (e.g., amount of
assistance) be reported based on the reporting month

[[Page 17863]]

because States will have these data elements on that basis.
    (5) We simplified or modified certain data elements, e.g., Received
Subsidized Housing, Received Food Stamps, Received Subsidized Child
Care, Reasons for and Amount of Assistance, Highest Level of Education
Attained and Highest Degree, and Citizenship/Alienage.
    (6) We revised the data element on Race to comport with the OMB
standard for coding multiple race and ethnic information.
    (7) We added a new data element to identify families converted to
``child-only'' cases and a new data element to identify a family in
which the State provides for the needs of a pregnant woman.
    (8) We made technical and editorial changes, e.g., adding coding
for some data elements to allow for unknown Social Security Numbers,
birth dates, citizenship status, or educational levels; and revised
other data elements such as changing the data element on ``Teen
Parent'' to ``Parent'' in order to more accurately calculate the two-
parent work participation rate.
    (9) As noted in our discussion of Sec. 265.2, the instructions also
give States the option to not report certain data elements for one or
more groups of individuals.
(b) TANF Data Report--Section Two--Disaggregated Data on Closed Cases
(Appendix B)
    (1) We reduced the number of data elements from 53 in the NPRM to
30 in the final rule, in part by combining several data elements.
    (2) We made the same clarifications, modifications, and
simplifications in the data elements in this Appendix as we made for
the corresponding data elements in Appendix A.
    (3) We clarified that States are not expected to track closed cases
in order to collect information on families after the family is no
longer receiving assistance. States should report the case-record
information as of the last month of assistance.
    (4) We re-configured the data element on Reasons for Case Closure
to add a few break-out categories, partly in response to strong
recommendations from commenters. We believe the refinement of these
codes will provide better data and significantly increase our
understanding of the circumstances of recipients who leave assistance,
without increasing the data collection burden.
    We understand that many States already collect detailed reasons for
case closure, although the information varies across States. Some
States are also participating in studies of persons leaving TANF (i.e.,
``leavers' '' studies) which will provide information on the
circumstances of families after they leave TANF.
    In addition, we want to respond more specifically to some
commenters' objections to reporting data based on section 411(b) of the
Act. (We explained in the NPRM that most of the data elements in
Appendix B were based on section 411(b) (annual report to Congress).)
    Section 411(b) is specific in requiring information on ``* * * the
demographic and financial characteristics of families applying for
assistance, families receiving assistance, and families that become
ineligible to receive assistance * * *.''
    As we said earlier in the preamble discussion to this section, we
believe that we have authority to collect data based on section 411(b),
and have designed a data collection procedure for closed cases that
places minimal burden on States by drawing on the information they have
as of the last month the family received assistance. We believe that we
have also responded to commenters' concerns by reviewing each data
element and reducing by almost one-half the number of data elements in
this section of the TANF Data Report.
(c) TANF Data Report--Section Three--Aggregated Data (Appendix C)
    We eliminated one data element in this section of the TANF Data
Report: Total Number of Minor Child Head-of-Households.
(d) SSP-MOE Data Report--Sections One, Two, and Three--Disaggregated
and Aggregated Data (Appendices E, F, and G)
    (1) We reduced the total number of data elements in this report
from 160 in the NPRM to 108 in the final rule.
    (2) Because the data elements in the SSP-MOE Data Report are
similar to the data elements in the TANF Data Report, we incorporated
into this Report the same clarifications, simplifications, and
modifications that we made in the TANF Data Report.
    (3) We deleted the proposed requirement that a State must report
SSP data if it wants to be considered for a reduction in the penalty
for failure to meet work participation requirements.
    (4) The final rule narrows the types of separate State MOE programs
on which States must report disaggregated and aggregated data. If the
State opts to report data on separate State programs, it must report:
    <bullet> Only on separate State programs for which MOE expenditures
are claimed;
    <bullet> Only on those persons served by separate State programs
whose expenditures are claimed as MOE expenditures; and
    <bullet> Only on separate State programs that provide assistance.
(The narrowed definition of assistance at Sec. 260.31 reduces the types
of programs subject to reporting.)
    (5) We reduced the reporting burden in Sec. 265.3(d)(1)(i) by
specifying that, if a State wishes to receive a high performance bonus,
it must file only sections one and three of the SSP-MOE Data Report.
Changes Made in the TANF Financial Report (Appendix D)
    In the NPRM, we proposed to collect TANF expenditure data in the
ACF-196 TANF Financial Report. This reporting form and instructions
were in Appendix D. We also proposed an annual addendum to the fourth
quarter TANF Financial Report.
    As a result of comments received and to clarify some of our
policies, we have made several changes in Sec. 265.3(c) and to the ACF-
196. One substantive change that we made in response to comments was to
delete the requirement that States submit program information as an
annual addendum to the TANF Financial Report. These requirements now
appear in the annual report described at Sec. 265.9.
    We outline the other changes to the ACF-196 TANF Financial Report
below:
    (1) We have modified the instructions to reflect our clarification
about allowable expenditures of carry-over funds and to note the change
in SSBG transfer authority (reducing the maximum transfer of 10 percent
to 4.25 percent, beginning in FY 2001). This latter change was made by
the Transportation Equity Act for the 21st Century, Pub. L. 105-178.
    (2) We have added several categories of expenditures on which
States must separately report--including transportation (Job Access and
other), refundable earned income tax credits, other refundable State
and local credits, activities related to purposes three and four of
TANF, IDA's, and assistance authorized only on the basis of section
404(a)(2) of the Act. For Other Expenditures (Lines 5d, 6e, and 7), we
have asked States to submit footnotes describing what activities are
funded under this category.
    Also, we have shifted work subsidies from the assistance section of
the report to the nonassistance section to reflect our decision to
revise the definition of assistance. We include child care and

[[Page 17864]]

other supportive services in both sections, and we provide for separate
aggregate reporting on transitional services. We have also revised the
instructions substantially so that they more clearly identify how
States would report particular types of expenditures and they provide
some additional guidance on allowable Federal and MOE expenditures.
    In general, the additional reporting is designed to give us better
information on where States are focusing their resources. We will use
this information as part of our strategy to monitor whether
expenditures of Federal and States funds are consistent with the
purposes of the program and to help identify any policy areas or States
that might need further attention. We will also use the data to tell us
more about the nature and scope of both TANF programs and separate
State programs. State plans and the annual reporting will provide some
characteristics information, but the expenditure data are critical for
determining where States are focusing their resources. Thus, the data
on State spending patterns provide valuable supplemental information
about what is happening under welfare reform, and we intend to include
summary information from these reports as part of our discussion of
State program characteristics in the annual report to Congress.
    (3) For State expenditures reported as Administrative Costs in
columns (B) and (C), we have changed the language to clarify that the
15-percent administrative cap applies to the cumulative total of (B)
and (C) rather than separately to MOE and Separate State Programs.
    (4) We have added a statement that States must determine the
administrative costs of contract and subcontracts based on the nature
or function of the contract.
    (5) We have added language to provide that the systems exclusion
for tracking and monitoring purposes applies to MOE expenditures as
well as the TANF grant. (See prior discussion regarding MOE in the
preamble discussion relating to Sec. 263.2.)
    The Territorial Financial Report is under development. We are
sharing a preliminary version of this Report with the Territories and
will be considering their comments before issuing it in final.

Section 265.4--When Are Quarterly Reports Due? (Sec. 275.4 of the NPRM)

    In the NPRM, the language in paragraph (a) of this section
reflected the statutory requirement that quarterly data reports are due
45 days after the end of each quarter.
    In paragraph (b) of the NPRM, we proposed to give States two
options in the timing of the submittal of their TANF-MOE (now SSP-MOE)
Data Report.
    Paragraph (c) of the NPRM proposed the due dates for the State's
initial TANF reports. (Because these are no longer applicable, we have
deleted the content of this paragraph from the final rule.)
    Comment: Two commenters found it confusing to have ``two due dates
for reporting'' in the NPRM. The second due date they referred to was
in Sec. 275.8(d). There, we had proposed that we would not impose a
penalty for late reporting if a State filed its complete and accurate
quarterly report by the end of the quarter immediately following the
quarter for which the data were due. (This is a statutory provision
found in section 409(a)(2)(B) of the Act.)
    Response: For clarity, we have revised the language in paragraphs
(a) and (b). With the new language, it is clearer that the statutory
due date for the penalty is 45 days after the end of the reporting
quarter, but States will not actually incur any penalty liability as
long as they submit their reports by the end of the quarter following
the reporting quarter.
    Although States will incur penalties only if they fail to file
their data by the end of the succeeding quarter, we strongly encourage
States to submit their reports on the due date. This will provide an
opportunity to identify and correct any potential problems or omissions
that could otherwise result in a State penalty.
    We have made two other changes in this section. First, as noted
above, we deleted paragraph (c), as the due dates for the State's
initial TANF reports are no longer applicable. Second, we made minor
editorial changes in paragraph (b) of the NPRM (regarding timing
options for States to submit the SSP-MOE Report) and re-designated it
as a new paragraph (c).

Section 265.5--May States Use Sampling? (Sec. 275.5 of the NPRM)

    Most of the comments on this section of the NPRM raised questions
about the sampling specifications found in Appendix H of the NPRM.
    The statute, in section 411(a)(1)(B)(i), gives States the option of
using scientifically acceptable sampling methods to comply with the
data collection and reporting requirements of section 411(a). Under
section 411(a)(1)(B)(ii), the Secretary must provide the States with
case-record sampling specifications and data collection procedures
necessary to produce statistically valid estimates of the performance
of State TANF programs.
    The NPRM at Sec. 275.5(a) specified the option that States have to
report data based on sampling or to report data on the entire
population (universe) of recipients. In paragraph (a), we also stated
that States could use samples to report only disaggregated, not
aggregated data. In paragraph (b), we proposed a definition of
``scientifically acceptable sampling method.''
    The majority of comments (from more than 25 States and national
State-based organizations) urged us to consider greater flexibility in
the sampling specifications. In general, they recommended that we:
    (1) Eliminate the monthly sample size requirements because they
would restrict the State's flexibility provided under the statute;
    (2) Allow smaller sample sizes, particularly for smaller States;
    (3) Permit States to file some information using sampling and other
information using universe reporting; and
    (4) Allow States to use alternative sampling methodologies when
they can demonstrate that other methods produce equally valid samples.
    We disagree with the recommendations to eliminate the monthly
sample size requirement but, as discussed below, we have clarified the
flexibility States have in designing their sampling plans. We discuss
these and other recommendations in the response to comments below.
    Comment: Two commenters asked us to confirm that a State can submit
universe data if a State does not have enough cases to meet the sample
size requirements, e.g., the State does not have 600 two-parent
families in its caseload (This was explicitly stated in the
instructions to the ETDR, but was not included in the NPRM.)
    Response: In the NPRM, we proposed an annual sample size of 600
two-parent families, i.e., an average monthly sample size of 50 two-
parent families. We confirm that, if a State has less than 50 two-
parent families for a month, the State must report data on all such
families.
    Comment: In recommending changes to sample sizes, several
commenters (i.e., about 10 States) stated that the sample sizes
proposed in the NPRM (3,000 annual cases for active cases and 800
annual cases for closed cases for both the TANF and separate State
programs) were far in excess of the sample size of 1200 cases that we
allowed many States to use under the AFDC-Quality Control (QC) system.
The

[[Page 17865]]

proposed sample sizes, they believed, would result in a dramatic
increase in State data collection workload. For some States, the sample
size would equal or exceed the entire caseload.
    Commenters also questioned the significance of using the same
sample size for large States as for smaller States. Some commenters
also objected to the two-parent sample size (600 cases) because two-
parent families were a very small percentage of their caseload.
    Commenters recommended an overall reduction in sample sizes and/or
the use of a finite correction factor that would take into account the
size of the caseload in smaller States.
    Response: First, in response to the question of the smaller sample
size permitted for the AFDC-QC data collection, we believe the
differences in these two programs dictate larger sample sizes. The
nature of the programs are different and the purpose for which the data
are collected is also different.
    Under the AFDC program, States had much less flexibility; the major
purpose of data collection was focused on determining payment accuracy
and charting national trends. Under the TANF program, States have
greatly increased flexibility, and data collection is critically
important for monitoring and measuring program accountability and
program performance.
    Second, we agree that a finite population correction factor may be
useful, particularly to States with small TANF populations. Thus, we
will incorporate this provision in the TANF Sampling Manual.
    Third, the recommendations to reduce sample sizes raised more
difficult and serious issues. We considered all comments very carefully
in evaluating the possible effects of various sample size options. On
balance, we are retaining the sample sizes proposed in the NPRM for the
reasons discussed below.
    In the NPRM (Appendix H, Sampling Specifications), we proposed the
following annual minimum required sample sizes:
    (1) For families receiving TANF assistance, 3000 families, of which
600 (approximately 25 percent) must be newly approved applicants.
    (2) Of the 2400 families that have been receiving TANF assistance,
600 (approximately 25 percent) must be two-parent families.
    (3) For families no longer receiving TANF assistance (closed
cases), the minimum required sample size is 800 families.
    (4) The same sample sizes apply to families receiving assistance
and families no longer receiving assistance under separate State
programs.
    Clearly, reduced sample sizes would increase State flexibility and
reduce reporting burden; on the other hand, reduced sample sizes will
also reduce the precision of and provide less reliable data for
computing State work participation rates.
    As we stated in the NPRM, these sample sizes will provide
reasonably precise estimates for the overall (i.e., the all-family) and
the two-parent work participation rates. The overall rate has a
precision of about plus or minus two percentage points at a 95-percent
confidence level. The two-parent rate has a precision of about 2.3
percentage points at a 95-percent confidence level. (We could have
improved the precision of the two-parent rate to plus or minus two
percentage points with an annual sample size of 800 families.) We
believe this precision is important to States as the basis for the
computation of reliable work participation rates.
    In addition, we believe the larger sample sizes are needed to
monitor State TANF programs and to enable us to answer key questions of
concern to both the Administration and Congress. As we discussed in an
earlier section of the preamble, the Secretary is responsible for
discerning what is happening at the State level to sub-groups for which
we have monitoring responsibility or a major interest, such as child-
only cases, sanctioned cases, and immigrants. For example, under a
reduced sample size, we would not be able to detect an increase in the
percentage of child-only cases until the increase is quite substantial.
States could attribute smaller increases to sampling variation.
    Furthermore, a smaller sample size hampers our ability to explore
the underlying causes of any detected trends. For example, in addition
to tracking child-only cases, we might wish to investigate changes in
the number of such cases with sanctioned adults in the household. Under
the sample sizes proposed in the NPRM, we might be able to study about
150 such families. Using smaller sample sizes, we would be less
confident in drawing conclusions based on correspondingly smaller
numbers.
    We believe that the specific burden and cost of reporting will be
different for each State depending on multiple factors. Initial
decisions a State must make concern whether to enter the TANF and the
SSP-MOE data elements into the State's automated management information
system, whether to report these data on a sampling basis, or whether to
use a combination of both mechanisms.
    For some States, it may be more efficient to automate all data
reporting, particularly those States that choose to report universe
data. (Currently, 30 States report universe data in their ETDR.)
Clearly, as States move to an automated data collection system, the
cost and burden of data collection will decline.
    For other States, sampling will be the most practicable, efficient,
and feasible method. For example, under the sampling specifications in
the sampling manual to be issued, the State would select one/twelfth of
the minimum annual required sample each month, i.e., approximately 250
cases. (One-twelfth of 3000 is 250.)
    Comment: Several commenters also expressed concern that the scope
of the proposed data collection was particularly burdensome in light of
the changes needed to make State information systems Y2K compliant.
They contended that, since States had limited system personnel
resources, they could not effectively manage Y2K efforts and major
modifications of their systems as a result of final TANF data
collection rules at the same time.
    Response: Where Y2K problems exist, we suggest that States consider
the sampling option in reporting TANF data. (The TANF statute at
section 411 provides States with the option of furnishing the
disaggregated TANF data via sample. The NPRM provided sampling
specifications, and we will be issuing a sampling manual providing
States with detailed options.)
    With respect to Y2K issues, in general, sampling offers both
advantages and disadvantages. On the one hand, the use of samples
provides better data (i.e., data that are more readily verified) and
uses fewer State and Federal resources. On the other hand, sampled data
does not allow States or the Department to track individuals over time.
It also does not provide the same precise information on population
subgroups within a State, such as child-only cases, or allow matching
of TANF recipient data with WtW recipient data. If States use a sample,
along with the pc-based software we provide for the creation of their
transmission files, they will not need to make major system changes
while they work on Y2K problems. In this instance, the use of samples
has a number of advantages for a State:
    (1) It can devote different personnel resources to conducting
samples than to working on the Y2K effort.
    (2) It can limit its data collection efforts to the cases or
individuals in the sample; it would not have to collect new

[[Page 17866]]

information from the entire caseload that it may not find useful or
relevant.
    (3) Sample information may be more current.
    (4) Using a sample, it could extract required information that is
already in its computer files and manually collect additional
information.
    (5) After solving its Y2K problems, a State could reassess whether
reporting on a sample basis is still in its best interest.
    Even though sampling might make it easier for States to implement
the new reporting requirements, we recognize that: (1) the effective
date of new reporting requirements comes at a particularly inopportune
time for States that have not fully resolved their Y2K issues; and (2)
the first responsibility of States is to ensure that their automated
systems are capable of maintaining benefits to their neediest citizens.
Thus, we have added an additional criterion for reasonable cause at
Sec. 262.5(b)(1) related to this issue. Under this new provision,
States that miss the deadlines for submitting complete and accurate
data for the first two quarters of FY 2000 will receive reasonable
cause if: (1) they can clearly demonstrate that their failure was
attributable to Y2K compliance activities; and (2) they submit the
required data by July 1, 2000.
    Comment: Several commenters recommended that States be permitted to
report some data based on sampling and other data based on universe
data. One State described its TANF program as made up of sub-programs;
it wanted the option of reporting sample data on some sub-programs and
universe data on others.
    However, two States said that we should not allow States to ``mix
sample and universe reporting.'' They believed that, in order for data
to be meaningful for evaluating policy or performance, States had to
use a single method of reporting.
    Response: We have decided not to allow a State to submit some
disaggregated data based on universe reporting and other data based on
sampled information because we do not believe it would be feasible. Not
only would it be difficult to analyze such data at the Federal level,
it would also be impossible to set up a systematic procedure for
estimating totals, proportions, averages, etc., across States.
Depending on how fractured the State's reporting is, such mixed
reporting might even make within-State estimates impossible. Each data
element could have its own weight rather than a weight being associated
at the case level.
    In addition, States were not in agreement as to what data would be
reported on a sample basis and what data would be reported on a 100-
percent basis.
    Comment: Two States asked us to clarify whether a State could
propose the use of an alternate sampling plan as long as it met
precision requirements. One State asked for directions on how we will
approve the State's sampling methodology.
    A few commenters recommended that we allow alternative sampling
methodologies when a State could demonstrate that other methods produce
equally valid samples. One State, for example, described and
recommended approval of a longitudinal sampling design and a rolling-
panel design currently in use in its State.
    Response: In Appendix H of the NPRM, ``Sampling Specifications,''
we proposed to give States a substantial amount of flexibility in
designing sampling plans. In general, we proposed that monthly cross-
sectional probability samples be used. Within this broad class of
sampling designs, States would have considerable flexibility to
formulate their plans. We also suggested that simple random sampling or
systematic random sampling design would be easier to implement.
However, we did not propose to require that States use one of these
designs. We will issue a sampling manual that will incorporate Appendix
H, reflect the other decisions in the final rule, and describe, in more
detail, the sampling specifications and requirements for States that
opt to report based on samples of TANF families and families in
separate State programs. Under this TANF Sampling Manual, States will
be free to propose other designs for our consideration, as long as
their designs reflect cross-sectional monthly probability sampling. We
need such samples to calculate monthly work participation rates. We
will publish the Sampling Manual in the Federal Register and submit it
for approval under the Paperwork Reduction Act.
    We have added a new paragraph (c) to this section to advise States
that they will find the sampling specifications and procedures that
they must use in the TANF Sampling Manual.
    We reject the specific proposal that we allow longitudinal or
rolling-panel designs, primarily because these designs are
inappropriate for measuring the work participation rate. These types of
study designs predict or reveal the composition of future samples.
Thus, a State would know its sample cases for future months and could
concentrate on boosting the participation rates of sample cases. In
this instance, the sample would no longer be representative of the
caseload as a whole and a bias in the resulting estimates would occur.
As noted earlier in this discussion, States will be free to propose
other sample designs as long as the designs meet cross-sectional
monthly probability sampling criteria.
    Comment: One commenter recommended that we count sample cases as
long as States have sufficient data to satisfy core elements for work
participation calculations and make other responses optional.
    Response: If a State opts to collect and report data for a sample
of families receiving TANF assistance, it must report all section
411(a) data on all families selected into the sample. When samples are
used to make estimates about the universe from which the sample was
selected, each sample unit has valuable information to contribute to
the estimate.
    Comment: Two commenters objected to item #4 in the sampling
specifications, which proposed that States must submit a monthly list
of selected sample cases within 10 days of selection. They stated that
this requirement was not in the statute, and it was burdensome on
States. They recommended that each State keep a record of the cases
pulled and provide a reason for dropping cases, if this occurs.
    Response: We need the list of selected cases to ensure that we
receive data for all selected cases for each reporting month (i.e.,
that there are no missing cases). Furthermore, States need such a list
for control of their sample. This reporting is not a new requirement;
States previously provided such a listing under the AFDC-QC system.
    Comment: Two commenters questioned a provision in Sec. 272.3(b)(2)
of the NPRM, dealing with ``How will we determine if a State is subject
to a penalty?'' This paragraph proposed to prohibit a State from
revising its sampling frames or program designations for cases
retroactively.
    Response: In constructing the sample frame for the reporting month,
States must include all families that received assistance for the
reporting month through the end of the month. Once the State constructs
its frame and selects its sample cases, it would be improper to allow
it to redesignate a TANF case as a SSP-MOE case, for example. However,
if a family in a sample did not receive assistance for the reporting
month, the State would use code (2)--``Listed in error'' under the
Disposition data element.
    Comment: One State commented on sampling and stratification
concerns

[[Page 17867]]

and recommended that States be allowed different sampling schemes based
on local conditions, e.g., different sample sizes for the different
monthly strata. It claimed that the proposed sampling specifications
effectively created a de facto stratification by month. However, it
believed that States gained no advantage by the stratification. Its
recommendation, it believed, would be especially helpful for States
using monthly samples and would help with work flow and data processing
issues.
    Response: States have considerable flexibility in designing their
sampling plans, including designing strata to accommodate local
conditions. Within that flexibility, however, the sampling
specifications require that a State select about one-twelfth of the
minimum annual sample size each month in the fiscal year. (One-twelfth
of 3000 is about 250 families.) This minimum size is important in order
to ensure an adequate number of families for calculating a monthly work
participation rate, as required by statute.
    Comment: One commenter stated that there is no reason, in theory or
logic, to assume that systemic random sampling is as good or better
than simple random sampling. (The sampling specifications in the NPRM
suggested that the former was the preferred approach.)
    Response: We had suggested systematic random sampling in the NPRM
because most States had used that method in selecting samples for the
AFDC-QC program. However, we agree that simple random sampling is an
acceptable method for selecting the State's TANF and MOE samples. There
are a wide variety of methods that could be used to select monthly
samples. These methods include both simple random sampling and
stratified random sampling.
    Comment: One State suggested that we work with States to develop a
more workable approach to sampling. For example, they suggested that it
might be useful to permit States to oversample in the first two months
of the quarter and undersample in the third month, given the strict
requirements for the submission of timely data.
    Response: Annual participation rates are based on monthly work
participation rate samples. To assure a reliable annual work
participation rate, we believe that the samples for each month need to
be sufficiently large to calculate a reasonably precise monthly
estimate. Therefore, we believe it is reasonable to require States to
select \1/12\th of its sample each month. Months in which a sample is
relatively small (i.e., less than \1/12\th the annual required sample
size), adversely impact the calculation of the annual work
participation rate.
    Comment: Two commenters appeared to believe (although we had not
specified this in the NPRM) that it was permissible to report aggregate
data by sampling, and one commenter recommended that we permit this.
    Response: The statute at section 411(a)(1)(B) refers to sampling
for disaggregated case-record information. It does not provide specific
authority to sample aggregate data. Based on the comments, however, we
have determined that it would be appropriate to allow sampling for some
aggregate nonexpenditure data elements. (Expenditure data is never
reported based on sampling.) We have amended paragraph (a) of this
section to reflect this option. We also indicate in the instructions to
section three of the TANF Data Report (Appendix C) and section three of
the SSP-MOE Data Report (Appendix G) those data elements that may be
reported based on sampling.

Section 265.6--Must States File Reports Electronically? (Sec. 275.6 of
the NPRM)

    The NPRM proposed to require that States file all quarterly reports
electronically, based on format specifications that we would provide.
    Comment: We received comments from States and national
organizations on this provision.
    Several commenters expressed general support for the proposed
requirement (e.g., saying ``the law does not expressly require
electronic reporting, but it will greatly facilitate the analysis of
data.''), and most States that commented believed that they had the
capacity to report electronically.
    However, some expressed concern that circumstances might occur that
would prevent a State from reporting electronically in a timely manner
or would prevent electronic reporting of some, but not all, data. They
recommended that the final rule allow alternative reporting methods and
give States the flexibility to report data in whatever format is
feasible for them, given the varying levels of automation. In addition,
a few States commented that they had problems with the current
electronic reporting process and software.
    Response: As we said in the NPRM, State representatives supported
electronic submission of both recipient and financial data in our pre-
NPRM external consultation meetings, and we believe all States have
electronic reporting capability (as evidenced by their use of
electronic reporting under previous programs). We continue to believe
that electronic submission of reports will reduce paperwork and
administrative costs, be less expensive and time consuming, and be more
efficient for both the States and the Federal government.
    We would take into account any catastrophic events or one-time-only
circumstances that prevented a State from filing its reports
electronically, on a timely basis, but we see no reason to change the
final rule or give States general authority to submit reports in a
variety of formats.
    If a State has initial problems in using the reporting processes
and software that we will make available, we are committed to working
with the State to resolve these problems.
    Comment: A few States pointed out that there was no basis in the
statute for the electronic reporting requirement. One State recommended
that we delete the provision from the rule and issue instructional
material separate from the regulations.
    Response: We agree that this requirement does not appear in the
statute. However, for the reasons stated above, we believe that it will
not be an onerous administrative requirement, is programmatically
justified, and is within our authority to regulate. Therefore, we have
made no change in Sec. 265.6.
    Comment: One commenter asked what efforts are underway to ensure
compatibility of the proposed software with the many different systems
States are using.
    Response: As a part of the ETDR, we provided States with a data
reporting system, including file layout and transmission
specifications. States with a variety of systems and file structures
were able to provide the specified data in the format required. We plan
to modify this system to capture the data required in the final rule.
States will be able to enter data and create transmission files using
our pc-based software. It incorporates a free-form capability to help
prevent any future system incompatibility problems.

Section 265.7--How Will We Determine If the State Is Meeting the
Quarterly Reporting Requirements? (Sec. 275.7 of the NPRM)

          and

Section 265.8--Under What Circumstances Will We Take Action To Impose a
Reporting Penalty for Failure To Submit Quarterly and Annual Reports?
(Sec. 275.8 of the NPRM)

    We are discussing these two sections together because, as the
commenters

[[Page 17868]]

pointed out, the proposed penalty provisions in Sec. 275.8 were tied,
in part, to the definition of a ``complete and accurate report'' in
Sec. 275.7 of the NPRM.
    Section 409(a)(2)(A) of the Act provides that the grant of any
State that fails to report data under section 411(a) of the Act within
45 days following the end of the fiscal quarter shall be reduced by
four percent. However, in accordance with section 409(a)(2)(B), we
would not apply this penalty if the State submits the report by the end
of the quarter following the quarter for which the data were due. The
statute does not specifically address ``complete and accurate.'' We
have used these terms to clarify for States what is required in order
for a State to be considered to have filed the report required by
section 411(a) of the Act.
How Will We Determine if the State Is Meeting a Reporting Requirement?
(Sec. 275.7 of the NPRM)
    In this section of the NPRM, we proposed definitions of what would
constitute a ``complete and accurate report'' for disaggregated data
reports, aggregated data reports, and financial reports, i.e., the TANF
Data Report, the TANF-MOE Data Report (now known as the SSP-MOE Data
Report), and the TANF Financial Report (and, as applicable, the
Territorial Financial Report). We also proposed to review State data to
determine if the data met these standards and to use audits and reviews
to verify the accuracy of the data filed. We reminded States of the
need to maintain records to support all reports filed.
    The proposed definition of ``complete and accurate'' was a
stringent one. In simple terms, it meant that States must report all
elements for all families (or all sample families) with no arithmetical
errors or inconsistencies. We proposed to use this definition as a
standard against which we would determine if the State was subject to a
reporting penalty. For example, we proposed that the data reported to
us must accurately reflect the information available to the State; be
free from computational errors and internally consistent; be reported
for all elements (e.g., no missing data); be provided for all families
(universe data) or for all families selected as a part of the sample;
and, where estimates are necessary, reflect reasonable methods used by
the State to develop its estimates.
    We based these proposals on the critical importance of the data and
the multiple purposes that the data would serve--the most important of
which is meeting the accountability requirements of the statute. We
also referred to problems in obtaining complete and accurate data under
previous programs and specifically requested additional comments and
suggestions on ways to help assure better data, without creating an
undue burden on States.
    Most of the comments on this issue came from States and national
advocacy organizations. Many said that the definition of ``complete and
accurate'' was too restrictive; it would be difficult for States to
meet both the ``timely'' and the ``complete and accurate''
requirements; 100 percent error-free reporting was unfair (in view of
the severe penalty provision) and unrealistic (based on past
experience); and the final rule should allow States both a reasonable
margin of error and an opportunity to correct or revise their data in
appropriate circumstances.
Under What Conditions Will a State Be Subject to a Reporting Penalty
for Failure To Submit Quarterly Reports? (Sec. 275.8 of the NPRM)
    In this section of the NPRM, we described the circumstances and
conditions under which we would impose a reporting penalty.
    We proposed that we would impose the penalty if a State did not
file the reports on a timely basis (a statutory requirement) and if the
data in the TANF Data Reports and the TANF Financial Reports were not
complete and accurate. We specified, however, that the penalty would
not apply in several situations:
    (1) It would not apply to the TANF-MOE (now the SSP-MOE) Data
Report or to the annual program and performance report; and
    (2) It would not apply to all data elements.
    For example, for disaggregated data on TANF recipients, it would
apply only to the data elements in section 411(a) (other than section
411(a)(1)(A)(xii)) and to the nine data elements necessary to carry out
a data collection system. For aggregated data, it would apply only to
the data elements in section 411(a), the data elements necessary to
carry out a data collection system, and those elements necessary to
verify and validate the disaggregated data.
    We did not specify each step of the penalty process but referred
readers to Secs. 272.4 through 272.6 of this chapter (now Secs. 262.4
through 262.6 of this chapter).
    Many commenters appeared to believe that all data elements in all
data and financial reports were subject to a penalty and that one
missing data element in any one of these reports would trigger an
automatic penalty. Others questioned the Secretary's authority to
``penalize States for data not required in the statute.'' Still others
appeared to be unaware of the penalty process, e.g., consideration of
reasonable cause, submittal of a State's corrective compliance plan,
and reduction or recision of the penalty under certain circumstances.
    We agree that the language of the NPRM did not provide for
flexibility or exceptions. Our intent in proposing these two sections
was to define a performance standard for all reports. In addition to
the statutory requirement for a timely report, the definition of
``complete and accurate'' would constitute the standard against which
we would review the reports submitted; work with States to resolve
problems; and, if necessary, move through the steps of the penalty
process.
    We envision several steps in an implementation process that would
lead to full compliance with the data collection and reporting
requirements.
    (a) Step one: Initial implementation.
    In the final rule, we have reduced the overall reporting
requirements, including the number of data elements, and we have
delayed the effective date of the rule to give States additional time
to adjust to these reporting requirements. Once States begin to
transmit the data specified in the final rule, we anticipate a
temporary transition period to work out any problems, but we would hold
States to the complete and accurate standard. For example, if States
report their data within 45 days of the end of the quarter, as the
statute requires, we could have the opportunity to resolve any data
problems before the end of the quarter. Thus, submittal by the 45-day
deadline could reduce the risk of penalty action against the State.
    We would continue the same partnership approach with States that is
currently in place to resolve problems that have occurred in the
transmission of the ETDR data. We are referring here to nonrecurring
and nonsystemic problems such as inadvertent errors, missing data
elements, occasional technical glitches, and isolated or unintentional
errors.
    In addition, we would not prohibit a State from re-transmitting
corrected elements in their Data or Financial reports, both during or
after a reporting period, as long as retransmission does not become a
habitual practice.
    (b) Step two: On-going operation.
    In this step, all States are able to transmit successfully, and
most are able to transmit the data generally without errors. We would
continue to hold to the complete and accurate standard and