# Child Support Enforcement Program; Incentive Payments, Audit Penalties > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A00-32702 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** December 27, 2000 - **Citation:** 65 FR 82178 ## Text DEPARTMENT OF HEALTH AND HUMAN SERVICES Administration for Children and Families 45 CFR Parts 302, 304 and 305 RIN 0970-AB85 Child Support Enforcement Program; Incentive Payments, Audit Penalties AGENCY: Office of Child Support Enforcement (OCSE), HHS. ACTION: Final rule. SUMMARY: This final rule implements the statutory requirement of the Social Security Act that requires the Secretary of Health and Human Services to establish the new performance-based incentive system. It also implements a performance-based penalty system and establishes standards for certain types of audits. Finally, this rule includes a requirement that States establish an administrative review process. The incentive system will be used to reward States for their performance in running a Child Support Enforcement (IV-D) Program. The penalty system will be used to penalize States that fail to perform at acceptable levels or fail to submit complete and reliable data. EFFECTIVE DATE: The final rule is effective: December 27, 2000. Section 304.12 is effective through September 30, 2001. FOR FURTHER INFORMATION CONTACT: Joyce Pitts, OCSE Division of Policy and Planning, (202) 401-5374. Hearing impaired individuals may call the Federal Dual Party Relay Service at 800-877-8339 between 8:00 a.m. and 7:00 p.m. eastern time. SUPPLEMENTARY INFORMATION: I. Statutory and Regulatory Authority These regulations implement sections 409(a)(8), 452(a)(4) and (g), and 458A of the Social Security Act (Act), as added by the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, Pub. L. 104-193, (PRWORA), by the Child Support Performance and Incentive Act of 1998, Pub. L. 105-200, and as amended by the Balanced Budget Act of 1997, Pub. L. 105-33 and the Consolidated Appropriations Act of FY 2000, Pub. L. 106-113. These regulations are also issued under the authority granted to the Secretary of Health and Human Services (the Secretary) by section 1102 of the Act, 42 U.S.C. 1302. Section 1102 of the Act authorizes the Secretary to publish regulations that may be necessary for the efficient administration of the functions for which the Secretary is responsible under the Act. II. Background A. The National Strategic Plan The Government Performance and Results Act of 1993 required Federal programs to set goals and measure results by establishing strategic plans. OCSE and State partners developed a National Child Support Enforcement Strategic Plan by consensus with a vision, mission, goals and objectives. The plan includes three major goals for the child support program—that all children have paternity established, all children in the program have financial and medical support orders established, and all children in the program receive financial and medical support from both parents. After development of the National Child Support Enforcement Strategic Plan, States and OCSE worked together to develop specific performance indicators that could be used to measure the program's success in achieving the goals and objectives. It was this Strategic Plan and its performance measures that the States and OCSE used to recommend a performance-based incentive funding system to reward States for results. The Plan's array of performance measures was reviewed and the key indicators for the major activities of the child support enforcement program were selected. The Strategic Plan measures and the incentive measures for paternity establishment, support order establishment, collections on current support and cost-effectiveness are the same. The only deviation from the plan was the measure for collections on past-due support. State and Federal partners rejected the Strategic Plan measure that would provide an arrearage collection rate because there is a wide variation in how States' laws affect arrearages. State and Federal partners concluded that the only workable measure that would level the playing field among States in this important area was one based on the number of cases that were paying on arrears. After the incentive funding proposals were developed, State and Federal partners further collaborated to recommend a system of performance penalties for States. They returned to the Strategic Plan and the recommended incentive funding system that was being considered for legislation. The partners focused on those key measures of the program's performance which had been recommended for incentives and chose a subset of the incentive measures for application of financial penalties. These were the incentive measures which were given a greater weight in the computation of the incentive formula—paternity establishment, order establishment and the collection of current support. The Strategic Plan was also the basis for shaping a revision of the child support data reporting and collection systems and the role of the Federal audit process. This implements key structures that have been shaped and guided by the Strategic Plan and these structures will, in turn, help achieve outcomes that fulfill the goals and objectives of the Plan itself. B. Issues and Activities Leading to the New Incentive Provisions Under section 458 of title IV-D of the Act, States are paid a minimum of six percent of their collections in TANF cases and six percent of their non-TANF collections as an incentive. Under this system, there is also the potential to earn up to 10 percent of collections based on the State's cost-effectiveness in running a child support program. However, the amount of non-TANF incentives is capped at 115 percent of the TANF incentive earned. This incentive system has been questioned for focusing on only one aspect of the IV-D program—Cost-effectiveness. In addition, since all States receive the minimum incentive amount of six percent of collections regardless of performance, this system was not regarded as having a real incentive effect. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) required the Secretary, in consultation with State IV-D Program Directors, to recommend to Congress a new incentive funding system for State IV-D programs based on program performance. The Incentive Funding Workgroup recommended a new incentive funding system based on the foundation of the National Strategic Plan. The Secretary fully endorsed the incentive formula recommendations and made recommendations to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate. Most of the recommendations were included in Pub. L. 105-200, the Child Support Performance and Incentive Act of 1998. This rule implements that legislation. The legislative language is very explicit. Therefore, we are for the most part adopting the statutory language in this rule. C. Audit and Penalties Prior to enactment of PRWORA, the Federal statute at former section 452(a)(4) of the Act required periodic, comprehensive Federal audits of State IV-D programs to ensure substantial compliance with all Federal IV-D requirements. If the audit found that the State program was not in substantial compliance and if the deficiencies identified in an audit were not corrected, States faced a mandatory fiscal penalty of between 1 and 5 percent of the Federal share of the State's title IV-A program funding under section 403(h) of the Act. Once an audit determined compliance with identified deficiencies, the penalty was lifted or ceased. Such a detailed, process-oriented audit was time-consuming and labor-intensive for both Federal auditors and the States. In addition, audit findings did not measure current State performance or current program requirements because of delays and the time it took to conduct audits. States contended that the audits focused too much on administrative procedures and processes rather than performance outcome and results. Section 452(a)(4) of the Act, as amended by PRWORA, changed the Federal audit process to focus on measuring performance and program results, instead of process. Subsequently, as part of technical amendments to PRWORA, the penalty provision under section 409(a)(8) of the Act was modified to conform to the new audit approach under the IV-D program. The new approach to measuring program results changes the Federal audit focus to determining the reliability of program data used to measure performance and requires States to conduct self-reviews, similar to the former Federal process audits, to assess whether or not all required IV-D services are being provided. In addition, Federal auditors will conduct periodic financial and other audits, as necessary. The penalty system in this rule replaces the previous penalty under former section 403(h) of the Act that focused on substantial compliance with prescriptive Federal IV-D requirements. However, section 452(a)(4)(C)(iii) provides for audits for such other purposes as the Secretary may find necessary and section 409(a)(8) provides for a penalty “on the basis of the results of an audit. * * *” The assessment of data reliability by Federal auditors is a critical aspect of assuring that both incentives and penalties are based on accurate and reliable State-reported data. State-reported statistical and financial data taken from reporting forms, the OCSE-157, the OCSE-34A, and the OCSE-396A, will be audited for completeness and reliability and will be used in determining State performance levels. State-reported data that is determined to be incomplete or unreliable may cause reductions in the State's funding under the IV-A (Temporary Assistance for Needy Families) program and will result in loss of Federal incentive payments under the IV-D program. While the specifics of performance measures for penalty purposes, with the exception of the Paternity Establishment Percentage (PEP) under section 452(g) of the Act, are left to the discretion of the Secretary, the approach to assessing penalties in this regulation takes into consideration the results of work done by State and Federal partners during the development of the National Strategic Plan and the proposal for incentive measures, as well as consultations with a wide variety of other interested parties. III. Description of Regulatory Provisions—Incentives and Administrative Review This final rule does not have many changes from the notice of proposed rule making published in the Federal Register on October 8, 1999 (64 FR 55073). However, we considered each comment and made some changes. The administrative complaint procedure was revised and clarified; a standard was added to the definition of data reliability; a deadline was established for having final incentive data to OCSE; and the incentive and reinvestment base-year calculation examples were removed. Parts 302, 303 and 304—State Plan Requirements, Standards for Program Operations, and Federal Financial Participation The cross-references to existing regulations mentioned in this Description of Regulatory Provisions are as amended by the Interim Final Conforming Rule (64 FR 6237) published in the Federal Register February 9, 1999. Sections302.55 and 304.12—Regulations for Existing Incentives Process. Currently, under section 454(22) of the Act and 45 CFR 302.55, the only restriction on the use of incentive funds awarded to the State is that States must share incentives earned with any political subdivision that shares in funding the administrative cost of the program. The requirement to share funds with political subdivisions is not being changed. Therefore, we are adding reference to the new part 305 in § 302.55 by adding the words “and part 305” after “§ 304.12”. Current 45 CFR 304.12(b)(1), as revised on February 9, 1999 at 64 FR 6237, based on section 458 of the Act, computes incentive payments for States for a fiscal year as a percentage of the State's TANF collections, and a percentage of its non-TANF collections. The percentages are determined separately for TANF and non-TANF portions of the incentive. The percentages are based on the ratio of the State's TANF collections to the State's total administrative costs and the State's non-TANF collections to the State's total administrative costs. This is known as a State's cost-effectiveness ratio. The portion of the incentive payment paid to a State in recognition of its non-TANF collections is limited to 115 percent of the portion of the incentive payment paid in recognition of its TANF collections. HHS estimates the total incentive payment that each State will receive for the upcoming fiscal year. Each State includes one-quarter of the estimated total payment in its quarterly collection report that will reduce the amount that would otherwise be paid to the Federal government. Following the end of the fiscal year, HHS calculates the actual incentive payment the State should have received. If adjustments to the estimated amount are necessary, an additional positive or negative title IV-D grant award is issued. Under section 201(f) of the Child Support Performance and Incentive Act of 1998, effective October 1, 2001, current section 458 of the Act will be repealed and section 458A of the Act, will be redesignated as section 458. To implement this statutory provision, we added a new paragraph (d) to § 304.12 under which § 304.12 in its entirety becomes obsolete on October 1, 2001. A new paragraph (e) is also added to reflect the phase-in of the new incentive system as prescribed under section 201(b) of the Child Support Performance and Incentive Act. In fiscal year 2000, the amount of incentives paid under § 304.12 will be reduced by one-third. In fiscal year 2001, the amount of incentives paid under § 304.12 will be reduced by two-thirds. Section 303.35—Administrative complaint procedure We have shifted to using an outcome-oriented approach to child support enforcement program accountability and responsibility. This approach, much of which was adopted under PRWORA, seeks to balance the Federal government's oversight responsibility with States' responsibilities for child support service delivery and fiscal accountability. One element of the approach, adopted partially in PRWORA and being implemented by these final regulations, is the focus on results-oriented performance measures for incentives and penalties purposes. A second aspect of the approach replaces statutory and regulatory Federal audit requirements with States' responsibility for ensuring that their programs meet IV-D requirements. The requirement for periodic State self-reviews, intended for management purposes to identify and resolve deficiencies in case processing, was also adopted under PRWORA as a State plan requirement at section 454(15)(A) of the Act. Procedures for State self-reviews are being implemented under a separate rulemaking. Although Federal funding of administrative review processes has long been considered an allowable expenditure under the IV-D program, we believe it to be a key element to any IV-D program. In the era of our focus on program results, we believe it appropriate to ensure that these administrative complaint processes are available to recipients of IV-D services. Using the authority under section 1102 of the Act to publish regulations that the Secretary deems necessary for the efficient administration of the IV-D program, we have added a section to part 303 requiring States to provide for an administrative review. Under § 303.35, entitled Administrative Complaint Procedure, each State must have a procedure in place to allow individuals receiving IV-D services the opportunity to request a review of their cases when there is evidence that an action should have been taken on their cases. In addition, the State must have procedures in place, notify individuals of the procedures, and make them available to recipients of IV-D services to use when requesting a review, and use them for notifying recipients of the results of the review and any actions taken. This final rule revises § 303.35 as it appeared in the notice of proposed rulemaking published in the Federal Register on October 8, 1999 (64 FR 55073). These changes were made to balance our concern for efficient IV-D service provision with our commitment to allowing States discretion and flexibility in program design. We believe that recipients of IV-D services, through administrative complaint procedures, should be able to lodge complaints when they have evidence to support specific concerns in their cases. However, we have revised the regulatory language to address concerns that the proposed language was overly broad and open to multiple interpretations. In addition, we have included language to require States to notify individuals of the availability of administrative complaint procedures. Part 305—Program Performance Measures, Standards, Financial Incentives, and Penalties We added a new part 305 to implement the new incentive system under section 458A of the Act and certain audit and penalty provisions found in sections 409(a)(8), 452(a)(4)(C) and 452(g) of the Act. Former part 305 was revoked on February 9, 1999 at 64 FR 6237. Section 305.0 Scope. Section 305.0, Scope, explains what part 305 covers, including the statutory basis for the incentive and penalty systems and a general description of the contents of part 305. Section 305.1 contains definitions and § 305.2 contains performance measures. Sections 305.31 through § 305.36 of part 305 describe the incentive system. Sections 305.40 through § 305.42 and §§ 305.60 through § 305.66 describe the grounds for penalties under section 409(a)(8) of the Act, the procedures for imposing penalties, the types of audits, and set forth the standards for substantial compliance audits and certain audit procedures. Section 305.1 Definitions. Under § 305.1, Definitions, the definitions found in § 301.1 of program regulations also apply to part 305. In addition, for purposes of part 305, § 305.1 defines the following terms: Under paragraph (a), the term IV-D case means a parent (mother, father, or putative father) who is now or eventually may be obligated under law for the support of a child or children receiving services under the title IV-D program. A parent is a separate IV-D case for each family with a dependent child or children that the parent may be obligated to support. If both parents are absent and liable or potentially liable for support of a child or children receiving services under the IV-D program, each parent is considered a separate IV-D case. In counting cases for the purposes of this part, States may exclude cases closed under § 303.11 and cases over which the State has no jurisdiction. Lack of jurisdiction cases are those in which a non-custodial parent resides in the civil jurisdictional boundaries of another country or Federally recognized Indian Tribe and no income or assets of this individual are located or derived from outside that jurisdiction, and the State has no other means through which to enforce the order. The definition of a IV-D case in § 305.1 implements the requirement in section 458A(e) that the Secretary include in regulations directions for excluding from the incentive calculations certain closed cases and cases over which the States do not have jurisdiction. The definition itself is used in required Federal report forms and defines which cases may be excluded for purposes of calculating incentives, namely, IV-D cases meeting the conditions for case closure under § 303.11 and cases over which the State has no jurisdiction. This definition assures that workable cases are counted while those cases in which there is no possible action by the IV-D agency will be discounted. It is essential that we use consistent definitions for all data and therefore, the definitions in § 305.1 apply equally for incentives and penalties purposes. Under paragraph (b), the term Current Assistance collections means collections received and distributed on behalf of individuals whose rights to support are required to be assigned to the State under title IV-A (TANF or Aid to Families with Dependent Children, AFDC), IV-E (Foster Care), or XIX (Medicaid) of the Act. In addition, a referral to the State's IV-D agency must have been made. Current Assistance collections do not include collections received and distributed under the Tribal TANF program because the statute includes only those collections where there is an assignment to the State. Tribal TANF recipients are not required by statute to assign their support rights. Thus, it is inappropriate to include collections relative to Tribal TANF programs in this definition. Under paragraph (c), the term Former Assistance collections means collections received and distributed on behalf of individuals whose rights to support were formerly required to be assigned to the State under either title IV-A, title IV-E, or title XIX of the Act. Under paragraph (d), the term Never Assistance/Other collections means all other collections received and distributed on behalf of individuals who are receiving child support enforcement services under title IV-D of the Act. The definitions of various categories of collections above reflect categories of collections described in section 458A(b)(5)(C) of the Act and used to calculate the State's collections base used for computing incentives. Current Assistance and Former Assistance collections are multiplied by 2 and added to Never Assistance/Other collections to determine the State's collections base. Under paragraph (e), the term total IV-D dollars expended means total IV-D administrative expenditures claimed by a State in a specified fiscal year adjusted in accordance with § 305.32. Section 305.32, addressed later, includes specific expenditures that are excluded when calculating a State's total IV-D administrative expenditures for calculation of the cost-effectiveness performance measure. The term Consumer Price Index or CPI in paragraph (f) is taken from the definition in section 458A(b)(2)(B) of the Act, and means the last Consumer Price Index for all-urban consumers published by the Department of Labor. The CPI for a fiscal year is the average of the Consumer Price Index for the 12-month period ending on September 30 of the fiscal year. Under paragraph (g), the term State incentive payment share for a fiscal year means the incentive base amount for the State for the fiscal year divided by the sum of the incentive base amounts for all of the States for the fiscal year. This definition is found in section 458A(b)(3) of the Act. Under paragraph (h), the term State incentive base amount for a fiscal year means the sum of the State's performance level percentages (determined in accordance with § 305.33) multiplied by the State's corresponding maximum incentive base amount for each of the following measures: (1) The paternity establishment performance level; (2) the support order performance level; (3) the current collections performance level; (4) the arrears collection performance level; and (5) the cost-effectiveness performance level. This definition is found in section 458A(b)(4) of the Act. Under paragraph (i), the term reliable data means the most recent data available which are found by the Secretary to be reliable for purposes of computing the paternity establishment percentage. This definition is based on section 452(g)(2)(C) of the Act and includes further elaboration of the circumstances under which the Secretary will consider data to be reliable. In the final rule, we have added that data for computing each of the measures must be found to be sufficiently complete and error free to be convincing for their purpose and context. For purposes of incentives and penalties, data must meet a 95 percent standard of reliability beginning in fiscal year 2001. The 95 percent rate was selected based on generally accepted accounting principles used by the auditing community and our experience from data reliability audits conducted to date on State systems. This standard is consistent with the recognition that “data may contain errors as long as they are not of a magnitude that would cause a reasonable person, aware of the errors, to doubt a finding or conclusion made based on the data.” Part of this definition is lifted verbatim from Chapter 1, Introduction of the U.S. General Accounting Office, Office of Policy Booklet (Standards) entitled, Assessing the Reliability of Computer-Processed Data , dated September 1990. The official designation of this booklet is GAO/OP-8.1.3. The Government Auditing Standards—generally referred to as the “Yellow Book”—provide the standards and requirements for financial and performance audits. A key standard covers the steps to be taken when relying on computer-based evidence. This booklet from the GAO, Office of Policy is intended to help auditors meet the Yellow Book standard for ensuring that computer-based data are reliable. Under paragraph (j), the term complete means all reporting elements from OCSE reporting forms that are necessary to compute a State's performance levels, incentive base amount, and maximum incentive base amount have been provided within the timeframes established in instructions to these reporting forms and § 305.32(f). We believe the definitions in (i) and (j) are appropriate for purposes of Part 305 since State IV-D programs are required to have comprehensive statewide automated systems in place by October 1, 2000 which, under section 454A(c) of the Act, must enable the Secretary to determine the incentive payments and penalty adjustments required by sections 452(g) and 458 of the Act. In addition, under section 454(15)(A), States must have a process of extracting from the automated data processing system and transmitting to the Secretary, data and calculations concerning the levels of accomplishment and rates of improvement with respect to the applicable performance indicators for purposes of sections 452(g) and 458 of the Act. Finally, Federal auditors are required under section 452(a)(4)(C)(i) of the Act to conduct audits to assess the completeness, reliability, and security of the data, and the accuracy of the reporting systems used in calculating performance indicators. These provisions, taken together, require a clear, accepted and supportable definition of reliable data. Section 305.2 Performance measures This section describes the performance measures that will be used in the incentive and penalty systems. Paragraph (a) of § 305.2, Performance measures, indicates the child support incentive system will measure State performance levels in five areas: (1) Paternity establishment; (2) child support order establishment (cases with orders); (3) collections on current support; (4) collections on arrears; and (5) cost-effectiveness. It also requires that the penalty system measure State performance in three of these areas: (1) Paternity establishment; (2) child support order establishment; and (3) collections on current support. Paragraph (a)(1), Paternity Establishment Performance Level, reflects the explicit statutory language in section 458A(b)(6)(A)(i) of the Act, which gives States the choice of being evaluated on one of two measures—the IV-D or the statewide paternity establishment percentage (commonly known as the PEP), discussed in detail later. The statute and the paragraph provide that the count of children shall not include any child who is a dependent by reason of the death of a parent (unless paternity is established for that child). It also shall not include any child with respect to whom there is a finding of good cause for refusing to cooperate with the State agency in establishing paternity, or for whom the appropriate State agency determines it is against the best interest of the child to pursue paternity issues. The IV-D paternity establishment percentage and statewide paternity establishment percentage definitions that follow are contained in paragraphs (a)(1)(i) and (ii) and are set forth in sections 452(g)(2)(A) and (B) of the Act: IV-D Paternity Establishment Percentage means the ratio that the total number of children in the IV-D caseload in the fiscal year (or, at the option of the State, as of the end of the fiscal year) who have been born out-of-wedlock and for whom paternity has been established or acknowledged, bears to the total number of children in the IV-D caseload as of the end of the preceding fiscal year who were born out-of-wedlock. The equation to compute the measure is as follows (expressed as a percent): ER27DE00.039 Statewide Paternity Establishment Percentage is the ratio that the total number of minor children who have been born out-of-wedlock and for whom paternity has been established or acknowledged during the fiscal year, bears to the total number of children born out-of-wedlock during the preceding fiscal year. The equation to compute the measure is as follows (expressed as a percent): ER27DE00.040 The second performance measure contained in § 305.2(a)(2), Support Order Performance Level, requires a determination of whether or not there is a support order for each case. The equation to compute the measure is as follows (expressed as a percent): ER27DE00.041 While the performance measure is defined in section 458A(b)(6)(B)(i) of the Act, paragraph (a)(2) provides guidance as to which orders are counted for calculation of performance measures. The performance measure in paragraph (a)(3) is Current Collections Performance Level. It measures the amount of current support collected as compared to the total amount owed. Current support is money applied to current support obligations and does not include payment plans for payment towards arrears. Voluntary collections must be included in both the numerator and the denominator. This measure will be computed monthly and the total of all months reported at the end of the year. The equation to compute the measure will be as follows (expressed as a percent): ER27DE00.042 As with the other performance measures, this measure derives from section 458A(b)(6) of the Act. Finally, as provided under section 458A(c) of the Act, support collected by one State at the request of another State will be treated as having been collected in full by both States. Section 458A(b)(6)(D)(i) of the Act sets forth the arrearage collection performance level included in § 305.2(a)(4) Arrearage Collection Performance Level. This measure will include those cases where all of the past-due child support was disbursed to the family, or all of the past due child support was retained by the State because all the past due child support was assigned to the State. If some of the past due child support was assigned to the State and some was owed to the family, only those cases where some of the support actually was disbursed to the family will be included. The equation to compute the measure will be as follows (expressed as a percent): ER27DE00.043 This measure, unlike the current collections measure, counts cases with child support arrearage collections, rather than the percentage of arrearages collected. The final performance measure, reflecting section 458A(b)(6)(E)(i) of the Act, appears at paragraph (a)(5) Cost-Effectiveness Performance Level. This measure compares the total amount of IV-D collections for the fiscal year to the total amount of IV-D expenditures the fiscal year. The equation to compute this measure is as follows (expressed as a ratio): ER27DE00.044 This indicator provides a basic cost-benefit analysis of a child support enforcement program. As provided under section 458A(c) of the Act, collections by one State at the request of another State will be counted as having been collected in full by both States and any amounts expended by a State in carrying out a special project under section 455(e) of the Act will be excluded. (Section 305.32 lists monies that are excluded when determining total dollars expended, such as fees collected from individuals, recovered costs and program income.) Under § 305.2(b), as specified in section 458A(b)(5) of the Act for incentive purposes, the five performance measures will be weighted in the following manner. Each State will earn five scores based on performance on each of the five measures. The first three measures (paternity establishment, order establishment, and current collections) percentage scores earn a maximum of 100 percent of the collections base as defined in § 305.31(d). The last two measures (collections on arrears and cost-effectiveness) earn a maximum of 75 percent of the collections base as defined in § 305.31(d). The weighting provision was recommended by State and Federal partners and included in the Secretary's report to Congress as an essential aspect of the incentive system, placing extra emphasis on getting support to families each and every month. Section 305.31 Amount of incentive payment. Under paragraph (a) of § 305.31 (which addresses the contents of section 458A(b) of the Act), the incentive payment for a State for a fiscal year is equal to the incentive payment pool for the fiscal year, multiplied by the State incentive payment share for the fiscal year. As specified in section 458A(b)(2) of the Act, paragraph (b) defines the incentive payment pool as: (1) $422,000,000 for fiscal year 2000; (2) $429,000,000 for fiscal year 2001; (3) $450,000,000 for fiscal year 2002; (4) $461,000,000 for fiscal year 2003; (5) $454,000,000 for fiscal year 2004; (6) $446,000,000 for fiscal year 2005; (7) $458,000,000 for fiscal year 2006; (8) $471,000,000 for fiscal year 2007; (9) $483,000,000 for fiscal year 2008; and (10) For any succeeding fiscal year, the amount of the incentive payment pool for the fiscal year that precedes such succeeding fiscal year multiplied by the percentage (if any) by which the CPI for such preceding fiscal year exceeds the CPI for the second preceding fiscal year. In other words, for each fiscal year following fiscal year 2008, the incentive payment pool will be multiplied by the percentage increase in the CPI between the two preceding years. For example, for fiscal year 2009, if the CPI increases by 1 percent between fiscal years 2007 and 2008, then the incentive pool for fiscal year 2009 will be a 1 percent increase over the $483,000,000 incentive payment pool for fiscal year 2008, or $487,830,000. Paragraph (c) defines, in accordance with section 458A(b)(3) of the Act, the State incentive payment share for a fiscal year to be the incentive base amount for the State for the fiscal year divided by the sum of the incentive base amounts for all of the States for the fiscal year. Under paragraph (d), a State's maximum incentive base amount for a fiscal year is the combined sum of: the State's collections base for the fiscal year for each of the paternity establishment, support order, and current collections performance measures; and 75 percent of the State's collections base for the fiscal year for the arrearage payment and cost-effectiveness performance measures. This is specified in section 458A(b)(5) of the Act. Under paragraph (e), a State's maximum incentive base amount for a fiscal year is zero, unless a Federal audit performed under § 305.60 (described later in this preamble) determines that the data which the State submitted for the fiscal year and which will be used to determine the performance levels involved are complete and reliable. This provision is required by section 458A(b)(5)(B) of the Act. It is essential to ensure the integrity of the incentive system and the timeliness of the determinations. States are accountable for providing reliable data on a timely basis or they receive no incentives. This determination will be made using data submitted no later than the end of the first quarter of the next fiscal year (i.e. December 31). This deadline is needed so each State's data can be audited promptly during the first part of the following year to determine reliability and completeness. Allowing updates, corrections, and adjustments during that period would impede our ability to make final incentive determinations, and would result in continuing adjustment of the amount of the incentives payable to all States. Finally, under paragraph (f), a State's collections base for a fiscal year, as provided in section 458A(b)(5)(C) of the Act, is equal to: 2 times the sum of the total amount of support collected for Current Assistance cases plus two times the total amount of support collected in Former Assistance cases, plus the total amount of support collected in all other cases during the fiscal year, that is: 2 (Current Assistance collections + Former Assistance collections) + all other collections. This double-weighting of collections in Current Assistance and Former Assistance cases when calculating the collection base is another key component of the new incentives system. As with the emphasis placed on the current collections performance measure to ensure consistent and timely support to families, the calculation of the State's collection base also emphasizes the goal of helping families become and remain self-sufficient. Under the current incentive system, States lose incentives when families leave the State assistance rolls because collections in non-assistance cases are capped at 115 percent of collections in assistance cases. However, under section 458A of the Act and these regulations, collections in Former Assistance cases, as well as collections in Current Assistance cases will count double, while collections in all other cases (often seen as requiring less work by IV-D programs) will only be counted once. We note that Current Assistance cases do not include cases in which assistance is paid under a Tribal TANF program because the statutory language covers only cases where an assignment to the State is required by the Act. Tribal TANF cases have no such required assignment to the State. Tribal TANF cases will be included in Former Assistance cases to the extent that the individuals formerly were required to assign support rights to the State. Section 305.32 Requirements applicable to calculations Section 305.32 establishes certain special provisions applicable to calculating the amount of incentives and penalties. Some are derived from current incentive rules and practice and some are based on explicit rules in section 458A of the Act. They are also applied to penalty calculations because we are using the same measures. Under this section the following conditions apply: Section 305.32(a) specifies that each measure will be based on data relating to the Federal fiscal year (FY). The Federal fiscal year runs from October 1st of one year through September 30th of the following year. This is consistent with current practice and reference to the fiscal year in section 458A of the Act. Section 302.32(b) specifies that only collections disbursed or retained, as applicable, and only those expenditures made by the State, in the fiscal year will be used to determine the incentive payment payable for that fiscal year. This is consistent with the way collections have always been counted on Federal reporting forms. Section 305.32(c) specifies that support collected by one State at the request of another State will be treated as having been collected in full by each State. Required by section 458A(c) of the Act, this maintains the same practice that exists under the current incentive system under section 458 of the Act for the new incentive system. Section 305.32(d) specifies that amounts expended by the State in carrying out a special project under section 455(e) of the Act will be excluded from the State's total IV-D dollars expended in computing incentive payments. This implements section 458A(c) of the Act, and also appears in section 458 of the Act. Section 305.32(e) specifies that fees paid by individuals, recovered costs, and program income, such as interest earned on collections, will be deducted from total IV-D dollars expended. This is consistent with § 304.12(b)(4)(iii) which is applicable to the current incentive system under section 458 and the requirement under § 304.50 that States exclude from quarterly expenditure claims an amount equal to all fees, interest and other income earned from services provided under the State IV-D plan. Section 305.32(f) specifies that States are required to submit data used to determine incentives following instructions and formats required by HHS and on Office of Management and Budget (OMB) approved reporting instruments, and sets December 31st of each calendar year as the final deadline for the submittal of State data for a fiscal year. It includes any necessary data from the previous fiscal year needed to calculate the paternity establishment percentage or any improvements over that fiscal year's performance necessary to earn incentives or avoid penalties for the current fiscal year. This is consistent with the requirement in § 302.15 under which States must maintain statistical, fiscal and other records necessary for reporting and accountability required by the Secretary and make such reports in the form and containing information the Secretary requires. Data submitted as of December 31st will be used to determine the State's performance for the prior fiscal year and the amount of incentive payments due the States. We encourage States to have the capacity to make reports ( e.g., year-to-date, previous quarter) available before the end of the reporting year so that we may conduct audits to determine data reliability and completeness earlier. By doing so, States will maximize their opportunity to correct any deficiencies before the end of the reporting year or, at least, by the end of the succeeding fiscal year which the statute allows for the State to take corrective action . A cut-off point is necessary for us to make the required performance determinations and calculations on a timely basis. Section 305.33 Determination of applicable percentages based on performance levels. This section sets forth the explicit requirements in section 458A(b)(6) of the Act for determining the applicable percentages used to calculate incentives based on a State's performance levels in the five performance measures. Paternity Establishment Percentage Under paragraph (a), a State's paternity establishment performance level for a fiscal year will be, at the option of the State, the IV-D paternity establishment percentage or the Statewide paternity establishment percentage determined under § 305.2 of this part. The applicable percentage for each level of a State's paternity establishment performance is set forth in table 1, except as provided in paragraph (b). Under paragraph (b), if the State's paternity establishment performance level for a fiscal year is less than 50 percent, but exceeds its paternity establishment performance level for the immediately preceding fiscal year by at least 10 percentage points, then the State's applicable percentage for the paternity establishment performance level is 50 percent. Support Order Under paragraph (c), a State's support order performance level for a fiscal year is the percentage of the total number of IV-D cases where there is a support order determined under § 305.2 and § 305.32. The applicable percentage for each level of a State's support order performance can be found on table 1, except as provided in paragraph (d). Under paragraph (d), if the State's support order performance level for a fiscal year is less than 50 percent, but exceeds the State's support order performance level for the immediately preceding fiscal year by at least 5 percentage points, then the State's applicable percentage is 50 percent. Table 1.—Use this table to determine the maximum incentive levels for the paternity establishment and support order performance measures. If the Paternity Establishment or Support Order Performance Level Is: At least: (percent) But less than: (percent) The applicable percentage is: 80 100 79 80 98 78 79 96 77 78 94 76 77 92 75 76 90 74 75 88 73 74 86 72 73 84 71 72 82 70 71 80 69 70 79 68 69 78 67 68 77 66 67 76 65 66 75 64 65 74 63 64 73 62 63 72 61 62 71 60 61 70 59 60 69 58 59 68 57 58 67 56 57 66 55 56 65 54 55 64 53 54 63 52 53 62 51 52 61 50 51 60 0 50 0 Current Support Collections Under paragraph (e), a State's current collections performance level for a fiscal year is equal to the total amount of current support collected during the fiscal year divided by the total amount of current support owed during the fiscal year in all IV-D cases, as determined under §§ 305.2 and 305.32. The applicable percentage with respect to a State's current collections performance level can be found on table 2, except as provided in paragraph (f). Under paragraph (f), if the State's current collections performance level for a fiscal year is less than 40 percent but exceeds the current collections performance level of the State for the immediately preceding fiscal year by at least 5 percentage points, then the State's applicable percentage is 50 percent. Arrearage Collections Under paragraph (g), a State's arrearage collections performance level for a fiscal year is equal to the total number of eligible IV-D cases in which payments of past-due child support were received and disbursed during the fiscal year, divided by the total number of IV-D cases in which there was past-due child support owed, as determined under §§ 305.2 and 305.32. The applicable percentage with respect to a State's arrearage collections performance level can be found on table 2, except as provided in paragraph (h). Under paragraph (h), if the State's arrearage collections performance level for a fiscal year is less than 40 percent but exceeds the arrearage collections performance level for the immediately preceding fiscal year by at least 5 percentage points, then the State's applicable percentage is 50 percent. Table 2.—If the Current Collections or Arrearage Collections Performance Level Is: (Use this table to determine the maximum incentive levels for the current and arrearage support collections performance measures.) At least: (percent) But less than: (percent) The applicable percentage is 80 100 79 80 98 78 79 96 77 78 94 76 77 92 75 76 90 74 75 88 73 74 86 72 73 84 71 72 82 70 71 80 69 70 79 68 69 78 67 68 77 66 67 76 65 66 75 64 65 74 63 64 73 62 63 72 61 62 71 60 61 70 59 60 69 58 59 68 57 58 67 56 57 66 55 56 65 54 55 64 53 54 63 52 53 62 51 52 61 50 51 60 49 50 59 48 49 58 47 48 57 46 47 56 45 46 55 44 45 54 43 55 53 42 43 52 41 42 51 40 41 50 0 40 0 Under paragraph (i), a State's cost-effectiveness performance level for a fiscal year is equal to the total amount of IV-D support collected and disbursed or retained, as applicable during the fiscal year, divided by the total amount expended during the fiscal year, as determined under §§ 305.2 and 305.32. The applicable percentage with respect to a State's cost-effectiveness performance level can be found on ­table 3. Table 3.—If the Cost-Effectiveness Performance Level Is: (Use this table to determine the maximum incentive level for the cost-effectiveness performance measure.) At least: But less than: The applicable (percent) 5.00 100 4.50 4.99 90 4.00 4.50 80 3.50 4.00 70 3.00 3.50 60 2.50 3.00 50 2.00 2.50 40 0.00 2.00 0 Because of the complexity of the incentives formula set forth in section 458A of the Act and implemented by these regulations, we have included an example of how the system will work in a particular year for State A: Let's make the following assumptions regarding State A (See table A): • State A's paternity performance level is 54 percent, making its applicable percent 64 percent (see table 1) • State A's order establishment performance level is 79 percent, making its applicable percent 98 percent (see table 1) • State A's current support collections performance level is 41 percent, making its applicable percent 51 percent (see table 2) • State A's arrearage support collections performance level is 40 percent, making its applicable percent 50 percent (see table 2) • State A's cost-effectiveness ratio is 3.00, making its applicable percent 60 percent (see table 3) • State A's collections base is $50 million (determined by 2 times the collections for Current Assistance and Former Assistance cases plus collections for other cases) • The maximum incentive is: —$32 million collections base for paternity ($50 mil. times 0.64), plus —$49 million collections base for orders ($50 mil. times 0.98), plus —$25.5 million collections base for current collections ($50 mil. times 0.51), plus —$18.8 million collections base for arrearage collections ($50 million times 0.75 times 0.50) plus —$22.5 million collections base for cost-effectiveness ($50 million times 0.75 times 0.60) equals —Resulting in a maximum incentive base amount of $147.8 million for ­State A. Table A Measure State A's performance level Applicable percent based on performance (percent) Weight State A's collection base (assumed to be $50.0 million) Paternity establishment 54% 64 1.00 $32.0 million. Order establishment 79% 98 1.00 $49.0 million. Current collections 41% 51 1.00 $25.5 million. Arrearage collections 40% 50 0.75 $18.8 million. Cost-effectiveness $3.00 60 0.75 $22.5 million. State A's maximum incentive base amount $147.8 million. • We must now make some assumptions regarding the other States. Let's assume that there are only two other States in our country—and the maximum incentive base amount is $84 million for State B and $50 million for State C, making the total maximum incentive base amount $281.8 million for all three States (See table B). • We must now determine what State A's share of the $281.8 million is. It is 52 percent ($147.8 divided by $281.8) Table B State Maximum incentive base amounts State's share of $281.8 million Incentive payment pool $422 million (in millions) A $147.8 0.52 $219.4 B 84.0 0.30 126.6 C 50.0 0.18 76.0 Totals 281.8 1.00 422.0 • Let us assume the incentive payment pool for the FY is $422 million. • Since State A's share is 0.52, this State has earned 52 percent of the $422 million incentive payment pool that Congress is allowing, or $219.4 ($422 mil. times 0.52) million incentive payment for this particular fiscal year. Section 305.34 Payment of Incentives Section 458A(d) of the Act includes administrative provisions for estimating and paying incentives. Section 305.34 implements those provisions. Under paragraph (a), each State must claim/include one-fourth of its estimated annual incentive payment on each of its four quarterly expenditure reports for a fiscal year. When combined with the other amounts reported on each of the State's four quarterly expenditure reports, the portion of the annual estimated incentive payment as reported each quarter will be included in the calculation of the next quarterly grant awarded to the State under title IV-D of the Act. Under paragraph (b), following the end of each fiscal year, HHS will calculate the State's annual incentive payment, using the actual collection and expenditure data and the performance data submitted by the State and other States for that fiscal year. To determine the final incentive amounts, OCSE will first audit State-reported data submitted by December 31, or if a data reliability audit has already been performed during that fiscal year, OCSE will confirm that no system's or other changes have occurred in the interim which may have affected the data reliability. A determination of reliability will be made. Because data reliability audits may have to be conducted for some States which did not take advantage of the opportunity for such audits to be conducted during the performance year, final calculation of the State's incentive award will be made in August using actual data and performance levels of the State and other States, factoring in any determinations of incomplete or unreliable data as provided in paragraph (c). Based on this calculation, a positive or negative grant will be awarded to each State under title IV-D of the Act to reconcile the actual annual incentive payment that for a fiscal year with the incentive payment estimated by the State during that year. We are encouraging states to be conservative in their estimates during the phase-in years for the new incentive system. This will decrease the likelihood that HHS will have to make large negative adjustments. Under paragraph (c), payment of incentives is contingent on a State's data being determined reliable data by Federal auditors, consistent with the requirement for complete and reliable data set forth in section 458A(b)(5)(B) of the Act. Section 305.35 Reinvestment Section 458A(f) of the Act requires a State to use incentive payments to supplement and not supplant other funds used by the State in its IV-D program, or otherwise with approval of the Secretary. Under § 305.35, which implements this requirement, paragraph (a) requires a State to expend the full amount of incentive payments received under the IV-D program to supplement, and not supplant other funds used by the States to carry out IV-D program activities; or funds for other activities approved by the Secretary which may contribute to improving the effectiveness or efficiency of the State's IV-D program, including cost-effective contracts with local agencies, whether or not the expenditures for the activity are eligible for reimbursement under title IV-D of the Act. Under paragraph (b), in those States in which incentive payments are passed through to political subdivisions or localities, in accordance with section 454(22) of the Act and § 302.55, such payments must be used in accordance with this section. Under paragraph (c), State IV-D expenditures may not be reduced as a result of the receipt and reinvestment of incentive payments. In order to determine if incentive payments are used to supplement rather than supplant other amounts used by the State to fund the IV-D program, a base year level of program expenditures is necessary. Therefore, under paragraph (d), a base amount will be determined by subtracting the amount of actual incentives paid to the State which was reinvested in the IV-D program for fiscal year 1998 from the total amount expended by the State in the IV-D program during the same period. The rule also allows States, in the alternative, to use the average of the previous three fiscal years (1996, 1997, and 1998) as a base amount. This base amount of State spending will have to be maintained in future years. Incentive payments under this part are to be used in addition to, and not in lieu of, the base amount. We selected fiscal year 1998 rather than fiscal year 1999 because we believe that the total for fiscal year 1999 may not be available until some time in fiscal year 2000 and we want States to know what their base amount that must be maintained is in advance of receiving any incentive payments under section 458A. Additionally, we allow the States the alternative of computing a 3-year average. We used this alternative because we believe it might more closely approximate the amount a State has been spending on its IV-D program and will not give undue weight to any extraordinary or non-recurring expenditures that the State may have made in fiscal year 1998. Based on comments from the proposed regulation, we eliminated the proposed examples under paragraph (e) and revised the language in paragraph (d) to clarify when incentive payments would be subtracted from FY 1998 expenditures. Most commenters found that the examples added an element of confusion to the base year calculation. Under paragraph (f), that has been redesignated as the new paragraph (e), requests for approval of expending incentives on activities not currently eligible for funding under the IV-D program, but which would benefit the IV-D program (e.g., work programs for noncustodial parents), must be submitted in accordance with instructions issued by the Commissioner of the Office of Child Support Enforcement. We will develop and disseminate by Action Transmittal instructions for States seeking approval to expend incentives on activities that would benefit the IV-D program. Section 305.36 Incentive Phase-In Section 201(b) of the Child Support Performance and Incentive Act of 1998 establishes a transition period which phases in the new incentives system under section 458A of the Act. Under § 305.36, the incentive system under part 305 will be phased-in over a three-year period during which both the current system and the new system will be used to determine the amount a State will receive. For fiscal year 2000, a State will receive two-thirds of what it would have received under the incentive formula set forth in § 304.12, and one-third of what it would have received under the formula set forth under part 305. In fiscal year 2001, a State would receive one-third of what it would have received under the incentive formula set forth under § 304.12 and two-thirds of what it would have received under the formula under part 305. In fiscal year 2002, the formula set forth under part 305 will be fully implemented and will be used to determine all incentive amounts. V. Description of Regulatory Provisions—Penalties and Audit Former Audit and Penalty Process In implementing the former requirement at section 452(a)(4) of the Act, the former regulations at part 305 required HHS to conduct an audit at least once every three years, to evaluate the effectiveness of each State's program in carrying out the purposes of title IV-D of the Act and to determine that the program met the title IV-D requirements. These audits were the sole basis for imposing a penalty under former section 403(h) of the Act. The audits were a comprehensive review of all program requirements. A penalty was assessed in accordance with section 403(a) of the Act when the State failed the audit, but it was suspended during the period the State was under a corrective action plan. If the State passed the follow-up review, the penalty was not applied. In addition, HHS then conducted the comprehensive audit on an annual basis in the case of a State that was subject to a penalty. For a State operating under a corrective action plan, the review at the end of the corrective action period covered only the criteria specified in the notice of non-compliance. Part 305 of the regulations was removed as part of an omnibus clean-up regulation designed to conform existing program regulations to mandatory changes made by PRWORA and subsequent laws. Since PRWORA and Pub. L. 105-200 significantly changed the audit and penalty provisions of the statute, we removed all of part 305. The clean-up regulation was published February 9, 1999 (64 FR 6237). We include this summary of the former Federal process, however, because under the revised audit and penalty provisions in sections 409(a)(8) and 452 (a)(4) and (g) of the Act, the Secretary is required to assess a penalty if a State IV-D program is determined not to be in substantial compliance with IV-D requirements. As explained in greater detail later in this preamble, the process for making such a determination is based largely on the former audit and penalty standards and procedures. New Audit and Penalty Process Under section 409(a)(8) of the Act, if, based on the data submitted by the State for a review, the State program fails to achieve the paternity establishment or other performance standards set by the Secretary; or if an audit finds that the State data is incomplete or unreliable; or if the State failed to substantially comply with one or more IV-D requirements, and the State fails to correct the deficiencies in the succeeding fiscal year following the performance year, then the amounts otherwise payable to the State under title IV-A will be reduced. However under section 409(a)(8)(C) of the Act, a State will be determined to be in substantial compliance with IV-D requirements if the Secretary determines that the noncompliance is of a technical nature which does not adversely affect the performance of the State's IV-D program, or will be determined to have submitted accurate data where the incompleteness or unreliability of the data is of a technical nature which does not affect the determination of the State's performance on the performance standards. In these regulations, we have relied heavily on the well-established, tested and experienced Federal audit process, which was used for penalties assessed under the former section 403(h) of the Act and former part 305, to establish the new audit regulations. In fact, much of our language governing the audit process is taken almost verbatim from former part 305, particularly in sections dealing with the audit process, State responsibilities, definition of substantial compliance, and notice and assessment of the penalty. Section 305.40 Penalty Performance Measures and Levels Section 305.40 establishes the performance measures to be used to determine whether a State IV-D program is performing adequately to avoid a financial penalty under section 409(a)(8)(A)(i)(I) of the Act. As discussed earlier in this preamble, under paragraph (a), there are three performance measures for which States have to achieve certain levels of performance in order to avoid being penalized for poor performance. These measures are paternity establishment, support order establishment, and current collections as set forth in § 305.2 of these regulations. The levels of performance that determine whether or not a State is subject to a penalty were established based on analysis of historical statistical and financial program data submitted by States. This program data was used to set the expected levels of performance and improvements, which are based on past State performance and reasonable expectations of improved performance. The expectations of performance in this rule were set taking into consideration State concerns, prior work done by State and Federal partners to develop the incentive system, and consultations with State partners about what constituted reasonable performance levels supported by historical data. The measures and levels of performance are: (1) The paternity establishment percentage which is required under section 452(g) of the Act for penalty purposes. States have the option of using either the IV-D paternity establishment percentage or the statewide paternity establishment percentage defined in § 305.2. Table 4 shows at which level of performance the State is subject to a penalty under the paternity establishment measure. For example, if State A earned a paternity establishment percent of 34 percent and only improved by 3 percentage points over the previous fiscal year, then State A is subject to a penalty of 1-2 percent of TANF funds, for the first finding. Table 4.—Statutory Penalty Performance Standards for Paternity Establishment (Use this table to determine the level of performance for the paternity establishment measure that will incur a penalty.) PEP Increase required over previous year's PEP Penalty FOR FIRST FAILURE if increase not met 90% or more None No penalty. 75% to 89% 2% 1-2% TANF funds. 50% to 74% 3% 1-2% TANF funds. 45% to 49% 4% 1-2% TANF funds. 40% to 44% 5% 1-2% TANF funds. 39% or less 6% 1-2% TANF funds. (2) The support order establishment performance measure to be used for penalty purposes is the measure defined in § 305.2. For purposes of the penalty with respect to this measure, there is a threshold of 40 percent, below which a State is penalized unless an increase of 5 percent over the previous year is achieved—which will also qualify it for an incentive. Performance in the 40 percent to 49 percent range with no significant increase will not be penalized, but neither will it qualify for an incentive payment. Table 5 shows at which level of performance a State will incur a penalty under the order establishment measure. Table 5.—Performance Standards for Order Establishment (Use this table to determine the level of performance for the order establishment measure that will incur a penalty.) Performance level Increase over previous year Incentive/Penalty 50% or more no increase over previous year required Incentive/No Penalty. 40% to 49% w/ 5% increase over previous year Incentive/No Penalty. w/out 5% increase No Incentive/No Penalty. Less than 40% w/ 5% increase over previous year Incentive/No Penalty. w/out 5% increase No Incentive/Penalty equal to 1-2% of TANF funds for the first failure, 2-3% for second failure, and so forth, up to a maximum of 5% of TANF funds. (3) For the current collections performance measure, there is a threshold of 35 percent below which a State is penalized unless an increase of 5 percent over the previous year is achieved (that qualifies it for an incentive). Performance in the 35 percent to 40 percent range with no significant increase will not be penalized, but neither will it qualify for an incentive payment. Table 6 shows at which level of performance the State will incur a penalty under the current collections measure. Table 6.—Performance Standards for Current Collections (Use this table to determine the level of performance for the current collections measure that will incur a penalty.) Performance level Increase over previous year Incentive/Penalty 40% or more no increase over previous year required Incentive/No Penalty. 35% to 40% w/5% increase over previous year Incentive/No Penalty. w/out 5% increase No Incentive/No Penalty. Less than 35% w/5% increase over previous year Incentive/No Penalty. w/out 5% increase No Incentive/Penalty equal to 1-2% of TANF funds for the first failure, 2-3% for second failure, and so forth, up to a maximum of 5% of TANF funds. Under paragraph (b), the provisions applicable to calculations listed under § 305.32, apply to the calculation of performance levels for penalty purposes, e.g., counting only disbursed collections, and double-counting interstate collections. Section 305.42 Penalty phase-in Section 305.42 sets a schedule for phasing in the new penalty provisions which relates to the incentive phase-in under § 305.36. States will be subject to penalties for poor performance as of fiscal year 2001. States are subject to the performance penalties based on data reported for FY 2001. Data reported for FY 2000 will be used as a base year to determine improvements in performance during FY 2001. There is an automatic statutory corrective action period of one fiscal year immediately succeeding the performance year before any penalty will be imposed. If at the end of the corrective action period the deficiency is not corrected, the penalty will be taken. For example, if the Secretary finds with respect to FY 2001, that the State had either failed to achieve the level of performance required or that the State's FY 2001 data was unreliable or incomplete, then the State would be required to correct the deficiency and meet the performance measure during the succeeding year, i.e., FY 2002. If the State has either unreliable or incomplete data or fails the performance measure for the corrective action year, FY 2002, a penalty will be assessed. Since States' performance will be measured on the basis of the States' own data, a State should be expected to continually monitor its progress toward meeting the performance standards during the course of the year. Similarly, States should continuously monitor their own data for completeness and reliability. OCSE will conduct a data reliability audit for a State during the year upon request by a State and will assess performance, based upon the data submitted by the State, as soon as it is reported at the end of the year. States are on notice, however, that any corrective action which may be necessary to correct either a data or a performance deficiency must be achieved before the end of the fiscal year immediately succeeding the performance year. Section 305.60 Timing and scope of federal audits Based on explicit statutory requirements at sections 452(a)(4)(C) and 409(a)(8)(A)(i)(II) of the Act, under § 305.60 OCSE will conduct audits, in accordance with the Government auditing standards of the Comptroller General of the United States— (1) At least once every three years (or more frequently if the State fails to meet performance standards and reliability of data requirements) to assess the completeness, authenticity, reliability, accuracy and security of data and the systems used to process the data in calculating performance indicators under part 305; (2) To determine the adequacy of financial management of the State IV-D program, including assessments of: (i) Whether funds to carry out the State program are being appropriately expended, and are properly and fully accounted for; and (ii) Whether collections and disbursements of support payments are carried out correctly and are fully accounted for; and (3) For such other purposes as the Secretary may find necessary, including audits to determine if the State is substantially complying with one or more of the requirements of the IV-D program (with the exception of the requirements of section 454(24) of the Act relating to statewide-automated systems of section 454(27)(A) or (B)(i) relating to the State Disbursement Units). If a data reliability audit has been performed during the prior year, OCSE will conduct a limited review to determine whether any systems or other changes have occurred which may have affected data reliability or completeness. A State may request a data reliability audit at any time during the year as such reviews do not necessarily require analysis of the full year's data. Substantial compliance audits are defined in § 305.63 and are discussed later in this preamble. Under these rules the substantial compliance audits will be conducted at the discretion of the Secretary, and are triggered based on substantiated evidence of a failure by the State to meet IV-D program requirements. The evidence that might warrant such an audit to determine substantial compliance include: (i) The results of 2 or more sequential State self-reviews conducted under section 454(15)(A) of the Act which show evidence of sustained poor performance or indicate that the State has not corrected deficiencies identified in previous self-assessments and that these deficiencies are determined to seriously impact the performance of the State's program; or (ii) Evidence of a State program's systemic failure to provide adequate services under the program through a pattern of non-compliance over time. While we recognize the advantage and responsibility to maintain the authority to conduct audits similar to those which resulted in improved State performance in years past, we are committed to the philosophy which focuses on measuring program results, and allowing States the flexibility and responsibility to manage their own programs, while assuring that Federal requirements are met. We expect States to take the self-reviews to determine compliance with IV-D requirements seriously and to use those processes to continually critique and adjust their programs to ensure that children and families are adequately served. These Federal process audits authorized under section 452(a)(4)(C) of the Act provide a fall back measure for the Secretary's use should systemic or serious problems with IV-D programs become apparent. The Child Support Performance and Incentive Act of 1998, Pub. L. 105-200, established a specific financial penalty for a State's failure to meet statewide-automated systems requirements in section 454(24) of the Act. As a conforming amendment, section 409(a)(8) of the Act was amended to preclude a financial penalty under that section for failing to meet automated systems requirements under section 454(24) of the Act. Similarly, the Consolidated Appropriations Act for FY 2000, Pub. L. 106-113, established an alternative penalty for States that fail to comply with the State Disbursement Unit (SDU) requirements under section 454(27)(A) and (B)(i) of the Act. As a conforming amendment, section 409(a)(8) of the Act was also amended to preclude a financial penalty under that section for failing to meet automated systems requirements under section 454(27)(A) or (B)(i). While compliance with particular systems requirements will be excluded from any Federal audit to determine substantial compliance with IV-D requirements, States must still have complete and reliable data and meet the individual IV-D program requirements being audited, as defined in § 305.63, in order to avoid a financial penalty under § 305.61. These program requirements exist independently from the systems requirements under section 454(24) of the Act and, therefore, States will be held accountable for compliance. Under paragraph (b), as with past audits, during the course of the audit, OCSE will make a critical investigation of the State's IV-D program through inspection, inquiries, observation, and confirmation and use the audit standards promulgated by the Comptroller General of the United States in “Government Auditing Standards.” Section 305.61 Penalty for failure to meet IV-D requirements To implement the requirements of section 409(a)(8) of the Act, under paragraph (a) of § 305.61, a State is subject to a financial penalty and the amounts otherwise payable to the State under title IV-A of the Act would be reduced: If, on the basis of: (i) Data submitted by the State or the results of an audit conducted under § 305.60, the State's program failed to achieve the paternity establishment percentages, as defined in section 452(g)(2) of the Act and § 305.40, or to meet the support order and current collections performance measures set forth in § 305.40; or (ii) The results of an audit under § 305.60, the State did not submit complete and reliable data, as defined in § 305.1; or (iii) The results of an audit under § 305.60, the State failed to substantially comply with one or more of the requirements of the IV-D program, as defined in § 305.63; And, with respect to the corrective action year immediately following such failure, the State failed to take sufficient corrective action to achieve the appropriate performance levels or compliance or the data submitted by the State are still incomplete or unreliable. A penalty will be applied only if the State failed to correct any identified deficiencies by the end of this automatic corrective action year. For example, if a State fails the PEP in fiscal year 2001, it must have reliable data and meet the PEP in the succeeding fiscal corrective action year—meaning it must meet the PEP standard for fiscal year 2002 or face a penalty in fiscal year 2003. Under paragraph (b) of § 305.61, the penalty reductions described under § 305.61(c) (discussed below) will be made for quarters following the end of the automatic corrective action fiscal year following the fiscal year with respect to which the State submitted unreliable or incomplete data or failed the performance measure or was determined not to be in substantial compliance. The penalty will continue until the beginning of the first quarter following the end of the first quarter throughout which the State, as appropriate: (1) Has achieved the paternity establishment percentages, the order establishment or the current collections performance measures defined in § 305.40; and (2) Has submitted data that is complete and reliable; or (3) Is in substantial compliance with the IV-D requirements audited for substantial compliance, as defined in § 305.63. A State must have reliable and complete data and meet the performance standards in order to avoid imposition of a penalty following the end of the automatic corrective action year. It is important to note that the statute at section 409(a)(8)(A) of the Act and these regulations clearly require States to submit complete and reliable data for all of the performance measures under sections 452(g) and 458 or incur financial penalties. However, unlike other penalty circumstances, penalties for incomplete or unreliable data will also result in a loss of incentives. When data is incomplete or unreliable, it will be impossible to accurately determine the State's level of performance to either pay incentives or to assess performance. In such cases, a State's data must be complete and reliable by the end of the succeeding fiscal year and must demonstrate that the submitted data meets the performance measures in order to avoid the imposition of a penalty. Correcting incomplete or unreliable data within the automatic one-year corrective action period is not enough; the data must also show that the State performed at a high enough level during the corrective action year to avoid a financial penalty. For example, say a State is determined to have unreliable current collection performance data for FY 2001 and the State corrects the unreliable data for FY2001 during FY 2002. The State must still have reliable FY2002 data and meet the current collection performance standard for FY 2002 or incur a penalty in FY2003. It should be noted, with reference to the example above, that the State may need to correct and resubmit its FY2001 data in order to demonstrate improvement which would qualify for incentives or to meet the penalty performance measure during FY2002. If the State will otherwise achieve the minimum performance level without showing an increase over the prior year, then correction of FY2001 data would be unnecessary. Paragraph (c) sets forth the penalty levels from section 409(a)(8)(B) of the Act under which the payments for a fiscal year under title IV-A of the Act will be reduced by the following percentages: (1) One to two percent for the first finding; (2) Two to three percent for the second consecutive finding; and (3) Not less than three percent and not more than 5 percent for the third or a subsequent consecutive finding. These section 409(a)(8) penalties, which increase with each subsequent finding, are based upon penalties assessed under the former audit and penalty process in former section 403(h) of the Act. In actual practice, OCSE has used the lower amount for each situation. Because the penalty is taken as a percentage of the amount payable to the State under part A of title IV, certain provisions applicable to other TANF penalties also apply to this penalty. The provisions in section 409(d) of the Act which provide that the total penalties that may be taken may not exceed 25 percent of the TANF grant applies. In addition, section 410 of the Act provides for appeals when penalties are taken pursuant to section 409 of the Act. Finally, section 409(a)(12) of the Act which requires that a State spend additional funds to replace the reductions in funds resulting from the imposition of a penalty applies. The TANF regulations published April 12, 1999 at 64 FR 17720 and effective October 1, 1999, contain provisions in new 45 CFR part 262 which address and implement these statutory provisions. We incorporate those provisions by cross reference. Section 305.62 Disregard of a failure which is of a technical nature. Section 409(a)(8)(C) of the Act, like the former section 403(h) of the Act, recognizes that certain noncompliance may be insufficient to significantly impact a State's performance or data reliability. Under § 305.62, we implement this concept by providing that a State subject to a penalty under § 305.61(a)(1)(ii) or (iii) may be determined, as appropriate, to have submitted adequate data or to have achieved substantial compliance with one or more IV-D requirements, as defined in § 305.63 (discussed below), if the Secretary determines that the incompleteness or unreliability of the data, or the noncompliance with one or more of the IV-D requirements, are of a technical nature which does not adversely affect the performance of the State's IV-D program or does not adversely affect the determination of the level of the State's paternity establishment or other performance measure percentages. Section 305.63 Definition of substantial compliance with IV-D requirements. Because section 409(a)(8) of the Act requires the assessment of a penalty should a State be found, as a result of an audit, to have failed to substantially comply with one or more IV-D requirements which it fails to correct in the corrective action year, we must provide a definition of substantial compliance that will be used by the auditors to measure State compliance with IV-D requirements. Former § 305.20 established, for purposes of the former Federal audit and penalty process, the definition of an effective program in substantial compliance with the requirements of title IV-D of the Act. Therefore, under § 305.63 we use the definition under former § 305.20 as the basis for a determination that a State failed to achieve substantial compliance with one or more IV-D requirements. However, there is one significant difference between the new and former audit and penalty process which deals with the required scope of the audit. Under the former statute and regulations, a penalty was based on a complete audit of a State's program for substantial compliance with all of the applicable IV-D requirements. Under section 408(a)(9) of the Act and these regulations, a State may be audited on one, some, or all of the requirements and may be assessed a penalty, if it is found not to comply with one or more IV-D requirements. Assessment of a penalty could be based, therefore, on a targeted audit of specific IV-D requirements. Specifically, for the purposes of a determination under § 305.61(a)(1)(iii), in order to be determined in substantial compliance with one or more of the IV-D requirements as a result of an audit conducted under § 305.60, a State is required to meet the specific IV-D State plan requirement or requirements that were audited. The IV-D requirements subject to audit are contained in part 302 of program regulations, and are measured as described in the following paragraphs. Under paragraph (a), the State must meet all the requirements under any of the following areas being audited: Statewide operations, § 302.10; Reports and maintenance of records, § 302.15(a); Separation of cash handling and accounting functions, § 302.20; and Notice of collection of assigned support, § 302.54. These areas are identical to those in former § 305.20, which measured management and accountability of the program. Under paragraph (b), the State is required to meet the requirements under the following areas in at least 90 percent of the cases reviewed for each criterion being audited, consistent with the requirements used under the former § 305.20: Establishment of cases, § 303.2(a); and Case closure criteria, § 303.11. We believe these criteria should continue to be met in 90 percent of cases reviewed because of their critical nature. They are intended to ensure that cases are opened and closed appropriately. Under paragraph (c), States will be held to the same test they have been held to under former audit and penalty requirements in place and used since the early to mid-1990s. Under the paragraph, the State is required to meet the following areas in at least 75 percent of the cases reviewed for each criterion being audited: (1) Collection and distribution of support payments, including: collection and distribution of support payments by the IV-D agency under § 302.32(b); distribution of support collections under § 302.51; and distribution of support collected in title IV—E foster care maintenance cases under § 302.52; (2) Establishment of paternity and support orders, including: establishment of a case under § 303.2(b); services to individuals not receiving TANF or title IV-E foster care assistance, under § 302.33(a)(1) through (4); provision of services in interstate IV-D cases under § 303.7(a), (b) and (c)(1) through (6) and (8) through (10); location of non-custodial parents under § 303.3; establishment of paternity under § 303.5(a) and (f); guidelines for setting child support awards under § 302.56; and establishment of support obligations under § 303.4(d), (e) and (f); (3) Enforcement of support obligations, including, in all appropriate cases: establishment of a case under § 303.2(b); services to individuals not receiving TANF or title IV-E foster care assistance, under § 302.33(a)(1) through (4); provision of services in interstate IV-D cases under § 303.7(a), (b) and (c)(1) through (6) and (8) through (10); location of non-custodial parents under § 303.3; enforcement of support obligations under § 303.6 and State laws enacted in accordance with section 466 of the Act, including submitting once a year all appropriate cases in accordance with § 303.6(c)(3) to State and Federal income tax refund offset; and income withholding under § 303.100. In cases in which income withholding cannot be implemented or is not available and the non-custodial parent has been located, States must use or attempt to use at least one enforcement technique available under State laws in addition to Federal and State tax refund offset, in accordance with State laws and procedures and applicable State guidelines developed under § 302.70(b) of this chapter; (4) Review and adjustment of child support orders, including: establishment of a case under § 303.2(b); services to individuals not receiving TANF or title IV-E foster care assistance, under § 302.33(a)(1) through (4); provision of services in interstate IV-D cases under § 303.7(a), (b) and (c)(1) through (6) and (8) through (10); location of non-custodial parents under § 303.3; guidelines for setting child support awards under § 302.56; and review and adjustment of support obligations under § 303.8; (5) Medical support, including: establishment of a case under § 303.2(b); services to individuals not receiving TANF or title IV-E foster care assistance, under § 302.33(a)(1) through (4); provision of services in interstate IV-D cases under § 303.7(a), (b) and (c)(1) through (6) and (8) through (10); location of non-custodial parents under § 303.3; securing medical support information under § 303.30; and securing and enforcing medical support obligations under § 303.31; and . (6) Disbursement of support payments in accordance with the timeframes in section 454B of the Act or the regulation at § 302.32. Except for the last requirement for disbursement of support collected within the timeframe set forth in requirements for a State Disbursement Unit in section 454B of the Act, the provisions are taken from the former § 305.20. We are using those standards because we still consider them to represent the critical aspects of IV-D program requirements and believe they are essential to any determination of substantial compliance with any of the requirements being audited for that purpose. The subparagraphs, as written, are broad and incorporate revised provisions of title IV-D of the Act, such as any changes in distribution, additional enforcement techniques, revised review and adjustment procedures and evolving medical support expectations that are indicated in the statute or regulations. The timeframe for disbursement of support collections by the State Disbursement Unit under section 454B of the Act is included because it is one of the essential case processing timeframes added by PRWORA. Other explicit requirements of PRWORA are included by reference to laws enacted under section 466 of the Act and still others, for example, the State Directory of New Hires and other new locate sources, will be evaluated as part of the State's automated system certification. As with the former audit process which recognized that citing States for each failure to meet a specific timeframe could remove a State's motivation to move forward in such a case, we propose to adopt the provisions from former § 305.20 under which States can receive credit for a case being reviewed if they accomplish the necessary action within the audit period, despite having missed an interim timeframe. We remain committed to this concept in these regulations and have incorporated it into paragraph (d). Finally, as under the former audit standards in § 305.20, paragraph (e) requires a State to meet the requirements for expedited processes under § 303.101(b)(2)(i) and (iii), and (e). Under the new penalty standards in section 409(a)(8) of the Act and the new audit responsibilities under section 452(a)(4) of the Act, the Federal audit and subsequent penalty can cover simply one, or a number of IV-D requirements. Using the definition of substantial compliance described above, Federal auditors, States and other interested parties will be aware of the expected level of State performance with respect to any particular requirement being audited. Section 305.64 Audit procedures and State comments This section will adopt the same procedures as were in effect under former § 305.12. Under paragraph (a), prior to the start of the actual audit, whether for data reliability and completeness or for substantial compliance, Federal auditors will hold an audit entrance conference with the State IV-D agency. At that conference, the auditors will explain how the audit will be performed and make any necessary arrangements. Under paragraph (b), at the conclusion of audit fieldwork, Federal auditors will afford the State IV-D agency an opportunity to have an audit exit conference at which time preliminary audit findings will be discussed and the State IV-D agency may present any additional matter it believes should be considered in the audit findings. Under paragraph (c), after the exit conference, Federal auditors will prepare and send to the State IV-D agency, a copy of an interim report on the results of the audit. Within a specified timeframe from the date the report was sent by certified mail, the State IV-D agency will be able to submit written comments on any part of the report that the State IV-D agency believes is in error. The auditors will note such comments and incorporate any response into the final audit report. Section 305.65 State cooperation in audit Also consistent with historic State responsibilities with respect to Federal audits, we incorporated former § 305.13 and require that each State make available to the Federal auditors such records or other supporting documentation (electronic and manual) as the audit staff may request, including records to support the data as submitted on the Federal statistical and financial reports that will be used to calculate the State's performance. On-line access to a State's system and data will expedite the process for both the Federal auditors and the States. We have included specific reference to the data States must submit because it is essential to the auditors' work. States will also be required to make available personnel associated with the State's IV-D program to provide information that the audit staff may find necessary in order to conduct or complete the audit. We also require, under paragraph (b), that States provide evidence to OCSE that their data are complete and reliable. This ensures the responsibility for maintaining and providing reliable data is the State's responsibility. As was the case under former audit regulations at § 305.13, we require in paragraph (c), that failure to comply with the requirements of this section with respect to audits conducted under § 305.64 may necessitate a finding that the State has failed to comply with the particular criteria being audited. State cooperation with the audit is essential to assess performance. In addition, States are encouraged to provide Federal auditors with on-line access to their systems and data. On-line access to a State's system and data will expedite the process for both the Federal auditors and the States. Section 305.66 Notice, corrective action year, and imposition of penalty for failure to meet requirements Section 305.66 addresses notice to the State of any deficiency or deficiencies identified. Similar to the notice aspects of the former audit process at former § 305.99, paragraph (a) requires that, if the Secretary, on the basis of the results of an audit or review, finds a State to be subject to a penalty, OCSE will notify the State in writing of such finding. Under paragraph (b), the notice will: (1) Explain the deficiency or deficiencies which result in the State being subject to a penalty, indicate the amount of the potential penalty, and give reasons for the Secretary's finding; and (2) Specify that the penalty will be assessed if the State has failed to correct the deficiency or deficiencies cited in the notice during the succeeding fiscal year, referred to as the “corrective action” year. The corrective action year is the fiscal year immediately following the year with respect to which the deficiency occurred. The State should be continuously monitoring its own performance and taking action to improve performance which its own data shows may fail to achieve the performance measures. The State is also responsible for maintaining proper procedures and controls to ensure data reliability and completeness. OCSE is willing to conduct data reliability audits at any time during the compliance year, but the State should not wait or rely upon the Secretary's determination of a data or a performance deficiency in order to begin corrective action. Two consecutive years of failure (either poor data or poor performance) in the same performance measure criterion will trigger a penalty imposition. As discussed earlier in the preamble, the imposition of a penalty is subject to certain limitations, appeals and replacement of funds requirements specified in sections 409 and 410 of the Act. We incorporate those statutory requirements in paragraph (b)(2) by cross reference to the specific TANF regulatory provisions in 45 CFR part 262 that implement those requirements. Under paragraph (c), the penalty will be assessed if the Secretary determines that the State has not corrected the deficiency or deficiencies cited in the notice by the end of the corrective action year. This determination will be made as soon as possible after the end of the corrective action year. The penalty will be assessed, however, commencing with the first quarter following the end of the corrective action year. The statute requires that the penalty must be imposed for a minimum period of one quarter, but may be suspended “following the end of the first quarter throughout which the State program has achieved * * * (compliance).” We require, as supported by the language of section 409(a)(8) of the Act, under paragraph (d), that only one corrective action period be provided to a State in relation to a given deficiency when consecutive findings of noncompliance are made on that deficiency. Under paragraph (e), a consecutive finding occurs only when the State does not meet or achieve substantial compliance with the same criterion or with any one of the criteria cited in the notice. A new corrective action year will be triggered by a data deficiency or performance failure under a different criterion than was cited in the prior penalty notice. VI. Response to Comments We received twenty-eight comments from representatives of State IV-D agencies, national organizations, and advocacy groups on the proposed rule published October 8, 1999 in the Federal Register (64 FR 55074). A summary of the changes made in response to comments is followed by a summary of the comments received and our responses follows: Changes Made in Response to Comments OCSE carefully considered the comments received and made some changes to the final regulation in response. Section 303.35 dealing with the administrative complaint procedure was revised and clarified. Section 305.1(i) on the definition of data reliability was further clarified by including a 95 percent standard for data reliability to be effective for data reported for fiscal year 2001. Section 305.32(f) was revised to add a deadline of December 31 of each calendar year by which date complete and reliable data for the prior fiscal year necessary to compute the prior fiscal year's performance must be submitted to OCSE or the State will not receive incentives for that prior fiscal year. The example of the incentives calculation was removed from the regulation language. The two examples for determining a base year for the reinvestment requirement were removed. Comments to Section 303.35 Administrative complaint procedure We received twenty-six comments on the administrative complaint procedure from State IV-D agencies, national organizations and advocacy groups. Of these comments, four expressed strong support for the proposed review procedure and twenty-two expressed opposition to the proposal. Most of those expressing support were advocacy groups. In expressing support for the proposed review process, four commenters stated that the process would appropriately hold IV-D agencies accountable in individual cases, would improve customer satisfaction, would increase efficiency and expedite resolution of individual problems, and could help States identify systemic problems. However, in order to strengthen the proposed review process, these commenters made several suggestions for additions to the regulation. The twenty-two commenters in opposition to the proposal were from State IV-D directors. Most of these requested that § 303.35 be removed from the final regulations. We believe that an administrative complaint procedure is an essential component in the child support program. The rule does not dictate how States must implement the complaint procedure. We recognize that many States may already have these procedures in place. The rule sets minimal requirements and States are able to set their own procedures. We have revised the regulatory language to state that an administrative complaint procedure must be in place “as defined by the State.” We have addressed individual concerns in the following responses and have revised the regulatory language to address the objections. The comments and our responses are as follows: 1. Comment: Three commenters suggested the addition of a specific deadline for State IV-D agencies in responding to client complaints and notifying the complainant of the review determination. Response: We have not adopted this suggestion to include in the regulation a specific time deadline for response and notification. The intent of this regulation is to ensure that all State IV-D programs have a review process in place, not to dictate specific requirements for States in implementing their complaint procedures. 2. Comment: Three commenters recommended the addition of a requirement for State IV-D agencies to establish procedures for informing clients about the availability of the review process. Response: We have included this suggestion in the regulation, in order to ensure that recipients of IV-D services are informed of the State's review process. We would encourage all States to include this notification in the initial information provided to applicants and those referred for program services. 3. Comment: Two commenters suggested we add an analysis of types and origins of complaints as a required element in the State's self-assessment report to allow for the identification and correction of systemic problems. Response: We have chosen not to include analysis of complaints as required element in the State self-assessment report. However, we would encourage States to regularly examine the types of complaints they are receiving in order to identify and correct any chronic or systemic problems. This examination of complaints could be included in the optional program service enhancements section of the State self-assessment, with a description of practices initiated by the State that are contributing to improved program performance and customer service. In order to assess the need for any future program improvements, we will monitor State implementation of the administrative complaint procedure and seek input from States and other stakeholders. 4. Comment: One commenter recommended we require the reviews to be conducted by an independent decision-maker to enhance the credibility and fairness of the process. In so doing, this commenter cited the California statute that includes such a provision. Response: We have not adopted this recommendation as we are not convinced that an independent decision-maker is necessary to ensure fairness and we wish to provide the maximum flexibility to States in designing and implementing their administrative review procedures. States may utilize an independent reviewer to maximize fairness and due process for all parties involved. 5. Comment: Eighteen commenters stated that the proposed regulation is unnecessary as most States already have complaint procedures in place. One commenter stated further that the regulation may create confusion regarding existing State procedures and whether they are/are not in compliance with the new regulation. One commenter stated that, due to existing State procedures, the regulation would provide no new protections for clients but would add administrative burdens to the State. Finally, one commenter stated that each State should be free to set its own complaint procedures. Response: We believe that an administrative complaint procedure is an essential component in the move to a program based on outcomes and performance-based incentives and penalties. Recipients of services, through administrative complaint processes, should be able to access the IV-D agency and lodge complaints when they have evidence to support specific concerns in their cases. It is not our intent to nor does the rule dictate how States must implement the complaint procedure or to require States to replace their existing procedures with a more formal process. We recognize that many States may already have these procedures in place and do not intend to place additional burdens on those States with these requirements. The rule sets minimal requirements and States are able to set their own procedures. We have revised the regulatory language to state that an administrative complaint procedure must be in place “as defined by the State.” 6. Comment: Sixteen commenters expressed concern that the proposed regulation would divert fiscal and personnel resources away from the primary IV-D mission. One commenter stated further that this diversion of resources could ultimately result in decreased agency efficiency and customer service. Ten commenters stated further that resources might be drained due to the potential for abuse of the system by custodial parents who submit repeated complaints, requiring multiple reviews in each case. One commenter stated further that, as a result of this proposal, programs would have difficulty meeting major program goals, with the result of deficient performance in critical program areas. Finally, one commenter requested a more thorough analysis of the costs associated with this proposed regulation. Response: Since most States already have procedures in place, as asserted in comment #1, this regulation would not require additional resources for them—they may continue with their existing procedures. In establishing their procedures, States have the ability to establish parameters for appropriate complaints and to, therefore, avoid excessive or repeated reviews in a case. For States that do not currently have a complaint procedure in place, this regulation will require some additional resources. However, we feel strongly that customer service and a process for administrative reviews are critical program areas consistent and supportive of the program's mission. Further, we believe that the 66 percent Federal funding of State IV-D programs should allow for sufficient funding to address this requirement. 7. Comment: Ten commenters stated that the language of the proposed § 303.35 is vague and overly broad, allowing multiple interpretations and increasing the potential for abuse of the complaint system. Two commenters specifically cited the regulatory language “appropriate action” and “resolving” as examples of this vague, broad language. Two commenters specifically requested that the second sentence in paragraph (a), which stated that the State “must have a procedure for reviewing the individual's complaint and resolving it where appropriate action was not taken”, be deleted in order to eliminate the vague language of “resolving” and to require a simpler case review upon request. Response: To address these concerns, we revised the regulatory language to eliminate reference to resolving complaints but retain language to require States to take any appropriate action. The intent of this regulation is to allow customers a process for having their cases reviewed if an error has occurred and not to require formal administrative hearing processes or adjudication of complaints. We recognize that “resolution” of all complaints would be subject to interpretation. States determine appropriate action in IV-D cases and the complaint procedures is intended to remedy errors, not to allow individuals to dictate actions in a case. 8. Comment: Nine commenters opposed this provision on the basis that it is beyond the scope and intent of the statute. One commenter, in referencing congressional intent, specifically cited provisions similar to this regulation that were in welfare reform bills that were rejected prior to the passage of PRWORA. One commenter states that the provision may also be unconstitutional. Response: Section 1102 of the Act provides the authority to publish regulations that the Secretary deems necessary for the efficient administration of the IV-D program. Using this authority, we remain committed to requiring the administrative complaint procedures as we believe they are a necessary component in the program shift under PRWORA to performance-based incentives and State self-reviews. PRWORA revised Federal audit requirements from a process-based system to a performance-based system. The administrative complaint procedure represents a key element to identify case management problems that would have been captured in the previous, process-based audit system. We have included the administrative complaint procedure in this final rule because these regulations implement this program shift toward a performance-based, rather than process-based system. In the absence of clear legislative statements to the contrary, we do not believe that the failure to enact these administrative complaint procedures in PRWORA was intended to preclude the Secretary from using her regulatory authority under section 1102 of the Act. In addition, we do not believe there is any basis upon which to conclude that this provision would be unconstitutional. 9. Comment: Eight commenters referenced the Supreme Court decision in the Blessing v. Freestone case, stating that the proposed administrative complaint procedure would conflict with the Supreme Court decision in this case. Two additional commenters state that the proposed regulation would infer an “individual right of action”, but do not specifically reference the Blessing v. Freestone case. Five additional commenters expressed a concern that this regulation would result in increased litigation against the State IV-D agency. Response: The United States Supreme Court, in the case of Blessing v. Freestone , 520 U.S. 329 (1997), ruled unanimously that title IV-D did not create an individually enforceable right to force States to “substantially comply” with all of the requirements of the IV-D program. The administrative complaint procedure established under § 303.35 does not conflict with the Court's decision in that case, nor does it establish or infer an “individual right of action” to pursue judicial remedies for failure to provide specific IV-D services. We believe that establishment of such administrative procedures will, in fact, result in a decreased risk of litigation against the State IV-D agency based upon alleged failure of the State to provide specific services required under the statute and implementing regulations. Many of the requirements of title IV-D are concrete, mandatory, and binding upon the State and local agencies. For example, time limits which have been established for certain provision of services, distribution of support, and the like, could be construed as establishing enforceable rights. The establishment of an administrative complaint procedure, however, does nothing substantively to enhance or otherwise affect such rights as may already exist under title IV-D. The establishment of such procedures merely requires that the State have “administrative” pre-judicial review procedures to determine, and possibly correct, failures to take particular actions which may have been required under existing IV-D rules. The State has broad discretion to determine what sort of an administrative complaint procedure it chooses to establish. We believe that most States, in fact, already have adequate procedures in place and that this new rule may impose virtually no additional requirement or burden on their program operations. In those States which have not established any mechanism for responding to complaints arising from parents' concern that certain mandatory actions have been delayed or were not taken at all, we believe that creating a forum to review such allegations will lead to increased customer satisfaction and should actually reduce the risk of judicial challenges to the State IV-D program. 10. Comment: Six commenters expressed concern that this provision would remove State discretion in determining and using the most appropriate enforcement tools. Instead, the provision would allow the customers to dictate enforcement in their cases. Response: We disagree that this provision would allow customers to dictate enforcement or would remove appropriate State discretion. The rule does not mandate that the State take any particular action in response to a complaint. States will continue to have responsibility for determining and using the appropriate actions and enforcement tools in a particular case in accordance with Federal regulations. This regulation is simply intended to allow recipients of IV-D services a mechanism for requesting a review of their cases when there is evidence that an action should have been taken by the IV-D agency. For example, a IV-D customer might request a review if he or she has provided information to the IV-D agency on the obligated parent's place of employment, but no action has been taken within federally required timeframes to institute wage withholding. 11. Comment: Four commenters stated that OCSE has provided inadequate documentation to justify the need for regulation in this area. Three commenters proposed further that OCSE and the States work together on this proposal to assess the need for regulation. One of these commenters suggested that OCSE convene a national workgroup to assess the need for regulation and, if necessary, draft more explicit regulatory language. Finally, one commenter requested a more thorough analysis of the costs associated with this proposed regulation. Response: OCSE remains committed to partnership with States and consultation with our stakeholders. However, we are also committed to prioritizing customer service and feel that this regulation is necessary to ensure appropriate service for all IV-D customers. We will work with States to provide technical assistance and share best practices for implementing administrative complaint procedures. In this process, we will seek input from States and other stakeholders for further improvements. 12. Comment: Four commenters questioned OCSE's decision to regulate in this area, citing the recent commitment of OCSE and HHS to avoid unnecessary regulations. Response: OCSE believes these requirements are necessary to ensure IV-D customers are given opportunities to raise concerns about their cases. We have drafted language that we believe imposes minimal requirements and allows maximum State flexibility in adopting and implementing administrative complaint procedures. 13. Comment: Four commenters expressed concern regarding the language “actions not taken,” fearing a potential for litigation or abuse of the system. One commenter requested that, if the entire section 303.35 is not removed, that this “action not taken” language be removed from the final regulations. Response: We agree with the concern that the proposed regulatory language was subject to multiple interpretations. Thus, we have revised the language “action taken, or not taken” that appeared in the NPRM to provide that individuals may request a review when there is evidence that an action should have been taken in their particular cases. The language now reads: “Each State must have an administrative complaint procedure, defined by the State, to allow individuals the opportunity to request an administrative review, and must take appropriate action if there is evidence that an error has occurred or an action should have been taken on a case.” This final rule will ensure that all States have administrative complaint procedures in place and that recipients are notified of the availability of services and the outcome of the review, but will also allow States the flexibility to define their own administrative complaint procedures. 14. Comment: Four commenters asserted that the administrative review requirement would eliminate the efficiency gained by automated systems by essentially returning case management to a case-by-case review. Response: While it is true that this regulation will require some case review, we disagree that it will eliminate the efficiency of the automated systems. The majority of cases will continue to be handled through automation. This regulation will require case review only in specific instances when the customer requests a review in accordance with State-established procedures. In these instances, we believe case review is appropriate in order to ensure the best possible case management and ensure maximum child support collections for children and families. 15. Comment: Two commenters expressed concern that the complaint process implies a requirement for 100% caseload compliance, rather than “substantial” compliance. Response: These requirements are not intended as an avenue for IV-D customers to lodge complaints without a basis of concern. If the State is taking appropriate actions, in accordance with Federal requirements and its own State procedures, there should be no basis for lodging a complaint. States are expected to comply with Federal requirements in all cases. However, they will only be penalized when they are not in substantial compliance. 16. Comment: Two commenters expressed concern that the purpose of the proposed rule is to create a specific measure of State performance, but the proposed rule did not include any specifics regarding the method of measurement for State performance. Response: The intent of this regulation is to ensure that all State IV-D agencies have a complaint system in place. We believe that recipients of services should be able to access the IV-D agency and lodge complaints when they have specific concerns in their cases. However, the administrative complaint procedure is not intended to be used as a specific, quantitative measure of State performance. Nor does the complaint procedure convert the measure of substantial compliance test in State self-assessments to a 100 percent standard. Thus, we do not believe that including a specific method of measurement in the regulation is necessary. States may choose to address results of their procedures in their annual self-assessment reports. 17. Comment: Two commenters expressed concern regarding the open-ended nature of the proposal and requested the review process be limited to specific areas or issues. One of these commenters proposed that the review be limited to disputes surrounding the allocation and distribution of child support, and not applied to case management issues. Response: We encourage IV-D agencies to strive to achieve efficiency and quality customer service in all program areas. The administrative complaint procedure will allow IV-D programs to demonstrate this commitment to improving customer service, by providing recipients of services with a process to express their concerns. We believe that IV-D recipients of services should have the ability to request a review of any aspect of their case, including case management issues. Thus, we have not adopted this specific suggestion to limit the scope of the regulation to disputes involving allocation and distribution of collections, although that is an appropriate area for review, if warranted. However, we have revised the language to require procedures “as defined by the State”. This change is intended to allow States flexibility and discretion in structuring their own administrative complaint procedures. 18. Comment: Two commenters suggested that an additional paragraph should be added to § 303.35 to explicitly spell out what the rule does and does not require. This suggestion was made due to concern that the regulatory language allows the potential for extreme interpretations, controversy and legal action. In addition, one commenter suggested that, if the final regulations do require administrative reviews of prior IV-D activity, that a time limit be included so that reviews will only go back for a specific period of time. Finally, one commenter expressed concern that the proposal does not indicate the specific recordkeeping requirements that would be imposed on States with respect to the review process. Response: While we have not adopted these suggestions, they may be appropriate for State consideration in establishing procedures. As stated earlier, the intent of this regulation is to ensure that all State IV-D programs have some type of complaint process in place, not to dictate the specifics of the procedure. We believe it is preferable and supportable to allow States to establish their own procedures. 19. Comment: One commenter questioned whether allowing the custodial parent to review actions taken on their case would be in conflict with safeguarding provisions, stating that the IV-D agency is not allowed to release their work product. Response: We do not believe that this provision would be in conflict with safeguarding provisions. The regulation does not allow a IV-D customer to review actions taken on his or her case. It requires the State to review the case at the request of the customer where there is evidence an action should have been taken and to notify the individual of the results of the review. This notification would not be a per se violation of the safeguarding requirements. Pursuant to section 454(26) of the Social Security Act, State IV-D programs are required “to have in effect safeguards, applicable to all confidential information handled by the State agency, that are designed to protect the privacy rights of the parties”. States must design their administrative complaint procedures to ensure safeguarding requirements are met and that the information provided does not violate the privacy rights of one or both parties. 20. Comment: One commenter questioned how the administrative complaint process would be applied in interstate cases. Respon [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A00-32702. Public record. Not legal advice.